MYRIAD GENETICS INC - Quarter Report: 2015 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2015

OR

For the transition period from                      to                     

Commission file number: 0-26642

MYRIAD GENETICS, INC.

(Exact name of registrant as specified in its charter)

(801) 584-3600

Registrant’s telephone number, including area code:

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    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 the definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check one:

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 April 30, 2015 the registrant had 69,451,234 shares of $0.01 par value common stock outstanding.

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MYRIAD GENETICS, INC.

INDEX TO FORM 10-Q

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MYRIAD GENETICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except per share amounts)

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

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MYRIAD GENETICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

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

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MYRIAD GENETICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

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

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MYRIAD GENETICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 (“SEC”). 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, 2014, included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2014. Operating results for the three and nine months ended March 31, 2015 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 U.S. 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 revenue 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. For the nine months ended March 31, 2014, a reclassification of $1.0 million from proceeds from maturities and sales of marketable securities was made to the effect of foreign exchange rates on cash and cash equivalents in the condensed consolidated statement of cash flows and for the year ended June 30, 2014, a reclassification of $0.6 million from other receivables to trade accounts receivable on the condensed consolidated balance sheet to conform to the current-year presentation.

The Company has classified its marketable investment securities as available-for-sale securities. These securities are carried at estimated fair value with unrealized holding gains and losses, net of the related tax effect, included in accumulated other comprehensive loss in stockholders’ equity until realized. Gains and losses on investment security transactions are reported on the specific-identification method. Dividend and interest income are recognized when earned. The amortized cost, gross unrealized holding gains, gross unrealized holding losses, and fair value for available-for-sale securities by major security type and class of security at March 31, 2015 and June 30, 2014 were as follows:

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Cash, cash equivalents, and maturities of debt securities classified as available-for-sale securities are as follows at March 31, 2015:

The Company maintains a share-based compensation plan, the 2010 Employee, Director and Consultant Equity Incentive Plan, as amended (the “2010 Plan”), that has been approved by the Company’s shareholders. The 2010 Plan allows the Company, under the direction of the Compensation Committee of the Board of Directors, to make

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grants of stock options, restricted and unrestricted stock awards and other stock-based awards to employees, consultants and directors. On December 5, 2013, the shareholders approved an amendment to the 2010 Plan to set the number of shares available for grant to 3,500,000. At March 31, 2015, 1,801,462 shares were available for issuance. In addition, as of March 31, 2015, the Company may grant up to 4,400,795 additional shares under the 2010 Plan if options previously granted under the Company’s terminated 2003 Employee, Director and Consultant Option Plan are cancelled or expire without the issuance of shares of common stock by the Company.

The number of shares, terms, and vesting period of awards under the 2010 Plan are determined by the Compensation Committee of the Board of Directors for each equity award. Stock options granted under the plan prior to December 5, 2012 generally vest ratably over four years and expire ten years from the grant date. Stock options granted after December 5, 2012 generally vest ratably over four years and expire eight years from the grant date. The exercise price of options granted is equivalent to the fair market value of the stock on the grant date. In September 2014, the Company began issuing restricted stock units (“RSUs”) which generally vest ratably over four years on the anniversary date of the grant in lieu of stock options to all employees and directors. The number of RSUs awarded to certain executive officers may be reduced if certain additional functional performance metrics are not met.

Stock Options

A summary of the stock option activity under the Company’s plans for the nine months ended March 31, 2015 is as follows:

As of March 31, 2015, options to purchase 8,935,850 shares were vested and exercisable at a weighted average price of $22.55.

As of March 31, 2015, there was $24.4 million of total unrecognized share-based compensation expense related to stock options that will be recognized over a weighted-average period of 1.84 years.

Restricted Stock Units

A summary of the RSU activity under the Company’s plans for the nine months ended March 31, 2015 is as follows:

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The grant date fair value of an RSU equals the closing price of our common stock on the grant date. The weighted average grant date fair value of RSUs outstanding at March 31, 2015 is $37.68.

As of March 31, 2015, there was $28.7 million of total unrecognized share-based compensation expense related to RSUs that will be recognized over a weighted-average period of 2.77 years. This unrecognized compensation expense is equal to the fair value of RSUs expected to vest.

