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| MYGN > SEC Filings for MYGN > Form 10-Q on 4-Nov-2009 | All Recent SEC Filings |
4-Nov-2009
Quarterly Report
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 help 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).
To date we have launched seven commercial molecular diagnostic products, including four predictive medicine and three personalized medicine products. We market these products through our own 300-person sales force in the United States and we have entered into marketing collaborations with other organizations in selected foreign countries for some of our predictive medicine products. Molecular diagnostic revenue was $85.1 million for the three months ended September 30, 2009, an increase of 22% over revenues of $70.0 million for the same period in the prior year. We launched our first molecular diagnostic product, BRACAnalysis®, in November 1996, and sales of BRACAnalysis account for most of our molecular diagnostic revenues.
We believe that advances in the emerging field of molecular diagnostics will improve our ability to determine which patients are subject to a greater risk of developing disease later in life and who, therefore, would benefit from preventive therapies. We also believe that molecular diagnostic products will assist patient's physicians in managing their healthcare to ensure that patients receive the most appropriate treatment base on their individual genetic makeup and specific cause of disease.
The seven commercial molecular diagnostic products that we have launched to date are:
• BRACAnalysis®, our predictive medicine product for hereditary breast and ovarian cancer;
• COLARIS®, our predictive medicine product for hereditary colorectal and uterine cancer;
• COLARIS AP®, our predictive medicine product for colon cancer;
• MELARIS®, our predictive medicine product for hereditary melanoma;
• Theraguide® 5FU, our personalized medicine product for chemotherapy toxicity;
• Prezeon™, our personalized medicine product to asses PTEN status for disease progression and drug response; and
• OnDose™, our personalized medicine product to measure chemotherapy exposure to 5FU.
During the three months ended September 30, 2009, devoted substantially all of our resources to supporting our molecular diagnostic products, as well as to the research and development of future molecular diagnostic product candidates. We have two reportable operating segments-genetics and molecular diagnostics. See Note 6 "Segment and Related Information" in the notes to our condensed consolidated financial statements (unaudited) for information regarding these operating segments. Our revenues consist of sales of our molecular diagnostic products.
We incurred research and development expenses from continuing operations of $5.7 million and $4.4 million for the three months ended September 30, 2009, and 2008, respectively. Our research and development expenses include costs incurred in maintaining and improving our seven current molecular diagnostic products and costs incurred for the discovery, development and validation of our pipeline of molecular diagnostic product candidates. Our sales and marketing expenses and general and administrative expenses include costs associated with building our molecular diagnostic business. We expect that these costs will fluctuate from quarter to quarter and that such fluctuations may be substantial.
For the three months ended September 30, 2009, we had net income from continuing operations of $30.4 million compared to $24.5 million for three months ended September 30, 2008. As of September 30, 2009, we had an accumulated deficit of $89.5 million.
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 along with $188.0 million of cash into our then wholly-owned subsidiary, Myriad Pharmaceuticals, Inc. ("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 for the periods prior to that date as discontinued operations. We do not have any ownership or other form of interest in MPI subsequent to the separation.
Critical Accounting Policies
Critical accounting policies are those policies which are both important to the presentation 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 and related marketing agreements, 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 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.
As of September 30, 2009 and June 30, 2009, 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 $400,000 and $385,000, respectively.
Share-Based Payment Expense. We recognize expense related to 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.
Income Taxes. 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 research and development 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.
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.
