Business Context and Reporting Period
Myriad Genetics, Inc. is a personalized medicine company providing molecular diagnostic testing, pharmaceutical and clinical services, and related research and development. This unaudited Form 10-Q covers the three and six months ended December 31, 2017, the company’s fiscal second quarter and first half of fiscal 2018. Results include the Assurex Health business acquired in August 2016.
Key Financial Metrics
| Metric | Three Months Ended Dec. 31, 2017 | Three Months Ended Dec. 31, 2016 | Six Months Ended Dec. 31, 2017 | Six Months Ended Dec. 31, 2016 |
|---|---|---|---|---|
| Total revenue | $194.0 million | $196.5 million | $384.2 million | $373.9 million |
| Operating income | $4.4 million | $17.0 million | $91.9 million | $22.6 million |
| Net income attributable to shareholders | $32.1 million | $5.9 million | $113.2 million | $4.7 million |
| Diluted EPS | $0.45 | $0.09 | $1.59 | $0.07 |
| Operating margin | 2.3% | 8.7% | 23.9% | 6.0% |
| Net margin | 16.5% | 3.0% | 29.5% | 1.3% |
| Cash flow from operations | Not separately provided | Not separately provided | $56.5 million | $28.5 million |
Quarterly revenue consisted of $179.2 million from molecular diagnostic testing and $14.8 million from pharmaceutical and clinical services. Six-month revenue consisted of $358.0 million and $26.2 million, respectively.
- Cash and cash equivalents were $88.7 million at December 31, 2017, compared with $102.4 million at June 30, 2017.
- Marketable investment securities totaled $113.3 million, producing total cash, cash equivalents and marketable securities of $202.0 million.
- Net long-term debt was $43.2 million, down from $99.1 million at June 30, 2017. The revolving facility matures December 23, 2021, with no scheduled principal payments before maturity.
- Total contingent consideration was $81.0 million, including $70.0 million classified as current. Management expected the final Assurex contingent consideration payment during the quarter ending March 31, 2018.
- Operating cash flow was partly offset by $19.8 million of investing outflows and $49.4 million of financing outflows, including $56.0 million of debt repayment.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue declined $2.5 million, or approximately 1.3%, primarily because Hereditary Cancer Testing revenue fell $17.0 million due to reduced reimbursement. This was partly offset by $10.0 million of GeneSight growth, $1.9 million of Prolaris growth, and $2.2 million of pharmaceutical and clinical services growth.
- First-half revenue increased $10.3 million, or approximately 2.8%, primarily from $31.5 million of GeneSight growth, including the contribution from Assurex, and increases in VectraDA and Prolaris. These gains offset a $29.6 million decline in Hereditary Cancer Testing revenue.
- Second-quarter operating income decreased to $4.4 million from $17.0 million. The comparison included a $13.0 million expense from an increase in the fair value of contingent consideration versus a $3.8 million benefit in the prior-year quarter.
- First-half operating income increased to $91.9 million from $22.6 million, primarily because the company recorded a $60.2 million reduction in contingent consideration expense. The reduction principally reflected the Assurex randomized controlled trial’s failure to meet its primary endpoint, eliminating a related milestone obligation.
- Research and development expense declined to $16.8 million for the quarter and $34.6 million for the first half, while SG&A declined to $115.4 million and $230.5 million, respectively. Management cited Elevate 2020 savings and lower integration costs.
- The company recorded a provisional $32.6 million discrete tax benefit from the Tax Cuts and Jobs Act, principally from remeasuring deferred tax liabilities. Without this benefit, quarterly tax expense was $4.2 million and first-half tax expense was $9.8 million.
- The company corrected the classification of prior-year contingent consideration changes between operating income and other income. The correction did not affect prior-year net income or EPS.
Outlook, Commentary, Risks and Unusual Items
- Management stated that existing capital resources and expected operating cash generation should be sufficient for foreseeable operating needs, contingent consideration and debt obligations, but noted that capital could be consumed faster than expected and additional financing might become necessary.
- Key operating risks include reimbursement reductions, particularly for Hereditary Cancer Testing; competition; development and commercialization of new tests; regulatory requirements; intellectual property disputes; laboratory operations; integration of acquired businesses; and compliance with debt covenants.
- Management reported compliance with all financial covenants at December 31, 2017. The secured credit facility restricts additional indebtedness, liens, asset sales, dividends, mergers and certain change-in-control transactions.
- The company had $160.7 million remaining under its $200.0 million share repurchase authorization and made no repurchases during the quarter.
- Accounting for certain Tax Act provisions remained incomplete, including the transition tax and GILTI. Final effects could differ materially from the provisional estimates.
- The IRS, New Jersey and Canadian tax authorities were conducting audits covering various prior fiscal years. Management stated that existing legal proceedings were not expected to have a material adverse effect, but tax audit outcomes could differ from accrued amounts.
- Management highlighted GeneSight clinical results, riskScore validation data, VectraDA predictive data, a favorable Medicare coverage decision for certain prostate cancer patients, and FDA approval of BracAnalysis CDx in connection with Lynparza for HER2-metastatic breast cancer.
Most Important Facts to Verify
- Whether Hereditary Cancer Testing reimbursement pressure persists and whether GeneSight growth offsets that decline.
- The amount and timing of the final Assurex contingent consideration payment and any further fair-value adjustments.
- The conversion of reported earnings into recurring earnings after excluding the $32.6 million Tax Act benefit and other contingent-consideration effects.
- Completion of the company’s Tax Act accounting, including transition-tax and GILTI assessments.
- Cash generation, debt repayment capacity and compliance with the revolving facility’s leverage and interest coverage covenants.
- Results of the disclosed tax audits and any changes to legal, reimbursement, regulatory or intellectual-property exposures.