Employee Stock Purchase Plan

The Company also has an Employee Stock Purchase Plan that was approved by shareholders in 2012 (the “2012 Purchase Plan”), under which 2,000,000 shares of common stock have been authorized. Shares are issued under the 2012 Purchase Plan twice yearly at the end of each offering period. As of March 31, 2015, approximately 334,000 shares of common stock have been issued under the 2012 Purchase Plan and approximately 1,666,000 were available for issuance.

Share-Based Compensation Expense

Share-based compensation expense recognized and included in the condensed consolidated statements of income and comprehensive income was allocated as follows:

In October 2014, the Company and its former Chief Financial Officer entered into a resignation agreement under which the vesting of certain awards were modified such that the specified awards were vested in full. As a result of this award modification the Company recognized approximately $3.1 million in share-based compensation expense for the nine months ending March 31, 2015.

In February 2015, the Company and its Chief Executive Officer entered into a resignation agreement under which the vesting of certain awards were modified such that the specified awards were accelerated. As a result of this award modification the Company recognized approximately $5.2 million in share-based compensation expense for the three and nine months ending March 31, 2015.

Share Repurchase Program

In February 2015, the Company’s Board of Directors authorized an additional share repurchase program of $200 million of the Company’s outstanding common stock increasing the cumulative share repurchase authorization to

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$1.2 billion. The Company plans to repurchase its common stock from time to time or on an accelerated basis through open market transactions or privately negotiated transactions as determined by the Company’s management. The amount and timing of stock repurchases under the program will depend on business and market conditions, stock price, trading restrictions, acquisition activity and other factors. As of March 31, 2015, approximately $199.7 million remained available for repurchases under the program. The Company uses the par value method of accounting for its stock repurchases. As a result of the stock repurchases, the Company reduced common stock and additional paid-in capital and recorded charges to retained earnings. The shares retired, aggregate common stock and additional paid-in capital reductions, and related charges to retained earnings for the repurchases for the three and nine months ended March 31, 2015 and 2014 were as follows:

Basic earnings per share is computed based on the weighted-average number of shares of the Company’s common stock outstanding. Diluted earnings per share is computed based on the weighted-average number of shares of the Company’s common stock, including the dilutive effect of common stock equivalents outstanding.

The following is a reconciliation of the denominators of the basic and diluted earnings per share computations:

Certain outstanding stock options and RSUs were excluded from the computation of diluted earnings per share for the three and nine months ended March 31, 2015 and 2014 because the effect would have been anti-dilutive. These potential dilutive common shares, which may be dilutive to future diluted earnings per share, are as follows:

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The Company’s business units have been aggregated into three reportable segments: (i) research, (ii) molecular diagnostics and (iii) pharmaceutical and clinical services. The research segment is focused on the discovery of genes, biomarkers and proteins related to major common diseases and includes corporate services such as finance, human resources, legal, and information technology. The molecular diagnostics segment provides testing that is designed to assess an individual’s risk for developing disease later in life, identify a patient’s likelihood of responding to drug therapy and guide a patient’s dosing to ensure optimal treatment, or assess a patient’s risk of disease progression and disease recurrence. The pharmaceutical and clinical services segment provides testing products and services to the pharmaceutical, biotechnology and medical research industries. The Company evaluates segment performance based on results from operations before interest income and expense and other income and expense.

Segment revenue and operating income (loss) were as follows during the periods presented:

The fair value of the Company’s financial instruments reflects the amounts that the Company estimates it will receive in connection with the sale of an asset or pay in connection with the transfer of a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value hierarchy prioritizes the use of inputs used in valuation techniques into the following three levels:

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All of the Company’s financial instruments are valued using quoted prices in active markets or based on other observable inputs. For Level 2 securities, the Company uses a third party pricing service which provides documentation on an ongoing basis that includes, among other things, pricing information with respect to reference data, methodology, inputs summarized by asset class, pricing application and corroborative information. The Company reviews, tests and validates this information. The following table sets forth the fair value of the financial assets that the Company re-measured on a regular basis:

In order to determine the Company’s quarterly provision for income taxes, the Company used an estimated annual effective tax rate that is based on expected annual income and statutory tax rates in the various jurisdictions in which the Company operates. Certain significant or unusual items are separately recognized in the quarter during which they occur and can be a source of variability in the effective tax rates from quarter to quarter.

