Myriad Genetics, Inc. — Form 10-Q Summary
Business context and reporting period
Myriad Genetics is a personalized medicine company focused on molecular diagnostic testing, pharmaceutical and clinical services, and related research and development. This unaudited quarterly filing covers the three months ended September 30, 2015, the first quarter of fiscal 2016, with comparison to the three months ended September 30, 2014.
The company reported two segments: diagnostics and other. Diagnostics generated $171.9 million of revenue and $62.3 million of segment operating income; the other segment generated $11.6 million of revenue and a $19.0 million operating loss.
Financial performance and liquidity
| Metric | Three months ended September 30, 2015 | Three months ended September 30, 2014 |
|---|---|---|
| Total revenue | $183.5 million | $168.8 million |
| Operating income | $43.3 million | $25.9 million |
| Net income | $26.6 million | $16.0 million |
| Diluted EPS | $0.37 | $0.21 |
| Cash flow from operations | $24.9 million | $7.0 million |
- Molecular diagnostic revenue was $171.9 million, including hereditary cancer testing of $156.7 million and VectraDA revenue of $11.4 million.
- Pharmaceutical and clinical services revenue was $11.6 million, including approximately $5.0 million contributed by the German Clinic acquisition.
- Cost of sales was $36.5 million, or 19.9% of revenue, producing an implied gross margin of approximately 80.1%.
- Operating margin was approximately 23.6%, compared with 15.3% in the prior-year quarter. Net margin was approximately 14.5%, compared with 9.5%.
- Research and development expense was $17.2 million, and selling, general and administrative expense was $86.5 million.
- Income tax expense was $16.9 million, representing an effective tax rate of approximately 38.8%.
- Cash and cash equivalents were $87.4 million at September 30, 2015. Short- and long-term marketable investment securities totaled $111.1 million, for combined cash, cash equivalents and marketable securities of $198.5 million.
- Total liabilities were $99.9 million. The balance sheet does not report conventional short-term or long-term borrowings; it does report $27.2 million of unrecognized tax benefits, $7.1 million of other long-term liabilities and $6.6 million of long-term deferred taxes.
- Cash flow from investing activities was $9.0 million, while financing activities used $10.3 million. The company repurchased $38.0 million of common stock and received $22.8 million from share issuance under equity compensation plans.
Material changes versus the prior comparable period
- Revenue increased $14.7 million, or approximately 8.7%, primarily from a $6.1 million increase in hereditary cancer testing and a $7.3 million increase in pharmaceutical and clinical services revenue.
- Hereditary cancer testing growth reflected increased volume associated with the myRisk panel. Approximately 80% of incoming hereditary cancer tests were ordered as myRisk by quarter-end.
- Operating income increased $17.4 million, or approximately 67%, and net income increased $10.6 million, or approximately 66%.
- Cost of sales as a percentage of revenue improved to 19.9% from 20.7%, primarily due to laboratory efficiencies, partly offset by the German Clinic.
- R&D expense decreased $5.4 million, primarily because prior-year spending included costs related to formulating, improving, validating and modifying the myRisk production process.
- SG&A increased $1.1 million, including $2.2 million of additional Clinic-related costs, partly offset by a $1.1 million reduction in bad debt expense.
- Operating cash flow increased $17.9 million, while the net increase in cash and cash equivalents rose to $23.3 million from $5.0 million.
- Weighted-average diluted shares declined to 72.1 million from 76.1 million, reflecting share repurchases, partly offset by equity award exercises.
- The company acquired Privatklinik Dr. Robert Schindlbeck GmbH & Co. KG in February 2015 for preliminary consideration of $20.1 million, recording $8.1 million of goodwill.
Guidance, outlook, risks, contingencies and unusual items
- The filing does not provide specific quantitative revenue or earnings guidance. Management stated that existing capital resources and expected operating cash generation should fund current and planned operations for the foreseeable future, subject to changes that could consume capital more quickly.
- Noridian issued a favorable final local coverage determination for Prolaris, effective October 15, 2015, covering certain low- and very-low-risk patients under National Comprehensive Cancer Network guidelines.
- Medicare proposed preliminary pricing for certain advanced diagnostic tests that, if adopted, could reduce VectraDA revenue in the second half of the fiscal year. Management stated that it was challenging the proposed methodology.
- Key risks include reimbursement reductions, transition to new tests, competition, regulatory and healthcare payment changes, intellectual property disputes, laboratory operating issues, international expansion, and integration of acquired businesses.
- The company is subject to ordinary-course claims and legal proceedings; management believes any resulting liability will not materially affect financial position, results or cash flows.
- New Jersey tax returns for fiscal years 2007 through 2013 were under examination. The ultimate assessment, if any, could differ materially from accrued amounts.
- The company had $116.9 million remaining under its $200.0 million share repurchase authorization at September 30, 2015. Repurchases may be suspended or discontinued without notice.
- Share-based compensation expense was $8.7 million for the quarter, with $40.1 million of unrecognized RSU expense and $13.0 million of unrecognized stock-option expense remaining at quarter-end.
Important facts for investors to verify
- Final Medicare pricing and its effect on VectraDA revenue and margins.
- Sustainability of myRisk adoption, hereditary cancer testing volume and reimbursement levels.
- Progress and financial contribution of the German Clinic acquisition.
- Remaining share repurchase authorization, future repurchase pace and resulting share count.
- Resolution and potential exposure from the New Jersey tax examination and unrecognized tax benefits.
- Whether operating cash flow continues to support research and development, acquisitions and share repurchases.
- Potential changes in reimbursement, competitive offerings, regulatory requirements and intellectual property matters.