Myriad Genetics, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Myriad Genetics develops and markets molecular diagnostic products focused on predictive, personalized, and prognostic medicine. The filing covers the three months ended September 30, 2010, the company’s fiscal first quarter, compared with the three months ended September 30, 2009. Myriad offered eight commercial molecular diagnostic products and employed a 315-person U.S. sales force. BRACAnalysis remained the principal product.
Key Financial Metrics
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Revenue | $91.9 million | $85.1 million | Up 8% |
| Gross profit | $80.8 million | $74.1 million | Up approximately 9% |
| Gross margin | 88% | 87% | Up 1 percentage point |
| Operating income | $35.6 million | $29.7 million | Up 20% |
| Operating margin | 38.8% | 34.9% | Improved |
| Net income | $22.5 million | $30.4 million | Down 26% |
| Diluted EPS | $0.24 | $0.31 | Down $0.07 |
| Net cash from operations | $29.3 million | $23.2 million | Up $6.1 million |
Revenue growth reflected approximately 6% higher testing volume and a 2% price increase. BRACAnalysis generated $80.7 million, or 87.8% of revenue, compared with 88.4% in the prior-year quarter. COLARIS and COLARIS AP generated $7.1 million, or 7.8% of revenue.
At September 30, 2010, cash and cash equivalents were $123.3 million, and marketable investment securities totaled $385.1 million, producing $508.4 million of cash and investments. Total liabilities were $39.7 million, including $8.8 million of unrecognized tax benefits; the filing does not report outstanding debt. Current assets were $491.8 million versus current liabilities of $30.9 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased 8%, while cost of revenue declined slightly to $11.0 million because of technology improvements and laboratory efficiency gains.
- Operating income increased to $35.6 million despite only modest increases in research and development and selling, general, and administrative expenses.
- Net income declined because income tax expense increased to $13.6 million from $1.0 million. The 2010 provision reflected an estimated annual effective tax rate of approximately 38%, while the prior-year provision primarily reflected alternative minimum and state taxes.
- Interest income declined 62% to $0.7 million because of lower interest rates.
- Operating cash flow increased to $29.3 million. Investing activities provided $16.7 million, while financing activities used $15.5 million, primarily due to share repurchases.
- Myriad repurchased approximately 1.8 million shares for $28.6 million during the quarter, completing its initial $100 million authorization. A separate additional $100 million authorization was approved in August 2010, with completion expected by June 30, 2011.
- Weighted-average basic shares declined to 93.3 million from 96.0 million, primarily reflecting repurchases.
Guidance, Outlook, Risks, and Unusual Items
Management expected to launch a ninth molecular diagnostic product for genetic predisposition to pancreatic cancer on or before December 31, 2010. Research and development spending was expected to increase over the next several years as the company develops its product pipeline. Management also expected selling, general, and administrative expenses to fluctuate with product launches and sales and marketing activity.
Management believed existing capital resources and expected cash generation would fund current and planned operations for at least two years, although additional financing could become necessary or desirable. Cash taxes were expected to be minimal relative to book tax expense because net operating loss carryforwards were available to offset taxes payable.
Key risks include heavy dependence on BRACAnalysis, economic pressure on physician visits and insurance coverage, reimbursement changes, inability to sustain testing volume or margins, regulatory developments, laboratory operating issues, intellectual-property challenges, licensing risks, competing products, litigation, and delays or failures in developing and commercializing new products.
Unusual or important items included the substantial increase in income tax expense, $12.4 million of excess tax benefits from stock-based compensation, $6.4 million of share-based compensation expense, and $1.4 million of auction-rate securities valued using Level 3 inputs. Management stated that pending legal matters were not expected to have a material adverse effect, and that there were no material changes to previously disclosed legal proceedings or risk factors.
Investor Verification Checklist
- Verify the sustainability of revenue growth and the company’s concentration in BRACAnalysis.
- Assess the effect of reimbursement, healthcare-system, and economic changes on testing volumes and collections.
- Reconcile the reported 38% effective tax rate with cash taxes and the use of net operating loss carryforwards.
- Monitor completion and funding of the additional $100 million share-repurchase authorization.
- Confirm the timing, regulatory status, and commercial prospects of the planned pancreatic-cancer product.
- Review the valuation and liquidity of the auction-rate securities and other marketable investments.
- Consider the impact of share-based compensation and approximately $37.5 million of unrecognized future compensation expense.