Income tax expense for the three months ended March 31, 2015 was $14.1 million, or approximately 40% of pre-tax income, compared to $20.6 million, for the three months ended March 31, 2014, or approximately 36% of pre-tax income. Income tax expense for the nine months ended March 31, 2015 was $37.9 million, or approximately 38% of pre-tax income, compared to $82.7 million, or approximately 37% of pre-tax income. Income tax expense for the three and nine months ended March 31, 2015 is based on the Company’s estimated annual effective tax rate for the full fiscal year ending June 30, 2015, adjusted by discrete items recognized during the period. For the three months ended March 31, 2015, the Company’s recognized effective tax rate differs from the U.S. federal statutory rate of 35% primarily due to the effect of state income taxes and the impact from the exclusion of certain losses incurred from our international operations offset by the benefits realized from the timing differences related to the recognition of the tax effect of equity compensation expense from incentive stock options and the deduction realized when those options are disqualified upon exercise and sale.

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The Company files U.S., foreign and state income tax returns in jurisdictions with various statutes of limitations. The Company’s New Jersey State income tax returns for the years ended June 30, 2007 through 2013 are currently under examination by the New Jersey State Department of Taxation and Finance. Annual and interim tax provisions include amounts considered necessary to pay assessments that may result from examination of prior year tax returns; however, the amount ultimately paid upon resolution of issues may differ materially from the amount accrued. The Company’s U.S. federal tax return and other state tax returns are not currently under examination.

German Clinic

On February 27, 2015, the Company completed the acquisition of privately-held Privatklinik Dr. Robert Schindlbeck GmbH & Co. KG located in Germany (“Clinic”) approximately 15 miles from the Company’s European laboratories. The cash paid and preliminary total consideration transferred to acquire the Clinic was $20.1 million.

Total consideration transferred was allocated to tangible and identifiable intangible assets acquired and liabilities assumed based on their preliminary fair values at the acquisition date as set forth below. The Company believes acquisition of the Clinic may facilitate the Company’s penetration into the German molecular diagnostic market. The Clinic will allow the Company to directly negotiate reimbursement with government and private insurance providers in the German market and collaborate with hospitals and physician groups. These factors contributed to consideration transferred in excess of the fair value of the Clinic’s net tangible and intangible assets acquired, resulting in the Company recording goodwill in connection with the transaction. Under German tax law the goodwill related to the purchase of the clinic is deductible and will be amortized for tax purposes over 15 years. Management estimated the fair values of tangible and intangible asset and liabilities in accordance with the applicable accounting guidance for business combinations and utilized the services of third-party valuation consultants. The preliminary allocation of the consideration transferred is subject to potential adjustments primarily due to tax-related matters, including tax basis of acquired assets and liabilities in the foreign jurisdiction, and third party valuations of acquired assets and liabilities, including deferred grants and actuarial analysis of pension assets and liabilities. During the measurement period, the Company may record adjustments to the provisional amounts recognized in the Company’s initial accounting for the acquisition. The Company expects the allocation of the consideration transferred to be final within the measurement period (up to one year from the acquisition date).

The Clinic has received subsidies from the German government for assets that were previously purchased. These subsidies are recorded in deferred grants currently totaling $10.4 million as of March 31, 2015. The recognition of revenue relating to the subsidies occurs ratably over the useful life of the related assets.

The unaudited condensed consolidated financial statements include the operating results of the Clinic in the pharmaceutical and clinical services segment from the date of acquisition. Pro forma results of operations have not been presented as the Clinic’s prior-period financial results are not considered material to the Company.

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Crescendo Bioscience, Inc.

On February 28, 2014, the Company completed the acquisition of privately-held Crescendo Bioscience, Inc. (“Crescendo”), pursuant to an Amended and Restated Agreement and Plan of Merger, dated February 2, 2014 (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, Myriad acquired Crescendo for total consideration of $259.0 million.

The following table reconciles consideration transferred to the total cash paid to acquire Crescendo:

The total consideration of $259 million consisted of (i) $225.1 million in cash, (ii) $25.9 million in elimination of intercompany balances related to accrued interest and the term loan the Company issued to Crescendo on September 8, 2011, and (iii) $8 million related to the fair value of the purchase option granted to the Company on September 8, 2011 by Crescendo through a definitive merger agreement (“Option Agreement”) entered into in association with the term note. Of the cash consideration, $20 million was deposited into an escrow account to fund (i) any post-closing adjustments payable to Myriad based upon differences between the estimated working capital and the actual working capital of Crescendo at closing, and (ii) any indemnification claims made by Myriad against Crescendo, for a period of time, based upon the completion of an audit of Crescendo’s financial statements, of no fewer than twelve nor more than fifteen months following closing.

