News Column

MYRIAD GENETICS INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 13, 2014

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 solve 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 biomarkers (DNA, RNA and proteins) will enable us to develop novel molecular diagnostic tests. Our goal is to provide physicians with critical information to guide the healthcare management of their patients by addressing four major questions 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 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 drug (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 and expand our existing products and markets. Second, we are developing our business internationally with an international direct sales force. Finally, we are launching and intend to continue to launch new potentially transformative products across a diverse set of disease indications, complementing our current businesses in oncology, women's health, urology, dermatology and rheumatology. In February 2014, we completed the acquisition of privately-held Crescendo for $270 million in cash, which was reduced by the repayment of a loan made to Crescendo and other customary adjustments in accordance with the acquisition agreement. We believe that the acquisition of Crescendo facilitates our entry into the high growth autoimmune and inflammatory disease market, diversifies our product revenues and enhances our strength in protein-based diagnostics. The business of Crescendo, including its VectraฎDA blood test for rheumatoid arthritis disease management, is operated as a wholly owned subsidiary. During the fiscal year ended June 30, 2014, we devoted our resources to supporting and growing our molecular diagnostic testing and pharmaceutical and clinical services businesses, as well as to the research and development of future molecular diagnostic and companion diagnostic candidates. See Note 10 "Segment and Related Information" in the notes to our consolidated financial statements for information regarding our operating segments. We also used $287.7 million of cash generated from operations to repurchase shares of our common stock under our share repurchase program described below. Our consolidated revenues primarily consisted of sales of molecular diagnostic tests through our wholly-owned subsdiaries Myriad Genetic Laboratories, Inc., Myriad Genetics GmbH, and Crescendo Bioscience, Inc. and pharmaceutical and clinical services through our wholly-owned Myriad RBM subsidiary. During the year ended June 30, 2014, we reported total revenues of $778.2 million, net income of $176.2 million and diluted earnings per share of $2.25 that included income tax expense of $101.6 million. We incurred research and development expenses of $67.5 million, $53.7 million, and $42.6 million for the years ended June 30, 2014, 2013 and 2012, respectively. Our research and development expenses include costs incurred in formulating, improving, validating and creating alternative or modified processes related to and expanding the use of our 13 current molecular diagnostic test offerings and costs incurred for the discovery, 44



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development and validation of our pipeline of molecular diagnostic and companion diagnostic candidates. Our research and development expense may fluctuate substantially from quarter to quarter depending on the number of clinical studies and the timing of samples supporting those clinical studies.

Our selling, 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, legal, finance and accounting, information technology, human resources, and allocated facilities expenses. We expect that our selling, general and administrative expenses will increase from quarter to quarter 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 and the transition from our existing product portfolio to our new products, as well as our continued international expansion efforts. Between May 2010 and November 2013, we repurchased $700 million of our outstanding common stock. In November 2013, our board of directors authorized us to repurchase an additional $300 million of our outstanding common stock. In connection with this latest stock repurchase authorization, we have been authorized to repurchase shares at management's discretion based on market conditions and have repurchased $134.3 million of our outstanding common stock as of June 30, 2014 under this authorization. See also "Part II, Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities-Issuer Purchases of Equity Securities."



Critical Accounting Policies

Critical accounting policies are those policies which are both important to the portrayal of a company's financial condition and results and require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies are as follows: • revenue recognition; • allowance for doubtful accounts; • goodwill; and • income taxes Revenue Recognition. Revenue includes the sale of molecular diagnostic tests and of our pharmaceutical and clinical services. Revenue is recorded at the invoiced amount net of any discounts or allowances and is recognized when persuasive evidence of an agreement exists, delivery has occurred, the fee is fixed or determinable, and collection is reasonably assured. Revenue is recognized upon completion of the test or service, communication of results, and when collectability is reasonably assured. Allowance for Doubtful Accounts. The preparation of our financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amount of assets at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Trade accounts receivable are comprised of amounts due from sales of our molecular diagnostic tests, which are recorded net of any discounts or contractual allowances. We analyze trade accounts receivable and consider historic experience, customer creditworthiness, facts and circumstances specific to outstanding balances, and payment terms when evaluating the adequacy of the allowance for doubtful accounts. We periodically evaluate and adjust the allowance for doubtful accounts when trends or significant events indicate that a change in estimate is appropriate. Such changes in estimate could materially affect our results of operations or financial position; however, to date these changes have not been material. It is possible that we may need to adjust our estimates in future periods. 45



