UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended March 31, 2003

 

OR

 

 

For the transition period from             to             

 

Commission file number:  0-26642

 

 

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 ý   No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No ý  (Not an accelerated filer due to fiscal year end June 30, 2003)

 

As of May 1, 2003 the registrant had 27,019,508 shares of $0.01 par value common stock outstanding.

 

 

 

MYRIAD GENETICS, INC.

 

INDEX TO FORM 10-Q

 

PART I - Financial Information
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets as of March 31, 2003 (unaudited) and June 30, 2002
	Condensed Consolidated Statements of Operations for the three and nine months ended March 31, 2003 and 2002 (unaudited)
	Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2003 and 2002 (unaudited)
	Notes to Condensed Unaudited Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
PART II - Other Information
Item 1.	Legal Proceedings
Item 2.	Changes in Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits and Reports on Form 8-K
Signatures

 

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MYRIAD GENETICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(in thousands, except per share amounts)		(Unaudited) Mar. 31, 2003			June 30, 2002
Assets
Current assets:
Cash and cash equivalents		$	80,421		$	61,067
Marketable investment securities		12,833			12,008
Prepaid expenses		5,904			4,827
Trade accounts receivable, less allowance for doubtful accounts of $795 at Mar. 31, 2003 and $505 at June 30, 2002		11,706			7,233
Other receivables		10,246			220
Related party receivables		119			¾
Total current assets		121,229			85,355
Equipment and leasehold improvements:
Equipment		30,397			26,409
Leasehold improvements		7,469			5,384
		37,866			31,793
Less accumulated depreciation and amortization		19,580			16,360
Net equipment and leasehold improvements		18,286			15,433
Long-term marketable investment securities		37,301			51,168
Other assets		6,101			5,434
		$	182,917		$	157,390
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	4,653		$	9,462
Related party payable		¾			1,038
Accrued liabilities		4,342			3,591
Deferred revenue		3,924			14,430
Total current liabilities		12,919			28,521
Stockholders’ equity:
Preferred stock, $0.01 par value.  5,000 shares authorized, no shares issued and outstanding		¾			¾
Common stock, $0.01 par value, 60,000 shares authorized; issued and outstanding 27,015 at Mar. 31, 2003 and 23,817 at June 30, 2002		270			238
Additional paid-in capital		260,591			202,149
Accumulated other comprehensive income		707			308
Accumulated deficit		(91,570		)	(73,826		)
Total stockholders’ equity		169,998			128,869
		$	182,917		$	157,390

 

See accompanying notes to condensed consolidated financial statements.

 

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MYRIAD GENETICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

		(Unaudited)						(Unaudited)
		Three Months Ended						Nine Months Ended
(in thousands, except per share amounts)		Mar. 31, 2003			Mar. 31, 2002			Mar. 31, 2003			Mar. 31, 2002
Revenues:
Predictive medicine revenue		$	9,314		$	7,255		$	25,329		$	19,141
Research revenue		6,432			5,803			21,852			20,583
Related party research revenue		342			¾			1,436			¾
Total research revenue		6,774			5,803			23,288			20,583
Total revenues		16,088			13,058			48,617			39,724
Costs and expenses:
Predictive medicine cost of revenue		3,361			2,848			9,277			7,685
Research and development expense		11,053			8,740			34,217			25,614
Selling, general and administrative expense		7,785			5,912			24,795			17,617
Total costs and expenses		22,199			17,500			68,289			50,916
Operating loss		(6,111		)	(4,442		)	(19,672		)	(11,192		)
Other income (expense):
Interest income		701			1,077			2,268			4,426
Other		1			(6		)	35			¾
Loss before taxes		(5,409		)	(3,371		)	(17,369		)	(6,766		)
Income taxes		125			125			375			375
Net loss		$	(5,534	)	$	(3,496	)	$	(17,744	)	$	(7,141	)
Basic and diluted loss per share		$	(0.20	)	$	(0.15	)	$	(0.70	)	$	(0.30	)
Basic and diluted weighted average shares outstanding		27,012			23,763			25,294			23,617

 

See accompanying notes to condensed consolidated financial statements.