Of the total cash paid, $6.9 million was accounted for as share-based compensation expense resulting from the accelerated vesting of employee options immediately prior to the acquisition and $5.7 million was accounted for as change of control bonuses paid to Crescendo employees and directors. The Company recognized the share-based compensation expense and change of control bonuses in post-acquisition consolidated statements of comprehensive income for the year ended June 30, 2014.

Total consideration transferred was allocated to tangible and identifiable intangible assets acquired and liabilities assumed based on their preliminary fair values at the acquisition date as set forth below. The Company believes that the acquisition of Crescendo facilitates the Company’s entry into the high growth autoimmune market, diversifies its product revenue and enhances its strength in protein-based diagnostics. These factors contributed to consideration transferred in excess of the fair value of Crescendo’s net tangible and intangible assets acquired, resulting in the Company recording goodwill in connection with the transaction.

The Company’s allocation of consideration transferred for Crescendo is as follows:

Pro Forma Information

The unaudited pro-forma results presented below include the effects of the Crescendo acquisition as if it had been consummated as of July 1, 2013, with adjustments to give effect to pro forma events that are directly attributable to the acquisition which includes adjustments related to the amortization of acquired intangible assets, interest income and expense, stock-based compensation expense, and depreciation. The unaudited pro

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forma results do not reflect any operating efficiency or potential cost savings which may result from the consolidation of Crescendo. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operation of the combined company would have been if the acquisition had occurred at the beginning of the period presented nor are they indicative of future results of operations and are not necessarily indicative of either future results of operations or results that might have been achieved had the acquisition been consummated as of July 1, 2013.

Goodwill

The following summary sets forth the changes in goodwill for the nine months ended March 31, 2015:

At March 31, 2015, the Company had recorded goodwill of $185.2 million, net of translation adjustments, related to the acquisitions of Myriad RBM, Inc. on May 31, 2011 (formerly Rules-Based Medicine, Inc.), Crescendo on February 28, 2014 and the Clinic on February 27, 2015.

Intangible Assets

Intangible assets primarily consist of amortizable assets of purchased licenses and technologies, customer relationships, and trade names as well as non-amortizable intangible assets of in-process technologies and research and development. The following summarizes the amounts reported as intangible assets:

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The Company recorded amortization expense during the respective periods for these intangible assets as follows:

As of March 31, 2015, the Company had a $5.0 million investment in RainDance Technologies, Inc., which has been recorded under the cost method as an “Other Asset” on the Company’s condensed consolidated balance sheet. There were no events or circumstances that indicated that impairment exists; therefore, the Company recorded no impairment in the investment for the nine months ended March 31, 2015.

The Company is subject to various claims and legal proceedings covering matters that arise in the ordinary course of its business activities. As of March 31, 2015, the management of the Company believes any liability that may ultimately result from the resolution of these matters will not have a material adverse effect on the Company’s consolidated financial position, operating results, or cash flows.

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

Overview

We are a leading molecular diagnostic company dedicated to making a difference in patients’ lives through the discovery and commercialization of novel, transformative tests across major diseases. We believe in improving healthcare for patients by providing physicians with important information to address unmet medical needs. Through our proprietary technologies, we believe we are positioned to identify important disease genes, the proteins they produce, and the biological pathways in which they are involved to better understand the genetic basis of human disease and the role that genes and their related proteins may play in the onset and progression of disease. We believe that identifying these biomarkers (DNA, RNA and proteins) will enable us to develop novel molecular diagnostic tests.

Our goal is to provide physicians with critical information to better guide the healthcare management of their patients by addressing four major concerns a patient may have about their healthcare: (1) what is the likelihood of my getting a disease, (2) do I have a disease, (3) how aggressively should my disease be treated, and (4) which therapy will work best to treat my disease. We have developed and are developing new molecular diagnostic tests that are designed to assess an individual’s risk for developing disease later in life (predictive medicine), accurately diagnose disease (diagnostic medicine), identify a patient’s likelihood of responding to a particular therapy and assess if a patient will benefit from a particular therapy (personalized medicine), and assess a patient’s risk of disease progression and disease recurrence (prognostic medicine).

