MYRIAD GENETICS INC annual report, FY2017

Myriad Genetics, Inc. — Fiscal 2017 Form 10-K Summary

Reporting period: Fiscal year ended June 30, 2017. The provided filing is a fiscal 2017 annual report, not a 2016 fourth-quarter filing. Myriad is a specialty molecular diagnostics company focused on hereditary cancer, oncology, autoimmune, urology, neuroscience and related pharmaceutical and clinical services.

Financial Performance and Position

Metric	FY2017	FY2016	Change
Total revenue	$771.4 million	$753.8 million	+2.3%
Molecular diagnostic revenue	$722.1 million	$705.7 million	+2.3%
Pharmaceutical and clinical services revenue	$49.3 million	$48.1 million	+2.5%
Operating income	$49.4 million	$166.8 million	-70.4%
Operating margin	6.4%	22.1%	Down 15.7 points
Net income attributable to stockholders	$21.8 million	$125.3 million	-82.6%
Diluted EPS	$0.32	$1.71	-81.3%
Net cash from operating activities	$106.2 million	$166.3 million	-36.2%

Gross profit was approximately $600.2 million, implying a gross margin of approximately 77.8%, compared with approximately 79.1% in fiscal 2016. Cost of sales increased to $171.2 million, or 22.2% of revenue, from 20.9%, primarily due to product mix, lower hereditary-cancer fixed-cost absorption and reduced hereditary-cancer reimbursement.

Hereditary cancer revenue declined $63.6 million to $568.7 million and represented 74% of total revenue, versus 84% in fiscal 2016.
GeneSight contributed $78.4 million following the August 2016 acquisition of Assurex Health.
Research and development expense increased to $74.4 million from $70.6 million.
Selling, general and administrative expense increased to $476.4 million from $359.1 million, driven principally by Assurex operating costs, acquisition and integration costs, amortization, sales investments and higher bad-debt expense.
The effective tax rate increased to 49.7% from 25.8%, reflecting valuation allowances, uncertain tax positions, acquisition-related costs and stock-compensation accounting effects.

Liquidity, Debt and Capital Allocation

Cash, cash equivalents and marketable securities totaled $199.2 million at June 30, 2017, compared with $238.9 million at June 30, 2016.
Working capital was $99.6 million, down from $242.2 million.
Net long-term debt was $99.1 million, consisting of $100.0 million principal less $0.9 million of debt discount. The revolving facility matures December 23, 2021, has no scheduled principal payments before maturity and includes leverage and interest-ratio covenants.
The company repaid $105.0 million of debt, spent $216.1 million on the Assurex acquisition, repurchased $31.6 million of common stock and invested $6.1 million in capital expenditures.
The remaining share-repurchase authorization was $160.7 million at June 30, 2017; no shares were repurchased during the fourth quarter.
Contractual purchase obligations and operating leases totaled $100.3 million, including $21.8 million due within one year.

Material Changes Versus the Prior Comparable Period

Revenue growth was modest, but the business mix shifted materially away from hereditary cancer toward newer products, particularly GeneSight.
Profitability deteriorated substantially as SG&A, amortization and acquisition-related costs increased following the Assurex acquisition.
Assurex was acquired for total consideration of $351.6 million, including $216.1 million in cash and potential performance-based milestones with a recorded fair value of $130.0 million. Assurex contributed $78.4 million of revenue and approximately $96.4 million of operating expenses during the period.
Goodwill increased to $316.1 million from $195.3 million, and intangible assets increased to $491.6 million from $227.5 million, primarily reflecting acquisitions.
Operating cash flow declined by $60.1 million, while financing cash flow improved to a $71.8 million inflow because of new debt issuance.
Share count declined to 68.4 million shares outstanding from 69.1 million, principally due to repurchases.

Guidance, Outlook, Commentary and Risks

Management launched the Elevate 2020 operating-margin program in the fourth quarter, targeting $50 million of incremental operating income by fiscal 2020 through centralized resources, technology, sourcing and laboratory-efficiency initiatives.
The company expects growth from new products, international kit sales, broader reimbursement and increased market penetration, but does not provide a clear consolidated revenue or EPS forecast in the provided text.
Management expects existing liquidity and future operating cash flow to fund planned operations and debt repayment for the foreseeable future, while acknowledging that additional financing could become necessary if operating plans or cash needs change.
A Medicare administrative contractor issued a draft non-coverage decision for Vectra DA. The comment period had closed, but a final decision was still pending as of the filing.
Hereditary-cancer testing remains exposed to competition, pricing pressure and reimbursement declines following patent challenges and market entry by other laboratories.
The company faces reimbursement uncertainty for newer tests, including the effect of PAMA on future Medicare pricing, and has acknowledged that recognized average selling prices for pipeline tests are substantially below target levels.
FDA oversight of laboratory-developed tests remains uncertain. Companion and complementary diagnostics require FDA clearance or approval, which may be costly and time-consuming.
Myriad is defending patent-infringement litigation brought by Esoterix Genetic Laboratories and Johns Hopkins University. The plaintiffs seek damages and injunctive relief; Myriad filed counterclaims and inter partes review petitions.
Potential risks include acquisition integration, goodwill and intangible-asset impairment, debt covenant compliance, cybersecurity and privacy breaches, laboratory interruptions, regulatory sanctions, product liability, intellectual-property disputes and foreign-exchange exposure.

Most Important Facts for Investors to Verify

Whether the Vectra DA Medicare coverage dispute resulted in a final non-coverage decision and the resulting revenue impact.
Progress toward the Elevate 2020 target and whether cost savings can offset continued acquisition and commercialization expenses.
GeneSight revenue growth, reimbursement, operating losses and integration performance after the Assurex acquisition.
Hereditary-cancer testing volumes, pricing, reimbursement and the pace of migration from legacy products to myRisk.
Compliance with the revolving credit facility’s leverage and interest covenants and the company’s ability to refinance or repay the $99.1 million net debt balance by maturity.
Status and potential exposure of the Esoterix/Johns Hopkins patent litigation and other intellectual-property matters.
Realizability of the $316.1 million goodwill balance and $491.6 million of intangible assets, particularly if newer products underperform.
The effect of future revenue-recognition adoption, including the expected reclassification of certain patient-responsibility bad-debt amounts as reductions of revenue.
Assurex’s exclusion from management’s fiscal 2017 internal-control assessment, despite representing 33.8% of total assets, 42.8% of net assets and 10.2% of revenue.