MYRIAD GENETICS INC quarterly report, Q2 FY2011

Myriad Genetics, Inc. — Form 10-Q Summary

Business context and reporting period

Myriad Genetics is a molecular diagnostics company focused on predictive, personalized, and prognostic medicine. The filing covers the three and six months ended December 31, 2010, the company’s fiscal second quarter and first six months of fiscal 2011. The company offered nine commercial molecular diagnostic products, marketed primarily in the United States through a 315-person sales force. Foreign revenues were not material.

Financial performance and liquidity

Metric	Three months ended Dec. 31, 2010	Three months ended Dec. 31, 2009	Six months ended Dec. 31, 2010	Six months ended Dec. 31, 2009
Revenue	$100.4 million	$92.8 million	$192.3 million	$177.9 million
Operating income	$38.6 million	$34.5 million	$74.2 million	$64.2 million
Net income	$24.2 million	$35.4 million	$46.7 million	$65.8 million
Diluted EPS	$0.26	$0.36	$0.50	$0.66
Operating margin	Approximately 38.4%	Approximately 37.2%	Approximately 38.6%	Approximately 36.1%
Gross margin	88%	88%	88%	88%

Revenue increased approximately 8% year over year in both the quarter and six-month period. Management attributed quarterly growth to approximately 5.4% higher testing volume and 2.6% price increases; six-month growth reflected approximately 5.5% higher volume and 2.5% price increases.
BRACAnalysis generated $89.2 million of quarterly revenue and $169.9 million for the six-month period, representing the substantial majority of total revenue.
Quarterly and six-month net income declined primarily because income tax expense increased to $14.9 million and $28.5 million, respectively, versus $1.0 million and $1.9 million in the prior-year periods. The current effective tax rate was approximately 38%.
Management stated that utilization of net operating loss carryforwards made actual cash taxes significantly lower than reported tax expense.
Net cash provided by operating activities was $66.4 million for the six months, compared with $65.9 million in the prior-year period. Capital expenditures were $3.0 million.
Cash and cash equivalents were $67.7 million at December 31, 2010. Marketable investment securities totaled $426.7 million, including $323.6 million classified as current and $103.1 million classified as long-term. Total cash, cash equivalents, and investments were approximately $494.4 million.
The filing presents no debt balance or borrowings; total liabilities were $32.5 million, including $23.2 million of current liabilities and $9.3 million of unrecognized tax benefits.
Management believed existing capital resources and expected operating cash flow were sufficient to support current and planned operations for at least two years, while noting that additional financing could become necessary depending on future conditions.

Material changes versus the prior comparable period

Revenue increased $7.7 million, or approximately 8%, in the quarter and $14.4 million, or approximately 8%, for six months.
Operating income increased approximately 12% in the quarter and 15% for six months, while gross margin remained unchanged at 88%.
Net income decreased approximately 32% in the quarter and 29% for six months because of the substantially higher income tax provision and lower interest income.
Interest income declined 64% in the quarter and 63% for six months because of lower interest rates.
Research and development expense increased 20% in the quarter and 10% for six months, reflecting clinical studies, product development, and acquired in-process research and development technology.
Selling, general, and administrative expense increased 4% in the quarter and 3% for six months, primarily from sales and marketing investments and international expansion evaluation.
The company repurchased $90.5 million of common stock during the six months, including approximately 4.6 million shares. Approximately $38.1 million remained available under the repurchase programs at December 31, 2010.
Weighted-average basic shares declined to 91.5 million in the quarter and 92.4 million for six months, versus 96.3 million and 96.1 million, respectively, reflecting share repurchases.

Guidance, outlook, risks, and unusual items

The company expected to complete the additional $100 million share repurchase authorization on or before June 30, 2011.
Management expected research and development spending to increase over the next several years as it develops additional diagnostic products. Selling, general, and administrative spending was expected to fluctuate with product launches and international expansion efforts.
In December 2010, the company acquired melanoma diagnostic technology for $1.5 million. The amount was immediately expensed as in-process research and development, with additional contingent payments tied to future commercial success.
Panexia, a predictive medicine product for pancreatic and related cancer, was launched in December 2010.
Management cited continuing economic pressures, including unemployment, fewer physician visits, higher insurance deductibles, and reduced employer-sponsored coverage, as factors that could constrain revenue growth.
Key risks include reimbursement changes, regulatory review, intellectual property disputes, competition, product development and commercialization failure, laboratory operating problems, license termination, and difficulty expanding internationally.
International expansion could expose the company to foreign regulatory approvals, price controls, differing reimbursement systems, collection and currency risks, political instability, and compliance risks.
The company reported no material changes to previously disclosed legal proceedings or market risks. Management concluded that disclosure controls were effective and that no material changes had affected internal control over financial reporting.

Most important facts for investors to verify

Whether approximately 8% revenue growth can continue after adjusting for price increases and testing-volume growth.
The sustainability of the 88% gross margin and the company’s high reliance on BRACAnalysis revenue.
The effect of the approximately 38% effective tax rate, future use of net operating loss carryforwards, and potential tax examinations.
The pace and economics of the remaining share repurchase authorization and its effect on liquidity and per-share results.
The commercial development, contingent consideration, and regulatory status of the acquired melanoma technology and newer products such as Panexia.
Progress, required investment, reimbursement, and regulatory risks associated with international expansion.
The composition, liquidity, and valuation risk of the company’s marketable securities, including $1.4 million of Level 3 auction rate securities.