Myriad Genetics, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2017; fiscal year ending June 30, 2017. The request metadata identifies “2016 Q3,” but the filing itself is for the third quarter of fiscal 2017. Financial statements are unaudited and presented in millions except per-share amounts.
Business Context and Reporting Period
Myriad is a personalized-medicine company providing molecular diagnostic testing, pharmaceutical and clinical services, and related research and development. Reportable segments are diagnostics and other. The August 31, 2016 acquisition of Assurex Health added the GeneSight neuropsychiatric pharmacogenomic test and established a neuroscience business.
Key Financial Metrics
| Metric | Three months ended March 31 | Nine months ended March 31 | ||
|---|---|---|---|---|
| 2017 | 2016 | 2017 | 2016 | |
| Total revenue | $196.9 | $190.5 | $570.9 | $567.4 |
| Operating income | $12.9 | $42.6 | $32.4 | $131.2 |
| Net income attributable to shareholders | $4.2 | $34.5 | $9.0 | $102.0 |
| Diluted EPS | $0.06 | $0.47 | $0.13 | $1.39 |
| Cash flow from operations | Not provided for quarter | Not provided for quarter | $69.6 | $127.8 |
Margins: Quarterly operating margin was approximately 6.5% versus 22.4% in the prior-year quarter; net margin was approximately 2.1% versus 18.1%. Nine-month operating margin was approximately 5.7% versus 23.1%; net margin was approximately 1.6% versus 18.0%. Cost of sales increased to 22.5% of revenue from 21.1% quarterly and from 20.7% to 22.5% year to date. SG&A rose to 62.0% of revenue from 47.5% quarterly and to 62.1% from 47.2% year to date.
Revenue mix: Quarterly molecular diagnostic revenue was $185.2, including Hereditary Cancer Testing of $140.8, GeneSight of $23.9, VectraDA of $11.2, Prolaris of $3.4, and EndoPredict of $2.3. Nine-month molecular diagnostic revenue was $534.2, including GeneSight revenue of $52.9.
Liquidity and capital structure: At March 31, 2017, cash and cash equivalents were $123.8, current marketable securities were $48.3, and long-term marketable securities were $53.4, for total cash, cash equivalents and marketable securities of $225.5. Net long-term debt was $167.1, consisting primarily of a $205.0 revolving facility less repayments and debt discount. The facility matures December 23, 2021, has no scheduled principal payments before maturity, is secured by substantially all relevant assets, and includes leverage and interest coverage covenants. The company was in compliance at quarter-end.
Material Changes Versus the Prior Comparable Period
- Revenue increased 3.4% quarterly and 0.6% year to date, primarily because of Assurex/GeneSight revenue. This was largely offset by lower Hereditary Cancer Testing revenue, reflecting reduced volumes, timing and reimbursement.
- Quarterly Hereditary Cancer Testing revenue declined $15.5, and nine-month revenue declined $54.6. VectraDA and Prolaris also declined quarterly.
- Operating income fell $29.7 quarterly and $98.8 year to date. SG&A increased $31.6 quarterly and $86.5 year to date, driven largely by Assurex costs, acquisition and integration expenses, sales and marketing, administrative expenses and higher bad-debt expense.
- Net income attributable to shareholders declined $30.3 quarterly and $93.0 year to date. Results included higher interest expense and changes in the fair value of contingent consideration.
- Operating cash flow declined $58.2 year to date, primarily because of lower net income. Investing cash use increased because of the $216.1 Assurex acquisition payment.
- Financing cash flow was $135.1 provided year to date, reflecting debt issuance and repayments. The company repurchased $31.6 of common stock year to date and had $160.7 remaining under its $200.0 authorization at March 31, 2017.
- Assurex increased goodwill by $119.7 and contributed approximately $23.9 of quarterly revenue and $53.0 of year-to-date revenue, while generating approximately $27.8 and $69.0 of operating expenses, respectively.
Outlook, Risks, Contingencies and Unusual Items
- Management stated that existing capital resources and expected operating cash generation should fund foreseeable requirements, including repayment of the revolving facility; it also cautioned that additional financing may be needed if capital is consumed faster than expected.
- A Medicare administrative contractor issued a draft non-coverage decision for VectraDA. Approximately 60% of VectraDA revenue comes from Medicare. If implemented, the decision could reduce revenue and impair the $112.3 goodwill balance associated with Crescendo.
- The Assurex acquisition included potential performance-based milestones with a recorded fair value of $130.0 and total potential payments of $185.0. Total contingent consideration was $142.5 at March 31, 2017, including $128.2 classified as short term.
- Debt covenants restrict additional indebtedness, liens, asset sales, mergers, change-in-control transactions, dividends and other distributions. A change in control involving more than 35% of voting power could require mandatory repayment. Covenant failure could increase interest rates or accelerate repayment.
- Myriad faces patent litigation brought by Esoterix Genetic Laboratories and Johns Hopkins University alleging infringement of laboratory-process patents. Plaintiffs seek injunctive relief, damages and other remedies; Myriad filed counterclaims and inter partes review petitions. Management believes other legal matters are not expected to have a material adverse effect, but litigation outcomes remain uncertain.
- Income tax rates were elevated at 47.5% for the quarter and 63.1% year to date, compared with 20.0% and 22.6%, respectively, in the prior periods. Variability reflected acquisition-related items, nondeductible expenses, penalties, valuation allowance changes and equity-compensation tax effects. The company is under examination by federal and state tax authorities.
- The filing provides no specific full-year revenue or earnings guidance. Management identifies reimbursement changes, competition, product development, regulatory requirements, intellectual property, acquisition integration, debt covenants and healthcare-policy changes as significant risks.
Important Facts for Investors to Verify
- Whether the draft VectraDA Medicare non-coverage decision becomes final and its effect on revenue, cash flow and Crescendo goodwill.
- Hereditary Cancer Testing reimbursement, volumes and collections, including the rising bad-debt expense.
- GeneSight growth, profitability and the operating contribution of Assurex relative to acquisition-related costs.
- Ability to maintain debt covenants and repay or refinance the $167.1 net debt balance when required.
- Timing and amount of Assurex and Sividon contingent-consideration payments.
- Potential exposure from the EGL/JHU patent litigation and related inter partes review proceedings.
- Resolution of outstanding IRS and state tax audits and the sustainability of the elevated effective tax rate.