Results of Operations for the Three Months Ended September 30, 2009 and 2008
Revenue for the three months ended September 30, 2009 was $85.1 million, compared to $70.0 million for the same three months in 2008. This 22% increase in our 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 due to market penetration for the three months ended September 30, 2009. During three months ended September 30, 2009, we have initiated a direct-to-consumer ("DTC") marketing campaign in strategic southern and midwestern states to increase our market penetration for BRACAnalysis in primarily the Ob/Gyn market. Through these 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, reduced doctor visits, and poorer patient compliance in the area of preventive diagnostic testing. We believe that there has been negative impact on our revenue growth due to these difficult economic conditions. 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 for the three months ended September 30, 2009 was $11.1 million, compared to $9.8 million for the same three months in 2008. This increase of 13% in molecular diagnostic cost of revenue is primarily due to the 22% increase in revenue from our molecular diagnostic products, partially offset by technology improvements and efficiency gains in the operation of our molecular diagnostic laboratory. Our gross profit margin was 87% for the three months ended September 30, 2009 compared to 86% for the same three months in 2008. Our gross profit margins may fluctuate from quarter to quarter based on the introduction of any new molecular diagnostic products, changes in our costs associated with such products, and any new technologies and operating systems in our molecular diagnostic laboratory. There can be no assurance that molecular diagnostic gross profit margins will continue to increase or remain at current levels.
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 three months ended September 30, 2009 were $5.7 million compared to $4.4 million for same three months in 2008. This increase of 30% was primarily due to increased research and development associated with internal predictive, personalized and prognostic product development. We expect our research and development expenses will increase over the next several years as we work to develop our product pipeline 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 three months ended September 30, 2009 were $38.7 million, compared to $32.4 million for the same three months in 2008. The increase in selling, general and administrative expense of 19% was due primarily to:
• increase in sales and marketing expense of approximately $3.0 million to support the continued expansion of our Ob/Gyn sales force from 100 to 150 sales representatives, acceleration of the mid-west DTC campaign launch, renewal of the southern DTC campaign, and other marketing initiatives;
• increase in share-based compensation expense of approximately $2.0 million;
• general increase in administrative costs of approximately $0.9 million to support the 22% growth in our molecular diagnostic business; and
• increase in bad debt expense of approximately $0.4 million associated with the increased molecular diagnostic sales.
We expect our selling, general and administrative expenses will continue to fluctuate depending on the number and scope of any new molecular diagnostic product launches and our efforts in support of our existing molecular diagnostic products.
Interest income for the three months ended September 30, 2009 was $1.9 million, compared to $3.4 million for the same three months in 2008. The decrease was due primarily to a lower market rates during the period. Other expense for the three months ended September 30, 2009 was $0.2 million compared to $2.0 million for the same three months in 2008. The decrease was due to a other-than-temporary impairment in 2008 on marketable investment securities from our holding of Lehman Brothers Holdings, Inc. ("Lehman") bonds. Due to Lehman's bankruptcy filing we determined that our investment in certain Lehman bonds was not likely to be recoverable.
The tax expense of $1.0 million for the three months ended September 30, 2009 represents our estimated alternative minimum tax and state tax liabilities.
Liquidity and Capital Resources
Cash, cash equivalents, and marketable investment securities increased $24.8 million, or 6%, from $392.2 million at June 30, 2009 to $417.0 million at September 30, 2009. This increase is primarily attributable to cash generated from sales of our molecular diagnostic products. This increase was partially offset by expenditures for our internal research and development programs, acquisition of capital assets, sales and marketing expense for our molecular diagnostic products, and other expenditures incurred in the ordinary course of business.
Net cash provided by operating activities was $23.2 million during the three months ended September 30, 2009, compared to $4.4 million used in operating activities during the same three months in 2008. Trade accounts receivable increased $3.5 million between September 30, 2009 and June 30, 2009, primarily due to increases in molecular diagnostic sales. Prepaid expenses increased $3.9 million due to increased sales and marketing efforts associated with our midwest and south DTC campaigns. Accrued liabilities and accounts payable decreased by $4.6 million and $6.5 million, respectively, between June 30, 2009 and September 30, 2009, primarily due to payments made following the spin-off of our former research and drug development businesses to MPI on June 30, 2009.
Our investing activities provided cash of $1.3 million during the three months ended September 30, 2009 and used cash of $41.4 million during the same three months in 2008. Investing activities were comprised primarily of purchases and maturities of marketable investment securities. Capital expenditures for research equipment and facilities were $1.6 million during the three months ended September 30, 2009.
