Myriad Genetics, Inc. Form 10-Q Summary
Business context and reporting period
Myriad is a personalized-medicine company providing molecular diagnostic testing, pharmaceutical and clinical services, and related research and development. This filing covers the three and six months ended December 31, 2018, representing fiscal second-quarter and first-half 2019 results. The prior comparable periods ended December 31, 2017. Financial statements are unaudited and presented in millions except per-share data.
On July 31, 2018, Myriad acquired Counsyl, Inc., subsequently renamed Myriad Women's Health, for $405.9 million, consisting of $278.5 million in cash and $127.4 million in common stock. The acquisition expanded the company’s reproductive and prenatal testing business.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2018 | Three months ended Dec. 31, 2017 | Six months ended Dec. 31, 2018 | Six months ended Dec. 31, 2017 |
|---|---|---|---|---|
| Total revenue | $216.8 | $187.9 | $419.1 | $366.7 |
| Operating income | $6.1 | $6.3 | $7.3 | $90.3 |
| Net income attributable to Myriad | $2.6 | $30.9 | $1.9 | $109.7 |
| Diluted EPS | $0.03 | $0.43 | $0.02 | $1.54 |
| Operating cash flow | Not separately provided | Not separately provided | $45.6 | $56.5 |
- Quarterly revenue increased $28.9 million, or approximately 15%, primarily from $31.2 million of prenatal revenue contributed by Counsyl, higher hereditary cancer and Prolaris revenue, partly offset by lower GeneSight revenue.
- Six-month revenue increased $52.4 million, or approximately 14%, including $49.3 million of prenatal revenue from Counsyl.
- Quarterly cost of sales was $52.1 million, or 24.0% of revenue, versus 23.6% in the prior year; implied gross margin was approximately 76.0%. Six-month cost of sales was 24.3% of revenue, implying a 75.7% gross margin.
- Quarterly operating margin was approximately 2.8% and net margin approximately 1.2%. Six-month operating margin was approximately 1.7% and net margin approximately 0.5%.
- Research and development expense increased to $22.4 million for the quarter and $43.5 million for the six-month period, primarily due to Counsyl-related costs.
- SG&A increased to $135.2 million for the quarter and $265.1 million for six months, reflecting Counsyl operating costs, amortization, and acquisition and integration expenses.
- Cash, cash equivalents, and marketable securities totaled $195.3 million at December 31, 2018, compared with $211.3 million at June 30, 2018. Cash and cash equivalents were $90.6 million versus $110.9 million.
- Net cash used in investing activities was $287.1 million, including the $278.5 million Counsyl cash purchase. Financing activities provided $219.5 million, including $340.0 million of revolving-credit borrowings, partly offset by $75.0 million of repayments and $50.0 million of share repurchases.
- Net long-term debt was $273.3 million at December 31, 2018, versus $9.3 million at June 30, 2018. The amended secured facility has a $350.0 million commitment and matures July 31, 2023, with no scheduled principal payments before maturity.
- Management stated that existing capital resources and expected cash generation should fund foreseeable operating requirements, but noted that additional financing could become necessary if resources are consumed more rapidly than expected.
Material changes versus the prior comparable period
- Revenue growth from the Counsyl acquisition was substantially offset at the earnings level by higher operating expenses, amortization, integration costs, and interest expense.
- Quarterly net income fell from $30.9 million to $2.6 million; six-month net income fell from $109.6 million to $1.8 million. The prior-year periods benefited from a $32.6 million discrete tax benefit related to the Tax Cuts and Jobs Act and a significant favorable change in contingent consideration.
- GeneSight revenue declined $7.7 million for the quarter and $7.3 million for six months, driven by reduced reimbursement, lower-than-anticipated collections on previously performed tests, and Medicare documentation changes.
- Hereditary Cancer Testing revenue increased $4.5 million for the quarter and $3.9 million for six months. Prolaris revenue increased $1.9 million for the quarter and $4.2 million for six months.
- The company repurchased $50.0 million of common stock, or approximately 1.6 million shares, during the six months. Approximately $110.7 million remained under the repurchase authorization at December 31, 2018.
- The company adopted ASC 606 using the full retrospective method, primarily reclassifying bad-debt expense as a reduction of revenue. Prior periods were restated; the filing states that June 30, 2018 accounts receivable and retained earnings increased by $1.2 million.
- Management reported that the previously disclosed material weakness concerning sales-allowance estimates and third-party payer collections was remediated during the six months ended December 31, 2018.
Guidance, outlook, risks, contingencies, and unusual items
- The filing does not provide specific numerical revenue, earnings, or margin guidance. Management expects current resources and future operating cash flow to support foreseeable requirements, subject to execution and market conditions.
- Management highlighted opportunities in reproductive testing, women’s health, pharmacogenomics, hereditary cancer testing, and additional FDA-approved companion diagnostics. A draft Medicare coverage determination could create potential coverage for myPath Melanoma in late fiscal 2019.
- Key operating risks include reimbursement reductions, payer collection uncertainty, Medicare documentation requirements, competition, regulatory changes, intellectual-property challenges, laboratory operating issues, and the ability to integrate Counsyl and realize expected benefits.
- The Department of Health and Human Services Office of Inspector General is investigating possible false or improper Medicare and Medicaid claims relating primarily to hereditary cancer testing. The company is cooperating; no claims had been made as of the filing date, and the potential outcome cannot be predicted.
- The company disclosed a purported securities class action related to alleged improper government claims and a separate Illinois action involving Assurex Health. Myriad and Assurex intend to defend these matters; management stated that other legal matters are not expected to have a material adverse effect, but outcomes remain uncertain.
- Income tax expense was $1.0 million for the quarter and $2.6 million for six months. Effective tax rates were unusually variable because of discrete items, including tax-liability releases, acquisition costs, equity compensation effects, and the prior-year Tax Act benefit.
- Remaining performance obligations under certain longer-term contracts totaled $7.3 million at December 31, 2018, of which $2.9 million was expected to be recognized in fiscal 2019.
Important facts for investors to verify
- Whether Counsyl’s prenatal and reproductive-testing revenue growth can offset its lower gross margins and substantial incremental operating costs.
- Trends in GeneSight reimbursement, Medicare documentation, payer collections, and revenue adjustments for previously completed tests.
- Debt repayment capacity, covenant compliance, interest expense, and the effect of the $273.3 million net debt balance on future cash flow.
- The ultimate resolution and potential financial impact of the government billing investigation and related litigation.
- Whether the reported remediation of the revenue and sales-allowance material weakness remains effective.
- The sustainability of operating cash flow after acquisition, integration, share repurchases, research and development spending, and contingent consideration requirements.
- Future amortization, goodwill and intangible-asset impairment exposure associated with Counsyl and prior acquisitions.