Myriad Genetics, Inc. — Form 10-Q Summary
Reporting period: The filing covers the three and nine months ended March 31, 2019, Myriad’s fiscal third quarter and nine-month year-to-date period. The request metadata identifies “2018 Q3,” but the filing itself clearly reports fiscal 2019 Q3. Comparative 2018 amounts were recast for adoption of ASC 606 revenue recognition.
Business Context
Myriad is a personalized-medicine company focused on molecular diagnostic testing, including hereditary cancer, pharmacogenomic, prenatal, prostate cancer, melanoma, and breast cancer testing, as well as pharmaceutical and clinical services. The company reports two segments: diagnostics and other.
On July 31, 2018, Myriad acquired Counsyl, subsequently renamed Myriad Women’s Health, for total consideration of $405.9 million, including $278.5 million in cash and $127.4 million in Myriad common stock. The acquisition expanded the company’s reproductive and women’s health testing offerings.
Financial Performance and Position
| Metric | Three months ended March 31 | Change | Nine months ended March 31 | Change |
|---|---|---|---|---|
| Total revenue | $216.6 million | +$33.5 million, 18.3% | $635.7 million | +$85.9 million, 15.6% |
| Operating income | $5.9 million | Down from $13.8 million | $13.2 million | Down from $104.3 million |
| Net income attributable to shareholders | $6.9 million | Down from $9.1 million | $8.8 million | Down from $118.9 million |
| Diluted EPS | $0.09 | Down from $0.13 | $0.12 | Down from $1.66 |
| Operating cash flow | Not separately provided | — | $52.2 million | Down from $68.0 million |
Margins: Third-quarter cost of sales was $48.6 million, or 22.4% of revenue, implying a gross margin of approximately 77.6%, compared with 75.9% in the prior-year quarter. Operating margin was approximately 2.7%, compared with 7.5% in the prior-year quarter, and net margin was approximately 3.2%, compared with 5.0%. For the nine-month period, gross margin was approximately 76.3%, operating margin 2.1%, and net margin 1.4%.
- Revenue mix: Third-quarter molecular diagnostic revenue was $200.5 million, including hereditary cancer testing of $117.6 million, GeneSight of $29.6 million, prenatal testing of $30.6 million, Vectra of $11.3 million, Prolaris of $6.9 million, and EndoPredict of $2.8 million. Pharmaceutical and clinical services contributed $16.1 million.
- Expenses: Third-quarter SG&A was $140.6 million, or 64.9% of revenue, versus 58.9% in the prior-year quarter. R&D was $21.5 million, or 9.9% of revenue. Counsyl-related operating expenses, amortization, acquisition and integration costs, and increased IT spending materially affected results.
- Cash and investments: At March 31, 2019, cash and cash equivalents were $84.9 million, current marketable securities were $64.8 million, and long-term marketable securities were $40.3 million, totaling $190.0 million versus $211.3 million at June 30, 2018.
- Debt and liquidity: Net long-term debt was $263.4 million versus $9.3 million at June 30, 2018. The amended revolving facility has a $350.0 million maximum commitment and matures July 31, 2023, with no scheduled principal payments before maturity. The company was in compliance with its financial covenants at March 31, 2019.
- Balance sheet: Total assets were $1.56 billion, including $699.5 million of net intangible assets and $415.9 million of goodwill. Trade accounts receivable increased to $142.6 million from $99.5 million at June 30, 2018.
Cash Flow and Capital Allocation
- Operating activities generated $52.2 million during the first nine months, compared with $68.0 million in the prior-year period.
- Investing activities used $290.9 million, primarily reflecting the $278.5 million cash acquisition payment for Counsyl.
- Financing activities provided $210.1 million, including $340.0 million of revolving-credit borrowings, partially offset by $85.0 million of repayments, $50.0 million of share repurchases, and $1.4 million of refinancing fees.
- Cash decreased by $26.0 million during the nine-month period, ending at $84.9 million.
