Form 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2007

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                 

Commission file number: 0-26642

MYRIAD GENETICS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   87-0494517

(State or other jurisdiction

of incorporation or organization)

  (I.R.S. Employer Identification No.)
320 Wakara Way, Salt Lake City, UT   84108
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (801) 584-3600

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check one:

 

Large accelerated filer  x   Accelerated filer  ¨
Non-accelerated filer  ¨   Smaller reporting company  ¨

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of January 31, 2008 the registrant had 43,413,174 shares of $0.01 par value common stock outstanding.

 

 

 


MYRIAD GENETICS, INC.

INDEX TO FORM 10-Q

 

          Page
PART I - Financial Information

Item 1.

   Financial Statements   
   Condensed Consolidated Balance Sheets (Unaudited) as of December 31, 2007 and June 30, 2007    3
   Condensed Consolidated Statements of Operations (Unaudited) for the three and six months ended December 31, 2007 and 2006    4
   Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended December 31, 2007 and 2006    5
   Notes to Condensed Consolidated Financial Statements (Unaudited)    6

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    9

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    16

Item 4.

   Controls and Procedures    16
PART II - Other Information

Item 1.

   Legal Proceedings    17

Item 1A.

   Risk Factors    17

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    17

Item 3.

   Defaults Upon Senior Securities    17

Item 4.

   Submission of Matters to a Vote of Security Holders    17

Item 5.

   Other Information    18

Item 6.

   Exhibits    18
Signatures    19

 

2


MYRIAD GENETICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

(In thousands, except per share amounts)    Dec. 31, 2007     Jun. 30, 2007  
Assets     

Current assets:

    

Cash and cash equivalents

   $ 114,575     $ 143,432  

Marketable investment securities

     66,576       70,679  

Prepaid expenses

     7,283       2,499  

Trade accounts receivable, less allowance for doubtful accounts of $3,650 at Dec. 31, 2007 and $2,600 at Jun. 30, 2007.

     38,468       31,103  

Other receivables

     2,600       1,348  
                

Total current assets

     229,502       249,061  
                

Equipment and leasehold improvements:

    

Equipment

     61,270       54,868  

Leasehold improvements

     10,145       9,826  
                
     71,415       64,694  

Less accumulated depreciation

     42,603       39,806  
                

Net equipment and leasehold improvements

     28,812       24,888  
                

Long-term marketable investment securities

     122,302       94,201  

Other assets

     3,742       3,917  
                
   $ 384,358     $ 372,067  
                
Liabilities and Stockholders’ Equity     

Current liabilities:

    

Accounts payable

   $ 13,910     $ 15,763  

Accrued liabilities

     20,647       15,558  

Deferred revenue

     333       383  
                

Total current liabilities

     34,890       31,704  

Stockholders’ equity:

    

Preferred stock, $0.01 par value, authorized 5,000 shares, issued and outstanding no shares

     —         —    

Common stock, $0.01 par value, authorized 60,000 shares, issued and outstanding 44,361 at Dec. 31, 2007 and 43,440 at Jun. 30, 2007

     444       434  

Additional paid-in capital

     613,973       592,727  

Accumulated other comprehensive income (loss)

     516       (398 )

Accumulated deficit

     (265,465 )     (252,400 )
                

Total stockholders’ equity

     349,468       340,363  
                
   $ 384,358     $ 372,067  
                

See accompanying notes to condensed consolidated financial statements (unaudited).

 

3


MYRIAD GENETICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

     Three Months Ended     Six Months Ended  
(In thousands, except per share amounts)    Dec. 31, 2007     Dec. 31, 2006     Dec. 31, 2007     Dec. 31, 2006  

Revenue:

        

Molecular diagnostic revenue

   $ 53,097     $ 34,175     $ 99,153     $ 65,026  

Research and other revenue

     3,645       2,960       5,855       5,652  
                                

Total revenue

     56,742       37,135       105,008       70,678  

Costs and expenses:

        

Molecular diagnostic cost of revenue

     7,690       7,529       15,026       15,634  

Research and development expense

     27,306       24,765       53,328       51,010  

Selling, general, and administrative expense

     30,482       16,210       56,970       30,403  
                                

Total costs and expenses

     65,478       48,504       125,324       97,047  
                                

Operating loss

     (8,736 )     (11,369 )     (20,316 )     (26,369 )

Other income (expense):

        

Interest income

     3,667       2,573       7,523       5,175  

Other

     2       —         (272 )     (27 )
                                
     3,669       2,573       7,251       5,148  
                                

Net loss

   $ (5,067 )   $ (8,796 )   $ (13,065 )   $ (21,221 )
                                

Basic and diluted loss per share

   $ (0.11 )   $ (0.22 )   $ (0.30 )   $ (0.53 )

Basic and diluted weighted average shares outstanding

     44,094       39,808       43,831       39,754  

See accompanying notes to condensed consolidated financial statements (unaudited).

