MYGN

Business Context and Reporting Period

Company: Myriad Genetics, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2009
Business Overview: Myriad is a leading molecular diagnostic company focused on predictive, personalized, and prognostic medicine. Following the spin-off of its research and drug development businesses into Myriad Pharmaceuticals, Inc. (MPI) on June 30, 2009, the Company now operates solely through its molecular diagnostics segment. The genetics segment, which includes corporate services, operates as a cost center.

Key Financial Metrics

Note: All figures are in thousands unless otherwise noted. The Company reported no long-term debt.

Material Changes vs. Prior Period

• Revenue Growth: Molecular diagnostic revenue increased 11% year-over-year for the quarter ($92.8M vs. $84.0M) and 16% for the six-month period ($177.9M vs. $153.9M). Growth was driven by increased testing volume and market penetration.
• Profitability: Net income for the six months ended Dec 31, 2009, was $65.8 million, a significant increase from $35.7 million in the prior year period. This improvement is largely due to the exclusion of losses from discontinued operations (research and drug development) which were spun off in June 2009.
• Expense Increases: Selling, general, and administrative (SG&A) expenses rose 20% year-over-year for both the quarter and six-month periods. This was primarily due to the expansion of the sales force (from 100 to 150 representatives), increased direct-to-consumer marketing, and higher share-based compensation.
• Interest Income: Interest income decreased 55% for the quarter and 50% for the six-month period compared to the prior year, attributed to lower market interest rates and the transfer of $188 million in cash and securities to MPI during the spin-off.

Guidance, Outlook, and Risks

Outlook and Product Pipeline: Management intends to launch an eighth molecular diagnostic product in the first half of calendar 2010 and a ninth product for pancreatic cancer predisposition in the second half of 2010. The Company expects R&D expenses to increase over the next several years to support this pipeline.

Liquidity: The Company maintains strong liquidity with $457.6 million in cash, cash equivalents, and marketable securities as of December 31, 2009. Management believes existing resources are adequate for foreseeable operations.

Risks and Contingencies:

• Economic Conditions: High unemployment and loss of employer-sponsored insurance may negatively impact revenue growth and patient compliance.
• Product Lifecycle: Most products are utilized once per patient; continued revenue growth depends on acquiring new patients or launching new products.
• Investment Portfolio: The Company holds auction rate securities and Lehman Brothers bonds. While management believes unrealized losses are temporary, market conditions have made trading or redeeming these securities difficult.
• Regulatory and IP: Risks include potential termination of licenses, patent infringement claims, and changes in healthcare payment systems.

Investor Verification Checklist

• Discontinued Operations: Verify that the significant improvement in net income is due to the spin-off of the loss-making research division (MPI) and not solely operational efficiency.
• Investment Valuation: Review the status of the $1.9 million in Level 3 assets (auction rate securities) and the potential for other-than-temporary impairments.
• SG&A Efficiency: Monitor whether the 20% increase in SG&A expenses yields proportional revenue growth in future quarters.
• Product Launches: Confirm the timeline and regulatory approval for the two new molecular diagnostic products scheduled for 2010.
• Allowance for Doubtful Accounts: Assess the adequacy of the $4.4 million allowance given the economic headwinds affecting patient insurance coverage.