Myriad Genetics, Inc. Form 10-Q Summary
Reporting period: Fiscal quarter and nine months ended March 31, 2018. The supplied metadata identifies “2017 Q3,” but the filing itself is the third quarter of fiscal 2018 and was filed May 9, 2018.
Business Context and Reporting Period
Myriad Genetics 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 filing presents unaudited results under U.S. GAAP and should be read with the fiscal 2017 Form 10-K.
- Diagnostics revenue was $179.7 million in the quarter and $537.6 million for the nine months.
- Pharmaceutical and clinical services revenue was $13.8 million in the quarter and $40.1 million for the nine months.
- Assurex contributed approximately $30.4 million of quarterly revenue and $91.0 million for the nine months.
Financial Performance and Position
| Metric | Three months ended March 31, 2018 | Three months ended March 31, 2017 | Nine months ended March 31, 2018 | Nine months ended March 31, 2017 |
|---|---|---|---|---|
| Total revenue | $193.5 million | $196.9 million | $577.7 million | $570.9 million |
| Operating income | $17.0 million | $7.7 million | $109.0 million | $30.4 million |
| Net income attributable to shareholders | $11.4 million | $4.2 million | $124.6 million | $9.0 million |
| Diluted EPS | $0.16 | $0.06 | $1.74 | $0.13 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $68.0 million | $69.6 million |
- Quarterly gross margin was approximately 77.2%, compared with 77.5% in the prior-year quarter. Quarterly operating margin was approximately 8.8%, compared with 3.9%; net margin attributable to shareholders was approximately 5.9%, compared with 2.1%.
- Nine-month gross margin was approximately 77.3%, compared with 77.5%. Nine-month operating margin was approximately 18.9%, compared with 5.3%; net margin attributable to shareholders was approximately 21.6%, compared with 1.6%.
- Nine-month results benefited substantially from a $61.3 million reduction in the fair value of contingent consideration and a $32.6 million provisional tax benefit from the Tax Cuts and Jobs Act.
- Cash and cash equivalents were $97.4 million at March 31, 2018, compared with $102.4 million at June 30, 2017. Total cash, cash equivalents and marketable securities were $208.6 million, up from $199.2 million.
- Accounts receivable increased to $123.7 million from $105.6 million, while inventory declined to $33.4 million from $42.2 million.
- Net long-term debt was $69.3 million, down from $99.1 million. The revolving facility has a $300.0 million commitment, matures December 23, 2021, and had no scheduled principal payments before maturity. The company was in compliance with its financial covenants.
- Capital expenditures were $6.6 million for the nine months. Net cash used in investing was $20.5 million, and net cash used in financing was $53.7 million.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue declined $3.4 million, or approximately 1.7%, primarily because Hereditary Cancer Testing revenue fell $17.5 million due mainly to reduced reimbursement.
- Quarterly revenue growth in GeneSight, VectraDA, Prolaris and pharmaceutical and clinical services partially offset the hereditary cancer decline.
- Nine-month revenue increased $6.8 million, or approximately 1.2%. GeneSight increased $38.1 million, VectraDA increased $8.6 million and Prolaris increased $5.1 million, while Hereditary Cancer Testing declined $47.1 million.
- Quarterly SG&A declined $7.0 million to $115.1 million, reflecting lower sales and marketing, bad debt and Elevate 2020 integration costs. Nine-month SG&A declined $8.8 million to $345.5 million.
- Quarterly R&D increased $0.9 million to $18.5 million; nine-month R&D declined $2.5 million to $53.1 million.
- The nine-month change in contingent consideration was a $61.3 million benefit versus a $2.0 million expense in the prior-year period. The company stated that the Assurex randomized controlled trial did not meet its primary endpoint, eliminating a related milestone obligation and reducing fair value by approximately $73.3 million.
- The company paid $63.2 million of contingent consideration during the nine months and had $17.0 million of contingent consideration liability remaining at March 31, 2018.
- No shares were repurchased during the quarter or nine-month period. The remaining authorization was $160.7 million.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management stated that existing capital resources and expected future sales should be sufficient for projected operating needs, contingent consideration and debt repayment for the foreseeable future, but cautioned that resources could be consumed faster than expected and additional financing might be required.
- Management highlighted new or expanded coverage and clinical support for Prolaris, hereditary cancer testing, myChoice HRD Plus, EndoPredict and BRACAnalysis CDx. It also reported positive GeneSight clinical-study results presented in May 2018.
- The company initiated a restructuring to move laboratory-developed testing to U.S. laboratories, close its Munich laboratory and sell the German Clinic in the first quarter of fiscal 2019. Management does not expect a significant gain or loss, but the final result will depend on the sale price relative to book value.
- The Tax Cuts and Jobs Act produced a provisional $32.6 million discrete tax benefit during the nine months. Accounting for certain foreign earnings, transition tax and GILTI provisions remained incomplete, and the ultimate tax impact could differ materially.
- 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, and the potential outcome was not estimable.
- A purported securities class action was filed April 20, 2018 against the company and current and former executives, alleging misleading disclosures concerning government claims. The company intends to defend the action, but an unfavorable outcome could materially affect financial condition, results and cash flows.
- Key ongoing risks include reimbursement reductions, competition, regulatory and healthcare-payment changes, intellectual-property challenges, laboratory operations, acquisition integration, debt covenants and the ability to commercialize new tests.
- The filing corrected the classification of contingent-consideration fair-value changes in prior-period operating results. The correction affected operating income and other expense presentation but did not affect net income or EPS.
Important Facts for Investors to Verify
- Whether hereditary cancer reimbursement pressure persists and whether growth in GeneSight, VectraDA, Prolaris and other products offsets the decline.
- The final accounting effects of the Tax Cuts and Jobs Act, including transition tax and GILTI provisions.
- The status and potential financial exposure of the OIG investigations and securities class action.
- Remaining contingent consideration obligations, milestone outcomes and future cash payments.
- Compliance with revolving-credit covenants and the company’s ability to repay or refinance debt by the December 2021 maturity.
- Execution and costs of the laboratory restructuring and planned German Clinic sale.
- Future cash conversion, particularly changes in accounts receivable, bad debt expense and reimbursement-related collections.