Utah-based diagnostic-testing corporation Myriad Genetics Inc. (MYGN) reported adjusted earnings per share (EPS) of 25 cents in the first-quarter of fiscal 2015, down 63.2% from the year-ago number of 68 cents. Adjusted earnings also missed the Zacks Consensus Estimate of 33 cents by 8 cents or 24.2%.

During the reported quarter, the company experienced heightened physician demand for its myRisk test which led to laboratory capacity constraints and in turn resulted in higher work-in-progress (WIP) and laboratory expenses for Myriad. This adversely affected the company's revenues and profitability over the short term, inducing the decline in earnings growth for the first quarter.

Investors clearly lost confidence in this stock following its disappointing earnings release. Evidently, Myriad's share price dropped 6.2% to close at $34.61 yesterday.

Myriad Genetics, Inc - Earnings Surprise | FindTheBest

Revenues

In the first quarter, total revenue declined 16.6% year over year to $168.8 million from the year-ago equivalent of $202.5 million. The top line also missed the Zacks Consensus Estimate of $174 million by 3.1%.

Difficult year ago comparisons due to inclusion of $35 million of revenue benefit owing to celebrity publicity in the first quarter of fiscal 2014,hurt revenues in the first quarter of 2015.

In addition, an increase in WIP associated with capacity constraints following the increased demand for myRisk process,and incremental share loss due to competition, was primarily also hurt the top line.

Myriad derives revenues from the sale of Molecular diagnostic tests (97.4% of total revenue in the first quarter) and Pharmaceutical and clinical services (2.6%).

In the reported quarter, Molecular diagnostic tests recorded revenues of $164.5 million, down 14.8% year over year. Molecular diagnostic testing revenues are primarily derived from the Oncology unit (down 22.4% to $84 million) and the Preventive Care unit (down 17.5% to $69.9 million).

Pharmaceutical and clinical service revenues in the first quarter was $4.3 million, down 54.7% year over year on account of the timing of research projects with Myriad's pharmaceutical company partners.

Margin Trends

Gross profit decreased 24.3% year over year to $133.9 million. Consequently, gross margin during the quarter declined 810 basis points (bps) to 79.3%, primarily due to the costs associated with capacity constraints resulting from the increased demand for myRisk test.

Adjusted operating expenses rose 11.6% to $104.7 million due to a 6.6% increase in adjusted selling, general and administrative (SG&A) expenses (to $82.2 million) and a 34.7% jump in research and development (R&D) expenses ($22.5 million), owing to the Crescendo acquisition.

As a result, adjusted operating margin contracted to 17.3% in the quarter from 41.1% in last year's quarter

Financial Position

Myriad exited the reported quarter with cash, cash equivalents and marketable securities of $213.7 million, compared with $270.6 million as of June 30, 2014. In the first quarter, cash flow from operations was $7 million, a massive decline from the year-ago tally of $90.5 million.

The company repurchased 1.2 million shares for $46 million during the quarter. At the end of the first quarter of fiscal 2015, the company had authorization to buy back shares worth another $120 million.

Guidance

Myriad maintained its guidance for fiscal 2015. The company continues to envisage revenues in the range of $800−$820 million, reflecting annualized growth of 2.8%−5.4%. The Zacks Consensus Estimate of $782 million lies below the revenue guidance.

Myriad continues to expect EPS for the fiscal in the range of $1.90−$2.00. The current Zacks Consensus Estimate of $1.87 lies considerably below Myriad's guidance.

Management also provided guidance for second-quarter fiscal 2015. The company expects adjusted earnings per share of 33 to 36 cents on total revenue of $180 to $185 million. The Zacks Consensus Estimate for revenues of $183 million lies within the guided range, while that for adjusted EPS of 44 cents lies above the guidance.

Our View

We are disappointed with the company's first-quarter fiscal 2015 financial numbers. The increased demand for myRisk test which led to capacity constraints for the company was the primary reason behind this outcome. However, looking at the situation in a different way, it implies if management can overcome the capacity constraint problem, revenues from myRisk will increase enormously, thereby ushering in more profits for Myriad. Evidently, in the reported quarter revenues from the myRisk Hereditary Cancer test increased 95% sequentially to $53.1 million. The company has also expressed its encouragement regarding the better physician receptivity for this test.

Moreover, Myriad believes the current trajectory of its Hereditary Cancer franchise puts the company in a better position to achieve increased profitability and reach its targeted goals, as management focuses on expanding capacity and increasing laboratory efficiencies.

Zacks Rank

Currently, Myriad carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the Med-Biomed/Generic industry are Affymetrix Inc. (AFFX), Agenus Inc. (AGEN) and AMAG Pharmaceuticals, Inc. (AMAG). All these stocks sport a Zacks Rank #1 (Strong Buy).

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