Strong 1Q from Myriad, Guidance Up

Myriad Genetics ( MYGN - Analyst Report ) reported earnings per share (‘EPS’) of 36 cents for the first quarter of fiscal 2013. The results improved 24% year over year and surpassed the Zacks Consensus Estimate of 32 cents.

Revenues for the quarter increased 21% year over year to $133.4 million, well above the Zacks Consensus Estimate of $130 million.

During the quarter, Myriad’s two businesses – Molecular diagnostic testing and Companion diagnostic services – recorded revenues of $127.3 million (up 22% year over year) and $6.2 million (down 4.6%), respectively. The company has been offering Companion diagnostic services following its acquisition of Rules-Based Medicine in May 2011 which now accounts for 4.6% of total revenues. Molecular diagnostic testing revenue is derived from both Oncology (up 16% to $86.2 million) and Women’s Health (up 38% to $41.1 million).

While Myriad markets several molecular diagnostic products, the company's flagship product is Bracanalysis (representing 78.7% of total revenues during the quarter), which studies BRCA1 and BRCA2 genes for assessing a woman's risk of developing hereditary breast and ovarian cancers. This test recorded a 17% jump in revenues to $105 million during the quarter. Moreover, revenues derived from Colaris and Colaris AP, which assess a patient's risk of developing hereditary colorectal and uterine cancers, increased 26% to $12.1 million.

Over the recent past, the company has been working on receiving reimbursements for the BART test that recorded revenues of $7.6 million during the reported quarter. In this respect, the company has progressed well as the Noridian Administrative Services announced that Medicare would reimburse the test October 1, 2012 onwards for patients with a personal history of breast or ovarian cancer.

Gross profit increased 20.8% year over year to $116 million. Gross margin, however, remained unchanged at 87%. Operating expenses increased 23.6% during the quarter to $67.5 million due to a 21.7% rise in selling, general and administrative expenses ($56.1 million) and a 34% increase in research and development (R&D) expenses ($11.4 million).

Higher operating expenses incurred were a result of the company’s attempts to support portfolio expansion, sales force expansion and deeper penetration in the international market. Consequently, operating margin declined 110 basis points to 36.4%.

Myriad exited the quarter with cash, cash equivalents and marketable securities of $466.3 million, an improvement from $454.2 million at the end of fiscal 2012. The company repurchased 1.8 million shares for $46.2 million during the quarter.The consistent share buyback program had a favorable impact on the company’s EPS as shares outstanding declined 3.6% year over year.

Guidance Raised

Myriad raised its outlook for fiscal 2013. The company now expects to report revenues of $570−$585 million (previous guidance was $550−$565 million), reflect growth of 15−18% (11−14%). The raised guidance is primarily on the back of an improved outlook for Molecular Diagnostics segment, which is expected to gross $545−$557 million in the said fiscal. Guidance for Companion diagnostic remained unchanged at $25–$28 million.

The EPS for the fiscal year is likely to be in a range of $1.50−$1.55 ($1.44−$1.48). However, the company also stated that an important part of its customer base in the Eastern US has been affected by the recent severe storm.

Recommendation

We consider Myriad’s Bracanalysis as a valuable asset for top-line growth as it has the potential to tap a widely unexplored market. We are encouraged by the company’s various initiatives to achieve this objective. During fiscal 2012, the company had entered into agreements with Cephalon, a subsidiary of Teva Pharmaceutical ( TEVA - Analyst Report ) , and Pharma Mar to conduct companion diagnostic testing for their clinical trials.

Myriad has also entered into a loan and acquisition option agreement with Crescendo Biosciences. The company made a $25 million debt investment in order to gain an exclusive, three-year option to acquire it.Moreover, with a strong cash balance, the company is well placed to expand its product portfolio and target new territories. The stock retains a Zacks #2 Rank (Hold) in the short term.

However, operating expenses are increasing due to the company’s focus on international expansion and product development. As a result, margin remains under pressure, although the bottom line should benefit from the repurchase program.

We currently have a ‘Neutral’ recommendation on Myriad.