 

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MYRIAD GENETICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		(Unaudited)
		Nine Months Ended
(dollars in thousands)		Mar. 31, 2003			Mar. 31, 2002
Cash flows from operating activities:
Net loss		$	(17,744	)	$		(7,141	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		3,969			3,275
Gain on disposition of assets		(35		)	¾
Bad debt expense		290			200
Changes in operating assets:
Trade receivables		(4,763		)	(3,718			)
Other receivables		(10,026		)	106
Related party receivables		(119		)	1,291
Prepaid expenses		(1,077		)	(32			)
Other assets		¾			(958			)
Accounts payable		(4,809		)	(4,350			)
Accrued liabilities		751			(3			)
Related party payable		(1,038		)	¾
Deferred revenue		(10,506		)	(9,298			)
Net cash used in operating activities		(45,107		)	(20,628			)
Cash flows from investing activities:
Capital expenditures		(6,387		)	(2,617			)
Proceeds from sale of investments in other companies		¾			630
Increase in other assets		(1,100		)	¾
Purchases of marketable investment securities		(23,123		)	(43,981			)
Proceeds from sales and maturities of marketable investment securities		36,597			86,386
Net cash provided by investing activities		5,987			40,418
Cash flows from financing activities:
Net proceeds from issuance of common stock		58,474			2,841
Net cash provided by financing activities		58,474			2,841
Net increase in cash and cash equivalents		19,354			22,631
Cash and cash equivalents at beginning of period		61,067			35,937
Cash and cash equivalents at end of period		$	80,421		$	58,568

 

See accompanying notes to condensed consolidated financial statements.

 

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MYRIAD GENETICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

(1)           Basis of Presentation

 

The accompanying condensed consolidated financial statements have been prepared by Myriad Genetics, Inc. (the “Company”) in accordance with accounting principles generally accepted in the United States of America 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.  The 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, 2002, included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2002.  Operating results for the three and nine month periods ended March 31, 2003 may not necessarily be indicative of the results to be expected for any other interim period or for the full year.

 

The preparation of financial statements in conformity with generally accepted accounting principles 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.

 

(2)           Comprehensive Loss (Unaudited)

 

The components of the Company's comprehensive loss are as follows (in thousands):

 

		Three Months Ended Mar. 31,						Nine Months Ended Mar. 31,
		2003			2002			2003			2002
Net loss		$	(5,534	)	$	(3,496	)	$	(17,744	)	$	(7,141	)
Unrealized gain (loss) on available-for-sale securities		76			(506		)	399			(524		)
Comprehensive loss		$	(5,458	)	$	(4,002	)	$	(17,345	)	$	(7,665	)

 

(3)           Net Loss Per Common Share

 

Loss per common share is computed based on the weighted-average number of common shares and, as appropriate, dilutive potential common shares outstanding during the period.  Stock options and warrants are considered to be potential common shares.

 

Basic loss per common share is the amount of loss for the period available to each share of common stock outstanding during the reporting period.  Diluted loss per share is the amount of loss for the period available to each share of common stock outstanding during the reporting period and to each share that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the period.

 

In calculating loss per common share the net loss and the weighted average common shares outstanding were the same for both the basic and diluted calculation.

 

6

 

As of March 31, 2003 and 2002, there were antidilutive potential common shares of 4,989,937 and 4,213,852, respectively.  Accordingly, these potential common shares were not included in the computation of diluted loss per share for the periods presented, but may be dilutive to future basic and diluted earnings per share.

 

(4)           Segment and Related Information

 

The Company’s business units have been aggregated into two reportable segments: (i) research and (ii) predictive medicine.  The research segment is focused on the discovery and sequencing of genes related to major common diseases, marketing of subscriptions to proprietary database information, and the development of therapeutic products for the treatment and prevention of major diseases.  The predictive medicine segment provides testing to determine predisposition to common diseases.

 

The accounting policies of the segments are the same as those described in the basis of presentation (note 1).  The Company evaluates segment performance based on results from operations before interest income and expense and other income and expense.  The Company’s assets are not identifiable by segment.

