Myriad Genetics, Inc. — Form 10-Q Summary
Business context and reporting period
Myriad Genetics is a personalized-medicine company providing molecular diagnostic testing, pharmaceutical and clinical services, and related research. This filing covers the three months ended September 30, 2018, the first quarter of fiscal 2019. Results are unaudited and reflect adoption of ASC 606 using the full retrospective method.
On July 31, 2018, Myriad completed its acquisition of Counsyl, Inc., subsequently renamed Myriad Women’s Health, for total consideration of $407.0 million, comprising $279.6 million of cash and $127.4 million of Myriad common stock.
Key financial metrics
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Total revenue | $202.3 million | $178.8 million | +$23.5 million |
| Operating income | $1.2 million | $84.0 million | -$82.8 million |
| Net income attributable to Myriad | $(0.7) million | $78.8 million | -$79.5 million |
| Diluted EPS | $(0.01) | $1.12 | -$1.13 |
| Operating cash flow | $7.8 million | $23.5 million | -$15.7 million |
| Capital expenditures | $1.3 million | $1.6 million | -$0.3 million |
- Molecular diagnostic revenue was $189.0 million, up $21.6 million, while pharmaceutical and clinical services revenue was $13.3 million, up $1.9 million.
- Reported gross profit was approximately $152.6 million, implying a 75.4% gross margin versus approximately 76.0% in the prior-year quarter. Cost of sales rose to 24.6% of revenue from 24.0%.
- Operating margin was approximately 0.6%, compared with 47.0% in the prior-year quarter. Net margin attributable to Myriad was approximately (0.3)%, compared with 44.1%.
- Research and development expense increased to $21.1 million from $17.8 million. SG&A increased to $129.9 million from $107.2 million.
- At September 30, 2018, cash and cash equivalents were $93.3 million, current marketable securities were $74.2 million, and long-term marketable securities were $24.2 million. Total cash, cash equivalents and marketable securities were $191.7 million, down from $211.3 million at June 30, 2018.
- Net long-term debt was $258.0 million, compared with $9.3 million at June 30, 2018. The amended revolving facility has a $350.0 million commitment and matures July 31, 2023; no scheduled principal payments are due before maturity. The company repaid $40.0 million during the quarter and reported compliance with all financial covenants.
- Total assets increased to $1.574 billion from $1.175 billion, primarily reflecting the Counsyl acquisition. Intangibles increased to $734.2 million and goodwill to $413.3 million.
Material changes versus the prior comparable period
- Revenue increased 13.1%, primarily from $18.1 million of Prenatal revenue contributed by Counsyl and a $2.3 million increase in Prolaris revenue. These gains were partly offset by lower Vectra and hereditary cancer testing revenue.
- Counsyl contributed approximately $19.4 million of revenue and $33.0 million of operating expenses in the quarter. Acquisition and integration costs included approximately $6.8 million of acquisition costs and $9.6 million of related SG&A costs.
- The prior-year quarter included a $73.2 million benefit from a reduction in the fair value of contingent consideration. The current quarter included a $0.4 million expense, creating a substantial year-over-year comparison distortion.
- Operating cash flow declined because of lower earnings, excluding the contingent-consideration impact, and lower non-cash charges.
- Cash used in investing activities was $279.0 million, including the $279.6 million Counsyl cash purchase. Financing activities provided $252.1 million, including $290.0 million of revolving credit borrowings.
- Common shares outstanding increased to 74.7 million from 70.6 million at June 30, 2018, principally from shares issued for the acquisition and employee equity plans. No shares were repurchased during the quarter; $160.7 million remained under the repurchase authorization.
- ASC 606 reduced restated prior-year revenue by $9.1 million and reclassified $8.0 million of bad-debt expense from SG&A to revenue. The filing also increased June 30, 2018 accounts receivable and retained earnings by $1.2 million.
Guidance, outlook, commentary, risks and unusual items
Management did not provide specific numerical revenue or earnings guidance in the filing. Management stated that existing capital resources and expected future sales should be sufficient for foreseeable operating requirements, including contingent consideration and repayment of the revolving facility, but cautioned that additional financing could become necessary if resources are consumed faster than expected.
- Management expects the Counsyl acquisition to expand Myriad’s position in reproductive and women’s-health genetic testing. The draft Medicare local coverage determination for myPath Melanoma could support coverage in late fiscal 2019, although timing and final coverage remain uncertain.
- Reported income tax expense was $1.6 million on $0.8 million of pretax income, producing an approximately 200% effective tax rate. The rate reflected discrete items and tax effects associated with uncertain tax liabilities, acquisition costs, equity compensation and foreign operations.
- Myriad is responding to a Department of Health and Human Services Office of Inspector General subpoena concerning possible false or improper Medicare and Medicaid claims related primarily to hereditary cancer testing. No claims had been made against the company as of the filing date.
- The company disclosed a purported federal securities class action and an Illinois qui tam/class action involving Assurex. Myriad and Assurex intend to defend the matters; potential outcomes and financial exposure were not determinable.
- Management reported that disclosure controls were effective but stated that a material weakness related to controls for estimating sales allowances and third-party-payor collections was still being remediated and had not yet been tested for effectiveness.
- Key operating risks include reimbursement reductions, payer coverage changes, competition, regulatory requirements, intellectual-property disputes, integration of acquisitions, debt covenant compliance, and the ability to service debt when due.
Most important facts for investors to verify
- Whether Counsyl’s revenue growth and reproductive-testing strategy offset its initially lower margins and substantial operating expenses.
- The sustainability of cash generation after the acquisition and the company’s ability to reduce or refinance approximately $258.0 million of net long-term debt.
- The status and potential financial impact of the OIG investigation and related securities and insurance-fraud litigation.
- Progress in remediating the material weakness concerning sales allowances and third-party-payor collections.
- Actual payer reimbursement trends for hereditary cancer testing, Vectra, Prenatal, Prolaris and other principal products.
- Final purchase-accounting adjustments for Counsyl, including the valuation of acquired intangibles, goodwill and deferred tax liabilities.
- Whether the draft Medicare coverage determination for myPath Melanoma becomes final and produces material revenue.