Myriad Genetics (MYGN) reported earnings per share (EPS) of 66 cents in the second quarter of fiscal 2014, registering a remarkable 40.4% beat over the Zacks Consensus Estimate and a stupendous year-over-year growth of 57.1%. Net income came in at $50.4 million, surging 43.8% from the comparable year-ago period.Apart from healthy sales growth, EPS growth was boosted by a reduced share count.

Quarter in Detail

Revenues increased 37% year over year to $204.1 million, sailing past the Zacks Consensus Estimate of $178 million. This also represents the 10^th consecutive quarter of more than 20% sales growth. Growth was mainly driven by strong performance in the core markets, complemented by international expansion. Additional publicity involving celebrities was also estimated as a major factor that boosted revenues by $15 million to $20 million.

Segments in Detail

Myriad operates through two major segments. Molecular diagnostic tests contributed 96% to total revenue in the quarter while Companion diagnostic tests accounted for the remaining 4% of sales.

Molecular diagnostic tests recorded revenues of $196.2 million, up 39% year over year. Molecular diagnostic testing revenues were, in turn, derived from the Oncology (up 12% to $101.6 million) and Women’s Health (up 90% to $94.6 million) segments. The Women's Health segment accounted for almost half of the molecular diagnostic revenues in the reported quarter and continues to be the highest growth earner at Myriad Genetics.

BRACAnalysis test revenues amounted to $141.2 million, up 43% year over year. Sales from the BART test were $24.7 million, surging significantly by 57% from the prior-year quarter. Colaris tests (Colarisand Colaris AP) demonstrated consistent growth in the second quarter, with revenues increasing 29% year over year to $15.6 million. 69% of the total revenue comprised of BRACAnalysis test, while 8% of the same was constituted by Colaris tests.

myRisk Hereditary Cancer test, that was launched last September, generated revenues of $11.5 million in the second quarter, representing 6% of total revenue. Other molecular diagnostic tests generated revenues of $3.2 million (11% of total revenue), up 25% from the comparable quarter in fiscal 2013.

Companion diagnostic service revenues declined 6.9% from the year-ago quarter to $7.9 million.

Operational Update

Gross profit increased 37.7% year over year to $177.9 million. Gross margin during the quarter was up by 53 basis points (bps) year over year to 87.2%.

Operating expenses rose 28.9% to $94.9 million. The increased expenditure was on account of a 30.7% increase in selling, general and administrative expenses (to $77.8 million) and a 21.1% escalation in research and development expenses (to $17.1 million).

Operating income rose 49.3% year over year to $82.9 million. Nonetheless, operating margin expanded 340 bps to 40.7% in the second quarter.

Financial Update

Myriad Genetics exited the quarter with cash, cash equivalents and marketable securities of $488.7 million, compared with $531.1 million at the end of fiscal 2013. Myriad’s Board of Directors repurchased 3.2 million shares during the reported quarter. In the first quarter of fiscal 2014, the company authorized a new $300 million stock repurchase program, expanding the total share buyback to $1 billion.

Guidance

Banking on core market growth that lead to another solid quarter and several recent positive takeaways including launch of number of products like myPlan Lung Cancer test (Oct 2013), myPath Melanoma test (Nov 2013) and the recent acquisition of Crescendo Bioscience,Myriad has raised its revenue outlook for fiscal 2014.

It expects revenues in the range of $740–$750 million, higher than the prior forecast of $700–$715 million implying annualized growth of 21% to 22%. The current Zacks Consensus Estimate of $708 million remains far below the company’s guidance. This guidance takes into consideration approximately $10 million of revenue from Crescendo, $25 million from Myriad RBM and $705 million to $715 million from its core molecular diagnostic business.

Myriad has also upgraded its EPS guidance for the fiscal year. The company currently projects its earnings to vary between $2.09 and $2.12 per share, compared with the previously guided range of $1.92 and $1.97. The revised outlook reflects growth of 18% to 20%. However, the Zacks Consensus Estimate for the same is pegged at $1.97 per share, which falls below the guided range.

Our Take

Myriad Genetics has been consistently reporting impressive results over the past few quarters. The higher-than-expected guidance for the current fiscal is also encouraging. With positive results from the company’s major cancer tests and forthcoming acquisitions collaborations, we believe Myriad Genetics will tread steadily on the growth path going forward.

However, as Myriad rolls out its myRisk hereditary cancer test in the U.S., it plans to gradually discontinue its legacy products including Bracanalysis, Colaris, Colaris AP, Melaris and Panexia. In line with its strategy to replace these legacy products with its innovative myRisk, Myriad plans to convert the hereditary cancer testing market by summer 2015. As per the company, the time period 2013-2015 will act as the conversion phase toward the pan-cancer panel. Although the company expects to increase its addressable market with myRisk in the near future, we remain cautious owing to the market conversion phase with the discontinuance of the company’s successful legacy products.

Currently, the stock carries a Zacks Rank #4 (Sell). Better-placed stocks that are worth a look include Actelion Ltd. (ALIOF), Affymetrix Inc. (AFFX) and Biogen Idec Inc. (BIIB), each carrying a Zacks Rank #1 (Strong Buy).

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