Our business strategy for future growth is focused on three key initiatives. First, we are working to grow our existing products and markets. Second, we are expanding our business globally with an international direct sales force and through distributors. Finally, we are developing new molecular diagnostic tests across a diverse set of disease indications, complementing our current businesses in oncology, preventive care, urology, dermatology, autoimmune and neuroscience.

Products and Services

We offer fourteen commercial molecular diagnostic tests, consisting of six predictive medicine tests, three prognostic medicine tests, four personalized medicine tests and one diagnostic medicine test. We market these tests in the United States through our own sales force of approximately 500 people. We have also established commercial laboratory operations in Munich, Germany and international headquarters in Zurich, Switzerland. We currently market our myRisk^TM, iBRACAnalysis^TM, COLARIS^®, COLARIS AP^®, Prolaris^®, EndoPredict^® and Tumor BRACAnalysis CDx^TM products in over 80 countries throughout the world through our own sales force in Europe and Canada and through distributors in other countries.

Our fourteen commercial molecular diagnostic tests include:

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We are also a pioneer in the discovery and development of companion diagnostics that help patients receive the most appropriate therapy. We believe the future of drug development is creating new therapies targeted to a subset of patients who would most likely benefit from the new therapies based on the identification of novel biomarkers and the development of companion diagnostics tests. We are currently collaborating with approximately 20 major pharmaceutical and biotechnology companies to develop new drugs based on our companion diagnostic technologies. In December 2014, we also recently received FDA approval of our BRACAnalysis CDx as a companion diagnostic test to identify ovarian cancer patients who may benefit from the PARP inhibitor Lynaparza^TM (olaparib). This is the first and only FDA-approved companion diagnostic for Lynaparza^TM, which we believe opens a new door in personalized medicine and represents a big step forward in tailoring treatment for women with ovarian cancer. In addition, in January 2015, we announced that we had obtained CE Marking in Europe for our Tumor BRACAnalysis CDx test, which identifies tumors that have mutations in the BRCA1 or BRCA2 genes, and launched the test as a companion diagnostic for PARP inhibitors.

Through our wholly owned subsidiary, Myriad RBM, Inc., we provide biomarker discovery and pharmaceutical and clinical services to the pharmaceutical, biotechnology, and medical research industries utilizing our multiplexed immunoassay technology. In March 2015, we announced the launch by Myriad RBM of immunoassay services based on the ultrasensitive Simoa ^TM (single molecule array) platform developed by Quanterix. The Simoa platform enables the accurate measurement of protein biomarkers that were previously difficult or even impossible to detect in blood samples.

Our technology enables us to efficiently screen large sets of clinical samples from both diseased and non-diseased populations against our extensive menu of protein biomarkers. By analyzing the data generated from these tests, we attempt to discover biomarker patterns that may be used to identify patients who would likely respond to a particular therapy.

Recent Developments

On February 27, 2015, the Company completed the acquisition of a privately-held Clinic located in Germany approximately 15 miles from the Company’s European laboratories for total consideration of $20.1 million. The Company believes acquisition of the Clinic may facilitate the Company’s penetration into the German molecular diagnostic market. The Clinic will allow the Company to directly negotiate reimbursement with government and private insurance providers in the German market and collaborate with hospitals and physician groups.

On February 3, 2015, we announced that Peter D. Meldrum, president and chief executive officer, notified the board of directors of his decision to retire at the conclusion of the fiscal year on June 30, 2015. Pursuant to our succession plan, the board of directors has unanimously elected Mark C. Capone, currently president of Myriad Genetic Laboratories, Inc., as Mr. Meldrum’s successor.

Use of Resources

During the three and nine months ended March 31, 2015, we devoted our resources to supporting and growing our molecular diagnostic testing and pharmaceutical and clinical services businesses, to the research and development of future molecular diagnostic and companion diagnostic candidates as well as repurchase of our stock as part of our share repurchase program. We have three reportable operating segments—research, molecular diagnostics and pharmaceutical and clinical services. See Note 6 “Segment and Related Information” in the notes to our condensed consolidated financial statements (unaudited) for information regarding these operating segments.

For the three and nine months ended March 31, 2015, we had net income of $21.5 million and $61.5 million and diluted earnings per share of $0.29 and $0.82, compared to net income of $36.8 million and $142.6 million and diluted earnings per share of $0.48 and $1.82 in the same period in the prior year. Net income and diluted earnings per share results for the three and nine months ended March 31, 2015 included income tax expense of $14.1 million and $37.9 million compared to $20.6 million and $82.7 million for the same period in the prior year.

