Myriad Genetics, Inc. Form 10-Q Summary
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. The filing covers the three and six months ended December 31, 2015, representing fiscal 2016 second quarter and first six months. The financial statements are unaudited and prepared under U.S. GAAP.
The company reports two segments: diagnostics and other. The February 2015 acquisition of Privatklinik Dr. Robert Schindlbeck GmbH & Co. KG in Germany contributed approximately $5.0 million of quarterly revenue and $10.1 million of year-to-date revenue, with no impact on diluted EPS.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2015 | Three months ended Dec. 31, 2014 | Six months ended Dec. 31, 2015 | Six months ended Dec. 31, 2014 |
|---|---|---|---|---|
| Total revenue | $193.3 million | $184.4 million | $376.8 million | $353.2 million |
| Operating income | $45.2 million | $36.3 million | $88.5 million | $62.3 million |
| Net income | $30.3 million | $24.0 million | $57.0 million | $40.0 million |
| Diluted EPS | $0.41 | $0.32 | $0.78 | $0.53 |
| Operating margin | 23.4% | 19.7% | 23.5% | 17.6% |
| Net margin | 15.7% | 13.0% | 15.1% | 11.3% |
Quarterly revenue increased 4.8%, operating income increased 24.5%, and net income increased 26.3%. Six-month revenue increased 6.7%, operating income increased 42.1%, and net income increased 42.5%.
- Molecular diagnostic revenue was $182.6 million for the quarter and $354.5 million year to date, compared with $179.2 million and $343.6 million, respectively, in the prior-year periods.
- Pharmaceutical and clinical service revenue increased to $10.7 million quarterly and $22.3 million year to date, from $5.2 million and $9.6 million, primarily due to the German Clinic acquisition.
- Quarterly revenue growth was led by hereditary cancer testing, up $1.6 million, Prolaris, up $1.5 million, and pharmaceutical and clinical services, up $5.5 million. Six-month growth was led by hereditary cancer testing, up $7.7 million, and pharmaceutical and clinical services, up $12.7 million.
- Cost of sales was 21.0% of quarterly revenue versus 20.6% in the prior year, but 20.5% year to date versus 20.6%. Laboratory efficiencies partly offset the Clinic’s higher cost structure.
- Research and development expense declined to $16.7 million quarterly and $33.9 million year to date, from $17.5 million and $40.1 million.
- SG&A declined to $90.8 million quarterly and $177.3 million year to date, from $92.7 million and $178.1 million. The reductions were primarily related to lower share-based compensation, including prior-year accelerated vesting for the former CFO.
- Income tax expense was $14.7 million for the quarter and $31.6 million year to date. Effective tax rates were approximately 32.7% and 35.7%, respectively, versus 36.7% and 37.3% in the comparable periods.
Net cash provided by operating activities was $65.8 million for the six months ended December 31, 2015, compared with $59.6 million in the prior year. Investing cash flow was negative $31.5 million, principally reflecting purchases of marketable securities. Financing cash flow was positive $38.1 million, including $84.9 million of proceeds from shares issued under equity compensation plans, $16.1 million of excess tax benefits, and $62.9 million used for share repurchases.
Cash and cash equivalents were $134.7 million at December 31, 2015, compared with $64.1 million at June 30, 2015. Including current and long-term marketable securities, total cash, cash equivalents, and marketable securities were $285.5 million versus $185.4 million. The filing does not identify outstanding debt; reported liabilities were $100.9 million, including $27.9 million of unrecognized tax benefits.
Material changes versus the prior comparable period
- Revenue and profitability increased in both the quarter and first six months, with meaningful operating-margin expansion.
- The German Clinic acquisition materially increased pharmaceutical and clinical service revenue and related costs.
- Prolaris benefited from Medicare coverage for certain low- and very-low-risk patients beginning October 15, 2015.
- R&D spending decreased due to lower myRisk production-process development costs and the timing of clinical studies.
- Cash and investments increased by $100.1 million from June 30, 2015, despite $62.9 million of share repurchases.
- Share count increased to 71.6 million issued and outstanding from 68.9 million at June 30, 2015, reflecting equity-plan issuances net of repurchases.
- The company adopted ASU 2015-17 prospectively, reclassifying approximately $13.5 million of net current deferred tax assets to non-current.
Guidance, outlook, commentary, risks, and unusual items
Management stated that existing capital resources and expected operating cash flow should fund current and planned operations for the foreseeable future, while cautioning that circumstances could consume capital more quickly and create a need or desire to raise capital. No specific revenue, earnings, or margin guidance is provided in the filing.
- Management highlighted a newly issued Vectra DA patent, favorable Medicare coverage for Prolaris, new oncology and immunotherapy companion diagnostics, a French EndoPredict tender expected to generate revenue in calendar 2016, and favorable Prolaris coverage from a major Swiss insurer.
- The company’s $200.0 million share-repurchase authorization had $91.6 million remaining at December 31, 2015. Repurchases may be suspended or discontinued without prior notice.
- New Jersey tax returns for fiscal years 2007 through 2013 were under examination. The company believes existing accruals are appropriate, but the ultimate assessment could differ materially.
- The company is subject to ordinary-course claims and legal proceedings; management does not expect them to have a material adverse effect. No material legal proceedings or material changes to previously disclosed risk factors were reported.
- Key risks include reimbursement changes, competition, regulatory and healthcare-payment changes, intellectual-property challenges, dependence on successful development and commercialization of new tests, international expansion, laboratory operations, public concerns regarding genetic testing, and integration of acquired businesses.
- Unusual or non-recurring comparability items include prior-year foreign-exchange gains related to funds held for the Clinic acquisition and prior-year accelerated vesting expense for the former CFO’s equity awards.
Important facts for investors to verify
- Confirm the sustainability of growth in hereditary cancer testing and whether Prolaris reimbursement expansion translates into durable volume and revenue gains.
- Assess the German Clinic’s contribution, profitability, reimbursement progress, and integration costs.
- Monitor reimbursement, regulatory, and competitive developments affecting the company’s principal diagnostic tests.
- Reconcile cash generation with the effects of share-based compensation proceeds and share repurchases, rather than treating the full cash increase as recurring operating performance.
- Review the New Jersey tax examination, unrecognized tax benefits, and potential changes in cash taxes.
- Evaluate future amortization, impairment, and commercialization risks related to approximately $177.0 million of goodwill and $186.3 million of intangible assets.