Myriad Genetics, Inc. — Form 10-Q Summary
Business context and reporting period
Myriad Genetics is a molecular diagnostics company providing predictive, personalized, and prognostic genetic testing, together with companion diagnostic services through Myriad RBM. The filing covers the three and six months ended December 31, 2012, the company’s fiscal second quarter and first six months of fiscal 2013. Results are unaudited and prepared under U.S. GAAP.
- Primary molecular diagnostic products included BRACAnalysis, COLARIS, COLARIS AP, BART, MELARIS, PANEXIA, PREZEON, Prolaris, and Theraguide 5-FU.
- The company had approximately 390 U.S. sales representatives and was expanding operations in Europe and other international markets.
- In December 2012, management decided to discontinue OnDose and recorded an associated intangible-asset impairment.
Financial performance and key metrics
| Metric | Three months ended Dec. 31, 2012 | Three months ended Dec. 31, 2011 | Six months ended Dec. 31, 2012 | Six months ended Dec. 31, 2011 |
|---|---|---|---|---|
| Total revenue | $149.1 million | $122.8 million | $282.6 million | $233.3 million |
| Operating income | $55.6 million | $45.5 million | $104.2 million | $86.9 million |
| Net income | $35.0 million | $28.3 million | $65.2 million | $53.4 million |
| Diluted EPS | $0.42 | $0.33 | $0.78 | $0.62 |
| Net cash from operations | Not provided for the quarter | Not provided for the quarter | $73.5 million | $59.4 million |
- Revenue increased 21% year over year in both the quarter and six-month period. Molecular diagnostic revenue increased 20% to $140.7 million in the quarter and 21% to $267.9 million for six months.
- Companion diagnostic revenue increased 63% to $8.5 million in the quarter and 25% to $14.7 million for six months.
- BART revenue increased 442% to $15.8 million in the quarter and 321% to $23.4 million for six months, reflecting increased testing following updated clinical practice guidelines.
- BRACAnalysis remained the largest product, generating $110.3 million in quarterly revenue and $215.2 million for six months.
- Estimated gross margin was approximately 86.7% for the quarter and 86.8% for six months, based on reported revenue less cost of revenue. Estimated operating margin was approximately 37.3% and 36.9%, respectively; estimated net margin was approximately 23.5% and 23.1%.
- Research and development expense increased 38% to $14.1 million in the quarter and 36% to $25.5 million for six months. Selling, general, and administrative expense increased 17% to $59.6 million in the quarter and 19% to $115.7 million for six months.
- The effective income tax rate was approximately 39% in both 2012 periods, compared with approximately 40% in the comparable 2011 periods.
Cash, liquidity, debt, and capital allocation
- Cash, cash equivalents, and marketable investment securities totaled $468.3 million at December 31, 2012, up from $454.2 million at June 30, 2012. Cash and cash equivalents alone were $68.4 million.
- Current assets were $457.3 million versus current liabilities of $45.5 million. Total liabilities were $55.6 million and the filing does not report traditional funded debt.
- The company held a $20.3 million note receivable from Crescendo Bioscience, carried at accreted value, and an exclusive option to acquire Crescendo. The related loan’s stated interest rate was increased from 6% to 7% during the quarter ended September 30, 2012.
- Operating cash flow was $73.5 million, while investing activities used $39.0 million and financing activities used $52.4 million during the six months.
- Capital expenditures were $7.0 million. The company repurchased $79.9 million of common stock during the six months and had approximately $19.8 million remaining under the then-current authorization at December 31, 2012.
- In January 2013, the company completed its fourth share repurchase authorization. In February 2013, the board authorized an additional $200 million repurchase program.
Material changes, outlook, risks, and unusual items
- Management attributed revenue growth primarily to higher testing volumes, increased BART adoption, stronger BRACAnalysis, COLARIS, and COLARIS AP activity, and increased companion diagnostic collaborations.
- Management expected research and development spending to increase as pipeline development and product offerings expand. Selling, general, and administrative expense was expected to fluctuate with product launches, sales support, and international expansion.
- The company stated that existing capital resources and expected operating cash flow should fund current and planned operations for the foreseeable future, while noting that additional funding could become necessary if conditions change.
- The OnDose discontinuation resulted in a $1.5 million intangible-asset impairment charge recorded in research and development.
- Bad debt expense increased materially, contributing to higher selling, general, and administrative expense. Trade receivables increased to $75.6 million from $60.4 million at June 30, 2012, and operating cash flow was reduced by a $29.9 million increase in receivables.
- The company was defending patent litigation brought by the Association for Molecular Pathology and others concerning BRCA-related patents. The Supreme Court had accepted review of the isolated-DNA composition claims, with a decision expected by June 30, 2013. Management did not expect the litigation to have a material adverse effect, but the outcome could affect intellectual-property protection and the business.
- New product development, reimbursement levels, regulatory changes, patent challenges, competition, international expansion, laboratory operations, licensing, acquisitions, and healthcare payment changes were identified as significant risks.
- The company’s New York State tax returns for fiscal years 2007 through 2009 were under examination. Management had recorded amounts it considered necessary, but the ultimate assessment could differ.
Investor verification checklist
- Verify the sustainability of the 21% revenue growth and the extent to which BART growth and other testing-volume increases continue.
- Review accounts-receivable aging, collection trends, days sales outstanding, and the rising allowance for doubtful accounts and bad debt expense.
- Assess the impact of continued international expansion and higher research, development, and selling expenses on operating margins.
- Monitor the BRCA patent litigation and any resulting effects on intellectual-property rights, competition, or reimbursement.
- Review the Crescendo note receivable, option valuation, collectability, and potential acquisition obligations.
- Track the additional $200 million share repurchase authorization and its effect on liquidity, share count, and capital allocation.
- Confirm the treatment and future consequences of the OnDose discontinuation and $1.5 million impairment charge.