Myriad Genetics, Inc. Form 10-Q Summary
Business Context and Reporting Period
Myriad Genetics is a precision-medicine company providing molecular diagnostic testing, pharmaceutical services, and clinical services. This filing covers the three and six months ended December 31, 2019, corresponding to fiscal 2020 second quarter and year-to-date results. The filing was signed February 6, 2020.
Reportable segments are diagnostics and other. Diagnostics generated $177.6 million of second-quarter revenue and $347.9 million for the six-month period.
Key Financial Metrics
| Metric | Three months ended Dec. 31, 2019 | Three months ended Dec. 31, 2018 | Six months ended Dec. 31, 2019 | Six months ended Dec. 31, 2018 |
|---|---|---|---|---|
| Total revenue | $195.1 million | $216.8 million | $381.4 million | $419.1 million |
| Operating income (loss) | $(8.8) million | $6.1 million | $(29.7) million | $7.3 million |
| Net income (loss) | $(8.3) million | $2.6 million | $(28.9) million | $1.8 million |
| Diluted EPS | $(0.11) | $0.03 | $(0.39) | $0.02 |
| Cash flow from operations | Not separately provided | Not separately provided | $13.9 million | $45.6 million |
Second-quarter gross profit was approximately $145.5 million, or 74.6% of revenue, compared with approximately 76.0% in the prior-year quarter. Operating margin was approximately (4.5)%, versus 2.8%; net margin was approximately (4.3)%, versus 1.2%. For the six-month period, gross margin was approximately 74.0%, operating margin approximately (7.8)%, and net margin approximately (7.6)%.
- Molecular diagnostic revenue was $181.1 million in the quarter, down from $203.0 million, and $353.1 million year to date, down from $392.0 million.
- Pharmaceutical and clinical service revenue increased to $14.0 million in the quarter from $13.8 million and to $28.3 million year to date from $27.1 million.
- Second-quarter cost of sales was $49.6 million, or 25.4% of revenue, compared with 24.0% in the prior year. SG&A was $135.6 million, or 69.5% of revenue, compared with 62.4%.
- Research and development expense was $18.8 million in the quarter and $40.1 million year to date, down from $22.4 million and $43.5 million, respectively.
- At December 31, 2019, cash and cash equivalents were $81.2 million, marketable securities totaled $108.0 million, and total liquidity represented by cash and marketable securities was $189.2 million.
- Net long-term debt was $225.1 million, with a July 31, 2023 maturity and no scheduled principal payments before maturity. The company repaid $8.6 million during the six months and was in compliance with its financial covenants.
- Total assets were $1.578 billion and stockholders’ equity was $1.077 billion at December 31, 2019.
Material Changes Versus the Prior Comparable Period
- Revenue declined $21.7 million, or approximately 10.0%, in the quarter and $37.7 million, or approximately 9.0%, for the six months.
- Quarterly Hereditary Cancer Testing revenue declined $9.0 million, primarily from reduced reimbursement. Prenatal revenue declined $14.8 million, also primarily from reimbursement and related estimate changes.
- For the six months, Hereditary Cancer Testing revenue declined $20.9 million, Prenatal revenue declined $9.4 million, and GeneSight revenue declined $8.0 million due to lower volumes.
- Operating results shifted from income to losses. The deterioration reflected lower revenue and reimbursement, higher SG&A as a percentage of revenue, lower gross margins associated with the Counsyl business, increased legal fees, and a $1.3 million goodwill impairment charge.
- Operating cash flow declined $31.7 million year over year to $13.9 million. Investing cash use improved substantially because the prior-year period included $278.5 million for the Counsyl acquisition.
- The company adopted the new lease standard on July 1, 2019, recognizing $74.5 million of operating lease right-of-use assets and $78.8 million of operating lease liabilities at adoption.
Outlook, Commentary, Risks, and Unusual Items
- Management stated that existing capital resources and expected future sales should fund projected operating requirements for the foreseeable future, but cautioned that additional financing could become necessary if resources are consumed more rapidly than expected.
- Management highlighted single-digit year-over-year growth in hereditary cancer revenue, additional GeneSight insurance coverage decisions, positive clinical and regulatory developments, and progress with companion diagnostic products.
- The company entered into an agreement after the reporting date to sell its German Clinic for $22.4 million, subject to customary conditions and regulatory approvals. The transaction was expected to close in the quarter ending March 31, 2020. Clinic assets of $32.9 million and liabilities of $10.5 million were classified as held for sale at December 31, 2019.
- The company paid a $9.1 million settlement in October 2019 related to a qui tam matter involving Medicare billing practices. The case was dismissed, the company denied wrongdoing, and management does not expect a material change in billing practices.
- Other unresolved legal matters include an Office of Inspector General investigation involving Crescendo Bioscience, a securities class action filed in September 2019, and an Illinois insurance-claims action involving Assurex. The filing states that potential outcomes and losses cannot currently be estimated for these matters.
- Key ongoing risks include reimbursement reductions, payer coverage decisions, competition, development and commercialization of new tests, regulatory requirements, laboratory operations, intellectual property disputes, acquisition integration, and compliance with debt covenants.
Important Facts for Investors to Verify
- Whether reimbursement pressure in Hereditary Cancer Testing, Prenatal, and GeneSight stabilizes or continues to reduce revenue and margins.
- The sustainability of positive operating cash flow while the company reports operating and net losses.
- Debt repayment capacity, covenant compliance, and refinancing or repayment requirements before the July 2023 maturity.
- Completion terms and proceeds from the Clinic sale, including the effect on goodwill and operating results.
- Potential exposure from the unresolved OIG investigation and pending litigation.
- The effect of revenue estimate adjustments for tests performed in prior periods; the company recognized a $3.7 million second-quarter and $6.9 million year-to-date decrease in revenue from such adjustments.
- Execution of new diagnostic products and companion diagnostic approvals, including whether regulatory approvals translate into reimbursed testing volume.