Business Context and Reporting Period
Myriad Genetics, Inc. filed this unaudited Form 10-Q for the three months ended September 30, 2011, the first quarter of fiscal 2012. The company develops and markets predictive, personalized, prognostic, molecular diagnostic tests and companion diagnostic services. It reported three segments: genetics, molecular diagnostics and companion diagnostics.
Myriad offered nine commercial molecular diagnostic tests, primarily marketed through a U.S. sales force of approximately 340 people. The May 2011 acquisition of Myriad RBM added companion diagnostic services. Management was expanding into Europe and other international markets and expected initial European product sales during fiscal 2012.
Financial Performance and Position
| Metric | Three months ended September 30, 2011 | Prior comparable period | Change |
|---|---|---|---|
| Total revenue | $110.5 million | $91.9 million | 20% |
| Operating income | $41.5 million | $35.6 million | 17% |
| Net income | $25.1 million | $22.5 million | 11% |
| Diluted EPS | $0.29 | $0.24 | 21% |
| Operating margin | 37.5% | 38.8% | Lower |
| Net margin | 22.7% | 24.5% | Lower |
| Cash flow from operations | $31.9 million | $29.3 million | 9% |
Molecular diagnostic revenue was $104.0 million, up 13%, while companion diagnostic service revenue contributed $6.5 million versus none in the prior-year quarter. BRACAnalysis represented approximately 81% of total revenue. Molecular diagnostic gross margin was 89%, compared with 88% in the prior-year period; companion diagnostic gross margin was 53%.
Research and development expense increased 48% to $8.5 million. Selling, general and administrative expense increased 17% to $46.1 million, reflecting Myriad RBM costs, support for molecular diagnostic growth, European expansion, sales and marketing, and share-based compensation.
At September 30, 2011, cash and cash equivalents were $62.7 million, current marketable securities were $286.8 million, and long-term marketable securities were $52.2 million. Total cash, cash equivalents and marketable securities were $401.7 million, down from $417.3 million at June 30, 2011. Current liabilities were $31.3 million and unrecognized tax benefits were $9.4 million. The filing does not report conventional borrowings by Myriad; instead, it reports a $25.0 million loan receivable from Crescendo.
The balance sheet text presents total assets of $611.7 million but total liabilities plus stockholders’ equity of $619.7 million. This apparent $8.0 million inconsistency should be verified against the filed financial statements or XBRL data.
Material Changes Versus the Prior Comparable Period
- Revenue increased 20%, driven by 13% growth in molecular diagnostic testing, price increases and $6.5 million of newly acquired companion diagnostic revenue.
- BRACAnalysis revenue increased 11% to $89.5 million; COLARIS and COLARIS AP revenue increased 35% to $9.6 million.
- R&D increased by $2.7 million, and SG&A increased by $6.6 million, partially offsetting revenue growth.
- Operating margin declined to approximately 37.5% from 38.8%, while molecular diagnostic gross margin improved to 89% from 88%.
- Weighted-average basic shares declined to 85.2 million from 93.3 million, primarily reflecting stock repurchases, supporting the increase in EPS.
- Myriad repurchased and retired 1.684 million shares for $37.2 million during the quarter. A $200 million repurchase authorization announced in August 2011 remained ongoing, with approximately $190.9 million available at September 30.
- Cash flow from investing changed from $16.7 million provided in the prior-year quarter to $2.5 million used, primarily due to the Crescendo investment and related loan.
Outlook, Commentary, Risks and Unusual Items
Management stated that existing capital resources and expected operating cash flow should fund current and planned operations for the foreseeable future, while noting that future financing could become necessary if capital is consumed faster than expected.
Management expected R&D expenses to increase over the next several years as the company develops its pipeline and expands molecular and companion diagnostic offerings. SG&A was expected to fluctuate substantially with product launches, support for existing businesses and international expansion.
On September 8, 2011, Myriad loaned Crescendo $25.0 million at 6% interest and received an exclusive three-year option to acquire Crescendo. The loan’s principal is due at maturity, while $8.0 million of the transaction value was allocated to the purchase option and $17.0 million to the note receivable. The option’s exercise price depends on revenue milestones or a fixed price under specified circumstances. The option is subject to impairment evaluation and the note receivable to collectability evaluation.
Key risks include dependence on BRACAnalysis, reimbursement and healthcare payment changes, regulatory review, patent and licensing disputes, competition, the ability to develop and commercialize new tests, international expansion, integration of acquisitions, laboratory operating issues and the performance of the Crescendo investment.
Income tax expense was $16.7 million, or approximately 40% of pretax income, compared with 38% in the prior-year quarter. Management stated that net operating loss carryforwards made actual cash tax payments minimal relative to reported tax expense. Legal proceedings were not expected to have a material adverse effect, and management reported no material changes to previously disclosed risk factors.
Important Facts for Investors to Verify
- Reconcile the apparent $8.0 million balance sheet discrepancy between reported total assets and total liabilities plus stockholders’ equity.
- Assess the sustainability of revenue concentration in BRACAnalysis, which generated approximately 81% of total revenue.
- Review reimbursement, regulatory and patent developments affecting the company’s diagnostic tests.
- Evaluate the economics, valuation assumptions, impairment exposure and collectability of the Crescendo option and $25.0 million loan.
- Track the remaining $190.9 million stock repurchase authorization and its effect on liquidity and share count.
- Monitor whether rising R&D, international expansion and acquired-business costs reduce operating leverage.
- Confirm the timing and costs of European operations and the planned launch of the tenth molecular diagnostic test.