Myriad Genetics, Inc. — Form 10-Q Summary
Business context and reporting period
Myriad Genetics is a molecular diagnostics company offering predictive, personalized, and prognostic tests, primarily in oncology and women’s health. The filing covers the three and six months ended December 31, 2011, the company’s fiscal second quarter and first six months of fiscal 2012. Results are unaudited and should be read with the fiscal 2011 Form 10-K.
- Molecular diagnostic testing includes nine commercial tests, led by BRACAnalysis.
- Companion diagnostic services were added through the May 2011 acquisition of Myriad RBM, Inc. (formerly Rules-Based Medicine).
- The company is expanding internationally, including operations in Germany, Switzerland, and France.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2011 | Three months ended Dec. 31, 2010 | Six months ended Dec. 31, 2011 | Six months ended Dec. 31, 2010 |
|---|---|---|---|---|
| Total revenue | $122.8 million | $100.4 million | $233.3 million | $192.3 million |
| Operating income | $45.5 million | $38.6 million | $86.9 million | $74.2 million |
| Net income | $28.3 million | $24.2 million | $53.4 million | $46.7 million |
| Diluted EPS | $0.33 | $0.26 | $0.62 | $0.50 |
| Net cash from operating activities | Not separately provided | Not separately provided | $59.4 million | $66.4 million |
- Revenue increased 22% for the quarter and 21% for the six-month period.
- Molecular diagnostic revenue rose 17% to $117.6 million in the quarter and 15% to $221.6 million for the six months.
- Companion diagnostic revenue contributed $5.2 million in the quarter and $11.7 million for the six months; there was no comparable revenue in 2010.
- BRACAnalysis represented 82.6% of quarterly total revenue and approximately 81.8% of six-month total revenue, indicating significant product concentration.
- Molecular diagnostic gross margin was 89% in both the quarter and six-month period, compared with 88% in the prior-year periods.
- Companion diagnostic gross margin was 37% in the quarter and 45% for the six months.
- Quarterly operating margin was approximately 37%; six-month operating margin was approximately 37%.
- Income tax expense was $18.5 million for the quarter and $35.2 million for the six months, representing an effective tax rate of approximately 40%, versus approximately 38% in the prior-year periods.
- At December 31, 2011, cash and cash equivalents were $108.8 million, current marketable securities were $241.8 million, and long-term marketable securities were $77.6 million. Total cash, cash equivalents, and marketable securities were $428.3 million.
- Total liabilities were $44.5 million, including $35.0 million of current liabilities and $9.4 million of unrecognized tax benefits. The filing does not disclose conventional debt borrowings; instead, Myriad held a $17.7 million note receivable from Crescendo.
- Cash and marketable securities increased from $417.3 million at June 30, 2011 to $428.3 million at December 31, 2011.
Material changes versus the prior comparable period
- Revenue growth reflected higher molecular testing volume and new products, price increases, and the addition of Myriad RBM’s companion diagnostic services.
- Research and development expense increased 67% in the quarter and 58% for the six months, primarily due to clinical studies, license fees and milestones, and development of molecular and companion diagnostic products.
- Selling, general, and administrative expense increased 17% in both the quarter and six-month period, driven by Myriad RBM integration, international operations, sales and marketing, bad debt expense, administrative costs, and share-based compensation.
- Interest income increased to $1.4 million for the quarter and $1.9 million for the six months, primarily due to the Crescendo note receivable.
- Weighted-average basic shares declined to 84.5 million from 91.5 million in the quarter and to 84.9 million from 92.4 million for the six months, reflecting share repurchases. The company repurchased 927,709 shares for $18.5 million during the quarter and $55.5 million during the six months.
- Net cash from operations declined year over year despite higher net income, primarily because of a $16.6 million prepayment of estimated federal income taxes.
Guidance, outlook, risks, contingencies, and unusual items
- Management did not provide specific quantitative revenue or earnings guidance in the filing.
- Management expects research and development expense to increase over the next several years as the company expands its product and companion diagnostic pipeline. Selling, general, and administrative expense is expected to fluctuate with product launches, existing-business support, and international expansion.
- Management believes existing capital resources and expected operating cash flow are adequate to fund current and planned operations for the foreseeable future, while noting that financing could become necessary if capital is consumed faster than expected.
- On September 8, 2011, Myriad loaned Crescendo Bioscience $25.0 million at 6% interest and obtained an exclusive three-year option to acquire Crescendo. The balance sheet recorded a $17.7 million note receivable and an $8.0 million option asset. If Crescendo defaults and Myriad does not exercise the option, the company could incur a loss of up to $25 million.
- The company’s BRACAnalysis-related patents remain subject to litigation. The Federal Circuit upheld certain patent claims and invalidated others; plaintiffs petitioned the U.S. Supreme Court for review in December 2011. Management does not believe the litigation will have a material adverse effect, citing additional claims and patents that are not challenged.
- Key risks include reimbursement and healthcare payment changes, regulatory review or enforcement, patent validity and infringement challenges, competition, reliance on licenses, international expansion, laboratory operations, product development, acquisition integration, and the concentration of revenue in BRACAnalysis.
- The company held $1.35 million of auction-rate securities classified as Level 3 investments at December 31, 2011.
- Share-based compensation expense was $13.3 million for the six months, with $51.8 million of unrecognized compensation cost remaining to be recognized over a weighted-average period of 2.6 years.
Most important facts for investors to verify
- Whether BRACAnalysis revenue concentration declines and whether newer tests and companion diagnostic services continue to grow.
- The sustainability of the 89% molecular diagnostic gross margin and the lower, more variable companion diagnostic margins.
- Whether increased research, development, sales, international, and integration costs remain aligned with revenue growth.
- The collectability of the Crescendo note receivable and the eventual value and exercise economics of the acquisition option.
- The outcome and potential commercial impact of the BRACAnalysis patent litigation, including any Supreme Court review.
- The remaining authorization and pace of the $200 million stock repurchase program, which had $172.7 million available at December 31, 2011.
- Changes in reimbursement, regulatory requirements, patent law, and healthcare policy that could affect testing demand or pricing.