Share Repurchase Program

In February 2015, we announced that our board of directors had authorized us to repurchase an additional $200 million of our outstanding common stock increasing the cumulative share repurchase authorization to $1.2 billion. During the three and nine months ended March 31, 2015, we repurchased $62.0 million and $165.9 million of our outstanding common

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stock. In connection with our stock repurchase program our board of directors authorized us to repurchase shares from time to time or on an accelerated basis through open market transactions or privately negotiated transactions as determined by our management. The amount and timing of stock repurchases under the program will depend on business and market conditions, stock price, trading restrictions, acquisition activity and other factors. See also “Part II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds – Issuer Purchases of Equity Securities.”

Critical Accounting Policies

Critical accounting policies are those policies which are both important to the presentation 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. No significant changes to our accounting policies took place during the period. For a further discussion of our critical accounting policies, see our Annual Report on Form 10-K for the fiscal year ended June 30, 2014.

Results of Operations for the Three Months Ended March 31, 2015 and 2014

Revenue

Revenue is comprised of sales of our molecular diagnostic tests and our pharmaceutical and clinical services. Total revenue for the three months ended March 31, 2015 was $180.0 million, compared to $182.9 million for the same three months in the prior year. The 2% decrease in total revenue is primarily due to the severe weather on the East coast. The 4% increase in pharmaceutical and clinical services revenue is primarily due to the acquisition of the Clinic in Germany.

Revenue of our molecular diagnostic tests and pharmaceutical and clinical services and revenue by product category as a percent of total revenue for the three months ended March 31, 2015 and 2014 were as follows:

Our molecular diagnostic revenues are generated primarily in three major markets, oncology, preventive care, and rheumatology. Oncology, preventive care and rheumatology revenue was 50%, 44% and 6% of total molecular diagnostic testing revenue, respectively, during the three months ended March 31, 2015. Sales of molecular diagnostic tests in each major market for the three months ended March 31, 2015 and 2014 were as follows:

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Costs and Expenses

Cost of revenue is comprised primarily of salaries and related personnel costs, laboratory supplies, equipment costs and facilities expense. Cost of molecular diagnostic testing revenue for the three months ended March 31, 2015 was $33.0 million, compared to $23.6 million for the same three months in 2014. This increase of 40% in molecular diagnostic testing cost of revenue is primarily due to the transition costs associated with the myRisk test and costs associated with Prolaris, myPath Melanoma and other new tests for which reimbursement has not yet been secured. Cost of revenue was also impacted by the addition of the VectraDA test to our product line. Our cost as a percentage of revenue may continue to fluctuate from quarter to quarter based on the introduction of new molecular diagnostic tests, changes in reimbursement rates, changes in testing volumes in the molecular diagnostic markets and as we gain economies of scale and increased efficiencies through automation. Our costs of pharmaceutical and clinical services include similar items. Cost of pharmaceutical and clinical services for the three months ended March 31, 2015 was $3.3 million, compared to $3.0 million for the same three months in 2014. This 10% increase in pharmaceutical and clinical testing cost of revenue is primarily associated with the increase in pharmaceutical and clinical services revenue as well as the acquisition of the Clinic in Germany.

During the first quarter of fiscal 2015, we initiated a national launch of our myRisk Hereditary Cancer test. As a result of this launch, test volumes for myRisk have increased rapidly and we exited the quarter with myRisk representing more than 58% of all hereditary cancer samples ordered. We improved our laboratory efficiencies significantly in the third fiscal quarter which should lead to continued improvements in turnaround times in the fourth quarter of fiscal 2015.

Our gross profit margins were 80% at March 31, 2015, compared to 85% in the same three months of the prior year. Gross profit margins were impacted primarily due to the additional costs associated with the transition to myRisk, the launch of three new tests for which reimbursement has not been obtained and the addition of the VectraDA test to the product mix, which is performed at a lower margin. There can be no assurance that gross profit margins will decrease, increase or remain at current levels.

