Business Context and Reporting Period
Company: Myriad Genetics, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: Myriad is a healthcare company focused on molecular diagnostic products for predictive, personalized, and prognostic medicine. The company operates two segments: Genetics and Molecular Diagnostics. On June 30, 2009, the company spun off its research and drug development businesses into a separate entity, Myriad Pharmaceuticals, Inc. (MPI). Results from these former businesses are reported as discontinued operations.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Three Months Ended Sep 30, 2008 |
|---|---|---|
| Revenue | $85.1 million | $70.0 million |
| Gross Profit Margin | 87% | 86% |
| Operating Income | $29.7 million | $23.4 million |
| Net Income (Continuing Ops) | $30.4 million | $24.5 million |
| Net Income (Total) | $30.4 million | $14.5 million |
| Diluted EPS | $0.31 | $0.15 |
| Cash and Cash Equivalents | $91.2 million | $230.2 million |
| Total Marketable Securities | $325.8 million | N/A (Prior period data not directly comparable due to spin-off) |
| Operating Cash Flow | $23.2 million | ($4.4 million) used |
Liquidity: As of September 30, 2009, total cash, cash equivalents, and marketable investment securities totaled approximately $417.0 million. The company reported no long-term debt.
Material Changes vs. Prior Period
- Revenue Growth: Molecular diagnostic revenue increased 22% to $85.1 million, driven by increased testing volume and market penetration, particularly for the BRACAnalysis product.
- Expense Increases:
- Cost of Revenue: Increased 13% to $11.1 million, primarily due to higher volume, partially offset by efficiency gains.
- R&D Expenses: Increased 30% to $5.7 million due to internal product development.
- Selling, General, and Administrative (SG&A): Increased 19% to $38.7 million. Drivers included a $3.0 million increase in sales/marketing (expanding the Ob/Gyn sales force and direct-to-consumer campaigns), a $2.0 million increase in share-based compensation, and higher bad debt expense.
- Discontinued Operations: The prior year period included a $10.1 million loss from discontinued operations (research and drug development), which was eliminated in the current period following the June 2009 spin-off.
- Investment Income: Interest income decreased to $1.9 million from $3.4 million due to lower market rates. Other expense decreased significantly as the prior year included a $2.0 million impairment charge on Lehman Brothers bonds.
Outlook, Risks, and Management Commentary
Management Commentary: Management attributes revenue growth to successful marketing and wider acceptance of products. However, they note that economic turmoil, job losses, and reduced insurance coverage may negatively impact revenue growth by reducing doctor visits and preventive testing. The company expects R&D and SG&A expenses to fluctuate based on new product launches and marketing efforts.
Liquidity Outlook: Management believes existing capital resources and expected cash flows from operations are sufficient to fund operations for at least the next two years.
Key Risks and Contingencies:
- Intellectual Property Litigation: The company is a defendant in a lawsuit filed by the Association for Molecular Pathology challenging the validity of seven patents related to the BRCA1 and BRCA2 genes, which underpin the BRACAnalysis product (the company's primary revenue source). A ruling invalidating these patents could seriously harm the business.
- Market Conditions: Economic downturns may reduce demand for preventive diagnostic testing.
- Product Lifecycle: Most products are utilized once per patient, requiring continuous acquisition of new patients or development of new products to sustain growth.
- Investment Portfolio: The company holds auction rate securities and other investments where liquidity and valuation may be uncertain due to market conditions.
Investor Verification Checklist
- Patent Litigation Status: Verify the current status of the lawsuit challenging BRCA1/BRCA2 patents and potential impacts on the core revenue stream.
- Revenue Sustainability: Assess the impact of the economic downturn on patient compliance and insurance coverage for molecular diagnostics.
- Bad Debt Trends: Monitor the allowance for doubtful accounts and bad debt expense, which increased in the current quarter.
- Investment Liquidity: Review the composition of the investment portfolio, specifically the $1.9 million in Level 3 auction rate securities and their liquidity status.
- Spin-off Separation: Confirm that all liabilities and assets related to the former research business (MPI) have been fully separated and that no contingent liabilities remain.