Business Context and Reporting Period
Myriad Genetics, Inc. filed this unaudited Form 10-Q for the three months ended September 30, 2014, the first quarter of fiscal 2015. The company develops and commercializes molecular diagnostic tests and provides pharmaceutical and clinical services. Its principal segments are molecular diagnostics, pharmaceutical and clinical services, and research.
The quarter included the first full reporting period after the February 2014 acquisition of Crescendo Bioscience, which added the Vectra DA rheumatoid arthritis test and expanded the company’s autoimmune diagnostics business.
Key Financial Metrics
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Total revenue | $168.8 million | $202.5 million | Down 17% |
| Molecular diagnostic revenue | $164.5 million | $193.0 million | Down 15% |
| Pharmaceutical and clinical services revenue | $4.3 million | $9.5 million | Down 54% |
| Gross margin | 79.4% | 87.4% | Down 8.0 percentage points |
| Operating income | $25.9 million | $82.9 million | Down 69% |
| Net income | $16.0 million | $55.5 million | Down 71% |
| Diluted EPS | $0.21 | $0.68 | Down 69% |
| Cash flow from operations | $7.0 million | $90.5 million | Down 92% |
Derived margins were approximately 15.4% for operating income and 9.5% for net income in Q1 FY2015, compared with approximately 40.9% and 27.4%, respectively, in the prior-year quarter.
- At September 30, 2014, cash and cash equivalents were $69.8 million, restricted cash was $22.7 million, and marketable securities totaled $143.9 million, including $89.8 million current and $54.1 million long term.
- Cash, cash equivalents, and marketable securities totaled $213.7 million, down from $270.6 million at June 30, 2014.
- Total assets were $809.0 million and total liabilities were $96.9 million. The balance sheet presented no borrowings or debt balance; the filing does not identify outstanding debt at September 30, 2014.
- Capital expenditures were $11.5 million, primarily to support expanded myRisk testing capacity.
- The company repurchased $45.6 million of common stock, or approximately 1.2 million shares. Approximately $120 million remained available under the repurchase authorization.
- The effective income tax rate was approximately 38%, compared with 34% in the prior-year quarter.
Material Changes Versus the Prior Comparable Period
- Hereditary cancer testing revenue declined 20% to $150.6 million. BRACAnalysis revenue fell to $73.7 million from $149.6 million, while myRisk generated $53.1 million of revenue in its launch period.
- Management attributed the revenue decline primarily to the transition from BRACAnalysis to myRisk, increased work in process and turnaround times, the nonrecurrence of celebrity-related testing volumes in the prior-year quarter, and additional market-share loss from competition.
- Vectra DA contributed $10.6 million of molecular diagnostic revenue following the Crescendo acquisition and partially offset declines in hereditary cancer testing.
- Cost of molecular diagnostic testing increased 53% to $32.8 million because of myRisk transition costs, capacity constraints, new-test costs, and the lower-reimbursement Vectra DA product mix.
- Research and development expense increased 35% to $22.6 million, while selling, general, and administrative expense increased 11% to $85.4 million. Crescendo-related expenses were a significant contributor to both increases.
- Operating cash flow declined substantially because of lower earnings, payments of accrued personnel costs and bonuses, $5.1 million of federal tax payments, and increases in other receivables.
- Shares outstanding declined as a result of repurchases, although share-based compensation activity continued. The company began issuing restricted stock units in September 2014 in lieu of certain stock option grants.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management stated that myRisk volumes increased rapidly after its national launch, exceeding 50% of hereditary cancer samples received. Additional staff and equipment were being added, and capacity was expected to improve during the second fiscal quarter, with lower turnaround times anticipated in the second half of fiscal 2015.
- Management expects revenue and margins to fluctuate as the company transitions its product portfolio, introduces new tests, changes product mix, and seeks reimbursement for newer products. No specific revenue or earnings guidance was provided.
- Management believed existing capital resources and expected operating cash generation would fund current and planned operations for the next several years, while noting that additional capital could be required if conditions change.
- Key risks include competition, reimbursement uncertainty, laboratory capacity and turnaround-time issues, regulatory changes, intellectual-property disputes, dependence on licenses, international expansion, acquisitions and integration, and the ability to commercialize new tests.
- The company was involved in multidistrict patent litigation concerning BRCA1 and BRCA2 testing. The Utah federal court dismissed certain patent-owner complaints against Counsyl and Invitae, while related claims continued. The Federal Circuit heard oral arguments regarding the preliminary-injunction appeal involving Ambry Genetics; no decision had been issued by the filing date.
- The New Jersey tax authority was examining the company’s state income tax returns for fiscal years 2007 through 2013. The company had accrued amounts it considered necessary, but the ultimate assessment could differ materially.
- A $22.7 million pledged cash account was classified as restricted cash and was subject to future contractual contingencies.
- The filing corrected an immaterial clerical error in the prior-year comprehensive-income presentation. The correction did not affect net income, EPS, the balance sheet, or cash flows.
Important Facts for Investors to Verify
- Whether myRisk capacity expansion reduced turnaround times and transition-related costs in subsequent quarters.
- Whether hereditary cancer testing volumes and reimbursement stabilized as customers moved from BRACAnalysis to myRisk.
- The sustainability of Vectra DA revenue and its effect on consolidated gross margins.
- Collections, bad-debt expense, accounts receivable, and operating cash flow after the sharp quarterly decline.
- The outcome and potential financial impact of the BRCA-related patent litigation and other intellectual-property matters.
- The status and release conditions of the $22.7 million restricted cash balance.
- Progress in integrating Crescendo and whether the acquisition delivers the expected growth and strategic benefits.
- The remaining share-repurchase authorization and the effect of further repurchases on liquidity and share count.