Myriad Genetics, Inc. — Fiscal 2014 Form 10-K Summary
Reporting period: Annual report for the fiscal year ended June 30, 2014, filed August 13, 2014. The requested “2013 Q4” metadata does not match the filing period. The filing includes unaudited quarterly data for the quarter ended June 30, 2014.
Business Context
Myriad is a molecular diagnostics company offering 13 commercial tests across predictive, diagnostic, personalized and prognostic medicine. Its principal markets include oncology, women’s health, urology, dermatology and rheumatology. It also provides pharmaceutical and clinical services using multiplexed immunoassay technology.
- Approximately 470 U.S. sales representatives and 1,649 full-time equivalent employees at June 30, 2014.
- Completed the acquisition of Crescendo Bioscience in February 2014 for total consideration of approximately $259.0 million and cash paid of approximately $263.6 million, adding the Vectra DA rheumatoid arthritis test.
- Launched or expanded newer products, including myRisk Hereditary Cancer, myPath Melanoma and myPlan Lung Cancer.
Financial Performance and Liquidity
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Total revenue | $778.2 million | $613.2 million | 27% |
| Molecular diagnostic revenue | $748.2 million | $582.4 million | 28% |
| Pharmaceutical and clinical services revenue | $30.0 million | $30.8 million | (2%) |
| Operating income | $274.4 million | $228.0 million | 20% |
| Net income | $176.2 million | $147.1 million | 20% |
| Diluted EPS | $2.25 | $1.77 | 28% |
| Net cash from operating activities | $190.2 million | $173.9 million | 9% |
| Cash, cash equivalents and marketable securities | $270.6 million | $531.1 million | (49%) |
- Calculated operating margin was approximately 35.3%, compared with 37.2% in FY2013; net margin was approximately 22.6%, compared with 24.0%.
- Molecular diagnostic gross margin declined to 87% from 89%, primarily because newer tests and Vectra DA had not yet achieved full reimbursement or economies of scale.
- Research and development expense increased 26% to $67.5 million; selling, general and administrative expense increased 30% to $327.1 million.
- Working capital was $241.8 million at June 30, 2014, compared with $419.5 million one year earlier.
- The filing does not report outstanding debt at June 30, 2014. The $25.0 million Crescendo term loan, including accrued interest, was settled in connection with the acquisition.
- Cash paid for income taxes was $108.2 million. Capital expenditures were $14.3 million.
- Contractual obligations totaled $120.7 million, including $72.3 million of operating leases and $48.4 million of purchase obligations.
Fourth-Quarter Snapshot
| Quarter ended June 30, 2014 | Amount |
|---|---|
| Total revenue | $188.8 million |
| Operating income | $53.3 million |
| Net income | $33.6 million |
| Diluted EPS | $0.43 |
Fourth-quarter revenue increased from $174.1 million in the comparable quarter of fiscal 2013, while net income declined from $44.1 million. Quarterly results were affected by higher operating expenses, acquisition-related costs and timing of reimbursement and testing activity.
Material Changes Versus the Prior Comparable Period
- BRACAnalysis revenue increased 13% to $517.9 million but declined to 66% of total revenue from 75% in FY2013, indicating greater product diversification.
- BART revenue increased 51% to $89.4 million.
- Myriad myRisk generated $53.7 million, or 7% of total revenue, in its initial commercial period.
- Crescendo contributed approximately $14.0 million of revenue and a $26.0 million net loss from acquisition through year-end, including $12.6 million of non-recurring acquisition-related charges.
- Women’s health molecular diagnostic revenue increased 61% to $341.8 million; oncology revenue increased 6% to $392.5 million. Rheumatology contributed $14.0 million following the Crescendo acquisition.
- Medicare pricing changes reduced revenue by approximately $6 million beginning January 1, 2014; part of the reduction was reversed April 1, 2014.
- Share repurchases totaled $287.7 million, including 10.4 million shares, compared with $146.3 million in FY2013. Shares outstanding declined materially, supporting diluted EPS growth.
- Cash declined primarily because of share repurchases, the Crescendo acquisition, income-tax payments and operating expenditures.
Outlook, Commentary, Risks and Unusual Items
- Management expects existing capital resources and operating cash flow to fund current and planned operations for the foreseeable future, but provides no assurance that additional financing will not be required.
- Future growth is expected to depend on expanding existing products, transitioning the hereditary cancer franchise to myRisk, launching additional tests, international expansion and integration of Crescendo.
- Management expects selling, general and administrative costs to continue increasing as the Company supports new product launches, international expansion and existing businesses.
- Major risks include dependence on BRACAnalysis, successful commercialization and reimbursement of new tests, reimbursement reductions, competition, regulatory changes affecting laboratory-developed tests, intellectual-property litigation, patent expiration or invalidation, laboratory disruptions, cybersecurity and privacy incidents, foreign-exchange exposure and acquisition integration.
- The FDA announced plans in July 2014 to regulate many laboratory-developed tests; future requirements could increase costs, delay launches or interrupt sales.
- Myriad and patent owners were involved in consolidated multidistrict litigation against companies offering competing hereditary cancer testing. The Utah federal court denied a preliminary injunction against Ambry, and the denial was appealed.
- The Supreme Court’s 2013 ruling regarding naturally occurring DNA reduced the scope of certain patent protection and contributed to increased competition.
- Crescendo-related unusual items included $6.9 million of accelerated stock-based compensation and $5.7 million of change-of-control bonuses. These were described as one-time items.
- The Company recorded $169.2 million of goodwill at year-end, including $112.3 million from Crescendo, with no goodwill impairment recorded.
- The Company reported no off-balance-sheet arrangements and stated that material litigation liabilities were not expected based on information available at year-end.
Most Important Facts to Verify
- Whether myRisk adoption can offset the long-term concentration and potential decline of BRACAnalysis revenue.
- Reimbursement levels and unit economics for myRisk, Vectra DA and other recently launched tests.
- Progress, costs and outcomes of the hereditary cancer patent litigation and related competitive activity.
- Integration, profitability and cash contribution of Crescendo, including the sustainability of its goodwill and acquired intangible assets.
- Whether regulatory changes for laboratory-developed tests or companion diagnostics will require additional approvals or raise compliance costs.
- Cash deployment decisions, including continued share repurchases, acquisitions and potential financing needs.
- Receivables quality and reimbursement risk, given $81.3 million of net trade receivables, an $9.0 million allowance for doubtful accounts and approximately 85% of revenue derived from third-party payors.