Business Context and Reporting Period
Myriad Genetics, Inc. is a personalized medicine company focused on molecular diagnostic testing, pharmaceutical and clinical services, and companion diagnostics. This Form 10-Q covers the three and nine months ended March 31, 2016, the company’s fiscal third quarter and first nine months of fiscal 2016. The financial statements are unaudited and prepared under U.S. GAAP.
The company reports two segments: diagnostics and other. Diagnostics generated $177.4 million of quarterly revenue and $532.0 million for the nine-month period; the other segment generated $13.1 million and $35.4 million, respectively.
Financial Highlights
| Metric | Three Months Ended March 31, 2016 | Three Months Ended March 31, 2015 | Nine Months Ended March 31, 2016 | Nine Months Ended March 31, 2015 |
|---|---|---|---|---|
| Total revenue | $190.5 million | $180.0 million | $567.4 million | $533.2 million |
| Operating income | $42.6 million | $35.7 million | $131.2 million | $98.0 million |
| Net income | $32.6 million | $21.4 million | $89.6 million | $61.5 million |
| Diluted EPS | $0.44 | $0.29 | $1.22 | $0.82 |
| Cash flow from operations | Not separately provided | Not separately provided | $109.9 million | $89.5 million |
- Quarterly revenue increased 5.8%; nine-month revenue increased 6.4%.
- Quarterly operating margin was approximately 22.4%, compared with 19.8% in the prior-year quarter. Nine-month operating margin was approximately 23.1%, compared with 18.4%.
- Quarterly net margin was approximately 17.1%, compared with 11.9%; nine-month net margin was approximately 15.8%, compared with 11.5%.
- Quarterly cost of sales was $40.2 million, or 21.1% of revenue, versus 20.2% in the prior-year quarter. Nine-month cost of sales was $117.3 million, or 20.7%, versus 20.4%.
- Research and development expense was $17.2 million for the quarter and $51.1 million year to date, compared with $16.7 million and $56.8 million, respectively.
- SG&A expense was $90.5 million for the quarter and $267.8 million year to date, compared with $91.3 million and $269.4 million, respectively.
- The quarterly effective tax rate was approximately 24%, versus 40% in the prior-year quarter. The nine-month rate was approximately 32%, versus 38%.
Liquidity, Cash Flow, and Capital Structure
- At March 31, 2016, cash and cash equivalents were $120.5 million, current marketable securities were $96.2 million, and long-term marketable securities were $69.7 million. Total cash, cash equivalents, and marketable securities were $286.4 million, up $101.0 million from June 30, 2015.
- Cash provided by operating activities increased to $109.9 million from $89.5 million for the comparable nine-month period.
- Investing activities used $47.6 million, primarily reflecting net purchases of marketable securities. Capital expenditures were $2.8 million, compared with $21.9 million in the prior year; the prior-year period included $20.1 million for the German Clinic acquisition.
- Financing activities used $4.1 million. The company received $85.9 million from shares issued under share-based compensation plans and spent $107.9 million repurchasing common stock.
- The company had $47.0 million remaining under its share repurchase authorization at March 31, 2016. No accelerated share repurchase agreement had been entered into as of the report date.
- No debt balance is presented in the condensed consolidated balance sheet. Total liabilities were $98.0 million, including $24.0 million of unrecognized tax benefits and $7.7 million of other long-term liabilities.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue growth was driven by a $6.1 million increase in pharmaceutical and clinical service revenue, largely reflecting the German Clinic acquisition, and a $4.7 million increase in Prolaris revenue.
- For the nine-month period, revenue growth was driven by an $18.8 million increase in pharmaceutical and clinical services, a $6.5 million increase in Prolaris revenue, and a $5.1 million increase in hereditary cancer testing revenue.
- Hereditary cancer testing revenue declined $2.7 million in the quarter but increased $5.1 million year to date. Quarterly Prolaris revenue increased to $5.2 million from $0.5 million following partial Medicare coverage beginning October 15, 2015 and $2.1 million of reimbursement for earlier tests.
- Operating income and net income increased substantially despite higher cost of sales, supported by revenue growth, lower R&D and SG&A costs, and a lower effective tax rate.
- Share-based compensation expense declined to $7.6 million from $12.5 million for the quarter and to $23.9 million from $31.6 million year to date, primarily because the prior-year period included accelerated vesting associated with executive transitions.
- Shares outstanding increased to 70.4 million at March 31, 2016 from 68.9 million at June 30, 2015, as employee equity issuances exceeded repurchases.
Outlook, Commentary, Risks, and Unusual Items
- Management stated that existing capital resources and expected operating cash generation should fund current and planned operations for the foreseeable future, while noting that circumstances could require additional capital.
- No specific quantitative revenue, earnings, or margin guidance is provided in the filing.
- Management highlighted additional hereditary cancer insurance contracts, 28 million private lives covered for Prolaris, a favorable Medicare coverage determination for certain Prolaris patients, a French EndoPredict tender expected to begin generating revenue in calendar 2016, and favorable Swiss coverage for Prolaris.
- The German Clinic contributed approximately $5.5 million of quarterly revenue and $15.6 million of year-to-date revenue, with no impact on diluted EPS according to management.
- The company is developing new companion diagnostics, including an approximately 80-gene tumor sequencing panel and an immune pathway assay, and is seeking pharmaceutical research collaborations.
- Key risks include reimbursement reductions or delays, dependence on existing molecular diagnostic products, competition, product development and commercialization risk, regulatory changes, laboratory operating issues, intellectual property disputes, foreign-market expansion, and integration of acquired businesses.
- The company is subject to IRS, New Jersey, and New York tax audits. Management believes existing legal proceedings are not expected to have a material adverse effect, but tax audit outcomes could differ materially from accrued amounts.
- The company adopted the prospective balance-sheet classification provisions of ASU 2015-17, reclassifying approximately $13.5 million of deferred tax assets to non-current during the quarter ended December 31, 2015. It is evaluating the future effects of new lease and stock-compensation accounting standards.
Important Facts for Investors to Verify
- Whether Prolaris reimbursement expansion and additional insurer coverage continue to offset weakness or slower growth in hereditary cancer testing.
- The sustainability of operating-margin improvement despite higher cost of sales from the German Clinic and product-mix changes.
- The extent to which quarterly and year-to-date earnings benefited from lower tax rates and other discrete tax items.
- Future cash deployment among share repurchases, acquisitions, and research and development, including the remaining $47.0 million authorization.
- Progress toward commercializing new companion diagnostics, EndoPredict in France, and international market expansion.
- Potential exposure from tax audits, reimbursement changes, intellectual property challenges, regulatory developments, and healthcare payment reforms.