Financing activities provided cash of $3.2 million during the three months ended September 30, 2009 and provided cash of $38.3 million in the same three months in 2008. Cash generated from financing activities was provided by the exercise of stock options.
We believe that with our existing capital resources and expected net cash to be generated for sales of our molecular diagnostic products, we will have adequate funds to maintain our current and planned operations for at least the next two years, although no assurance can be given that changes will not occur that would consume available capital resources before such time and we may need or want to raise additional financing within this period of time. Our future capital requirements, cash flows, and results of operations could be affected by and will depend on many factors that are currently unknown to us, including:
• failure to sustain revenue growth or margins in our molecular diagnostic business;
• termination of the licenses underlying our molecular diagnostic products;
• delays or other problems with operating our laboratory facilities;
• public concern over our approved products and any product candidates;
• the costs and expenses incurred in supporting our existing molecular diagnostic products;
• the progress, results and cost of developing additional molecular diagnostic products for our molecular diagnostic business;
• the costs, timing and results of launching new molecular diagnostic products;
• the costs, timing and outcome of any regulatory review of our existing or future molecular diagnostic products;
• the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our issued patents and defending intellectual property-related claims;
• the costs, timing and outcome of any litigation against us associated with any of our current or future products;
• introduction of technological innovations or new commercial products by us or our competitors;
• regulatory developments or enforcement in the United States and foreign countries;
• changes in intellectual propriety laws of our patents or enforcement in the United States and foreign countries;
• changes in structure of the healthcare system or healthcare payment systems;
• the impact of current economic conditions and job loss resulting in fewer doctor visits and loss of employer provided insurance coverage;
• our ability to enter into strategic collaborations, licensing or other arrangements favorable to us; and
• the costs to satisfy our obligations under our existing and potential future collaborations.
Effects of Inflation
We do not believe that inflation has had a material impact on our business, sales, or operating results during the periods presented.
Certain Factors That May Affect Future Results of Operations
The Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand a company's future prospects and make informed investment decisions. This Quarterly Report on Form 10-Q contains such "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.
Words such as "may," "anticipate," "estimate," "expects," "projects," "intends," "plans," "believes" and words and terms of similar substance used in connection with any discussion of future operating or financial performance, identify forward-looking statements. All forward-looking statements are management's present expectations of future events and are subject to a number of risks and uncertainties that could cause actual results to differ materially and adversely from those described in the forward-looking statements. These risks include, but are not limited to: the risk that sales and profit margins of our existing molecular diagnostic products may decline or will not continue to increase at historical rates; the risk that we may be unable to develop additional molecular diagnostic products; the risk that licenses to the technology underlying our molecular diagnostic products and any future products are terminated or cannot be maintained on satisfactory terms; risks related to delays or other problems with operating our laboratory testing facilities; risks related to public concern over our products; risks related to regulatory developments or enforcement in the United States and foreign countries and changes in the structure of healthcare payment systems; uncertainties about our ability to obtain new corporate collaborations and acquire new technologies on satisfactory terms, if at all; the development of competing products and services; the risk that we or our licensors may be unable to protect the proprietary technologies underlying our products; the risk of patent-infringement claims; challenges to intellectual property rights underlying our products or changes in intellectual property laws; risks of new, changing and competitive technologies and regulations in the United States and internationally; and other factors discussed under the heading "Risk Factors" contained in Item 1A of our Annual Report on Form 10-K for the year ended June 30, 2009, which has been filed with the Securities and Exchange Commission, as well as any updates to those risk factors filed from time to time in our Quarterly Reports on Form 10-Q or Current Reports on Form 8-K.
In light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained in this Quarterly Report or in any document incorporated by reference might not occur. Stockholders are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Quarterly Report. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent forward-looking statements attributable to us or to any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.
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