- Myriad repurchased $50.0 million of common stock during the nine months under an accelerated share repurchase arrangement. The remaining authorization was $110.7 million at March 31, 2019.
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily because of $30.6 million of third-quarter and $80.0 million of nine-month prenatal revenue contributed by Counsyl, along with growth in hereditary cancer testing and Prolaris.
- GeneSight revenue declined $0.8 million in the quarter and $8.2 million year to date because of reduced reimbursement. Vectra revenue declined $3.7 million in the quarter and $4.0 million year to date because of lower volumes.
- Operating income and net income declined substantially because the Counsyl acquisition added operating costs and amortization, SG&A increased, interest expense rose, and the prior year benefited from a $61.3 million reduction in contingent consideration.
- Interest expense increased to $3.2 million in the quarter and $8.8 million year to date, compared with $0.5 million and $2.2 million, respectively, because of acquisition-related debt.
- The third-quarter income tax benefit was $3.6 million, producing an unusual effective tax rate of negative 109.1%. The benefit was attributed primarily to releases of uncertain tax liabilities and tax effects of equity compensation.
- Myriad adopted ASC 606 using the full retrospective method. The principal 2018 impact was reclassification of bad debt expense from SG&A to a reduction of revenue.
- Management stated that a previously disclosed material weakness relating to sales allowance estimates and third-party payer collections was remediated during the first six months of fiscal 2019.
Guidance, Outlook, Commentary, and Risks
The filing does not provide explicit numerical revenue, earnings, or cash-flow guidance. Management stated that existing capital resources and future operating cash flow are expected to support projected operating requirements, contingent consideration, and debt obligations for the foreseeable future, while cautioning that additional financing may be needed if resources are consumed faster than expected.
- Management expects the Counsyl acquisition to increase access to the reproductive testing market and support expansion in women’s health genetics, but integration, cost synergies, and future benefits remain subject to execution risk.
- Myriad reported an in-network agreement with UnitedHealthcare for prenatal testing, expanded Prolaris coverage to approximately 27 million U.S. commercial lives, and received a final local coverage decision for myPath Melanoma. Subsequent to quarter-end, it finalized an agreement covering GeneSight for Kroger Prescription Plans employer clients.
- The company faces reimbursement and coverage uncertainty, including potential reductions in payer reimbursement, changes in government or commercial coverage, and challenges obtaining coverage for newer tests.
- Other risks include competition, regulatory changes, laboratory operations, intellectual-property disputes, technology and product-development risk, acquisition integration, debt covenant compliance, and the ability to repay debt.
- The Department of Health and Human Services Office of Inspector General is investigating possible false or improper Medicare and Medicaid claims. The company has not been served with a complaint and cannot estimate any potential loss.
- A separate investigation involving subsidiary Crescendo Bioscience remains ongoing. Myriad also disclosed an Illinois qui tam-related action involving Assurex Health; the state and county declined to intervene, and the company is unable to estimate potential losses.
- A purported securities class action was dismissed with prejudice on March 25, 2019, and no appeal was filed within the required period.
Investor Verification Points
- Verify the extent to which revenue growth and future profitability depend on Counsyl prenatal testing and successful integration of the acquired business.
- Assess whether higher SG&A, amortization, interest expense, and Counsyl operating costs are temporary integration effects or a continuing structural burden.
- Monitor payer reimbursement trends for GeneSight, hereditary cancer testing, and other products, as well as coverage developments for Prolaris and myPath Melanoma.
- Review the $263.4 million net debt balance, facility covenants, maturity terms, interest costs, and management’s ability to fund operations while continuing acquisitions or share repurchases.
- Reconcile the unusually favorable tax benefit in the quarter and determine the sustainability of the reported effective tax rate.
- Follow the HHS OIG investigations and Assurex litigation, for which the filing states that potential losses cannot be meaningfully estimated.
- Confirm the effect of ASC 606 recast amounts when comparing 2019 results with previously issued 2018 financial statements.