 

(in thousands)		Research			Predictive medicine			Total
Three months ended Mar. 31, 2003:
Revenues		$	6,774		$	9,314		$	16,088
Depreciation and amortization		878			417			1,295
Segment operating gain/(loss)		(6,547		)	436			(6,111		)
Three months ended Mar. 31, 2002:
Revenues		5,803			7,255			13,058
Depreciation and amortization		726			483			1,209
Segment operating gain/(loss)		(3,480		)	(962		)	(4,442		)
Nine months ended Mar. 31, 2003:
Revenues		23,288			25,329			48,617
Depreciation and amortization		2,490			1,479			3,969
Segment operating gain/(loss)		(16,092		)	(3,580		)	(19,672		)
Nine months ended Mar. 31, 2002:
Revenues		20,583			19,141			39,724
Depreciation and amortization		2,157			1,118			3,275
Segment operating gain/(loss)		(8,113		)	(3,079		)	(11,192		)

 

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		Three Months Ended Mar. 31,						Nine Months Ended Mar. 31,
(in thousands)		2003			2002			2003			2002
Total operating loss for reportable segments		$	(6,111	)	$	(4,442	)	$	(19,672	)	$	(11,192	)
Interest income		701			1,077			2,268			4,426
Other		1			(6		)	35			¾
Income taxes		(125		)	(125		)	(375		)	(375		)
Net loss		$	(5,534	)	$	(3,496	)	$	(17,744	)	$	(7,141	)

 

(5)                                  Related Party Transactions

 

On July 1, 2002 Myriad Proteomics, Inc., which is 49 percent owned by the Company, contracted with the Company for the performance of certain high throughput sequencing services.  For the three months ended March 31, 2003 the Company recorded approximately $342,000 of revenues under this agreement with Myriad Proteomics for sequencing performed, which were recorded as related party research revenue in the accompanying condensed consolidated statements of operations.

 

(6)                                  Stock-Based Compensation

 

Prior to 1992, the Company granted nonqualified stock options to directors, employees, and other key individuals providing services to the Company.  In 1992, the Company adopted the “1992 Employee, Director, and Consultant Fixed Stock Option Plan” (subsequently renamed the 2002 Amended and Restated Employee, Director and Consultant Stock Option Plan).  The Company accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations.  No stock-based employee compensation cost is reflected in net income, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant.  The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

 

		Three Months Ended Mar. 31,						Nine Months Ended Mar. 31,
(in thousands, except per share amounts)		2003			2002			2003			2002
Net loss, as reported		$	(5,534	)	$	(3,496	)	$	(17,744	)	$	(7,141	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax related effects		(6,363		)	(4,638		)	(19,156		)	(15,585		)
Pro forma net loss		$	(11,897	)	$	(8,134	)	$	(36,900	)	$	(22,726	)
Earnings per share:
Basic and diluted – as reported		$	(0.20	)	$	(0.15	)	$	(0.70	)	$	(0.30	)
Basic and diluted – pro forma		$	(0.44	)	$	(0.34	)	$	(1.46	)	$	(0.96	)

 

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

 

We are a leading biopharmaceutical company focused on the development and marketing of novel therapeutic and predictive medicine products.  We have developed a number of proprietary technologies that permit us to identify genes, their related proteins and the biological pathways they form.  We use this information to better understand the role proteins play in the onset and progression of human disease. We operate two wholly owned subsidiaries, Myriad Pharmaceuticals, Inc. and Myriad Genetic Laboratories, Inc., to commercialize our therapeutic and predictive medicine discoveries.  Myriad Pharmaceuticals, Inc. develops and intends to market novel therapeutic products. Myriad Genetic Laboratories, Inc. focuses on the development and marketing of predictive medicine products that assess an individual’s risk of developing a specific disease.

 

Myriad researchers have made important discoveries in the fields of cancer, viral diseases, depression, and obesity.  These discoveries point to novel disease pathways that may pave the way for the development of new drugs.  We have developed a pipeline of drug candidates that may offer therapeutic opportunities for the treatment of diseases such as cancer, HIV, heart disease, rheumatoid arthritis, and Alzheimer’s disease.  FlurizanÔ (MPC-7869), our lead therapeutic product candidate for the treatment of prostate cancer, is currently in a large, multi-center human clinical trial.  We have also submitted an Investigational New Drug (IND) application for the evaluation of MPC-7869 for the treatment of Alzheimer’s disease.  Under this IND, the Phase 1 study will evaluate the effects of MPC-7869 on healthy older volunteers and is currently in progress at sites at the Mayo Clinic and the University of California, San Diego.  We intend to independently develop and, subject to regulatory approval, market our therapeutic products, particularly in the area of cancer and infectious diseases.

