Myriad Genetics, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2017, the first quarter of fiscal 2018. The filing was signed November 8, 2017. Results are unaudited and should be read with the fiscal 2017 Form 10-K.
Business context
Myriad is a personalized medicine company providing molecular diagnostic testing, pharmaceutical and clinical services, and related research and development. Reportable segments are diagnostics and other. The quarter included a full quarter of GeneSight revenue from the Assurex acquisition completed in August 2016.
Financial performance and liquidity
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Total revenue | $190.2 million | $177.5 million | +$12.7 million, approximately 7.2% |
| Molecular diagnostic revenue | $178.8 million | $165.1 million | +$13.7 million |
| Pharmaceutical and clinical services revenue | $11.4 million | $12.4 million | -$1.0 million |
| Operating income | $87.4 million | $5.7 million | +$81.7 million |
| Operating margin | 45.9% | 3.2% | Significantly higher |
| Net income attributable to shareholders | $81.1 million | $(1.2) million | +$82.3 million |
| Diluted EPS | $1.15 | $(0.02) | +$1.17 |
| Cash flow from operations | $23.5 million | $(2.9) million | +$26.4 million |
Operating results benefited heavily from a $73.2 million decrease in the fair value of acquisition-related contingent consideration. This non-cash adjustment was recorded in operating income and substantially explains the year-over-year earnings improvement. Excluding this unusual item, the filing does not present a separate adjusted operating-income or adjusted-net-income measure.
- Revenue mix: Hereditary Cancer Testing revenue declined $12.6 million to $126.7 million, primarily due to reduced reimbursement. GeneSight revenue increased $21.6 million to $28.8 million, reflecting a full quarter of Assurex revenue and higher volumes. VectraDA revenue increased $4.4 million to $16.0 million, partly due to Medicare billing and collection timing and a change to accrual-basis recognition for some payers.
- Costs: Cost of sales increased to $43.0 million from $40.0 million, with cost of sales at 22.6% of revenue versus 22.5%. Research and development declined to $17.8 million from $19.4 million. Reported SG&A declined to $42.0 million from $112.4 million, primarily because of the contingent-consideration adjustment and the Elevate 2020 efficiency program.
- Cash and investments: Cash and cash equivalents were $87.9 million at September 30, 2017, compared with $102.4 million at June 30, 2017. Total cash, cash equivalents, and marketable securities were $198.4 million versus $199.2 million.
- Debt: Net long-term debt was $74.2 million, down from $99.1 million, after a $25.0 million repayment on the revolving credit facility. The facility matures December 23, 2021, has no scheduled principal payments before maturity, and the company was in compliance with its financial covenants.
- Balance sheet: Total assets were $1.228 billion and total liabilities were $357.7 million. Intangible assets and goodwill totaled $802.8 million, representing a substantial portion of assets.
Material changes versus the prior comparable period
- Total revenue grew approximately 7.2%, but the composition shifted materially toward GeneSight and VectraDA while Hereditary Cancer Testing declined.
- The company moved from a $1.2 million shareholder net loss to $81.1 million of net income, primarily because the prior period included acquisition-related contingent-consideration expense and the current period included a $73.2 million fair-value reduction.
- Operating cash flow improved to $23.5 million from negative $2.9 million. Prior-year investing cash flow included $213.0 million for the Assurex acquisition; no acquisition cash payment occurred in the current quarter.
- No shares were repurchased during the quarter. The remaining authorization was $160.7 million at September 30, 2017.
- The company launched riskScore for the myRisk hereditary cancer test. GeneSight clinical studies reported statistically significant improvements in response and remission, including a generalized-anxiety study in which congruent therapy improved GAD-7 symptoms 45% versus 26% for non-congruent therapy.
- The company corrected a prior-period classification error that moved $0.5 million of contingent-consideration expense from other income and expense to operating income. There was no effect on net income or EPS.
Guidance, outlook, risks, and contingencies
Management did not provide explicit numerical revenue or earnings guidance in the filing. Management stated that existing capital resources and expected future sales should be sufficient for projected operating needs and debt repayment for the foreseeable future, while cautioning that capital could be consumed faster than expected and additional financing might become necessary.
- Key risks include reimbursement reductions, competition, adoption and commercialization of new tests, regulatory and healthcare-payment changes, intellectual-property disputes, laboratory operating issues, and the ability to integrate and obtain benefits from acquisitions.
- The company is subject to IRS, New Jersey, and Canadian tax audits. The ultimate amounts payable may differ materially from accrued amounts.
- The company reported no legal proceeding expected to have a material adverse effect. A patent dispute with Esoterix Genetic Laboratories and Johns Hopkins University was dismissed without prejudice under a confidential August 2017 settlement, along with related inter partes review petitions.
- The company expects to adopt the new revenue-recognition standard on July 1, 2018 using the full retrospective method. Management preliminarily expects historical bad debt expense, primarily patient responsibility, to be presented as a reduction of revenue.
- The company plans to adopt the new lease standard in the first quarter of fiscal 2019 and was still evaluating its impact.
- The revolving credit facility contains restrictions on additional debt, liens, mergers, asset sales, dividends, distributions, and certain change-in-control transactions.
Investor verification checklist
- Assess recurring operating performance excluding the $73.2 million contingent-consideration fair-value benefit.
- Verify sustainability of GeneSight growth and the impact of reduced reimbursement on Hereditary Cancer Testing.
- Review payer mix, reimbursement trends, bad debt presentation, and the effect of the planned revenue-recognition adoption.
- Confirm debt covenant compliance, repayment capacity, facility terms, and available liquidity.
- Evaluate the carrying value and impairment risk of approximately $802.8 million of goodwill and intangible assets.
- Monitor tax audits, contingent consideration, acquisition integration, and the outcome of future clinical and regulatory developments.