Business Context and Reporting Period
Myriad Genetics, Inc. filed this unaudited Form 10-Q for the three months ended September 30, 2016, the first quarter of fiscal 2017. Myriad operates personalized-medicine businesses across molecular diagnostics, pharmaceutical services and clinical services, with reportable segments of diagnostics and other.
The quarter included the August 31, 2016 acquisition of Assurex Health, which added the GeneSight neuropsychiatric pharmacogenomic test and established a neuroscience business platform.
Key Financial Metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Total revenue | $177.5 million | $183.5 million | Down $6.0 million |
| Operating income | $6.2 million | $43.3 million | Down $37.1 million |
| Net income attributable to shareholders | $(1.2) million | $30.3 million | Down $31.5 million |
| Diluted EPS | $(0.02) | $0.42 | Down $0.44 |
| Operating margin | 3.5% | 23.6% | Down 20.1 percentage points |
| Net margin | (0.7)% | 16.5% | Down 17.2 percentage points |
| Net cash used in operating activities | $2.9 million | Cash provided of $29.8 million | Down $32.7 million |
Molecular diagnostic revenue was $165.1 million, down from $171.9 million. Pharmaceutical and clinical services revenue increased to $12.4 million from $11.6 million.
- Hereditary Cancer Testing revenue declined $17.4 million to $139.3 million, primarily due to lower volumes and reimbursement.
- GeneSight contributed $7.2 million following the Assurex acquisition.
- Prolaris revenue increased $2.2 million to $2.9 million, and EndoPredict revenue increased $0.9 million to $1.7 million.
- Cost of sales increased to $40.0 million, or 22.5% of revenue, from $36.5 million, or 19.9%, primarily due to product mix, lower fixed-cost absorption and reduced hereditary cancer reimbursement.
- Research and development expense increased to $19.4 million from $17.2 million.
- Selling, general and administrative expense increased to $111.9 million from $86.5 million, including Assurex costs, acquisition and integration expenses, increased sales and marketing spending, higher commissions and benefits, and increased bad debt expense.
- The effective tax rate was approximately 130%, reflecting $5.2 million of tax expense on $4.0 million of pretax income. The rate was affected by ASU 2016-09, nondeductible penalties and interest, and fair-value adjustments related to acquisition contingent consideration.
Liquidity, Debt and Capital Allocation
| Balance-sheet item | September 30, 2016 | June 30, 2016 |
|---|---|---|
| Cash and cash equivalents | $86.9 million | $68.5 million |
| Current marketable securities | $61.5 million | $90.5 million |
| Long-term marketable securities | $52.2 million | $79.9 million |
| Total cash, cash equivalents and marketable securities | $200.6 million | $238.9 million |
| Net short-term debt | $199.2 million | None reported |
- Cash flow from investing activities was $(158.0) million, including $213.0 million for the Assurex acquisition.
- Financing activities provided $175.8 million, including $199.0 million of net term-loan proceeds and $21.3 million used for share repurchases.
- The $200.0 million term loan matures August 31, 2017, with no scheduled principal payments before maturity. The credit agreement includes leverage and interest-ratio covenants beginning with the quarter ending December 31, 2016, and restricts additional debt, liens, acquisitions, distributions, investments and certain other activities.
- The company repurchased and retired approximately 1.0 million shares for $21.3 million during the quarter. The remaining authorization was $171.0 million at September 30, 2016.
Material Changes and Unusual Items
- Assurex was acquired for total estimated consideration of $348.5 million, including $213.0 million in cash and $130.0 million fair value of contingent milestone consideration. Assurex contributed $7.2 million of revenue and had approximately $15.1 million of operating expenses in the quarter, including $1.9 million of amortization.
- The acquisition added $116.3 million of goodwill and $298.8 million of intangible assets at preliminary fair values. Total goodwill increased to $312.8 million and total intangible assets increased to $521.2 million at quarter-end.
- Assurex acquisition and integration costs contributed to higher SG&A; the filing states that approximately $5.0 million of acquisition costs were recorded in SG&A, while the MD&A separately identifies $9.7 million of acquisition and integration-related costs.
- Other expense included a one-time $2.0 million indirect tax expense and higher interest expense.
- Foreign-currency translation gains of $4.3 million partially offset the net loss in comprehensive income, resulting in comprehensive income of $2.7 million.
Outlook, Commentary and Risks
Management stated that existing capital resources and expected cash generated from sales should be sufficient for projected operating requirements, including repayment of the term loan, for the foreseeable future. The filing does not provide clear quantitative revenue or earnings guidance.
Management highlighted preferred-provider agreements for hereditary cancer testing with The U.S. Oncology Network and Integrated Oncology Network, together representing approximately 70% of community oncologists in the United States.
- Key operating risks include continued declines in hereditary cancer volumes or reimbursement, competition, regulatory and healthcare-payment changes, delays in product development, and difficulty commercializing new tests.
- Assurex and other acquisitions may not be successfully integrated or generate expected benefits. The Assurex purchase-price allocation remained preliminary and contingent milestone payments totaled $141.5 million at fair value across Assurex and Sividon.
- Failure to generate sufficient revenue or obtain additional financing could require reductions in research and development, sales and marketing, expansion or headcount and could impair repayment of the term loan.
- The credit agreement’s financial covenants and restrictions could limit strategic flexibility; noncompliance could increase interest costs or accelerate repayment.
- Esoterix Genetic Laboratories and Johns Hopkins University filed a patent-infringement complaint in September 2016 concerning laboratory processes used in certain diagnostic testing. The plaintiffs seek damages, injunctive relief and other remedies; the filing does not provide a quantified exposure.
Important Facts for Investors to Verify
- Whether hereditary cancer testing volumes and reimbursement stabilize, and whether GeneSight, Prolaris and EndoPredict growth offsets the decline in the core hereditary cancer business.
- Assurex integration progress, actual performance against acquisition assumptions and the amount and timing of contingent milestone payments.
- Ability to generate sufficient operating cash to repay or refinance the $200.0 million term loan due August 31, 2017 while funding research, marketing and acquisitions.
- Compliance with leverage and interest-ratio covenants beginning December 31, 2016, and the effect of debt restrictions on repurchases and other capital allocation.
- Resolution and potential financial impact of the patent litigation and ongoing tax audits.
- Future margins, particularly whether elevated SG&A, acquisition costs, amortization and lower reimbursement continue to pressure profitability.