 

We also have developed and commercialized a number of innovative predictive medicine products; including BRACAnalysisÒ, which is used to assess a woman’s risk of developing breast and ovarian cancer, and COLARISÒ and COLARIS APÔ, which are used to determine a person’s risk of developing colon cancer.  In the United States we market these products using our own internal sales force and have entered into an agreement with Laboratory Corporation of America Holdings to be our exclusive sales and distribution partner to market our products to primary care and other internal medicine physicians.  We have also entered into marketing collaborations with other organizations in Australia, Austria, Brazil, Canada, Germany, Japan, New Zealand, and Switzerland.  Revenues from these proprietary products were $9.3 million for the three months ended March 31, 2003, an increase of 28% or $2.1 million over the same three months of 2002.

 

We believe that the future of medicine lies in the creation of new classes of drugs that prevent disease from occurring or progressing and that treat the cause, not just the symptoms, of disease. In addition, we believe that advances in the emerging field of predictive medicine will improve our ability to determine which patients are subject to a greater risk of developing these diseases and who therefore should receive these new preventive medicines.

 

We have devoted substantially all of our resources to maintaining our research and development programs, undertaking drug discovery and development, and operating our predictive medicine business. Our revenues have consisted primarily of sales of predictive medicine products, research payments, upfront fees, and milestone payments.  We have yet to attain profitability and, for the three and nine months ended March 31, 2003, we had net losses of $5.5 million and $17.7 million, respectively.  As of March 31, 2003 we had an accumulated deficit of $91.6 million.

 

We expect to incur losses for at least the next several years, primarily due to expansion of our drug discovery and development efforts, expansion of our research and development programs, launch of new predictive medicine products, and expansion of our facilities. Additionally, we expect to incur substantial sales, marketing and other expenses in connection with building our pharmaceutical and predictive

 

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medicine 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;

•                  investments in privately-held companies; and

•                  investment in Myriad Proteomics, Inc.

 

Revenue Recognition.  We apply the provisions of Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 101, Revenue Recognition (SAB 101) to all our revenue transactions.  In applying the principles of SAB 101 to our research and technology licensing 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 in accordance with the percentage-of-completion method of accounting and following the guidance in Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, as well as other proportional performance methodologies as considered appropriate.  Percent complete is estimated based on costs incurred relative to total estimated contract costs.  We make adjustments, if necessary, to the estimates used in the percentage-of-completion method of accounting as work progresses and we gain experience.  Our estimates of total contract costs include assumptions, such as estimated research hours to complete, materials costs, and other direct and indirect costs.  Actual results may vary significantly from our estimates.  Revenues related to up-front payments and technology license fees when continuing involvement or research services are required of us are recognized over the period of performance.

 

Predictive medicine revenues include revenues from the sale of predictive medicine products and related marketing agreements.  Predictive medicine revenue is recognized upon completion of the test and communication of results.  Up-front payments related to marketing agreements are recognized ratably over the life of the agreement.

 

Investments in Privately-Held Companies.  We review the valuation of our investments in privately-held biotechnology and pharmaceutical companies for possible impairment as changes in facts and circumstances indicate that impairment should be assessed.  The amount of impairment, if any, and valuation of these investments are based on our estimates and, in certain circumstances, the completion of independent, third-party appraisals of the investments.  Inherent in these estimates and appraisals are assumptions such as the comparability of the investee to similar publicly traded companies, the value of the investee’s underlying research and development efforts, the likelihood that the investee’s current research projects will result in a marketable product, and the investee’s expected future cash flows.  Accordingly, the amount recognized by us upon ultimate liquidation of these investments may vary significantly from the estimated fair values at March 31, 2003.

 

Investment In Myriad Proteomics.  In April 2001, we announced the formation of a new alliance with Hitachi, Ltd., Friedli Corporate Finance A.G., and Oracle Corporation.  The newly formed entity, Myriad Proteomics, Inc., intends to develop and market its proprietary proteomic information and targets to pharmaceutical and biotechnology companies for therapeutic and diagnostic product development.  We have entered into an agreement with Myriad Proteomics to perform certain high throughput sequencing services.