Our research and development expenses include costs incurred in formulating, improving and creating alternative or modified processes related to and expanding the use of our current molecular diagnostic tests and costs incurred for the discovery, validation and development of our pipeline of molecular diagnostic and companion diagnostic test candidates and our pharmaceutical and clinical services. Research and development expenses are comprised primarily of salaries and related personnel costs, laboratory supplies, clinical trial costs, equipment, and facilities costs. Research and development expenses incurred during the three months ended March 31, 2015 were $16.7 million compared to $13.4 million for same three months in 2014. This increase of 25% was primarily due to the following:

We expect that our research and development expenses as a percentage of revenues may increase over the next several years as we continue to develop our pipeline and expand our offerings of molecular diagnostic tests and pharmaceutical and clinical services.

Our sales, general and administrative expenses include costs associated with building our molecular diagnostic and pharmaceutical and clinical services businesses domestically and internationally. 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 March 31, 2015 were $91.3 million, compared to $87.6 million for the same three months in 2014. The increase in selling, general and administrative expense of 4% was due primarily to the following:

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We expect that our selling, general and administrative expenses will continue to increase and that such increases may be substantial, depending on the number and scope of any new molecular diagnostic test launches, our efforts in support of our existing molecular diagnostic tests and pharmaceutical and clinical services as well as our continued international expansion efforts.

Other Income (Expense)

Other income (expense) for the three months ended March 31, 2015 was ($0.2) million compared to $2.1 million in the same period of the prior year. The $2.3 million decrease is due to interest income recorded from the note receivable from Crescendo that was extinguished with the closing of the acquisition in February 2014.

Income Tax Provision

Income tax expense for the three months ended March 31, 2015 was $14.1 million, for an effective income tax rate of approximately 40%, compared to income tax expense of $20.6 million or a 36% effective income tax rate in the same period in 2014. Our quarterly effective tax rate differs from the U.S. federal statutory rate of 35%, primarily due to a state income tax impact and an impact from exclusion of certain losses incurred from our international operations. Certain significant or unusual items are separately recognized during the period in which they occur and can be a source of variability in the effective tax rates from quarter to quarter.

Results of Operations for the Nine Months Ended March 31, 2015 and 2014

Revenue

Revenue is comprised of sales of our molecular diagnostic tests and our pharmaceutical and clinical services. Total revenue for the nine months ended March 31, 2015 was $533.2 million, compared to $589.5 million for the same nine months in the prior year. The 10% decrease in total revenue is primarily due to turnaround times associated with the transition of the hereditary cancer market to our myRisk test, the timing of research projects with our pharmaceutical partners which can fluctuate from period to period, as well as the loss of the one-time bolus generated by celebrity publicity in the nine months ended March 31, 2014 that did not continue into the nine month period ended March 31, 2015. The decrease in hereditary cancer testing was offset by the addition of the VectraDA revenue from the acquisition of Crescendo.

Revenue of our molecular diagnostic tests and pharmaceutical and clinical services by product category as a percent of total revenue for the nine months ended March 31, 2015 and 2014 were as follows:

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Our molecular diagnostic revenues are generated primarily in three major markets, oncology, preventive care, and rheumatology. Oncology, preventive care and rheumatology revenue was 49%, 45% and 6% of total molecular diagnostic testing revenue, respectively, during the nine months ended March 31, 2015. Sales of molecular diagnostic tests in each major market for the nine months ended March 31, 2015 and 2014 were as follows:

The decline in the oncology and preventive care markets were impacted by the reduced volumes from celebrity publicity as described above, as well as increased competition.

Costs and Expenses

Cost of revenue is comprised primarily of salaries and related personnel costs, laboratory supplies, royalty payments, equipment costs and facilities expense. Cost of molecular diagnostic testing revenue for the nine months ended March 31, 2015 was $100.9 million, compared to $67.8 million for the same nine months in 2014. This increase of 49% in molecular diagnostic testing cost of revenue is primarily due to the transition costs associated with the myRisk test and costs associated with Prolaris, myPath Melanoma and other new tests for which reimbursement has not yet been secured. Cost of revenue was also impacted by the addition of the VectraDA test to our product line, which has not received full reimbursement. Our cost of revenue may continue to fluctuate from quarter to quarter based on the introduction of new molecular diagnostic tests, changes in reimbursement rates, changes in testing volumes in the molecular diagnostic segments and as we gain economies of scale and increased efficiencies through automation. Our costs of pharmaceutical and clinical services include similar items. Cost of pharmaceutical and clinical services for the nine months ended March 31, 2015 was $8.2 million, compared to $10.4 million for the same nine months in 2014. This 21% decrease in pharmaceutical and clinical testing cost of revenue is primarily due to the 31% decrease in pharmaceutical and clinical services revenue.

