MYGN

Business Context and Reporting Period

Company: Myriad Genetics, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: June 30, 2010
Business Overview: Myriad is a leading molecular diagnostic company focused on predictive, personalized, and prognostic medicine. The company markets eight commercial molecular diagnostic products, primarily through a U.S. sales force. The flagship product, BRACAnalysis (for hereditary breast and ovarian cancer), accounts for the majority of revenue. On June 30, 2009, the company spun off its research and drug development businesses into a separate entity, Myrexis, Inc. (formerly Myriad Pharmaceuticals, Inc.), which are now reported as discontinued operations.

Key Financial Metrics

Note: Fiscal 2009 net income includes a loss from discontinued operations of $51.6 million. Fiscal 2010 has no discontinued operations.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 11% to $362.6 million, driven primarily by increased testing volume for BRACAnalysis and other molecular diagnostic products.
• Profitability: Net income increased significantly to $152.3 million (from $84.6 million), largely due to the absence of discontinued operation losses in 2010 and a $11.5 million income tax benefit from the reversal of a valuation allowance on deferred tax assets.
• Expense Increases:
  • Selling, General & Administrative (SG&A): Increased 16% to $161.4 million, driven by expanded sales/marketing efforts ($14.0 million), higher share-based compensation ($4.9 million), and increased bad debt expense ($2.5 million).
  • R&D: Increased 22% to $21.9 million due to clinical studies and new product development.
• Interest Income: Decreased to $5.7 million (from $12.5 million) due to lower interest rates, stock repurchases, and the prior year's cash contribution to the spun-off entity.

Guidance, Outlook, Risks, and Unusual Items

Outlook and Guidance

Management anticipates that existing capital resources and cash generated from operations will fund current operations for at least the next two years. The company plans to continue expanding its sales force, executing public awareness campaigns, and developing new molecular diagnostic candidates, including a test for pancreatic cancer pre-disposition expected in fiscal 2011.

Material Risks and Contingencies

• Patent Litigation: Myriad is a defendant in a lawsuit challenging the validity of 15 claims in seven patents related to BRCA1 and BRCA2 genes. A District Court judge ruled these claims invalid in April 2010; Myriad has appealed. The company believes the lawsuit will not have a material adverse impact as 164 other claims and 16 other patents cover the product.
• Regulatory Environment: The FDA is reviewing regulatory requirements for Laboratory Developed Tests (LDTs). Future pre-market review requirements could delay commercialization or require cessation of sales pending approval.
• Reimbursement: Revenue depends on third-party payor reimbursement. Changes in healthcare policy (e.g., Affordable Care Act) or CPT coding reforms could impact pricing and profitability.
• Single Facility: All molecular diagnostic testing is performed at a single CLIA-certified laboratory in Salt Lake City, Utah. Disruption to this facility would halt operations.

Unusual Items

• Stock Repurchase: In May 2010, the company authorized a $100 million stock repurchase program. By June 30, 2010, it had repurchased approximately 3.9 million shares for $71.4 million.
• Tax Benefit: A significant $11.5 million income tax benefit was recorded due to the reversal of a valuation allowance on deferred tax assets, as the company established a sufficient history of taxable income.

Key Facts for Investor Verification

• Patent Validity: Monitor the status of the appeal regarding the invalidation of BRCA1/BRCA2 patent claims, as this product drives the majority of revenue.
• Regulatory Changes: Track FDA guidance on LDTs, as new regulations could impose significant compliance costs or require pre-market approvals.
• Reimbursement Rates: Verify the stability of reimbursement rates from major insurers and the impact of potential CPT code changes expected in 2012.
• Product Pipeline: Assess the progress and commercial viability of the upcoming pancreatic cancer test and other pipeline candidates to ensure future revenue growth beyond the current product suite.
• Concentration Risk: Confirm the operational resilience of the single laboratory facility and the dependency on BRACAnalysis for revenue generation.