Myriad Genetics, Inc. — Form 10-Q Summary
Business context and reporting period
Myriad Genetics is a precision medicine company providing molecular diagnostic testing, pharmaceutical and clinical services. This report covers the three months ended September 30, 2019, the first quarter of fiscal 2020, and compares results with the three months ended September 30, 2018. The company reports two segments: diagnostics and other.
Key financial metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Total revenue | $186.3 million | $202.3 million | $(16.0) million |
| Molecular diagnostic revenue | $172.0 million | $189.0 million | $(17.0) million |
| Pharmaceutical and clinical services revenue | $14.3 million | $13.3 million | $1.0 million |
| Operating income (loss) | $(20.9) million | $1.2 million | $(22.1) million |
| Net income (loss) | $(20.6) million | $(0.8) million | $(19.8) million |
| Net loss attributable to Myriad shareholders | $(20.6) million | $(0.7) million | $(19.9) million |
| Diluted EPS | $(0.28) | $(0.01) | $(0.27) |
| Cash flow from operations | $15.8 million | $7.8 million | $8.0 million |
- Gross profit was approximately $136.6 million, implying a gross margin of 73.3%, compared with approximately 75.4% in the prior-year quarter. Cost of sales was $49.7 million in both periods, but represented 26.7% of revenue versus 24.6% previously.
- Operating margin declined to approximately negative 11.2% from positive 0.6%; net margin was approximately negative 11.1% versus negative 0.3%.
- SG&A increased to $135.5 million from $129.9 million, while research and development expense was $21.3 million versus $21.1 million. Share-based compensation expense was $8.8 million.
- Cash and cash equivalents were $89.9 million at September 30, 2019. Current and long-term marketable securities totaled $104.2 million, resulting in cash, cash equivalents and marketable securities of $194.1 million.
- Net long-term debt was $225.0 million, down from $233.5 million at June 30, 2019 after $8.6 million of principal repayments. The revolving facility matures July 31, 2023, with no scheduled principal payments before maturity. The company was in compliance with its financial covenants.
- Total assets were $1.591 billion and total liabilities were $516.7 million at September 30, 2019. The balance sheet includes $71.3 million of operating lease right-of-use assets and $75.6 million of operating lease liabilities.
- Net cash used in investing activities was $7.1 million, including $1.4 million of capital expenditures and net purchases of marketable securities. Net cash used in financing activities was $12.3 million, including debt repayment and a $3.3 million contingent-consideration payment.
Material changes versus the prior comparable period
- Revenue declined 7.9%, primarily because hereditary cancer revenue fell $11.8 million to $104.5 million, reflecting reduced reimbursement and updated estimates for previously completed tests. GeneSight revenue fell $6.6 million to $22.7 million, primarily due to lower volumes.
- Prenatal revenue increased $5.4 million to $23.5 million, benefiting from the Counsyl business being included for the full quarter versus only part of the prior-year quarter.
- Diagnostics segment operating income declined to $17.3 million from $27.6 million. The other segment recorded an operating loss of $38.2 million versus $26.4 million, contributing to the consolidated operating loss.
- Higher costs relative to revenue reflected lower margins in the Counsyl business, reduced reimbursement for hereditary cancer and GeneSight, and higher SG&A associated in part with a full-quarter contribution from Counsyl.
- Interest expense increased to $2.9 million from $2.2 million, primarily due to debt incurred to finance the Counsyl acquisition.
- The company adopted the new lease accounting standard on July 1, 2019, recognizing $74.5 million of right-of-use assets and $78.8 million of operating lease liabilities at adoption. Prior-period amounts were not adjusted.
- The company recognized a $10.9 million revenue decrease, with a $0.11 per-share impact, for prior-period tests due to updated contractual adjustments, payer and patient information, and settlements with third-party payors.
Guidance, outlook, commentary, risks and unusual items
- Management reduced financial guidance during the quarter, primarily because of a lower outlook for hereditary cancer revenue. The filing does not provide the revised guidance amounts.
- Management cited a coding transition that reduced reimbursement for hereditary cancer tests despite double-digit first-quarter volume growth. UnitedHealthcare reimbursement coverage for GeneSight became effective October 1, 2019, and the company entered into a master service agreement with a large pharmacy benefit manager.
- Management stated that existing capital resources and expected future sales should support projected operating requirements and debt repayment for the foreseeable future, but cautioned that capital could be consumed faster than expected and additional financing might be required.
- Key risks include reimbursement reductions, payer coverage changes, competition, regulatory and healthcare-system changes, intellectual-property challenges, laboratory operations, successful integration of acquisitions, development and commercialization of new tests, and compliance with debt covenants.
- In July 2019, the company agreed to a $9.1 million settlement with a qui tam relator concerning allegations related to hereditary cancer Medicare billing. The Department of Justice declined to intervene; the company denies wrongdoing. The settlement was paid on October 29, 2019.
- A purported securities class action was filed in September 2019 alleging misleading statements concerning the company’s business, operations and acquisitions. The company intends to defend the action. The filing states that potential loss cannot presently be estimated for certain other legal matters, including an Illinois action involving Assurex.
- The company is subject to tax audits in several jurisdictions and held $22.1 million of unrecognized tax benefits at September 30, 2019.
Important facts for investors to verify
- Obtain the revised full-year financial guidance and assess whether reimbursement pressure in hereditary cancer and GeneSight has continued.
- Track revenue, volume, reimbursement and margin trends by product, particularly hereditary cancer, GeneSight and prenatal testing.
- Evaluate the sustainability of positive operating cash flow given the reported net loss, working-capital contribution and ongoing debt obligations.
- Review the $225.0 million net debt balance, covenant requirements, interest costs and July 2023 maturity of the revolving facility.
- Monitor the securities class action, Assurex litigation, OIG-related matters and the financial impact of the $9.1 million settlement.
- Assess Counsyl integration, related goodwill and intangible assets, including $416.1 million of goodwill and $667.8 million of net intangible assets.
- Confirm the effect of the lease-accounting adoption and the company’s implementation of the expected-credit-loss standard, which was not yet adopted as of the filing.