MYGN

Business Context and Reporting Period

Company: Myriad Genetics, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2006
Business Overview: Myriad is a biotechnology company focused on molecular diagnostics and drug development. Its operations are divided into three segments: Research, Molecular Diagnostics, and Drug Development. The company has not yet attained profitability and relies on cash reserves and financing activities to fund operations.

Key Financial Metrics

Margins: Gross profit margin for the molecular diagnostics segment was 78% for the three months ended Dec 31, 2006, and 76% for the six-month period.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 36% for the three months and 35% for the six months compared to the prior year periods. This was driven primarily by a 46% (quarterly) and 45% (six-month) increase in molecular diagnostic revenue.
• Research Revenue Decline: Research revenue decreased 25% for both the three and six-month periods, attributed to the successful completion of research collaborations in the prior year.
• Expense Increases:
  • R&D Expenses: Increased 30% (quarterly) and 36% (six-month) due to costs associated with ongoing clinical trials (adding approx. $7.0M quarterly and $16.6M six-month).
  • SG&A Expenses: Increased 39% (quarterly) and 34% (six-month) due to sales commissions supporting diagnostic growth and general expansion costs.
• Liquidity: Total cash, cash equivalents, and marketable securities decreased by $24.2 million (11%) from June 30, 2006, to December 31, 2006, due to clinical trial expenditures and capital asset acquisitions.

Guidance, Outlook, and Risks

Outlook: Management expects to incur losses for at least the next several years due to the expansion of drug discovery, clinical trials, and facility expansion. The company believes existing capital resources are adequate to maintain operations for at least the next two years.

Key Developments:

• Flurizan (Alzheimer's): Two Phase 3 clinical trials are underway (one completed enrollment, one enrolling).
• Azixa (Cancer): Completed Phase 1 trials; Phase 2 trials for brain tumors anticipated in the near future.
• MPC-7869 (Prostate Cancer): Announced on Jan 8, 2007, that the clinical trial did not achieve statistical significance for the primary endpoint. The company will not pursue this compound for cancer but will focus on its activity in Alzheimer's disease.

Risks and Contingencies:

• Significant dependence on the success of clinical trials for drug candidates (Flurizan, Azixa, MPC-2130, MPC-0920).
• Potential need for additional financing if capital resources are consumed faster than anticipated.
• Risks related to regulatory approval, patent infringement claims, and competition.
• Adoption of FIN 48 (Accounting for Income Tax Uncertainties) effective for fiscal years beginning after Dec 15, 2006, though no material effect is expected.

Investor Verification Checklist

• Cash Burn Rate: Verify the sustainability of the $21.2 million net cash used in operating activities over the six-month period against current cash reserves of ~$203.5 million.
• Clinical Trial Progress: Monitor enrollment and interim data for the two Phase 3 Flurizan trials and the upcoming Phase 2 Azixa trials.
• Revenue Concentration: Assess reliance on the molecular diagnostics segment, which generated the vast majority of revenue, versus the non-revenue generating drug development segment.
• Share-Based Compensation: Review the $3.1 million share-based compensation expense for the six months and the $17.9 million of unrecognized future costs.
• Bad Debt Provision: Note the $2.3 million bad debt expense for the six months, reflecting an increase in the allowance for doubtful accounts.