Myriad Genetics, Inc. Fiscal 2016 Form 10-K Summary
Business Context and Reporting Period
Myriad Genetics is a specialty molecular diagnostics company focused on hereditary cancer, oncology, autoimmune, urology, dermatology and pharmaceutical and clinical services. The filing covers the fiscal year ended June 30, 2016, not “2015 Q4” as indicated in the request metadata. The company reported approximately $753.8 million of worldwide revenue and had more than 2,206 full-time equivalent employees at year-end.
Approximately 84% of fiscal 2016 revenue came from hereditary cancer testing. Myriad operates two reportable segments: diagnostics and other, with the latter including pharmaceutical and clinical services, research and development, and corporate activities.
Financial Results and Key Metrics
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Total revenue | $753.8 million | $723.1 million | +$30.7 million, approximately 4.2% |
| Molecular diagnostic revenue | $705.7 million | $695.5 million | +$10.2 million |
| Pharmaceutical and clinical services revenue | $48.1 million | $27.6 million | +$20.5 million |
| Operating income | $166.8 million | $134.2 million | +$32.6 million |
| Net income | $125.3 million | $80.2 million | +$45.1 million |
| Diluted EPS | $1.71 | $1.08 | +$0.63 |
| Net cash from operating activities | $166.3 million | $140.5 million | +$25.8 million |
- Approximate operating margin was 22.1%, compared with 18.6% in fiscal 2015.
- Approximate net margin was 16.6%, compared with 11.1% in fiscal 2015.
- Cost of sales was $157.3 million, or 20.9% of revenue, versus 20.4% in fiscal 2015.
- Research and development expense was $70.6 million, or 9.4% of revenue, versus $75.5 million, or 10.4%, in fiscal 2015.
- Selling, general and administrative expense was $359.1 million, or 47.6% of revenue, versus $366.0 million, or 50.6%.
- Cash, cash equivalents and marketable investment securities totaled $238.9 million at June 30, 2016, compared with $185.4 million a year earlier. Working capital was $242.2 million.
- The balance sheet reports total liabilities of $132.4 million and stockholders’ equity of $748.1 million. No borrowings are separately reported in the financial statements; the filing does not provide a debt balance or debt covenant schedule.
- Contractual obligations totaled $120.2 million, consisting primarily of $101.9 million of operating leases and $18.3 million of purchase obligations.
Cash Flow, Capital Allocation and Liquidity
- Operating cash flow of $166.3 million exceeded net income, although working capital consumed cash through increases in receivables and inventory.
- Investing activities used $91.4 million, including $37.0 million for acquisitions, $5.0 million of capital expenditures and net purchases of marketable securities.
- Financing activities used $68.3 million, including $162.6 million for share repurchases, partially offset by $94.3 million of proceeds from stock issued under share-based compensation plans.
- In June 2016, the board authorized an additional $200 million share repurchase program. $192.3 million remained available at June 30, 2016.
- Management stated that existing liquidity and expected operating cash flow should fund current and planned operations for the foreseeable future, while noting that additional financing could be required if spending or acquisitions exceed expectations.
Material Changes Versus the Prior Comparable Period
- Revenue increased 4.2%, primarily because pharmaceutical and clinical services revenue rose $20.5 million, including a full year of revenue from the German Clinic acquired in February 2015. Prolaris revenue increased $9.2 million due to higher volume and partial Medicare coverage.
- Hereditary cancer revenue declined $6.0 million to $632.3 million, reflecting continued transition from legacy tests to the myRisk Hereditary Cancer panel and reimbursement and competitive pressures.
- Fiscal 2015 had been adversely affected by the loss of approximately $50 million of one-time BRACAnalysis revenue associated with celebrity publicity, a $12 million payor contract loss and a $3 million Medicare reimbursement reduction. These effects did not recur to the same extent in fiscal 2016.
- Operating income improved despite modest revenue growth because SG&A declined $6.9 million and R&D declined $4.9 million. SG&A benefited from lower executive-transition share-based compensation and administrative efficiencies.
- The effective tax rate fell to 25.8% from 40.6%, primarily due to early adoption of ASU 2016-09, reductions in unrecognized tax benefits and other tax-related items. The tax-rate improvement materially contributed to net income growth.
- Myriad acquired Sividon Diagnostics GmbH in May 2016 for $39.0 million upfront, with potential additional milestone payments of up to €15.0 million. The acquisition added the EndoPredict breast cancer prognostic test and increased goodwill by $17.7 million on a preliminary basis.
Guidance, Outlook, Commentary and Risks
The filing does not provide a specific fiscal 2017 revenue or earnings guidance range. Management’s stated priorities are to transition the hereditary cancer market toward panel testing, launch products across additional disease indications and expand internationally.
- Key commercial priorities include scaling myRisk, expanding Prolaris, developing oncology and companion diagnostics, and integrating Sividon and other acquired businesses.
- Management expects SG&A to continue increasing, potentially substantially, as new tests are launched, sales infrastructure is expanded and international operations grow.
- Major risks include intense competition following the 2013 Supreme Court patent decision, reimbursement reductions or denials, dependence on hereditary cancer testing, regulatory changes affecting laboratory-developed tests, FDA approval requirements for companion diagnostics, and execution risk in transitioning from legacy tests to newer products.
- The company relies on key laboratory facilities and a limited number of suppliers. Facility disruption, loss of certification, reagent shortages, information-security incidents or privacy breaches could materially affect operations.
- Approximately 85% of revenue came from private third-party payors, creating material exposure to reimbursement policy and pricing changes. PAMA is expected to make private-payor payment levels increasingly important to Medicare reimbursement.
- Foreign exchange exposure exists because the company conducts business in multiple currencies and does not currently use hedging strategies.
- A May 2016 HIPAA complaint by four patients had not resulted in OCR action as of the filing date; a related CAP matter was closed on July 27, 2016.
- Subsequent to year-end, Myriad agreed to acquire Assurex Health for $225 million in cash, subject to adjustments, with potential performance-based payments of up to $185 million. The transaction was expected to close before the end of the first quarter of fiscal 2017, subject to regulatory and stockholder approvals, and was expected to be funded with cash and potentially short-term debt.
Most Important Facts for Investors to Verify
- Verify the correct reporting period: this is a fiscal 2016 Form 10-K for the year ended June 30, 2016, rather than a 2015 fourth-quarter filing.
- Assess the sustainability of the revenue mix, particularly the 84% concentration in hereditary cancer testing and the transition from BRACAnalysis and other legacy products to myRisk.
- Reconcile the improvement in net income and EPS with the lower effective tax rate and determine how much of the benefit is recurring.
- Evaluate reimbursement trends, including Medicare and private-payor pricing, and the potential impact of PAMA.
- Review the economics, integration progress and milestone obligations related to Sividon and the subsequent Assurex transaction.
- Confirm the company’s actual borrowing capacity and any debt incurred to fund the Assurex acquisition, as the fiscal 2016 balance sheet does not present a separate debt balance.
- Monitor goodwill and intangible assets, which totaled approximately $422.8 million at year-end, for impairment risk if acquired businesses underperform.
- Review the remaining $192.3 million repurchase authorization against cash needs for acquisitions, research and development and international expansion.