Business Context and Reporting Period
Myriad Genetics, Inc. filed this Form 10-K for the fiscal year ended June 30, 2018. The company operates specialty molecular diagnostic laboratories, with products spanning hereditary cancer, neuroscience, autoimmune disease, urology, breast cancer, dermatology and companion diagnostics. It also provides pharmaceutical and clinical research services. The filing refers to fiscal 2018; the provided request metadata identifies 2017 Q4, but the filing itself is an annual report for fiscal 2018.
Key Financial Metrics
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Total revenue | $772.6 million | $769.9 million | 0.4% increase |
| Molecular diagnostic revenue | $719.3 million | $720.6 million | 0.2% decrease |
| Pharmaceutical and clinical services revenue | $53.3 million | $49.3 million | 8.1% increase |
| Operating income | $118.7 million | $48.7 million | Increase of $70.0 million |
| Operating margin | 15.4% | 6.3% | Improved |
| Net income attributable to Myriad stockholders | $131.1 million | $20.5 million | Increase of $110.6 million |
| Diluted EPS | $1.82 | $0.30 | Increase of $1.52 |
| Net cash from operating activities | $115.9 million | $106.2 million | 9.1% increase |
| Cash, cash equivalents and marketable securities | $211.3 million | $199.2 million | Increase of $12.1 million |
| Net long-term debt | $9.3 million | $99.1 million | Decrease of $89.8 million |
Cost of sales was $177.2 million, or 22.9% of revenue, compared with 22.2% in fiscal 2017, implying a consolidated gross margin of approximately 77.1%. Research and development expense declined to $70.8 million from $74.4 million, while SG&A declined to $467.1 million from $476.4 million. Working capital increased to $224.2 million from $84.2 million.
Operating cash flow included significant non-cash and unusual items, including a $60.9 million reduction in the fair value of contingent consideration and $22.7 million of contingent consideration payments. Management also presented $199.5 million of cash provided by operations excluding contingent consideration effects.
Material Changes Versus the Prior Comparable Period
- Revenue was essentially flat because growth in newer products offset a $69.0 million decline in hereditary cancer testing revenue, primarily due to lower reimbursement.
- New products generated a record $212.4 million of revenue, including GeneSight, Vectra DA, Prolaris and EndoPredict. These products represented approximately 70% of testing volume, compared with approximately 1% in fiscal 2013.
- GeneSight revenue increased $46.5 million to $124.9 million, reflecting increased volume and a full year of Assurex ownership.
- Vectra DA revenue increased $13.5 million to $57.2 million, Prolaris increased $8.8 million to $20.9 million, and EndoPredict increased $1.2 million to $8.9 million.
- Operating income benefited materially from the $61.2 million reduction in the fair value of contingent consideration, primarily because an Assurex randomized controlled trial did not meet its primary endpoint and a related milestone was no longer payable.
- Net income benefited from a provisional $32.0 million tax benefit related primarily to the Tax Cuts and Jobs Act. Excluding that benefit, management reported income tax expense of $18.1 million and an effective tax rate of 15.5%.
- The company identified errors in sales allowance estimates and revised prior-period results. Fiscal 2018 net income attributable to stockholders was reduced by $6.6 million; fiscal 2017, 2016 and 2015 were reduced by $1.3 million, $8.1 million and $0.4 million, respectively.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management did not provide a clear numerical revenue or earnings forecast in the filing. Its Elevate 2020 program targets $50 million of incremental operating income by fiscal 2020 through centralized resources, technology, sourcing and laboratory-efficiency initiatives. Management expects existing capital resources and operating cash flow to fund planned operations for the foreseeable future, but notes that additional financing could become necessary.
- Hereditary cancer testing remains the largest revenue source, representing approximately 65% of fiscal 2018 revenue, but faces reimbursement pressure and intensified competition following invalidation of key patents.
- Coverage for newer tests varies materially, with U.S. insurance coverage ranging from approximately 5% to 90% of the relevant addressable markets.
- The company is subject to a Department of Health and Human Services Office of Inspector General subpoena concerning possible false or improper Medicare and Medicaid claims for hereditary cancer testing. A separate investigation involving Crescendo relates to payments for specimen collection and processing. The filing states that no claims had been made as of June 30, 2018 and that outcomes cannot be predicted.
- A purported securities class action filed April 20, 2018 alleges misleading disclosures concerning Medicare and Medicaid billing practices. The company intends to defend the action, but potential losses are not determinable from the filing.
- Management and Ernst & Young concluded that internal control over financial reporting was ineffective because controls did not adequately and timely incorporate changes in third-party payor collection experience into sales allowance estimates. Ernst & Young issued an adverse opinion on internal control, while issuing an unqualified opinion on the financial statements.
- On July 31, 2018, after year-end, Myriad completed the $407.8 million acquisition of Counsyl, funded with approximately $280.4 million of cash and 2,994,251 shares of common stock. The purchase accounting was preliminary at filing.
- In connection with Counsyl, the revolving credit facility was amended to increase maximum commitments from $300 million to $350 million, extend maturity to July 31, 2023, and support $300 million of borrowing after year-end.
- The company expects to adopt ASC 606 using the full retrospective method on July 1, 2018. Preliminary estimates indicate that FY2018 revenue would have been $743.7 million rather than $772.6 million under the new presentation, primarily because certain bad debt expense would be classified as a reduction of revenue.
Important Facts for Investors to Verify
- Verify the impact and remediation status of the sales allowance material weakness and the revised historical financial statements.
- Monitor the HHS OIG investigations and securities class action for potential repayment, penalties, settlement costs or disclosure changes.
- Assess whether growth in GeneSight and other newer products can offset continued hereditary cancer reimbursement pressure.
- Reconcile reported operating cash flow with cash flow excluding contingent consideration and other non-cash items.
- Review the final purchase accounting, financing impact, integration costs and operating performance of the Counsyl acquisition.
- Evaluate the effects of ASC 606 on reported revenue, bad debt expense, margins and prior-period comparability.
- Review debt covenant compliance and liquidity after the post-year-end $300 million borrowing and increased acquisition-related leverage.