 

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Recent Accounting Pronouncements

 

During January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities.”  This interpretation establishes new guidelines for consolidating entities in which a parent company may not have majority voting control, but bears residual economic risks or is entitled to receive a majority of the entity’s residual returns, or both.  As a result, certain subsidiaries that were previously not consolidated under the provisions of Accounting Research Bulletin No. 51 may now require consolidation with the parent company.  This interpretation applies in the first year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003.  We are currently evaluating the provisions of this interpretation.

 

Results of Operations for the Three Months Ended March 31, 2003 and 2002

 

Predictive medicine revenues for the three months ended March 31, 2003 were $9.3 million compared to $7.3 million for the same three months in 2002, an increase of 28%.  Predictive medicine revenue is comprised of sales of predictive medicine products and marketing fees from our predictive medicine product marketing partners.  Increased sales and marketing efforts and wider acceptance of our products by the medical community have resulted in increased revenues for the three months ended March 31, 2003.  However, there can be no assurance that predictive medicine revenues will continue to increase at historical rates.

 

Total research revenues for the three months ended March 31, 2003 were $6.8 million compared to $5.8 million for the same three months in 2002.  Related party research revenues included in total research revenues for the three months ended March 31, 2003 were $0.3 million.  Related party research revenue is comprised of certain scientific outsourcing services performed for Myriad Proteomics, Inc., which is 49% owned by us.  Research revenue is comprised of research payments received pursuant to collaborative agreements, amortization of upfront fees and milestone payments.  This 17% increase in total research revenue is primarily attributable to revenue recognized from our DuPont and Abbott Laboratories collaborations.  Research revenue from our research collaboration agreements is generally recognized as related costs are incurred.  Consequently, as these programs progress and costs increase or decrease, revenues increase or decrease proportionately.

 

Predictive medicine cost of revenue for the three months ended March 31, 2003 was $3.4 million compared to $2.8 million for the same three months in 2002.  This increase of 18% in predictive medicine cost of revenue is primarily due to the 28% increase in predictive medicine revenue for the three months ended March 31, 2003 compared to same three months in 2002.  Gross margin percent for the three months ended March 31, 2003 was 64% compared to 61% for the same three months in 2002.  This improvement in gross margin percent resulted from technology improvements and gains in efficiencies in the operations of our predictive medicine business.

 

Research and development expenses for the three months ended March 31, 2003 were $11.1 million compared to $8.7 million for the same three months in 2002.  This increase of 26% was primarily due to increased costs associated with our ongoing clinical trials in prostate cancer and Alzheimer’s disease, other drug development programs, and increased research efforts associated with our Dupont and Abbott Laboratories collaborations.

 

Selling, general and administrative expenses for the three months ended March 31, 2003 were $7.8 million compared to $5.9 million for the same three months in 2002.  Selling, general and administrative expenses consist primarily of salaries, commissions and related personnel costs for sales, marketing, executive, legal, finance, accounting, human resources and business development personnel, allocated facilities expenses and other corporate expenses.  This increase of 32% was attributable to marketing costs related to our direct-to-consumer campaign and general increases in personnel and costs related to

 

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

 

Cash, cash equivalents, and marketable investment securities increased $4.9 million or 4% from $125.7 million at March 31, 2002 to $130.6 million at March 31, 2003.  This increase in cash, cash equivalents, and marketable investment securities is primarily attributable to the public offering of $57.2 million (net proceeds) of our common stock in November 2002.  This increase was partially offset by capital expenditures for research equipment, leasehold improvements for our new research facilities, increased expenditures for our internal drug development programs and other expenditures incurred in the ordinary course of business.  As a result of declining interest rates, interest income for the three months ended March 31, 2003 was $0.7 million compared to $1.1 million for the same three months in 2002, a decrease of 35%.

 

Results of Operations for the Nine Months Ended March 31, 2003 and 2002

 

Predictive medicine revenues for the nine months ended March 31, 2003 were $25.3 million compared to $19.1 million for the same nine months in 2002, an increase of 32%.  Predictive medicine revenue is comprised of sales of predictive medicine products and marketing fees from our predictive medicine product marketing partners.  Increased sales and marketing efforts and wider acceptance of our products by the medical community have resulted in increased revenues for the nine months ended March 31, 2003.  However, there can be no assurance that predictive medicine revenues will continue to increase at historical rates.

