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| MYGN > SEC Filings for MYGN > Form 10-K on 26-Aug-2009 | All Recent SEC Filings |
26-Aug-2009
Annual Report
Overview
We are a leading healthcare company focused on the development and marketing of novel molecular diagnostic products. We employ a number of proprietary technologies that help us to understand the genetic basis of human disease and the role that genes and their related proteins may play in the onset, progression and treatment of disease. We use this information to guide the development of new molecular diagnostic products that are designed to assess an individual's risk for developing disease later in life (predictive medicine), identify a patient's likelihood of responding to drug therapy and guide a patient's dosing to ensure optimal treatment (personalized medicine), or assess a patient's risk of disease progression and disease recurrence (prognostic medicine).
On February 24, 2009, our board of directors declared a two-for-one split of the Company's common stock, effected in the form of a stock dividend. The stock dividend was distributed on March 25, 2009 to shareholders of record on March 9, 2009. All historical share and per-share amounts have been retroactively adjusted for all periods presented to reflect the stock split.
On June 30, 2009, we separated our molecular diagnostic business from our research and drug development businesses for the treatment of cancers and other diseases by transferring our research and drug development businesses into our then wholly-owned subsidiary, Myriad Pharmaceuticals, Inc., or MPI. We contributed substantially all of the assets and certain liabilities from the research and drug development businesses and $188.0 million in cash and marketable securities to MPI. All outstanding shares of MPI were then distributed to our stockholders as a pro-rata, tax-free dividend on June 30, 2009 by issuing one share of MPI common stock for every four shares of our common stock to stockholders of record on June 17, 2009. The separation resulted in MPI operating as an independent entity with its own publicly-traded stock. The results of operations for the former research and drug development activities conducted by us and by MPI until June 30, 2009 are included as part of this report as discontinued operations. We do not have any ownership or other form of interest in MPI subsequent to the separation.
During the fiscal year ended June 30, 2009, we devoted our resources to supporting our predictive medicine, personalized medicine and prognostic medicine products, as well as to the research and development of future molecular diagnostic candidates. See Note 8 "Segment and Related Information" in the notes to our consolidated financial statements for information regarding our operating segments. Our revenues consisted primarily of sales of molecular diagnostic products. During the year ended June 30, 2009, we reported income from continuing operations of $136.3 million and total net income of $84.6 million. As of June 30, 2009, we had an accumulated deficit of $119.9 million.
We incurred research and development expenses from continuing operations of $17.9 million, $18.5 million, and $11.6 million for the years ended June 30, 2009, 2008, and 2007, respectively. Our research and development expenses include costs incurred in the development and improvement of our seven current molecular diagnostic product offerings BRACAnalysis, COLARIS, COLARIS AP, MELARIS, THERAGUIDE 5-FU, OnDose, and PREZEON and for costs incurred for the discovery, development and validation of other molecular diagnostic product candidates.
We expect to incur sales, marketing and other expenses in connection with building our molecular diagnostic business. We expect that earnings will fluctuate from quarter to quarter and that such fluctuations may be substantial.
Critical Accounting Policies
Critical accounting policies are those policies which are both important to the portrayal of a company's financial condition and results and require management's most difficult, subjective or complex judgments, often
as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies are as follows:
• revenue recognition;
• allowance for doubtful accounts;
• share-based payment expense; and
• income taxes
Revenue Recognition. Molecular diagnostic revenue includes revenue from the sale of molecular diagnostic products for our predictive, personalized and prognostic medicine products, and is recorded at the invoiced amount net of any discounts or allowances. Molecular diagnostic revenue is recognized upon completion of the test, communication of results, and when collectability is reasonably assured.
Allowance for Doubtful Accounts. The preparation of our financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amount of assets at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Trade accounts receivable are comprised of amounts due from sales of our molecular diagnostic products, which are recorded net of any discounts or contractual allowances. We analyze trade accounts receivable and consider historic experience, customer creditworthiness, facts and circumstances specific to outstanding balances, and payment terms when evaluating the adequacy of the allowance for doubtful accounts.
We periodically evaluate and adjust the allowance for doubtful accounts through a charge or credit to expense when trends or significant events indicate that a change in estimate is appropriate. Such changes in estimate could materially affect our results of operations or financial position; however, to date these changes have not been material. It is possible that we may need to adjust our estimates in future periods.
After a review of our allowance for doubtful accounts as of June 30, 2009 and 2008, we have determined that a hypothetical ten percent increase in our allowance for doubtful accounts would result in additional bad debt expense and an increase to our allowance for doubtful accounts of $385,000 and $410,000, respectively.
Share-Based Payment Expense. Financial Accounting Standards Board Statement No. 123R, Share-Based Payment, or SFAS 123R, sets accounting requirements for "share-based" compensation to employees, including employee stock purchase plans, and requires us to recognize in our consolidated statements of operations the grant-date fair value of our stock options and other equity-based compensation. The determination of grant-date fair value is estimated using an option-pricing model, which includes variables such as the expected volatility of our share price, the exercise behavior of our employees, interest rates, and dividend yields. These variables are projected based on our historical data, experience, and other factors. Changes in any of these variables could result in material adjustments to the expense recognized for share-based payments.
As a result of the option modifications that occurred in connection with the spin-off of our research and drug development businesses and the separation of MPI from us, we measured the potential accounting impact of these option modifications as established by SFAS 123R paragraphs 53 and 54. Based upon the analysis that included a comparison of the fair value of the modified options granted to our employees immediately after the modification with the fair value of the original option immediately prior to the modification, the Company determined there was no incremental compensation expense. All remaining unrecognized SFAS 123R compensation expense at the time of separation from options granted to MPI employees by the Company will be recognized by MPI over the remaining vesting term of the option.
Income taxes. Our income tax provision is based on income before taxes and is computed using the liability method in accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax basis of assets and liabilities using tax rates projected to be in effect for the year in which the differences are expected to reverse. Significant estimates are required in determining our provision for income taxes. Some of these estimates are based on interpretations of existing tax laws or regulations, or the expected results from any future tax examinations. Various internal and external factors may have favorable or unfavorable effects on our future provision for income taxes. These factors include, but are not limited to, changes in tax laws, regulations and/or rates, the results of any future tax examinations, changing interpretations of existing tax laws or regulations, changes in estimates of prior years' items, past levels of R&D spending, acquisitions, changes in our corporate structure, and changes in overall levels of income before taxes all of which may result in periodic revisions to our provision for income taxes. Uncertain tax positions are accounted for in accordance with Financial Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes."
Our deferred tax assets are offset by a full valuation allowance. The determination of the amount and extent of the valuation allowance offsetting our deferred tax assets requires a substantial degree of judgment. If we continue to experience positive trends in operating results, this valuation allowance could reverse in part or in full in the near term based on whether or not, in our judgment, it becomes more likely than not that the underlying deferred tax assets will be realized.
Recent Accounting Pronouncements
In April 2009, the FASB issued three new FASB Staff Positions ("FSPs") all of which impact the accounting and disclosure related to certain financial instruments. FSP FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly" (FSP FAS 157-4) provides additional guidance for estimating fair value in accordance with SFAS No. 157 when the volume and level of activity for the asset or liability have significantly decreased. It also includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP FAS 115-2 and FAS 124-2, "Recognition of Other-Than-Temporary Impairment" (FSP FAS 115-2 and FAS 124-2) amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. FSP FAS 107-1 and APB 28-1 "Interim Disclosures about Fair Value of Financial Instruments" (FSP FAS 107-1 and APB 28-1) amends SFAS No. 107 to require disclosures about the fair value of financial instruments on an interim basis in addition to the annual disclosure requirements. We adopted all three FSPs as of April 1, 2009 and they did not have a material impact on our financial position, results of operations or cash flows during the year ended June 30, 2009.
In May 2009, FASB issued SFAS No. 165, "Subsequent Events." This pronouncement establishes standards for accounting for and disclosing subsequent events (events which occur after the balance sheet date but before financial statements are issued or are available to be issued). SFAS No. 165 requires an entity to disclose the date through which subsequent events were evaluated and whether that evaluation took place on the date financial statements were issued or were available to be issued. We adopted SFAS No. 165 as of April 1, 2009 and SFAS No. 165 does not impact the Company's financial position or results of operation as it is disclosure-only in nature.
In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles." SFAS No. 168 will become the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission ("SEC") under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this statement, the codification will supersede all then existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the codification will become non-authoritative. This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We do not expect the adoption of SFAS No. 168 to have a material impact our results of operations, financial position or cash flows.
In February 2008, the FASB issued Statement of Financial Position (FSP) No. 157-2, which delays the effective date of FAS 157 for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value on a recurring basis (items that are re-measured at least annually). The FSP deferred the effective date of FAS 157 for non-financial assets and non-financial liabilities until our fiscal year beginning on July 1, 2009. The adoption of this standard by us is not expected to have a material effect on our consolidated financial statements.
Results of Operations
Years ended June 30, 2009 and 2008
Molecular diagnostic revenue is comprised primarily of sales of our molecular diagnostic products. Molecular diagnostic revenue for the fiscal year ended June 30, 2009 was $326.5 million compared to $222.9 million for the prior fiscal year, an increase of 47%. Sales of BRACAnalysis account for most of our molecular diagnostic revenues. This 47% increase in molecular diagnostic revenue is primarily attributable to increased testing volume. Increased sales, marketing, and education efforts resulted in wider acceptance of our products by the medical community and patients and increased testing volumes for the fiscal year ended June 30, 2009. We are currently in the process of expanding our sales force, executing a public awareness marketing campaign, and increasing our market penetration in the U.S. Ob/Gyn market. Through these and other efforts we are attempting to broaden utilization of our products with current physician customers and increase the number of new physician customers prescribing our products. We believe these efforts will allow us to continue to grow molecular diagnostic revenue in future periods; however, the markets in which we operate are experiencing unprecedented economic turmoil resulting in loss of jobs, loss of employer sponsored insurance coverage, and reduced doctor visits. We believe that there has been some dampening effect on our revenue growth in the fourth quarter of fiscal 2009 due to these difficult economic times. In addition, because BRACAnalysis and most of our molecular diagnostic products are only utilized once per patient, we will need to sell our services through physicians to new patients or develop new molecular diagnostic products in order to continue to generate revenue. Therefore, there can be no assurance that molecular diagnostic revenue will continue to increase at historical rates.
Molecular diagnostic cost of revenue is comprised primarily of salaries and related personnel costs, laboratory supplies, royalty payments, equipment costs and facilities expense. Molecular diagnostic cost of revenue for the fiscal year ended June 30, 2009 was $43.3 million compared to $32.3 million for the prior fiscal year. This increase of 34% in molecular diagnostic cost of revenue is primarily due to the 47% increase in molecular diagnostic revenues for the fiscal year ended June 30, 2009 compared to the prior fiscal year. Our gross profit margin was 87% for the fiscal year ended June 30, 2009 compared to 85% for the prior fiscal year. This increase in gross profit margins is primarily attributable to technology improvements and efficiency gains in the operation of our molecular diagnostic laboratory. There can be no assurance that molecular diagnostic gross profit margins will continue to increase and we expect that our gross profit margins will fluctuate from quarter to quarter based on the introduction of new products as well as new technologies and operating systems in our molecular diagnostic laboratory.
Research and development expenses from continuing operations are comprised primarily of salaries and related personnel costs, laboratory supplies, and equipment and facility costs. Research and development expenses for continuing operations incurred during the fiscal year ended June 30, 2009 were $17.9 million compared to $18.5 million for the prior fiscal year. This decrease of 3% was primarily due to decreased expenses associated with internal research projects of approximately $1.6 million offset by an increase in share-based payment expense of approximately $1.0 million. We expect our research and development expenses will increase over the next several years as we work to develop and expand our offerings of molecular diagnostic products.
Selling, general and administrative expenses for continuing operations consist primarily of salaries, commissions and related personnel costs for sales, marketing, customer service, billing and collection, executive, legal, finance and accounting, information technology, human resources, and allocated facilities expenses.
