Myriad Genetics, Inc. Form 10-Q Summary
Reporting period: Three and nine months ended March 31, 2014, with comparison to the corresponding 2013 periods. The request identifies “2013 Q3,” but the filing is for fiscal 2014 third quarter. Financial statements are unaudited.
Business Context
Myriad is a molecular diagnostics company offering predictive, personalized, prognostic and diagnostic tests, plus companion diagnostic services. Molecular diagnostics include oncology, women’s health, urology, dermatology and rheumatology products. The company completed its acquisition of Crescendo Bioscience on February 28, 2014, adding the Vectra DA rheumatoid arthritis test and entering the autoimmune market.
Key Financial Metrics
| Metric | Q3 FY2014 | Q3 FY2013 | Nine Months FY2014 | Nine Months FY2013 |
|---|---|---|---|---|
| Total revenue | $182.9 million | $156.5 million | $589.5 million | $439.1 million |
| Revenue growth | 17% | 34% | ||
| Operating income | $55.3 million | $57.9 million | $221.2 million | $162.1 million |
| Operating margin | 30.2% | 37.0% | 37.5% | 36.9% |
| Net income | $36.8 million | $37.9 million | $142.6 million | $103.1 million |
| Net margin | 20.1% | 24.2% | 24.2% | 23.5% |
| Diluted EPS | $0.48 | $0.46 | $1.82 | $1.23 |
| Operating cash flow | $149.3 million | $110.9 million |
Molecular diagnostic revenue increased 19% in the quarter and 36% year to date. Companion diagnostic revenue declined 17% in the quarter to $6.7 million but increased 6% year to date to $24.1 million. Molecular diagnostic gross margin was 87% in the quarter and 88% year to date, versus 89% in both comparable 2013 periods.
At March 31, 2014, cash and cash equivalents were $85.8 million, current marketable securities were $126.4 million and long-term marketable securities were $65.6 million, for total cash, cash equivalents and marketable securities of approximately $277.7 million. The balance sheet reports no borrowings or debt obligations; total liabilities were $94.2 million. Current assets were $338.2 million versus current liabilities of $72.2 million.
Material Changes Versus Prior Period
- Quarterly revenue rose 17%, primarily from higher testing volume for Myriad myRisk Hereditary Cancer and one month of Vectra DA revenue following the Crescendo acquisition.
- Nine-month revenue rose 34%, led by BRACAnalysis, BART, COLARIS/COLARIS AP, myRisk and Vectra DA.
- Quarterly operating income declined 5% and net income declined 3%, despite higher revenue, reflecting increased selling, general and administrative costs, new-product launch expenses, lower molecular diagnostic gross margin and acquisition-related charges.
- Quarterly SG&A increased 36% to $87.6 million; nine-month SG&A increased 35% to $242.8 million. The increases included higher sales and marketing, international expansion, legal costs, bad debt expense and Crescendo-related costs.
- The company repurchased $222.0 million of common stock during the first nine months, including $41.9 million during the quarter. Approximately $231.4 million remained available under the authorized program at March 31, 2014.
- Shares outstanding declined to 74.5 million from 80.6 million at June 30, 2013, while diluted EPS increased because of higher earnings and the reduced share count.
- The Crescendo acquisition added approximately $196.6 million of identifiable intangible assets and $109.9 million of goodwill. Crescendo contributed approximately $3.1 million of post-acquisition revenue and a $16.3 million net loss, including $12.6 million of nonrecurring acquisition-related charges.
Cash Flow, Liquidity and Unusual Items
- Operating cash flow was $149.3 million for the first nine months, up from $110.9 million, supported by net income and noncash charges.
- Investing cash flow was $2.2 million, including $223.5 million of net cash used for Crescendo and $9.7 million of capital expenditures, offset by net proceeds from marketable securities.
- Financing activities used $169.7 million, primarily because of share repurchases, partly offset by $47.2 million of proceeds from stock-based compensation plans.
- Quarterly results included $6.9 million of accelerated Crescendo employee option vesting expense and $5.7 million of Crescendo change-of-control bonuses. Management characterized both as one-time items.
- Interest income included $2.3 million in the quarter from accretion of the Crescendo note receivable; this source of income is not expected to continue.
- A January 1, 2014 Medicare pricing adjustment reduced quarterly revenue by approximately $6 million; the company stated that the adjustment was partially reversed on April 1, 2014.
Outlook, Commentary and Risks
Management expects existing capital resources and internally generated cash flow to fund current and planned operations for the next several years, but provided no specific revenue, earnings or margin guidance. Management plans to expand existing products, international operations and new products across oncology, women’s health, urology, dermatology and rheumatology.
Key risks include reimbursement reductions, competition and competing tests, regulatory changes, patent and intellectual-property litigation, challenges in integrating Crescendo, product-launch execution, international expansion, laboratory operations, bad debt and payer collections, and fluctuations in testing volumes and margins.
Following the Supreme Court’s June 2013 decision concerning BRCA gene patents, Myriad pursued multiple infringement actions against competing laboratories. A preliminary injunction against Ambry Genetics was denied in March 2014, and Myriad appealed. Other proceedings were consolidated for coordinated pretrial activity. Myriad settled with Gene by Gene, which agreed to cease marketing certain BRCA tests in North America through the earlier of February 12, 2016 or expiration of the relevant valid patent claims.
Management stated that existing legal proceedings were not expected to have a material adverse effect on consolidated financial position, results or cash flows, although litigation outcomes and costs remain uncertain. The company also disclosed tax examinations by New York and Washington authorities; ultimate assessments could differ materially from accrued amounts.
Investor Verification Items
- Verify the final purchase-price allocation and performance of Crescendo, including the substantial intangible assets and goodwill recorded.
- Monitor reimbursement developments, particularly Medicare pricing and private-payor coverage for Vectra DA and newly launched tests.
- Assess whether revenue growth can offset higher SG&A, launch costs, bad debt expense and lower molecular diagnostic margins.
- Review cash usage from the acquisition and share repurchases and the remaining repurchase authorization.
- Track BRCA-related patent litigation, the Ambry appeal and the competitive impact of post-Supreme Court testing activity.
- Evaluate the sustainability of operating cash flow and the company’s assertion that current liquidity will fund operations for several years.
- Confirm tax examination outcomes and any changes to unrecognized tax benefits.