Myriad Genetics, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Myriad Genetics is a molecular diagnostics company offering nine commercial predictive, personalized, and prognostic medicine products, including BRACAnalysis, COLARIS, Prolaris, and Panexia. The filing covers the three and nine months ended March 31, 2011, the company’s fiscal third quarter and first nine months of fiscal 2011. Comparisons are with the corresponding 2010 periods.
- Revenue is generated primarily by molecular diagnostic testing, with oncology and women’s health as the principal markets.
- The company had a 315-person U.S. sales force and was planning international expansion.
Financial Results and Liquidity
| Metric | Three Months Ended March 31, 2011 | Three Months Ended March 31, 2010 | Nine Months Ended March 31, 2011 | Nine Months Ended March 31, 2010 |
|---|---|---|---|---|
| Revenue | $102.4 million | $90.8 million | $294.7 million | $268.7 million |
| Operating income | $41.8 million | $33.2 million | $116.0 million | $97.5 million |
| Net income | $27.9 million | $33.3 million | $74.7 million | $99.1 million |
| Diluted EPS | $0.31 | $0.33 | $0.80 | $1.00 |
| Net cash from operating activities | Not separately provided | Not separately provided | $94.5 million | $108.6 million |
- Quarterly revenue increased 13%; management attributed approximately 8% to higher testing volume and 5% to price increases. Nine-month revenue increased 10%, driven by approximately 6% volume growth and 4% pricing.
- Gross margin was 89% in the quarter versus 88% in the prior-year quarter, and 88% for both nine-month periods. Derived operating margins were approximately 40.9% and 39.4% for the quarter and nine months, respectively.
- Quarterly and nine-month net income declined despite higher operating income because income tax expense increased to $14.4 million and $42.9 million from $1.2 million and $3.2 million, respectively. The 2011 effective tax rates were approximately 34% and 36%.
- Cash, cash equivalents, and marketable investment securities totaled $451.5 million at March 31, 2011, down from $488.4 million at June 30, 2010. Cash and cash equivalents alone were $67.4 million.
- The filing presents no debt balance or significant borrowing facility. Total liabilities were $32.8 million, including $9.4 million of unrecognized tax benefits, against $524.5 million of stockholders’ equity.
- Accounts receivable were $46.4 million, net of a $4.2 million doubtful-account allowance. Available-for-sale securities included $1.35 million of auction-rate securities classified as Level 3.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected increased testing volumes, price increases, and wider product acceptance. BRACAnalysis remained the largest product, generating $90.3 million of quarterly revenue versus $79.8 million in the prior year.
- Research and development expense increased 13% to $6.7 million for the quarter and 11% to $18.5 million for the nine months, reflecting clinical studies, product discovery, and acquired in-process technology.
- Selling, general, and administrative expense increased 5% to $42.8 million for the quarter and 4% to $126.0 million for the nine months, driven by share-based compensation, international expansion planning, and sales and marketing investment.
- Interest income declined 56% for the quarter and 61% for the nine months because of lower market interest rates.
- The weighted-average diluted share count declined to 90.1 million for the quarter and 92.8 million for the nine months, versus 99.7 million and 99.5 million, respectively, reflecting substantial share repurchases.
- The company repurchased approximately 4.5 million shares in the quarter and 9.1 million shares during the nine months for aggregate consideration of $178.6 million; cumulative repurchases under all programs totaled approximately 13.1 million shares.
Outlook, Commentary, Risks, and Unusual Items
- Management stated that existing capital resources and expected operating cash flow should fund current and planned operations for at least three years, although additional financing could become desirable or necessary depending on future conditions.
- No formal revenue or earnings guidance was provided. Management expects research and development expense to increase as the product pipeline expands, while selling, general, and administrative expense may fluctuate with product launches and international expansion.
- Management expects actual cash income-tax payments to remain minimal relative to reported tax expense because net operating loss carryforwards offset taxes payable.
- In December 2010, the company acquired melanoma diagnostic technology for $1.5 million, immediately expensed as in-process research and development, with additional contingent consideration tied to future commercial success.
- On April 27, 2011, after the reporting date, the company agreed to acquire Rules Based Medicine for $80 million in cash, subject to antitrust approval and other closing matters. The filing states that closing was anticipated by May 31, 2011.
- On March 1, 2011, the company authorized an additional $100 million stock repurchase program, including a $50 million accelerated share repurchase expected to be completed by June 2011 and a remaining $50 million expected to be completed by December 31, 2011.
- Key risks include reimbursement and healthcare-payment changes, regulatory review, patent and licensing disputes, competing technologies, laboratory operating issues, dependence on existing products, international expansion, acquisitions and integration, and variable testing volumes and margins.
- Management reported no material changes to previously disclosed legal proceedings or market risks, and stated that disclosure controls were effective.
Investor Verification Checklist
- Verify the effect of the materially higher effective tax rate on sustainable earnings and future cash-tax payments.
- Assess concentration in BRACAnalysis and the oncology and women’s health markets.
- Review the completion, purchase-price allocation, financing impact, and integration risks of the $80 million Rules Based Medicine acquisition.
- Confirm the remaining obligations and final share count under the accelerated and other repurchase programs.
- Evaluate whether volume and pricing growth can continue while research, sales, marketing, and international-expansion costs increase.
- Review reimbursement, regulatory, patent, licensing, and competition developments that could affect product revenue and margins.
- Monitor the liquidity and valuation risks associated with the company’s investment portfolio, including the $1.35 million of Level 3 auction-rate securities.