 

4


MYRIAD GENETICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     Six Months Ended  
(In thousands)    Dec. 31, 2007     Dec. 31, 2006  

Cash flows from operating activities:

    

Net loss

   $ (13,065 )   $ (21,221 )

Adjustments to reconcile net loss to net cash used in operating activities:

    

Depreciation and amortization

     4,235       3,581  

Loss on disposition of assets

     272       27  

Share-based compensation expense

     6,225       3,094  

Bad debt expense

     5,623       2,314  

Changes in operating assets and liabilities:

    

Prepaid expenses

     (4,784 )     (1,606 )

Trade accounts receivable

     (12,988 )     (5,500 )

Other receivables

     (1,252 )     (1,523 )

Accounts payable

     (1,853 )     3,393  

Accrued liabilities

     5,089       (4,060 )

Deferred revenue

     (50 )     317  
                

Net cash used in operating activities

     (12,548 )     (21,184 )
                

Cash flows from investing activities:

    

Capital expenditures for equipment and leasehold improvements

     (8,156 )     (7,265 )

Sales (purchases) of other assets

     (100 )     20  

Purchases of marketable investment securities

     (126,573 )     (42,838 )

Proceeds from maturities of marketable investment securities

     103,489       54,831  
                

Net cash provided by (used in) investing activities

     (31,340 )     4,748  
                

Cash flows from financing activities:

    

Net proceeds from common stock issued under share-based compensation plans

     15,031       3,731  
                

Net cash provided by financing activities

     15,031       3,731  
                

Net decrease in cash and cash equivalents

     (28,857 )     (12,705 )

Cash and cash equivalents at beginning of period

     143,432       98,573  
                

Cash and cash equivalents at end of period

   $ 114,575     $ 85,868  
                

See accompanying notes to condensed consolidated financial statements (unaudited).

 

5


MYRIAD GENETICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

(1) Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared by Myriad Genetics, Inc. (the “Company”) in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the applicable rules and regulations of the Securities and Exchange Commission. The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, the accompanying financial statements contain all adjustments (consisting of normal and recurring accruals) necessary to present fairly all financial statements in accordance with GAAP. The condensed consolidated financial statements herein should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2007, included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2007. Operating results for the three and six months ended December 31, 2007 may not necessarily be indicative of results to be expected for any other interim period or for the full year.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Certain reclassifications have been made to prior period amounts to conform to the current period presentation.

 

(2) Share-Based Compensation

The Company has adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment (SFAS 123R). SFAS 123R sets accounting requirements for “share-based” compensation to employees, including employee stock purchase plans, and requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation.

In 2003, the Company adopted and the shareholders approved the 2003 Employee, Director and Consultant Stock Option Plan, as amended most recently in November 2007 (the 2003 Plan), under which 6.9 million shares of common stock have been reserved for issuance upon the exercise of options that the Company grants from time to time. Additional shares represented by options previously granted under the Company’s 2002 Amended and Restated Employee, Director and Consultant Stock Option Plan (the “2002 Plan”) which are canceled or expire after the date of stockholder approval of the 2003 Plan without delivery of shares of stock by the Company and any shares which have been reserved but not granted under the 2002 Plan as of the date of stockholder approval of the 2003 Plan are available for grant under the 2003 Plan. As of December 31, 2007, approximately 3.3 million shares represented by options remain outstanding under the 2002 Plan that would be transferred to the 2003 Plan if they are cancelled or expire without delivery of the shares of stock by the Company.

The number of shares, terms, and exercise period are determined by the board of directors or a committee thereof on an option-by-option basis. Options generally vest ratably over four years and expire ten years from the date of grant. Options are granted to members of the board of directors under the terms of the 2003 Plan and vest on the first anniversary of the date of grant.

 

6


The exercise price of options granted is equivalent to the fair market value of the stock on the date of grant. During the three and six months ended December 31, 2007, the Company granted approximately 125,000 and 897,000 options under the 2003 Plan. The Company also has an Employee Stock Purchase Plan under which a maximum of 1,000,000 shares of common stock may be purchased by eligible employees. During the three and six months ended December 31, 2007, the Company issued 35,391 shares of common stock under the Employee Stock Purchase Plan.