Our gross profit margins were 80% for the nine months ended March 31, 2015, compared to 87% in the same nine months of the prior year. Gross profit margins were impacted by the change in product mix primarily due to the additional costs associated with the transition to myRisk, the launch of new tests for which reimbursement has not been obtained and the addition of the VectraDA test to the product mix, which is at a lower margin.

Our research and development expenses include costs incurred in formulating, improving and creating alternative or modified processes related to and expanding the use of our current molecular diagnostic tests and costs incurred for the discovery, validation and development of our pipeline of molecular diagnostic and companion diagnostic test candidates and our pharmaceutical and clinical services. Research and development expenses are comprised primarily of salaries and related personnel costs, laboratory supplies, clinical trial costs, equipment, and facilities costs. Research and development expenses incurred during the nine months ended March 31, 2015 were $56.8 million compared to $47.3 million for same nine months in 2014. This increase of 20% was primarily due to the following:

Our research and development expenses as a percentage of revenues may increase over the next several years as we continue to develop our pipeline and expand our offerings of molecular diagnostic tests and pharmaceutical and clinical services.

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Our sales, general and administrative expenses include costs associated with building our molecular diagnostic and pharmaceutical and clinical services businesses domestically and internationally. 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 nine months ended March 31, 2015 were $269.4 million, compared to $242.8 million for the same nine months in 2014. The increase in selling, general and administrative expense of 11% was due primarily to the following:

Other Income (Expense)

Other income for the nine months ended March 31, 2015 was $1.4 million compared to $4.1 million in the same period of the prior year. The $2.7 million decrease is due to interest income recorded from the note receivable from Crescendo that was extinguished with the closing of the acquisition in February 2014 partially offset by foreign exchange gains relating to our pledged account.

Income Tax Provision

Income tax expense for the nine months ended March 31, 2015 was $37.9 million, for an effective income tax rate of approximately 38 %, compared to income tax expense of $82.7 million or a 37% effective income tax rate in the same period in 2014. Our quarterly effective tax rate differs from the U.S. federal statutory rate of 35%, primarily due to a state income tax impact and an impact from exclusion of certain losses incurred from our international operations offset by the benefits realized from the timing differences related to the recognition of the tax effect of equity compensation expense from the disqualification of incentive stock options. Certain significant or unusual items are separately recognized during the period in which they occur and can be a source of variability in the effective tax rates from quarter to quarter.

Liquidity and Capital Resources

Cash, cash equivalents and marketable investment securities were $175.6 million at March 31, 2015 compared to $270.6 million at June 30, 2014, a decrease of $95.0 million. This decrease in cash, cash equivalents and marketable investment securities was attributable to the purchase of $165.9 million of our common stock under our share repurchase programs and $20.1 million for the acquisition of the Clinic offset by our cash collections from sales of molecular diagnostic tests and pharmaceutical and clinical services.

Net cash provided by operating activities was $89.5 million during the nine months ended March 31, 2015, compared to $149.3 million during the same nine months in 2014. Our cash from operations was impacted by a decrease in net income compared to the nine months ended March 31, 2014.

Our investing activities provided cash of $43.7 million during the nine months ended March 31, 2015 compared to providing cash of $1.2 million during the same nine months in 2014. Investing activities were comprised of $20.1 million in cash used to purchase the Clinic, capital expenditures for equipment and facilities of $21.9 million to support expanded myRisk testing volumes, offset by the net proceeds from the maturity, purchases and sales of marketable investment securities of $85.7 million.

Financing activities used cash of $137.1 million during the nine months ended March 31, 2015 and $169.7 million in the same nine months in 2014. Cash utilized in financing activities during the nine months ended March 31, 2015 was primarily due to the purchase of $165.9 million of our common stock through our share repurchase programs partially offset by $25.6 million from cash provided primarily by the exercise of stock options.

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We believe that our existing capital resources and net cash expected to be generated from sales of our molecular diagnostic tests and pharmaceutical and clinical services will be adequate to fund our current and planned operations for the next several years, although no assurance can be given that changes will not occur that would consume available capital resources more quickly than we currently expect and that we may need or want to raise additional funds. 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: