Myriad Genetics, Inc. — Form 10-Q Summary
Business context and reporting period
Myriad Genetics is a personalized-medicine company focused on molecular diagnostic testing, pharmaceutical and clinical services, and related research and development. This unaudited Form 10-Q covers the three and six months ended December 31, 2016, the second quarter and first half of fiscal 2017, with comparisons to the same periods of fiscal 2016.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2016 | Three months ended Dec. 31, 2015 | Six months ended Dec. 31, 2016 | Six months ended Dec. 31, 2015 |
|---|---|---|---|---|
| Total revenue | $196.5 million | $193.3 million | $373.9 million | $376.8 million |
| Operating income | $13.2 million | $45.2 million | $19.4 million | $88.5 million |
| Operating margin | 6.7% | 23.4% | 5.2% | 23.5% |
| Net income | $5.9 million | $37.1 million | $4.7 million | $67.5 million |
| Net margin | 3.0% | 19.2% | 1.3% | 17.9% |
| Diluted EPS | $0.09 | $0.50 | $0.07 | $0.92 |
| Net cash from operations | Not separately provided | Not separately provided | $28.5 million | $81.9 million |
- Quarterly molecular diagnostic revenue was $183.9 million, up $1.3 million year over year; pharmaceutical and clinical services revenue was $12.6 million, up $1.9 million.
- Six-month molecular diagnostic revenue was $348.9 million, down $5.6 million; pharmaceutical and clinical services revenue was $25.0 million, up $2.7 million.
- Cost of sales increased to 22.6% of quarterly revenue from 21.0% and to 22.5% of six-month revenue from 20.5%. R&D was 9.5% of quarterly revenue and 10.2% for the six-month period.
- SG&A increased to $120.3 million for the quarter and $232.2 million for the six months, representing 61.2% and 62.1% of revenue, respectively, versus 47.0% and 47.1% in the comparable periods.
- At December 31, 2016, cash and cash equivalents were $108.1 million, current marketable securities were $54.4 million, and long-term marketable securities were $55.5 million, for total cash, cash equivalents, and marketable securities of approximately $218.0 million.
- Net cash increased $39.5 million during the six months, ending at approximately $108.0 million. Investing cash flow was $(160.1) million, primarily due to the Assurex acquisition; financing cash flow was $171.8 million.
- Net long-term debt was $204.0 million, consisting of $205.0 million drawn under a senior secured revolving facility less debt discounts. The facility has up to $300.0 million of capacity and matures December 23, 2021, with no scheduled principal payments before maturity.
Material changes versus the prior comparable period
- Revenue was up 1.7% in the quarter but down 0.8% for the six months. Hereditary Cancer Testing revenue declined $21.7 million in the quarter and $39.0 million for the six months due primarily to lower volumes and reimbursement.
- GeneSight contributed $21.7 million of quarterly revenue and $29.0 million of six-month revenue following the August 31, 2016 acquisition of Assurex Health. Management stated that Assurex reduced diluted EPS by $0.18 year to date.
- Prolaris and EndoPredict revenue increased, while Vectra DA revenue declined modestly. Pharmaceutical and clinical services revenue benefited from the timing of research projects.
- The Assurex acquisition added $351.6 million of total consideration, including $216.1 million of cash and $130.0 million of fair-valued performance-based milestones. It increased goodwill by $120.5 million and intangible assets materially.
- SG&A increased largely from Assurex operating costs and acquisition and integration expenses. Six-month SG&A also included $10.8 million of Assurex acquisition and integration costs.
- Operating income and net income declined sharply because of higher SG&A, increased cost of sales, higher R&D, increased amortization, interest expense, and unusual items. Six-month depreciation and amortization increased to $22.1 million from $13.5 million.
- The company repurchased and retired 1.6 million shares for $31.6 million during the six months. Approximately $160.7 million remained under the $200.0 million authorization at December 31, 2016.
Guidance, outlook, risks and unusual items
- The filing provides no specific revenue, earnings, or margin guidance. Management stated that existing capital resources and expected operating cash flow should fund foreseeable operations, but additional financing could be required if resources are consumed faster than expected.
- A Medicare administrative contractor issued a draft non-coverage decision for Vectra DA. If implemented, management stated that Crescendo-related goodwill, reported at $112.3 million, could be impaired.
- The company recorded a $2.5 million impairment of its RainDance Technologies investment, a $1.3 million loss on extinguishment of debt, and a one-time $2.0 million indirect tax expense during the six months.
- The effective tax rate increased to 51.2% for the quarter and 70.8% for the six months, versus 17.6% and 23.8%, respectively, in the prior-year periods. Variability reflected acquisition-related items, penalties, valuation allowance changes, and share-based compensation tax effects.
- The revolving facility contains leverage and interest-ratio covenants and restrictions on additional debt, liens, asset sales, dividends, mergers, and certain change-in-control transactions. Covenants became effective during the quarter ending March 31, 2017.
- Esoterix Genetic Laboratories and Johns Hopkins University sued Myriad alleging patent infringement relating to certain laboratory processes and seeking damages and injunctive relief. Myriad denied the claims and filed counterclaims; management did not expect other disclosed proceedings to materially affect the company.
- Key ongoing risks include reimbursement reductions, declining hereditary cancer testing volumes, regulatory and healthcare-policy changes, competition, intellectual-property litigation, integration of acquisitions, impairment of goodwill or intangible assets, and compliance with debt covenants.
Important facts for investors to verify
- Whether the Vectra DA draft non-coverage decision becomes final and whether it triggers impairment testing or a goodwill impairment charge.
- Assurex revenue growth, operating losses, milestone payments, and the company’s ability to realize expected integration benefits.
- Hereditary Cancer Testing volumes, reimbursement rates, accounts receivable collections, and the elevated bad-debt expense.
- Compliance with the revolving facility’s leverage and interest covenants beginning March 31, 2017.
- The timing and funding of the $125.5 million Assurex contingent consideration liability and $11.6 million Sividon contingent consideration liability.
- Whether operating cash flow can support debt service, acquisitions, research and development, and the remaining $160.7 million share-repurchase authorization.