The fair value of each option grant is estimated on the grant date using the Black-Scholes option-pricing model. Expected option lives and volatilities used in fair valuation calculations are based on historical data of the Company and the related expense is recognized on a straight-line basis over the vesting period.

Share-based compensation expense included in the consolidated statements of operations for the three and six months ended December 31, 2007 and 2006 was approximately $3.8 million and 6.2 million compared to approximately $1.7 million and $3.1 million, respectively. As of December 31, 2007, there was approximately $35.6 million of total unrecognized share-based compensation cost related to share-based compensation granted under the Company’s plans that will be recognized over a weighted-average period of 2.8 years.

 

(3) Comprehensive Loss

The components of the Company’s comprehensive loss are as follows:

 

     Three months ended Dec. 31,     Six months ended Dec. 31,  
(In thousands)    2007     2006     2007     2006  

Net loss

   $ (5,067 )   $ (8,796 )   $ (13,065 )   $ (21,221 )

Unrealized gain on available-for-sale securities

     453       120       914       467  
                                

Comprehensive loss

   $ (4,614 )   $ (8,676 )   $ (12,151 )   $ (20,754 )
                                

 

(4) Loss Per Common Share

Basic and diluted loss per common share is computed using the weighted average number of shares of common stock outstanding during the period. Potentially dilutive common shares consisting of stock options and warrants were not included in the diluted loss per share attributable to common stockholders for all periods presented because the inclusion of such shares would have had an antidilutive effect.

For the six months ended December 31, 2007 and 2006, there were outstanding potential common shares of 8,296,119 and 8,504,120, respectively. These potential dilutive common shares may be dilutive to future diluted earnings per share.

 

(5) Segment and Related Information

The Company’s business units have been aggregated into three reportable segments: (i) research, (ii) molecular diagnostics, and (iii) drug development. The research segment is focused on the discovery of genes and protein pathways related to major common diseases. The molecular diagnostics segment provides testing to determine predisposition to common diseases and risk associated with drug toxicity and response. The drug development segment is focused on the development of therapeutic products for the treatment and prevention of major diseases.

 

7


The Company evaluates segment performance based on results from operations before interest income and expense and other income and expense.

 

(In thousands)    Research     Molecular
diagnostics
    Drug
development
    Total  

Three months ended Dec. 31, 2007:

        

Revenue

   $ 2,395     $ 53,097     $ 1,250     $ 56,742  

Depreciation and amortization

     608       713       847       2,168  

Segment operating income (loss)

     (7,235 )     20,766       (22,267 )     (8,736 )

Three months ended Dec. 31, 2006:

        

Revenue

     2,960       34,175       —         37,135  

Depreciation and amortization

     661       545       618       1,824  

Segment operating income (loss)

     (5,201 )     15,003       (21,171 )     (11,369 )

Six months ended Dec. 31, 2007:

        

Revenue

     4,605       99,153       1,250       105,008  

Depreciation and amortization

     1,202       1,387       1,646       4,235  

Segment operating income (loss)

     (13,927 )     39,230       (45,619 )     (20,316 )

Six months ended Dec. 31, 2006:

        

Revenue

     5,652       65,026       —         70,678  

Depreciation and amortization

     1,330       1,059       1,192       3,581  

Segment operating income (loss)

     (10,428 )     28,073       (44,014 )     (26,369 )
     Three months ended Dec. 31,     Six months ended Dec. 31,  
(In thousands)    2007     2006     2007     2006  

Total operating loss for reportable segments

   $ (8,736 )   $ (11,369 )   $ (20,316 )   $ (26,369 )

Interest income

     3,667       2,573       7,523       5,175  

Other

     2       —         (272 )     (27 )
                                

Net loss

   $ (5,067 )   $ (8,796 )   $ (13,065 )   $ (21,221 )
                                

 

(6) Recent Accounting Pronouncements

In June 2007, the FASB issued EITF Issue 07-3 Accounting for Advance Payments for Goods or Services to Be Used in Future Research and Development Activities, or EITF 07-3. The scope of EITF 07-3 is limited to nonrefundable advance payments for goods and services related to research and development activities. EITF 07-3 addresses whether such advanced payments should be expensed as incurred or capitalized. The Company is required to adopt EITF 07-3 effective January 1, 2008. The adoption of EITF 07-3 on January 1, 2008 is not expected to have a material effect on the Company’s consolidated financial position or results of operations.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of this statement relate to the definition of fair value, the methods used to measure fair value and the expanded disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The adoption of this standard is not expected to have a material effect on the Company’s consolidated financial position or results of operations.