Selling, general and administrative expenses for the fiscal year ended June 30, 2009 were $138.9 million compared to $110.4 million for the prior fiscal year. This increase of 26% was primarily attributable to:
• increased sales and marketing expense of approximately $10.5 million to support the 47% growth in our molecular diagnostic revenues, which included the continued expansion of our oncology and Ob/Gyn sales force and our direct-to-consumer marketing campaign in Florida and Texas;
• general increases in administrative support and facility expenses of approximately $3.3 million to support growth in molecular diagnostic sales and market expansion efforts;
• general increases in sales support costs of approximately $3.7 million to support growth in our molecular diagnostic business;
• an increase of $4.6 million in bad debt expense associated with increased molecular diagnostic sales;
• increased share-based payment expense of approximately $6.4 million.
We expect our selling, general and administrative expenses will continue to fluctuate depending on the number and scope of any new product launches and efforts in support of our existing molecular diagnostic products.
Interest income for the fiscal year ended June 30, 2009 was $12.5 million, compared to $13.7 million for the prior fiscal year. The decrease was due primarily to lower market interest rates during the fiscal year.
Other expense for the fiscal year ended June 30, 2009 increased $2.2 million from an expense of $0.3 million for the fiscal year ended June 30, 2008 to $2.5 million expense for the fiscal year ended June 30, 2009. This increase was primarily attributed to an other-than-temporary impairment on marketable investment securities. Based on the bankruptcy filing of Lehman Brothers Holdings, Inc. ("Lehman"), we determined that our investment in certain Lehman bonds was not likely to be recoverable. Based on this determination, we expensed the full value of all Lehman holdings resulting in an other-than-temporary impairment loss of approximately $2.0 million.
As noted above under "overview," on June 30, 2009, we separated the research and drug development businesses conducted by us and by MPI and spun-off MPI to our stockholders. We do not have any ownership or other form of interest in MPI subsequent to the separation. As a result of the separation, we have classified the operations from the research and drug development businesses that were conducted by us and MPI until June 30, 2009 as discontinued operations in our Consolidated Statements of Operations. During the year ended June 30, 2009, losses from discontinued operations increased by $25.1 million, from a $26.5 million loss for the year ended June 30, 2008 to a $51.6 million loss for the year ended June 30, 2009. The increase is primarily due to the lack of the one-time $100 million non-refundable upfront fee recognized at June 30, 2008 that partially offset our drug development costs. On June 30, 2008, we discontinued our development of the Alzheimers drug candidate.
Years ended June 30, 2008 and 2007
Molecular diagnostic revenue for the fiscal year ended June 30, 2008 was $222.9 million compared to $145.3 million for the prior fiscal year, an increase of 53%. Sales of BRACAnalysis account for most of our molecular diagnostic revenues. This 53% increase in molecular diagnostic revenue is primarily attributable to increased testing volume. Increased sales, marketing, and education efforts resulted in wider acceptance of our products by the medical community and increased testing volumes for the fiscal year ended June 30, 2008.
Molecular diagnostic cost of revenue for the fiscal year ended June 30, 2008 was $32.3 million compared to $30.8 million for the prior fiscal year. This increase of 5% in molecular diagnostic cost of revenue was primarily due to the 53% increase in molecular diagnostic revenues for the fiscal year ended June 30, 2008 compared to the prior fiscal year. Our gross profit margin was 85% for the fiscal year ended June 30, 2008 compared to 79% for the prior fiscal year. This increase in gross profit margins was primarily attributable to technology improvements and efficiency gains in the operation of our molecular diagnostic laboratory.
Research and development expenses for the fiscal year ended June 30, 2008 were $18.5 million compared to $11.6 million for the prior fiscal year. This $6.9 million increase was due a $6.0 million increase in development expenses of molecular diagnostic product offerings, and increase of $0.9 million increase in share-based payment expense.
