Business Context and Reporting Period
Myriad Genetics, Inc. is a molecular diagnostics company developing and marketing predictive, personalized, and prognostic medicine tests. Its principal commercial test is BRACAnalysis, which assesses hereditary breast and ovarian cancer risk. The filing is a Form 10-K for the fiscal year ended June 30, 2011, filed August 15, 2011. The request metadata references “2010 Q4,” but the source includes fiscal 2011 annual and fourth-quarter information; the fourth quarter ended June 30, 2011.
The company marketed nine commercial molecular diagnostic tests through an approximately 330-person U.S. sales force and was expanding internationally. On May 31, 2011, it acquired Rules-Based Medicine, Inc. for approximately $80.0 million in cash and operated it as Myriad RBM, adding companion diagnostic services and pipeline programs in neuroscience, infectious, and inflammatory diseases.
Key Financial Metrics
| Metric | Fiscal 2011 | Fiscal 2010 | Change or Commentary |
|---|---|---|---|
| Total revenue | $402.1 million | $362.6 million | Up 11% |
| Molecular diagnostic revenue | $400.0 million | $362.6 million | Up approximately 10%; 86.4% of total revenue came from BRACAnalysis |
| Companion diagnostic revenue | $2.0 million | — | Generated during the one month following the RBM acquisition |
| Operating income | $157.8 million | $135.1 million | Up 17%; operating margin approximately 39.2% |
| Income from continuing operations | $100.7 million | $152.3 million | Down 34%; prior year included a $11.5 million tax benefit |
| Diluted EPS from continuing operations | $1.10 | $1.54 | Down from the prior year |
| Net income | $100.7 million | $152.3 million | Net margin approximately 25.0% |
| Research and development expense | $27.8 million | $21.9 million | Up 27% |
| SG&A expense | $169.8 million | $161.4 million | Up 5% |
| Molecular diagnostic gross margin | 89% | 88% | Improved through technology and laboratory efficiency gains |
| Companion diagnostic gross margin | 47% | — | Based on initial RBM operations |
| Net cash from operating activities | $130.8 million | $155.1 million | Down primarily because of tax-related working-capital effects |
| Cash, cash equivalents and marketable securities | $417.3 million | $488.4 million | Down 15% |
| Working capital | $383.9 million | $446.5 million | Down primarily after acquisitions and share repurchases |
| Total liabilities | $44.0 million | $36.3 million | No material funded debt was disclosed |
| Stockholders’ equity | $566.8 million | $557.6 million | Despite substantial repurchases |
Material Changes Versus the Prior Comparable Period
- Revenue increased by $39.4 million, driven approximately 7.5% by higher testing volume, 2.5% by price increases, and 1% by newly acquired companion diagnostic services.
- BRACAnalysis revenue rose to $353.0 million from $319.8 million, while its concentration declined modestly from approximately 88.2% to 86.4% of total revenue.
- R&D increased by $5.9 million due to clinical studies, test discovery and development, acquired technologies, and new test launches. The company expected R&D spending to increase further.
- SG&A increased by $8.4 million, reflecting international expansion, sales and marketing investments, acquisition-related activity, and higher share-based compensation, partially offset by lower bad-debt expense.
- Income tax expense was $58.9 million, compared with an $11.5 million benefit in fiscal 2010. The prior-year benefit primarily resulted from reversing a valuation allowance on deferred tax assets; fiscal 2011 benefited from net operating loss carryforwards, keeping actual cash taxes below book tax expense.
- Cash declined by $71.1 million after approximately $200.5 million of share repurchases, the $80.0 million RBM acquisition, research and development spending, capital expenditures, and other operating uses.
- The RBM acquisition added $56.1 million of goodwill, $16.7 million of net intangible assets, and approximately $2.0 million of one-month revenue. Management excluded RBM from its fiscal 2011 internal-control assessment; RBM represented approximately 14% of consolidated assets and 1% of revenue.
- The company repurchased and retired approximately 9.8 million shares for $200.5 million during fiscal 2011. A remaining $28.1 million authorization from the March 2011 program was expected to be completed by the end of 2011, and a further $200 million authorization was approved in August 2011.
Guidance, Outlook, Risks and Unusual Items
No specific quantitative revenue or earnings guidance was provided in the filing. Management stated that existing cash, marketable securities, and expected operating cash flow should fund current planned operations for the foreseeable future, while noting that acquisitions, international expansion, regulatory changes, litigation, and new product development could increase capital needs.
- Management planned to expand in Europe, with a Munich laboratory expected to be operational by January 2012, and to pursue additional Latin American and Asian opportunities.
- The company expected to launch a tenth molecular diagnostic test for distinguishing benign moles from malignant melanoma during fiscal 2012.
- Approximately 85% of revenue came from third-party payors. New molecular genetic CPT codes expected to become usable as early as January 1, 2012 could reduce reimbursement if payment levels do not reflect test value.
- The company relied heavily on BRACAnalysis and a limited number of laboratory facilities. An interruption in sample flow, laboratory operations, certification, equipment, or supplies could materially affect revenue and profitability.
- The Association for Molecular Pathology litigation challenged 15 claims covering BRCA1 and BRCA2 technology. A July 29, 2011 appellate decision upheld eligibility for nine composition claims and one method claim but affirmed that five DNA comparison or analysis claims were ineligible. The company stated that the litigation was not expected to have a material adverse impact, but further review or appeal remained possible.
- Future FDA oversight of laboratory-developed tests remains uncertain. Premarket review or additional clinical and regulatory requirements could delay or increase the cost of existing and future tests.
- Other significant risks include reimbursement pressure, healthcare reform, patent invalidity or infringement claims, competition, product liability, privacy and HIPAA compliance, international expansion, RBM integration, and the potential impairment of acquired goodwill or intangible assets.
- Contractual obligations included approximately $88.9 million of operating lease commitments and $2.3 million of purchase obligations. The filing reported no off-balance-sheet arrangements.
- The investment portfolio included approximately $1.35 million of auction-rate securities classified as Level 3 assets. A hypothetical 25-basis-point increase in interest rates would have reduced portfolio fair value by approximately $1.0 million at June 30, 2011.
Most Important Facts to Verify
- Whether BRACAnalysis concentration continues to decline and whether newer tests and companion diagnostic services materially diversify revenue.
- Reimbursement rates under the new molecular genetic CPT codes and their effect on realized pricing, margins, and cash collections.
- Progress, cost, and commercial acceptance of the melanoma test, Prolaris, Myriad RBM programs, and the international expansion plan.
- Integration performance and revenue growth of Myriad RBM, including the realization of expected synergies and the recoverability of $56.1 million of goodwill.
- Subsequent developments in the BRCA patent litigation and the durability of the intellectual-property protection supporting BRACAnalysis.
- Operating cash flow after share repurchases, acquisitions, higher R&D spending, and potential future capital requirements.
- Actual cash taxes versus reported tax expense and the remaining availability and utilization limits of federal, state, and acquired net operating loss carryforwards.