 

8


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

We are a leading biotechnology company focused on the development and marketing of novel therapeutic and molecular diagnostic products. We employ a number of proprietary technologies that permit us to understand the genetic basis of human disease and the role that genes and their related proteins play in the onset and progression of disease. We use this information to guide the development of new healthcare products that are designed to treat disease and assess a person’s risk of disease later in life.

We believe that the future of medicine lies in the creation of new classes of drugs that treat the underlying cause, not just the symptoms, of disease and that may be useful in disease prevention. By understanding the genetic basis of disease, we believe we will be able to develop drugs that are more effective and have fewer side effects. In addition, 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 and who therefore would benefit from preventive therapies. Molecular diagnostic products may also guide a patient’s healthcare to insure the patient receives the most appropriate drug at the optimal dose.

Understanding the cause of disease at the molecular level can be very useful in determining how best to treat the disease. Historically, technologies used to discover pharmaceutical products that treat the symptoms of diseases have been less effective against complex diseases that arise through a combination of genetic and environmental factors, such as cancer and Alzheimer’s disease. To treat complex diseases effectively it is important to understand the function of genes and their proteins, how the disruption of important biological pathways can lead to disease, and the optimal point of therapeutic intervention in the pathway so that drugs may be developed to prevent, modify, or halt disease progression.

Our molecular diagnostic business focuses on the analysis of genes and their alterations to assess an individual’s risk for developing disease later in life (predictive medicine) and to assess a patient’s risk of disease progression, disease recurrence, drug toxicity, and drug response (personalized medicine). To date we have launched five commercial molecular diagnostic products:

 

 

 

BRACAnalysis®, our predictive medicine product for breast and ovarian cancer

 

 

 

COLARIS®, our predictive medicine product for colorectal and uterine cancer

 

 

 

COLARIS AP®, our predictive medicine product for colon cancer

 

 

 

MELARIS®, our predictive medicine product for melanoma

 

   

Theraguide™ 5FU, our personalized medicine product for chemotherapy toxicity

We market these products through our own sales force of approximately 200 people in the United States and we have entered into marketing collaborations with other organizations in other countries. Molecular diagnostic revenue was $53.1 million and $99.2 million for the three and six months ended December 31, 2007, an increase of 55% and 52% over revenues of $34.2 and $65.0 million for the same periods in the prior year.

Myriad researchers have made important discoveries in the fields of cancer, Alzheimer’s disease, and infectious diseases such as AIDS. These discoveries point to novel disease pathways that we believe may pave the way for the development of new classes of drugs. We intend to develop and, subject to regulatory approval, market our therapeutic products in the areas of cancer, Alzheimer’s disease and viral disease. We currently have five drug candidates in seven clinical trials and a number of drug candidates in late-stage preclinical development, including:

 

 

 

Flurizan® (tarenflurbil), our lead therapeutic candidate for the treatment of Alzheimer’s disease, is being tested in two Phase 3 clinical trials in patients with mild Alzheimer’s disease. We believe that our U.S. Phase 3 trial is proceeding on schedule and its 18-month term of study will conclude as planned at the end of March 2008. We anticipate that we will report the top-line results of this study by the end of June 2008;

 

9


 

 

Azixa, our drug candidate for solid primary and metastatic brain tumors, is being tested in three Phase 2 clinical trials;

 

 

 

Vivecon, our drug candidate for the treatment of AIDS, is in Phase 1 clinical testing;

 

   

MPC-2130, our drug candidate for hematologic cancers, is in Phase 1 clinical testing; and

 

   

MPC-0920, our drug candidate for thrombosis, recently completed Phase 1 clinical testing.

We have devoted substantially all of our resources to undertaking our drug discovery and development programs, operating our molecular diagnostic business, and continuing our research and development efforts. We have three reportable operating segments: (1) research, (2) molecular diagnostics, and (3) drug development. See Note 5 “Segment and Related Information” in the notes to our condensed consolidated financial statements (unaudited) for information regarding these operating segments. Our revenues have consisted primarily of sales of molecular diagnostic products and research payments. We have yet to attain profitability and, for the three and six months ended December 31, 2007, we had net losses of $5.1 million and $13.1 million, respectively. As of December 31, 2007 we had an accumulated deficit of $265.5 million.

We expect to incur losses for at least the next several years, primarily due to the expansion of our drug discovery and development efforts, the initiation and continuing conduct of human clinical trials, the preparation for launch and the launch of any drug candidates that receive regulatory approval, the launch of new molecular diagnostic products, the continuation of our internal research and development programs, and the expansion of our facilities. Additionally, we expect to incur substantial sales, marketing and other expenses in connection with building our pharmaceutical and molecular diagnostic businesses. We expect that losses 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; and

 

   

share-based payment expense.

Revenue Recognition. Molecular diagnostic revenue includes revenue from the sale of molecular diagnostic products and related marketing agreements. Molecular diagnostic revenue is recognized upon completion of the test, communication of results, and when collectibility is reasonably assured.

Research revenue includes revenue from research agreements and technology licensing agreements. In applying the principles of SAB 104 and EITF 00-21 to research and technology license agreements we consider the terms and conditions of each agreement separately to arrive at a proportional performance methodology of recognizing revenue. Such methodologies involve recognizing revenue on the basis of contractually defined output measures such as units delivered or as underlying research costs are incurred. We make adjustments, if necessary, to the estimates used in our calculations as work progresses and we gain experience. We recognize revenue from up-front nonrefundable license fees on a straight-line basis over the period of our continued involvement in the research and development project.

Payments received on uncompleted long-term contracts may be greater than or less than incurred costs and estimated earnings and have been recorded as other receivables or deferred revenues in the accompanying consolidated balance sheets.

 

10


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. 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. Changes in these factors could result in material adjustments to the expense recognized for bad debt.

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.

Results of Operations for the Three Months Ended December 31, 2007 and 2006

Molecular diagnostic revenue is comprised primarily of sales of our five molecular diagnostic products. Molecular diagnostic revenue for the three months ended December 31, 2007 was $53.1 million compared to $34.2 million for the same three months in 2006, an increase of 55%. We have expanded our sales force, launched a direct-to-consumer marketing campaign for our BRACAnalysis® predictive medicine product, and worked to increase our market penetration in 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, there can be no assurance that molecular diagnostic revenue will continue to increase or that it will continue to do so at historical rates.

Research and other revenue is comprised of research payments received pursuant to collaborative agreements. Research revenue for the three months ended December 31, 2007 was $3.6 million compared to $3.0 million for the same three months in 2006. This 23% increase in research revenue is primarily attributable to the addition of a new collaboration agreement. Research revenue from our research collaboration agreements is recognized using a proportional performance methodology. Consequently, as these programs progress and outputs increase or decrease, revenue may increase or decrease proportionately. In general, the Company continues to focus its research efforts on internal programs to develop molecular diagnostic and therapeutic products and de-emphasize external research collaborations.

Molecular diagnostic cost of revenue for the three months ended December 31, 2007 was $7.7 million compared to $7.5 million for the same three months in 2006. This increase of 2% in molecular diagnostic cost of revenue is primarily due to the 55% increase in sales of our molecular diagnostic products, and was partially offset by technology improvements and efficiency gains in the operation of our molecular diagnostic laboratory. Our gross profit margin was 86% for the three months ended December 31, 2007 compared to 78% for the same three months in 2006. There can be no assurance that molecular diagnostic gross profit margins will continue to increase or that they will continue to do so at historical rates. We expect that our gross profit margins will 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.

 

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Research and development expenses for the three months ended December 31, 2007 were $27.3 million compared to $24.8 million for the same three months in 2006. This increase of 10% was primarily due to increased costs of approximately $1.2 million associated with shared-based payment expense under FAS 123R for the three months ended December 31, 2007 compared to the same three months in 2006. Increased costs associated with our molecular diagnostic research programs added approximately $0.7 million and increased costs associated with our pharmaceutical development programs added $0.6 million for the three months ended December 31, 2007 compared to the same three months in 2006. We expect to increase our research and development expenses over the next several years as we conduct additional clinical trials to support the potential commercialization of our product candidates currently in clinical development, including Flurizan, Azixa and Vivecon, advance our other product candidates into clinical trials, and expand our research and development activities. We expect that these expenses will continue to fluctuate based on changes in our research programs and the progression of our drug development programs.

