Myriad Genetics, Inc. Form 10-Q Summary
Business context and reporting period
The filing covers the fiscal second quarter and six months ended December 31, 2014. Myriad Genetics provides molecular diagnostic testing across oncology, preventive care, rheumatology and other areas, as well as pharmaceutical and clinical services. The company reported 14 commercial molecular diagnostic tests and operates in the United States, Europe, Canada and selected international markets.
The quarter included revenue and expenses from the February 2014 acquisition of Crescendo Bioscience, including the VectraDA rheumatoid arthritis test. Management also announced that CEO Peter D. Meldrum would retire at the end of fiscal 2015, with Mark C. Capone elected as successor.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2014 | Three months ended Dec. 31, 2013 | Six months ended Dec. 31, 2014 | Six months ended Dec. 31, 2013 |
|---|---|---|---|---|
| Total revenue | $184.4 million | $204.1 million | $353.2 million | $406.5 million |
| Operating income | $36.3 million | $83.0 million | $62.3 million | $165.9 million |
| Net income | $24.0 million | $50.4 million | $40.0 million | $105.8 million |
| Diluted EPS | $0.32 | $0.66 | $0.53 | $1.33 |
| Net cash from operating activities | Not separately provided | Not separately provided | $59.6 million | $138.0 million |
Molecular diagnostic testing revenue was $179.1 million for the quarter, down 9%, and $343.7 million for the six months, down 12%. Pharmaceutical and clinical services revenue was $5.2 million for the quarter, down 34%, and $9.6 million for the six months, down 45%.
Gross margin was 79.5% for the quarter and 79.4% for the six months, compared with 87.2% and 87.3%, respectively, in the prior-year periods. The decline reflected myRisk transition costs, lower-margin VectraDA revenue, and new tests without full reimbursement.
At December 31, 2014, cash and cash equivalents were $59.7 million, restricted cash was $22.1 million, and marketable securities totaled $147.7 million, for cash, restricted cash and marketable securities of approximately $229.6 million. Cash, cash equivalents and marketable securities excluding restricted cash totaled $207.4 million, compared with $270.6 million at June 30, 2014. The company reported no debt balance in the condensed balance sheet; total liabilities were $87.6 million.
Six-month investing cash flow was positive $18.8 million, including $57.9 million of net proceeds from marketable securities, offset by $17.4 million of capital expenditures and $21.6 million deposited into a pledged account. Financing activities used $81.1 million, primarily for share repurchases.
Material changes versus the prior comparable period
- Total revenue declined 10% in the quarter and 13% for the six-month period.
- Hereditary cancer testing revenue declined 15% in the quarter and 17% for the six months, primarily reflecting the transition from individual tests to the myRisk cancer panel and the nonrecurrence of a prior-year celebrity-publicity-driven volume increase.
- myRisk revenue increased 640% to $85.1 million in the quarter, while iBRACAnalysis revenue declined to $72.5 million from $165.9 million as testing shifted to myRisk. COLARIS and COLARIS AP revenue declined to $7.4 million from $15.6 million.
- VectraDA contributed $10.8 million of quarterly revenue and $21.4 million for the six months; it was not included in the prior-year comparable periods.
- Molecular diagnostic cost of revenue increased 54% for the quarter and 53% for the six months, driven by myRisk transition costs, capacity constraints, new tests and incomplete reimbursement.
- Research and development expense increased 2% for the quarter and 18% for the six months, while selling, general and administrative expense increased 19% and 15%, respectively, partly due to the Crescendo acquisition.
- Operating income fell 56% in the quarter and 62% for the six months. Net income fell 52% and 62%, respectively.
- The weighted-average basic share count declined to 72.5 million for the quarter and 72.6 million for the six months, reflecting share repurchases.
Guidance, outlook, risks and unusual items
Management stated that increased laboratory capacity should improve myRisk turnaround times during the second half of fiscal 2015. Management expects revenue to fluctuate as customers transition from single-cancer tests to myRisk and as new products are introduced. Research and development and selling, general and administrative expenses may increase, potentially substantially, as the company expands its pipeline, launches tests and continues international expansion.
The company recognized approximately $3.1 million of share-based compensation expense in the quarter related to accelerated vesting of certain awards for the former CFO. Total share-based compensation expense was $19.0 million for the six months. The company repurchased $104.0 million of common stock during the six months, with approximately $61.7 million remaining under the repurchase authorization at December 31, 2014.
A $22.1 million restricted cash balance was pledged for a specific contractual arrangement and is subject to future contingencies. The company believes existing capital resources and expected operating cash flow are adequate for current and planned operations for the next several years, while acknowledging that competition, reimbursement changes, regulatory developments, laboratory delays, acquisitions, litigation and product-transition costs could reduce liquidity or results.
The company is involved in multidistrict litigation concerning BRCA1, BRCA2 and MUTYH patent claims. On December 17, 2014, the Federal Circuit ruled that certain key claims were directed to ineligible subject matter under Section 101. Proceedings involving several defendants were subsequently dismissed under settlement agreements; settlement discussions with GeneDX and Quest Diagnostics remained ongoing as of the filing. Management stated that other legal proceedings were not expected to have a material impact, but the ultimate outcome of the patent matters remains uncertain.
The New Jersey State tax authority was examining tax returns for years ended June 30, 2007 through 2013. Unrecognized tax benefits were $25.3 million at December 31, 2014. The filing states that the final amount paid after examination could differ materially from the accrued amount.
Most important facts for investors to verify
- Whether myRisk adoption improves testing volumes, laboratory turnaround times and gross margins during the second half of fiscal 2015.
- Whether reimbursement is obtained for myRisk, VectraDA, Prolaris and other newer tests at commercially attractive levels.
- The sustainability of hereditary cancer revenue after the transition from iBRACAnalysis, COLARIS and COLARIS AP to myRisk.
- The effect of the Federal Circuit patent ruling and any subsequent appeals, settlements or changes to the company’s ability to enforce BRCA-related intellectual property.
- The financial and operating benefits, integration costs and impairment risk associated with the Crescendo acquisition, including its intangible assets and goodwill.
- The use and release conditions of the $22.1 million restricted cash balance and the outcome of the New Jersey tax examination.
- The pace of share repurchases and their effect on liquidity, share count and capital allocation.
- Whether operating cash flow remains sufficient as capital expenditures, research and development, international expansion and selling expenses increase.