Myriad Genetics, Inc. — Fiscal 2014 Second Quarter Form 10-Q
Reporting period: Three and six months ended December 31, 2013, compared with the prior-year periods. The filing was signed February 5, 2014. Results are unaudited and may not be indicative of full-year performance.
Business context
Myriad Genetics develops and commercializes molecular diagnostic tests and provides companion diagnostic services. Its principal businesses are molecular diagnostics, companion diagnostics, and research. The company marketed 12 commercial molecular diagnostic tests and continued international expansion in Europe and Canada.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2013 | Three months ended Dec. 31, 2012 | Six months ended Dec. 31, 2013 | Six months ended Dec. 31, 2012 |
|---|---|---|---|---|
| Total revenue | $204.1 million | $149.1 million | $406.5 million | $282.6 million |
| Operating income | $83.0 million | $55.6 million | $165.9 million | $104.2 million |
| Net income | $50.4 million | $35.0 million | $105.8 million | $65.2 million |
| Diluted EPS | $0.66 | $0.42 | $1.33 | $0.78 |
| Operating margin | 40.7% | 37.3% | 40.8% | 36.9% |
| Net margin | 24.7% | 23.5% | 26.0% | 23.1% |
- Molecular diagnostic testing revenue increased 39% to $196.2 million in the quarter and 45% to $389.1 million for the six-month period.
- Companion diagnostic revenue decreased 7% to $7.9 million in the quarter but increased 19% to $17.4 million for the six-month period.
- Quarterly molecular diagnostic gross margin was 88%, compared with 89% in the prior-year quarter; six-month gross margin was 89% in both periods.
- Research and development expense increased 21% in the quarter and 33% for the six-month period, reflecting greater product development and clinical-study activity.
- Selling, general, and administrative expense increased 31% in the quarter and 34% for the six-month period, driven by sales and marketing, bad debt expense, administration, international expansion, and legal costs.
- Net cash provided by operating activities was $138.0 million, compared with $73.5 million in the prior-year six-month period. Capital expenditures were $8.1 million.
- Cash, cash equivalents, and marketable securities totaled $488.8 million at December 31, 2013, compared with $531.1 million at June 30, 2013.
- Cash and cash equivalents were $71.6 million, and marketable securities totaled $417.2 million, including $135.2 million classified as long-term.
- The company reported no borrowings or traditional debt; total liabilities were $80.7 million, including $13.3 million of unrecognized tax benefits.
Material changes versus the prior comparable period
- Revenue growth was led by BRACAnalysis, BART, COLARIS/COLARIS AP, and the newly launched Myriad myRisk Hereditary Cancer test. Women’s health molecular diagnostic revenue increased 90% in the quarter and 91% for the six-month period, while oncology revenue increased 12% and 20%, respectively.
- Myriad myRisk launched in September 2013, Myriad myPlan Lung Cancer in October 2013, and Myriad myPath Melanoma in November 2013. The company expected broader access to these products during the remainder of fiscal 2014.
- Share repurchases increased materially. The company repurchased $180.1 million of common stock during the six months, including 6.991 million shares, compared with $79.9 million and 3.067 million shares in the prior-year period.
- In November 2013, the board authorized a new $300 million repurchase program. Approximately $273.3 million remained available at December 31, 2013.
- Lower cash and securities balances primarily reflected share repurchases, partly offset by operating cash generation and collections.
Guidance, outlook, risks, contingencies, and unusual items
- Management stated that existing capital resources and expected operating cash flow should fund current and planned operations for the next several years, while noting that additional capital could become necessary if circumstances change.
- On February 2, 2014, the company entered into an agreement to acquire Crescendo Bioscience for $270 million in cash, subject to customary adjustments. The transaction was expected to close by the end of fiscal 2014, subject to regulatory clearance and other closing conditions, and was expected to be funded with existing cash and marketable securities.
- Crescendo had achieved the minimum revenue milestone under the prior option agreement. The company held a $23.0 million note receivable from Crescendo and recognized $2.2 million of related interest income for the six-month period.
- Management identified risks relating to reimbursement, competition, regulatory requirements, intellectual property, litigation, laboratory operations, international expansion, new product launches, acquisitions, and the sustainability of revenue and margins.
- Legal proceedings continued against providers offering competing BRCA1 and BRCA2 testing. New actions were filed against Invitae Corporation and Laboratory Corporation of America Holdings. Management stated that these matters were not expected to have a material adverse effect, but outcomes remain uncertain.
- Bad debt expense increased by $7.2 million for the six-month period. Legal fees increased by $3.3 million, and international administrative costs increased by $2.7 million.
- The six-month effective tax rate was approximately 37%, compared with 39% in the prior-year period. The quarterly rate was approximately 40%.
Important facts for investors to verify
- Whether the strong growth in BRACAnalysis, BART, Myriad myRisk, and women’s health testing is sustainable and how product launches affect gross margins.
- The closing status, final consideration, financing impact, regulatory approvals, and integration results of the Crescendo acquisition.
- Future reimbursement levels, competitive entry, and the effect of ongoing BRCA patent litigation on testing volume and pricing.
- Accounts receivable quality and the unusually higher bad debt expense, including the $9.2 million allowance for doubtful accounts at December 31, 2013.
- The pace of remaining share repurchases and their effect on liquidity, share count, and per-share earnings.
- Execution and spending associated with international expansion, new test development, clinical studies, and laboratory capacity.