Selling, general and administrative expenses 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 December 31, 2007 were $30.5 million compared to $16.2 million for the same three months in 2006. The increase in selling, general and administrative expense for the three months ended December 31, 2007 compared to same three months in 2006 was due primarily to:

 

   

Increased expense for sales and marketing commissions and headcount of approximately $4.4 million to support the 55% growth in our molecular diagnostic revenues;

 

 

 

Increased marketing costs of approximately $3.2 million associated with the launch of our direct-to-consumer advertising campaign for our BRACAnalysis® predictive medicine product;

 

   

Growth in our molecular diagnostic sales resulted in an increase of $1.9 million in bad debt expense;

 

   

Expansion of our commercialization efforts to support a potential product launch of Flurizan resulted in an increase of approximately $1.3 million;

 

   

Increased share-based payment expense under SFAS 123R of approximately $0.8 million;

 

   

General increases in costs of approximately $2.7 million to support growth in our molecular diagnostic business and therapeutic development efforts.

We expect our selling, general and administrative expenses will continue to fluctuate depending on the number and scope of any new product launches and our drug discovery and drug development efforts.

Results of Operations for the Six Months Ended December 31, 2007 and 2006

Molecular diagnostic revenue for the six months ended December 31, 2007 was $99.2 million compared to $65.0 million for the same six months in 2006, an increase of 52%. Increased sales, marketing, and education efforts, including our direct-to-consumer advertising campaign, have resulted in wider acceptance of our products by the medical community and increased revenue for the six months ended December 31, 2007. There can be no assurance that molecular diagnostic revenue will continue to increase at historical rates.

Research and other revenue for the six months ended December 31, 2007 was $5.9 million compared to $5.7 million for the same six months in 2006. This 4% increase in research revenue is primarily attributable the addition of a new collaboration in the six months ended December 31, 2007. In general, the Company continues to focus its research efforts on internal programs to develop molecular diagnostic and therapeutic products and de-emphasize external research collaborations.

 

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Molecular diagnostic cost of revenue for the six months ended December 31, 2007 was $15.0 million compared to $15.6 million for the same six months in 2006. This decrease of 4% in molecular diagnostic cost of revenue is primarily attributable to technology improvements and efficiency gains in the operation of our molecular diagnostic laboratory, which was offset by increased sales of our molecular diagnostic products. Our gross profit margin was 85% for the six months ended December 31, 2007 compared to 76% for the same six months in 2006.

Research and development expenses for the six months ended December 31, 2007 were $53.3 million compared to $51.0 million for the same six months in 2006. This increase of 5% was primarily due to increased costs of approximately $1.9 million associated with shared-based payment expense under FAS 123R for the six months ended December 31, 2007 compared to the same six months in 2006.

Selling, general and administrative expenses for the six months ended December 31, 2007 were $57.0 million compared to $30.4 million for the same six months in 2006. The increase in selling, general and administrative expense for the six months ended December 31, 2007 compared to same six months in 2006 was due primarily to:

 

   

Increased expense for sales and marketing commissions and headcount of approximately $8.6 million to support the 52% growth in our molecular diagnostic revenues;

 

 

 

Increased marketing costs of approximately $6.0 million associated with the launch of our direct-to-consumer advertising campaign for our BRACAnalysis® predictive medicine product;

 

   

Growth in our molecular diagnostic sales resulted in an increase of $3.2 million in bad debt expense;

 

   

Expansion of our commercialization efforts to support a potential product launch of Flurizan resulted in an increase of approximately $2.8 million;

 

   

Increased share-based payment expense of approximately $1.2 million; and

 

   

General increases in costs of approximately $4.8 million to support growth in our molecular diagnostic business and therapeutic development efforts.

We expect our selling, general and administrative expenses will continue to fluctuate depending on the number and scope of any new product launches, our efforts in support of our existing molecular diagnostic products, and our drug discovery and drug development efforts.

Liquidity and Capital Resources

Cash, cash equivalents, and marketable investment securities decreased $4.9 million, or 2%, from $308.3 million at June 30, 2007 to $303.5 million at December 31, 2007. This decrease is primarily attributable to expenditures for our ongoing clinical trials, internal research and drug development programs, acquisition of new equipment, and other expenditures incurred in the ordinary course of business. This decrease was partially offset by cash generated from sales of our molecular diagnostic products and proceeds from the exercise of stock options.

Interest income for the six months ended December 31, 2007 was $7.5 million, compared to $5.2 million for the same six months in 2006. This increase of 45% is due primarily to increases in cash, cash equivalents, and marketable investment securities during the same period in 2006.