 

Total research revenues for the nine months ended March 31, 2003 were $23.3 million compared to $20.6 million for the same nine months in 2002.  Related party research revenues included in total research revenues for the nine months ended March 31, 2003 were $1.4 million.  Related party research revenue is comprised of certain scientific outsourcing services performed for Myriad Proteomics, Inc., which is 49% owned by us.  Research revenue is comprised of research payments received pursuant to collaborative agreements, amortization of upfront fees and milestone payments.  This increase of 13% in total research revenue is primarily attributable to revenue recognized from our DuPont and Abbott Laboratories collaborations, including a $1 million milestone recognized and received from Abbott Laboratories for the discovery of a gene involved in depression.  Research revenue from our research collaboration agreements is generally recognized as related costs are incurred.  Consequently, as these programs progress and costs increase or decrease, revenues increase or decrease proportionately.

 

Predictive medicine cost of revenue for the nine months ended March 31, 2003 was $9.3 million compared to $7.7 million for the same nine months in 2002.  This increase of 21% in predictive medicine cost of revenue is primarily due to the 32% increase in predictive medicine revenue for the nine months ended March 31, 2003 compared to same nine months in 2002.  Gross margin percent for the nine months ended March 31, 2003 was 63% compared to 60% for the same nine months in 2002.  This improvement in gross margin percent resulted from technology improvements and gains in efficiencies in the operations of our predictive medicine business.

 

Research and development expenses for the nine months ended March 31, 2003 were $34.2 million compared to $25.6 million for the same nine months in 2002.  This increase of 34% was primarily due to increased costs associated with our ongoing clinical trials in prostate cancer and Alzheimer’s disease, other drug development programs, and increased research efforts associated with our Dupont and Abbott Laboratories collaborations.

 

Selling, general and administrative expenses for the nine months ended March 31, 2003 were $24.8 million compared to $17.6 million for the same nine months in 2002.  Selling, general and administrative expenses consist primarily of salaries, commissions and related personnel costs for sales, marketing,

 

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executive, legal, finance, accounting, human resources and business development personnel, allocated facilities expenses and other corporate expenses.  This increase of 41% was attributable to marketing costs related to our direct-to-consumer campaign and general increases in personnel and costs related to the support of our predictive medicine business and drug development efforts.  We expect our selling, general and administrative expenses will continue to fluctuate depending on the number and scope of new product launches and our drug discovery and drug development efforts.

 

Cash, cash equivalents, and marketable investment securities increased $4.9 million or 4% from $125.7 million at March 31, 2002 to $130.6 million at March 31, 2003.  This increase in cash, cash equivalents, and marketable investment securities is primarily attributable to the public offering of $57.2 million (net proceeds) of our common stock in November 2002.  This increase was partially offset by capital expenditures for research equipment, leasehold improvements for our new research facilities, increased expenditures for our internal drug development programs and other expenditures incurred in the ordinary course of business.  As a result of declining interest rates, interest income for the nine months ended March 31, 2003 was $2.3 million compared to $4.4 million for the same nine months in 2002, a decrease of 49%.

 

Liquidity and Capital Resources

 

Net cash used in operating activities was $45.1 million during the nine months ended March 31, 2003 compared to $20.6 million used in operating activities during the same period of the prior fiscal year.  Trade receivables increased $4.8 million between June 30, 2002 and March 31, 2003, primarily due to the 32% increase in predictive medicine sales during the same period.  Other receivables increased $10.0 million between June 30, 2002 and March 31, 2003, primarily due to amounts receivable from DuPont for research performed under our research collaboration agreement.  Prepaid expenses increased $1.1 million between June 30, 2002 and March 31, 2003, primarily due to the prepayment of lab supplies purchased at a discount.  Accounts payable decreased by $4.8 million between June 30, 2002 and March 31, 2003, primarily as a result of payments for purchases of equipment and lab supplies.  Related party payables decreased $1.0 million between June 30, 2002 and March 31, 2003 due to payments made for equipment purchased from Myriad Proteomics.  Deferred revenue, representing the difference in collaborative payments received and research revenue recognized, decreased by $10.5 million between June 30, 2002 and March 31, 2003.

