Myriad Genetics, Inc. Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2012. The request references 2011 Q4, but the filing is the 2012 annual report and includes unaudited quarterly data for the quarter ended June 30, 2012.
Business Context
Myriad is a molecular diagnostics company offering predictive, personalized and prognostic tests, primarily through its Myriad Genetic Laboratories subsidiary. It also provides companion diagnostic and biomarker discovery services through Myriad RBM, acquired in May 2011. The company had launched nine commercial molecular diagnostic tests and employed approximately 1,169 full-time equivalent employees as of July 25, 2012.
BRACAnalysis remained the principal product, representing 81.7% of fiscal 2012 revenue. The company also continued international expansion, research and development, and development of new tests across oncology, women’s health, urology, autoimmune disease and other indications.
Financial Performance and Liquidity
| Metric | Fiscal 2012 | Fiscal 2011 | Change |
|---|---|---|---|
| Total revenue | $496.0 million | $402.1 million | 23% |
| Molecular diagnostic revenue | $472.4 million | $400.0 million | 18% |
| Companion diagnostic revenue | $23.6 million | $2.0 million | 1,059% |
| Operating income | $180.3 million | $157.8 million | 14% |
| Net income | $112.2 million | $100.7 million | 11% |
| Diluted EPS | $1.30 | $1.10 | 18% |
| Cash flow from operations | $141.8 million | $130.8 million | 8% |
Operating margin was approximately 36.4%, compared with 39.2% in fiscal 2011. Net margin was approximately 22.6%, compared with 25.0% in the prior year. The lower margins reflected higher research and development and selling, general and administrative expenses.
- Research and development expense increased 54% to $42.6 million, primarily due to Myriad RBM protein biomarker work, clinical studies and new product development.
- Selling, general and administrative expense increased 23% to $208.4 million, driven by sales and marketing investment, Myriad RBM costs, international expansion, bad debt expense and share-based compensation.
- Cash, cash equivalents and marketable securities totaled $454.2 million at June 30, 2012, up from $417.3 million.
- Working capital was $377.5 million and stockholders’ equity was $635.7 million.
- The balance sheet reported no traditional borrowings or debt balance. Total liabilities were $55.0 million, including $45.0 million of current liabilities and $10.0 million of unrecognized tax benefits.
- The company issued a $25.0 million six-year term loan to Crescendo Bioscience; $19.0 million was recorded as a note receivable and $8.0 million as an option asset at year-end.
- Capital expenditures were $9.4 million. Financing activities included $128.5 million of share repurchases, partially offset by $25.0 million of stock issuance proceeds and $34.2 million of excess tax benefits.
Fourth-Quarter Snapshot
| Quarter ended June 30, 2012 | Amount |
|---|---|
| Revenue | $133.0 million |
| Operating income | $47.3 million |
| Net income | $29.1 million |
| Diluted EPS | $0.34 |
Fourth-quarter revenue increased from $107.4 million in the comparable quarter of fiscal 2011. Fourth-quarter operating margin was approximately 35.6% and net margin was approximately 21.9%.
Material Changes Versus the Prior Comparable Period
- Total revenue increased 23%, with approximately 18 percentage points attributed to higher molecular diagnostic testing volume and approximately 5 percentage points to companion diagnostic services.
- BRACAnalysis revenue increased 15% to $405.5 million, while its share of total revenue declined from 87.8% to 81.7%, indicating some diversification.
- COLARIS and COLARIS AP revenue increased 48% to $43.3 million; other molecular diagnostic revenue increased 32% to $23.6 million.
- Myriad RBM contributed $23.6 million of fiscal 2012 revenue versus $2.0 million in fiscal 2011, which included only one month of post-acquisition activity.
- Research and development increased substantially, while operating income grew more slowly than revenue and operating margin declined.
- The company repurchased 5.7 million shares for approximately $128.5 million during fiscal 2012. Shares outstanding declined from 86.2 million at June 30, 2011 to 82.6 million at June 30, 2012.
- Income tax expense increased to $72.4 million from $58.9 million. The fiscal 2012 effective tax rate was approximately 39%, and $34.2 million of excess tax benefits from stock compensation reduced taxes payable but did not reduce reported tax expense.
Guidance, Outlook, Risks and Unusual Items
No specific quantitative fiscal 2013 revenue or earnings guidance is provided in the filing. Management expects research and development and selling, general and administrative expenses to increase as it expands internationally, supports existing tests and develops new molecular diagnostic and companion diagnostic products. Management states that existing resources and expected operating cash flow should fund current and planned operations for the foreseeable future, subject to changes in its operating plan.
- Concentration risk: BRACAnalysis generated approximately 82% of revenue, and most tests are generally used once per patient.
- Reimbursement risk: Approximately 85% of revenue came from third-party payors. Medicare reimbursement rates for new molecular genetic CPT codes had not yet been determined and could affect future revenue, earnings and cash flow.
- Intellectual property litigation: The Association for Molecular Pathology litigation challenging certain BRCA1 and BRCA2 patent claims had been remanded to the Federal Circuit following the Supreme Court’s decision in Mayo v. Prometheus. Management did not believe the case would have a material adverse impact because more than 500 additional claims were not subject to the lawsuit.
- Crescendo exposure: The company could incur a loss of up to $25.0 million plus unpaid interest if Crescendo defaults and the company does not exercise its acquisition option.
- Goodwill sensitivity: Companion Diagnostic goodwill totaled $56.9 million. The reporting unit’s estimated fair value exceeded carrying value by less than 10%, making it sensitive to changes in discount rates, growth assumptions and operating performance.
- Regulatory risk: Future FDA regulation or premarket review of laboratory-developed tests could delay or increase the cost of offering current or future tests.
- Operational concentration: U.S. molecular diagnostic testing, European molecular diagnostic testing and companion diagnostic services each rely substantially on a single laboratory facility.
- Investment risk: The investment portfolio included $1.35 million of auction rate securities classified as Level 3 assets. A 25-basis-point increase in interest rates was estimated to reduce portfolio fair value by approximately $1.1 million.
- Contractual obligations: Fixed operating lease and purchase obligations totaled $84.6 million, including $82.2 million of operating lease commitments.
Investor Verification Checklist
- Confirm the filing period: this is a fiscal 2012 Form 10-K, not a fiscal 2011 fourth-quarter filing.
- Reconcile revenue growth with testing volumes, reimbursement rates and the contribution from Myriad RBM.
- Assess the sustainability of margins as research, sales, international and administrative spending increase.
- Monitor BRACAnalysis concentration and the commercial performance of newer tests and companion diagnostic services.
- Review Medicare reimbursement decisions for the new molecular genetic CPT codes effective in 2013.
- Track developments in the BRCA patent litigation and broader changes in diagnostic patent law.
- Evaluate collectability and valuation of the Crescendo note receivable and acquisition option.
- Review the sensitivity of the $56.9 million companion diagnostic goodwill balance to revised forecasts.
- Verify share repurchase activity, diluted share count and the effect of stock-based compensation on cash taxes and reported EPS.