Net cash used in operating activities was $12.5 million during the six months ended December 31, 2007 compared to $21.2 million used in operating activities during the same six months in 2006. Trade accounts receivable increased $13.0 million between June 30, 2007 and December 31, 2007, primarily due to increases in molecular diagnostic sales. Prepaid expenses increased $4.8 million

 

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between June 30, 2007 and December 31, 2007, primarily due to prepayments related to our ongoing clinical trials for Flurizan. Accrued liabilities increased by $5.1 million between June 30, 2007 and December 31, 2007, primarily due to accrued sales commissions and amounts accrued for our ongoing clinical trials.

Our investing activities used cash of $31.3 million during the six months ended December 31, 2007 and provided cash of $4.7 million during the same six months in 2006. Investing activities were comprised primarily of purchases and maturities of marketable investment securities and capital expenditures for research equipment.

Financing activities provided cash of $15.0 million during the six months ended December 31, 2007 and provided cash of $3.7 million in the same six months in 2006. During the six months ended December 31, 2007 we received $15.0 million from the exercise of stock options and sales of our shares under our Employee Stock Purchase Plan.

We have an effective shelf registration statement on Form S-3 (Registration No. 333-123914) on file with the Securities and Exchange Commission. We have approximately $43.4 million of various types of securities available for sale under this registration statement. Because of our significant long-term capital requirements, we may access the public or private equity markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at such time.

We believe that with our existing capital resources, 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:

 

   

the progress and results of our two current Phase 3 clinical trials of Flurizan for the treatment of Alzheimer’s disease and any additional trials that may be required by the FDA or that we may initiate on our own;

 

   

the progress and results of our three current Phase 2 clinical trials of Azixa for the treatment of cancer and any additional trials that we may initiate based on the Phase 2 results;

 

   

any future trials that we may initiate based on results of our Phase 1 clinical trial for MPC-0920;

 

   

the progress and results of our Phase 1 clinical trials for Vivecon and MPC-2130 and any future trials that we may initiate based on the Phase 1 results;

 

   

the results of our preclinical studies and testing for our preclinical programs and any decisions to initiate clinical trials if supported by the preclinical results;

 

   

the costs, timing and outcome of regulatory review of Flurizan, Azixa, Vivecon, MPC-2130, MPC-0920, and any other preclinical drug candidates that may progress to clinical trials;

 

   

the costs of establishing sales and marketing functions and of establishing commercial manufacturing capacities if any of our drug candidates is approved;

 

   

the scope, progress, results and cost of preclinical development, clinical trials and regulatory review of any new drug candidates we may discover or acquire;

 

   

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;

 

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our ability to enter into strategic collaborations, licensing or other arrangements favorable to us; and

 

   

the costs to satisfy our obligations under 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 we may be unable to further identify, develop or achieve commercial success for new products and technologies; the risk that we may be unable to discover drugs that are safer and more efficacious than our competitors; the risk that sales 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 predictive medicine products that help assess which patients are subject to greater risk of developing diseases and who would therefore benefit from new preventive therapies; the risk that we may be unable to develop or market additional personalized medicine products that may help identify appropriate drug selection and dose; the possibility of delays in the research and development necessary to select drug development candidates and delays in clinical trials, including the expected timing for the conclusion of the U.S. Phase 3 trial for Flurizan and the initial report of results from that trial; the risk that clinical trials may not result in marketable products; the risk that we may be unable to successfully finance and secure regulatory approval of and market our drug candidates; the risk that clinical trials will not be completed on the timelines we have estimated; 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 may be unable to protect our proprietary technologies; the risk of patent-infringement claims; 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, 2007, 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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Item 3. Quantitative and Qualitative Disclosures About Market Risk

We maintain an investment portfolio in accordance with our written investment policy. The primary objectives of our investment policy are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. Our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure to any single issue, issuer or type of investment.

Our investments consist of securities of various types and maturities of three years or less, with a maximum average maturity of 12 months. These securities are classified as available-for-sale. Available-for-sale securities are recorded on the balance sheet at fair market value with unrealized gains or losses reported as part of accumulated other comprehensive income/loss. Realized gains and losses on investment security transactions are reported on the specific-identification method. Dividend and interest income are recognized when earned. A decline in the market value of any available-for-sale security below cost that is deemed other than temporary results in a charge to earnings and establishes a new cost basis for the security.

The securities held in our investment portfolio are subject to interest rate risk. Changes in interest rates affect the fair market value of the marketable investment securities. After a review of our marketable securities as of December 31, 2007, we have determined that in the event of a hypothetical 10 percent increase in interest rates, the resulting decrease in fair market value of our marketable investment securities would be insignificant to the consolidated financial statements as a whole.