Selling, general and administrative expenses for the fiscal year ended June 30, 2008 were $110.4 million compared to $70.5 million for the prior fiscal year. This increase of 57% was primarily attributable to:
• increased sales and marketing expense of approximately $18.6 million to support the 53% growth in our molecular diagnostic revenues, which included the expansion of our oncology and Ob/Gyn sales force, as well as commissions, travel, and initiative programs;
• an increase of $5.7 million in bad debt expense associated with increased molecular diagnostic sales;
• an increase of $5.0 million in marketing expense from our DTC campaign and other marketing efforts;
• general increases in administrative support and facility expenses of approximately $4.8 million to support growth molecular diagnostic sales and market expansion efforts; and
• general increases in back office sales support costs of approximately $3.3 million to support growth in our molecular diagnostic business; and
• an increase in share-based payment expense of approximately $2.5 million.
Interest income for the fiscal year ended June 30, 2008 was $13.7 million, compared to $12.1 million for the prior fiscal year. The increase was due primarily to increases in cash, cash equivalents, and marketable investment securities.
Other income and expense for the fiscal year ended June 30, 2008 decreased $1.0 million from income of $0.7 million for the fiscal year ended June 30, 2007 to $0.3 million expense for the fiscal year ended June 30, 2008 as a result of losses realized from the disposition of equipment.
As noted above under "Overview," on June 30, 2009, we separated the research and drug development businesses conducted by us and by MPI and spun-off MPI to our stockholders. We do not have any ownership or other form of interest in MPI subsequent to the separation. As a result of the separation, we have classified the operations from the research and drug development businesses that were conducted by us and MPI until June 30, 2009 as discontinued operations in our Consolidated Statements of Operations. During the year ended June 30, 2008, the losses from discontinued operations decreased by $53.6 million from a $80.1 million loss at June 30, 2007 to a $26.5 million loss at June 30, 2008. The decrease is primarily due to the recognition of the one-time $100 million non-refundable upfront fee from a co-marketing agreement with Lundbeck A/S associated with our former Alzheimer's disease drug candidate at June 30, 2008 that partially offset our drug development costs. On June 30, 2008, we discontinued our development of the Alzheimers drug candidate.
Liquidity and Capital Resources
Cash, cash equivalents, and marketable investment securities decreased $27.9 million, or 6.6%, from $420.1 million at June 30, 2008 to $392.2 million at June 30, 2009. This decrease is primarily attributable to the contribution of $188.0 million to MPI in connection with the separation of our former drug development and research businesses from us which was partially offset by an increase of cash generated from continuing operating activities and an increase from proceeds from the exercise of warrants, and the exercise of stock options and sales of our common stock under our equity compensation plans.
Net cash provided by operating activities was $84.0 million during the fiscal year ended June 30, 2009 compared to $103.7 million provided by operating activities during the prior fiscal year. Net trade receivables increased $19.9 million between June 30, 2008 and June 30, 2009, primarily due to the 47% increase in
molecular diagnostic sales during the same period. Accounts payable decreased by $10.7 million and accrued liabilities decreased by $24.5 million between June 30, 2008 and June 30, 2009, primarily due to payments made following the discontinuance of our former Alzheimer's disease program as well as an $11 million payment for a sublicense fee related to the Lundbeck co-marketing agreement. Deferred revenue decreased by $2.0 million between June 30, 2008 and June 30, 2009, primarily due to the completion of research collaborations.
Our investing activities used cash of $206.3 million during the fiscal year ended June 30, 2009 compared to $31.3 million used in investing activities during the prior fiscal year primarily due to the purchase of marketable investment securities during the year. For the fiscal year ended June 30, 2009, purchases of marketable investment securities used cash of $308.6 million, maturities of marketable investment securities provided cash of $111.8 million, and capital expenditures for research equipment used cash of $7.5 million.
Financing activities used cash of $51.9 million during the fiscal year ended June 30, 2009 and provided cash of $21.9 million in the prior fiscal year. The decrease in cash from financing activities is attributed primarily to the transfer of $136.1 million in cash and cash equivalents to MPI (part of a total transfer of $188.0 million in cash, cash equivalents, and marketable investment securities) in connection with the separation of our former drug development and research businesses. This was offset by $84.2 million in proceeds from the exercise of stock options and the purchase of our common stock from our equity compensation plans.
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