 

Our investing activities provided cash of $6.0 million in the nine months ended March 31, 2003 and provided cash of $40.4 million in the nine months ended March 31, 2002.  Investing activities were comprised primarily of changes to marketable investment securities and capital expenditures for research equipment.  Other assets increased $1.1 million between June 30, 2002 and March 31, 2003 due to the acquisition of intellectual property.  During the nine months ended March 31, 2003, we shifted a portion of our investments from marketable investment securities to cash and cash equivalents due to changes in interest rates.

 

Financing activities provided $58.5 million during the nine months ended March 31, 2003.  On November 26, 2002, we received $57.2 million in net proceeds from an underwritten offering of 3 million shares of our common stock pursuant to our outstanding shelf registration statement on Form S-3 (Registration No. 333-73124).  Morgan Stanley & Co. Incorporated served as the sole underwriter of the offering.  Following the offering we have approximately $193 million of various types of securities available for sale at our discretion upon filing of a prospectus supplement with the SEC.  During the nine months ended March 31, 2003 additional funds were received from the exercise of stock options and warrants.

 

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.  Our future capital requirements will be substantial and will depend on many factors, including:

 

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•                  the progress of our preclinical and clinical activities;

•                  the progress of our research and development programs;

•                  the progress of our drug discovery and drug development programs;

•                  the cost of developing and launching additional predictive medicine products;

•                  the costs of filing, prosecuting and enforcing patent claims;

•                  the costs associated with competing technological and market developments;

•                  the payments received under collaborative agreements and changes in collaborative research relationships;

•                  the costs associated with potential commercialization of our discoveries, if any, including the development of manufacturing, marketing and sales capabilities; and

•                  the cost and availability of third-party financing for capital expenditures and administrative and legal expenses.

 

Because of our significant long-term capital requirements, we intend to raise funds when conditions are favorable, even if we do not have an immediate need for additional capital at such time.

 

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.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

We maintain an investment portfolio in accordance with our 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 either as available-for-sale or held-to-maturity.  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 loss.  Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts.  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 or held-to-maturity security below cost that is deemed other than temporary results in a charge to earnings and establishes a new cost basis for the security.  Premiums and discounts are amortized or accreted over the life of the related held-to-maturity security as an adjustment to yield using the effective-interest method.

 

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 March 31, 2003, we have determined that in the event of a hypothetical ten 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. The Company’s principal executive officer and principal financial officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) on May 1, 2003, have concluded that, based on such evaluation, the Company’s disclosure controls and procedures were

 

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adequate and effective to ensure that material information relating to the Company, including its 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.

 

(b)   Changes in Internal Controls.  There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, nor were there any significant deficiencies or material weaknesses in the Company’s internal controls. Accordingly, no corrective actions were required or undertaken.

 

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 contains such “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements may be made directly in this Quarterly Report, and they may also be made a part of this Quarterly Report by reference to other documents filed with the Securities and Exchange Commission, which is known as “incorporation by reference.”

 

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 from those described in the forward-looking statements. These risks and uncertainties include, among other things: our inability to further identify, develop and achieve commercial success for new products and technologies; the possibility of delays in the research and development necessary to select drug development candidates and delays in clinical trials; 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; our dependence upon pharmaceutical and biotechnology collaborations; the levels and timing of payments under our collaborative agreements; uncertainties about our ability to obtain new corporate collaborations and acquire new technologies on satisfactory terms, if at all; the development of competing systems; our ability to protect our proprietary technologies; 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” in our Annual Report on Form 10-K for the year ended June 30, 2002, which has been filed with the Securities and Exchange Commission.

 

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 of the date of this Quarterly Report or the date of the document incorporated by reference in 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 the Company or to any person acting on its behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.

 

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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 2.  Changes in Securities and Use of Proceeds.

 

None.

 

Item 3.  Defaults Upon Senior Securities.

 

None.

 

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

 

None.

 

Item 5.  Other Information.

 

None.

 

Item 6.  Exhibits and Reports on Form 8-K.

 

(a)  Exhibits

 

99.1  Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

 

99.2  Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

 

99.3  Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

(b)  Reports on Form 8-K

 

None.

 

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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:		May 5, 2003				By:		/s/ Peter D. Meldrum
						Peter D. Meldrum
						President and Chief Executive Officer
Date:	May 5, 2003					By:	/s/ Jay M. Moyes
						Jay M. Moyes
						Vice President of Finance
						Principal financial and chief accounting officer

 

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