 

Item 4. Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures. Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of period covered by this Quarterly Report on Form 10-Q, have concluded that, based on such evaluation, our disclosure controls and procedures were adequate and effective to ensure that material information relating to us, including our consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.

In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

(b) Changes in Internal Controls. There were no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - Other Information

 

Item 1. Legal Proceedings.

Neither the Company nor any of its subsidiaries is a party to any material legal proceedings.

 

Item 1A. Risk Factors

There have been no material changes to the risk factors included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2007.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

 

Item 3. Defaults Upon Senior Securities.

None.

 

Item 4. Submission of Matters to a Vote of Security Holders.

On November 15, 2007, the Company held its Annual Meeting of Stockholders (the “Annual Meeting”). A quorum of 35,594,031 shares of Common Stock of the Company (of a total of 43,864,477 shares outstanding as of the record date, or 81.15%) was represented at the Annual Meeting in person or by proxy, which was held to vote on the following proposals:

 

  1. To elect three members to the Board of Directors to serve three-year terms until the 2010 Annual Meeting and until their successors are duly elected and qualified or until their earlier death, resignation, retirement or removal. The nominees for Director were Peter D. Meldrum, Mark H. Skolnick, Ph.D. and Linda S. Wilson, Ph.D.

 

  2. To approve a proposed amendment to the Company’s 2003 Employee, Director and Consultant Stock Option Plan to increase by 1,500,000 the number of shares of our common stock available for issuance under this plan.

 

  3. To ratify the selection of Ernst and Young LLP as our independent registered public accounting firm for the fiscal year ending June 30, 2008.

Each of the proposals was adopted, with the vote totals as follows:

Proposal 1:

 

     FOR    WITHHELD

Peter D. Meldrum

   35,335,709    258,320

Mark H. Skolnick, Ph.D.

   35,346,694    247,335

Linda S. Wilson, Ph.D.

   35,301,711    292,318

Immediately following the Annual Meeting Walter Gilbert, Ph.D., Arthur H. Hayes, Jr., M.D., and Dennis H. Langer, M.D., J.D. continued to serve as Directors for terms expiring at the 2008 Annual Meeting and Robert S. Attiyeh and John T. Henderson, M.D. continued to serve as Directors for terms expiring at the 2009 Annual Meeting, and until their respective successors are duly elected and qualified, or until their earliest death, resignation, retirement or removal.

 

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In addition, on November 15, 2007 following the Annual Meeting, the Board of Directors of the Company approved a resolution, effective as of that date, to increase the size of the Board from eight to nine directors and appointed Gerald P. Belle to fill the newly created Board vacancy. Mr. Belle was appointed to serve until the 2009 Annual Meeting and until his successor has been duly elected and qualified, or until his earlier death, resignation, retirement or removal.

Proposal 2:

 

For

   23,447,973

Against

   6,109,727

Abstain

   42,070

Broker Non-vote

   5,994,261

Proposal 3:

 

For

   35,526,023

Against

   42,506

Abstain

   25,500

Broker Non-vote

   0

 

Item 5. Other Information.

None.

 

Item 6. Exhibits.

(a) Exhibits

 

  10.1$    Form of Amendment to Form of Executive Retention Agreement.
  10.2$    Myriad Genetics, Inc. 2003 Employee, Director and Consultant Stock Option Plan, as amended (previously filed and incorporated herein by reference from the Current Report on Form 8-K filed on November 16, 2007).
10.3    Restated By-Laws (previously filed and incorporated herein by reference from the Current Report on Form 8-K filed on November 16, 2007).
  10.4$    Employment Agreement between Myriad Genetics, Inc., Myriad Genetic Laboratories, Inc. and James S. Evans dated March 3, 1995 (previously filed and incorporated herein by reference from the Current Report on Form 8-K filed on November 6, 2007).
  10.5$    Resignation Agreement between Myriad Genetics, Inc. and Jay M. Moyes dated November 1, 2007 (previously filed and incorporated herein by reference from the Current Report on Form 8-K filed on November 6, 2007).
31.1    Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
32.1    Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

$ Management contract or compensatory plan or arrangement.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    MYRIAD GENETICS, INC.
Date: February 5, 2008     By:   /s/ Peter D. Meldrum
        Peter D. Meldrum
        President and Chief Executive Officer
        (Principal executive officer)
Date: February 5, 2008     By:   /s/ James S. Evans
        James S. Evans
        Chief Financial Officer
        (Principal financial and chief accounting officer)

 

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