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After a review of our allowance for doubtful accounts as of June 30, 2014 and 2013, we have determined that a hypothetical ten percent increase in our allowance for doubtful accounts would result in additional bad debt expense and an increase to our allowance for doubtful accounts of $0.9 million and $0.8 million, respectively. Goodwill. We test goodwill for impairment on an annual basis and in the interim by reporting unit if events and circumstances indicate that goodwill may be impaired. The events and circumstances that are considered include business climate and market conditions, legal factors, operating performance indicators and competition. Impairment of goodwill is evaluated on a qualitative basis to determine if using a two-step process is necessary. If the qualitative assessment suggests that impairment is more likely than not, a two-step impairment analysis is performed. The first step involves comparison of the fair value of a reporting unit with its carrying amount. The valuation of a reporting unit requires judgment in estimating future cash flows, discount rates and other factors. In making these judgments, we evaluate the financial health of our business, including such factors as industry performance, market saturation and opportunity, changes in technology and operating cash flows. Changes in our forecasts or decreases in the value of our common stock could cause book value of reporting units to exceed their fair values. If the carrying amount of a reporting unit exceeds its fair value, the second step of the process involves a comparison of the fair value and the carrying amount of the goodwill of that reporting unit. If the carrying amount of the goodwill of the reporting unit exceeds the fair value of that goodwill, an impairment loss would be recognized in an amount equal to the excess of carrying value over fair value. If an event occurs that would cause a revision to the estimates and assumptions used in analyzing the value of the goodwill, the revision could result in a non-cash impairment charge that could have a material impact on the financial results. At June 30, 2014, the Company has recorded goodwill of $169.2 million, $112.3 million recorded in connection with the acquisition of Crescendo in February 2014, which relates to the molecular diagnostics segment, and $56.9 million recorded in connection with the acquisition of Myriad RBM in May 2011, which relates to the pharmaceutical and clinical services segment, formerly our companion diagnostics segment. We have concluded that Crescendo and Myriad RBM represent distinct and separate reporting units. We evaluated the Crescendo reporting unit for impairment noting no indicators of impairment from the date of acquisition. We also measured the fair value of the Myriad RBM reporting unit utilizing income and market approaches. The income approach considered management's business plans and projections as the basis for expected cash flows for the next twelve years and a 4.0% residual growth rate thereafter. We also used a weighted average discount rate of 30% for the analysis. Other significant estimates used in the analysis include the profitability of the respective reporting unit and working capital effects. The market approach used values for comparable companies and market transactions. We noted the fair value of the Myriad RBM reporting unit exceeded its carrying value by 18% using these assumptions mentioned. A hypothetical increase in the weighted average discount rate of 0.5% would decrease the calculated fair value as a percentage of book value for the Myriad RBM reporting unit by 4%. A hypothetical decrease in the residual growth rate of 0.5% would decrease the calculated fair value as a percent of book value for the Myriad RBM reporting unit by 1%. Income taxes. Our income tax provision is based on income before taxes and is computed using the liability method in accordance with Accounting Standards Codification ("ASC") 740-Income Taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using tax rates projected to be in effect for the year in which the differences are expected to reverse. Significant estimates are required in determining our provision for income taxes. Some of these estimates are based on interpretations of existing tax laws or regulations, or the expected results from any future tax examinations. Various internal and external factors may have favorable or unfavorable effects on our future provision for income taxes. Those factors include, but are not limited to, changes in tax laws, regulations and/or rates, the results of any future tax examinations, changing interpretations of existing tax laws or regulations, changes in estimates of prior years' items, past levels of research and development spending, acquisitions, changes in our corporate structure, and changes in overall levels of income before taxes all of which may result in periodic revisions to our provision for income taxes.



Developing our provision for income taxes, including our effective tax rate and analysis of potential uncertain tax positions, if any, requires significant judgment and expertise in federal and state income tax laws, regulations and

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strategies, including the determination of deferred tax assets and liabilities and any estimated valuation allowance we deem necessary to offset deferred tax assets. If we do not maintain taxable income from operations in future periods, we may increase the valuation allowance for our deferred tax assets and record material adjustments to our income tax expense. Our judgment and tax strategies are subject to audit by various taxing authorities. While we believe we have provided adequately for our uncertain income tax positions in our consolidated financial statements, adverse determination by these taxing authorities could have a material adverse effect on our consolidated financial condition, results of operations or cash flows. Interest and penalties on income tax items are included as a component of overall income tax expense.



Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued ASU No. 2014-09, "Revenue from Contracts with Customers." Under the new standard, revenue is recognized at the time a good or service is transferred to a customer for the amount of consideration received for that specific good or service. It is effective for annual reporting periods beginning after December 15, 2016, including interim reporting periods, and early adoption is not permitted. Entities may use a full retrospective approach or report the cumulative effect as of the date of adoption. We are currently evaluating the impact, if any, the adoption of this standard will have on our Consolidated Financial Statements.



Results of Operations

Years ended June 30, 2014 and 2013

Revenue is comprised of sales of our molecular diagnostic tests and pharmaceutical and clinical services. Total revenue for the fiscal year ended June 30, 2014 was $778.2 million compared to $613.2 million for the prior fiscal year, an increase of 27%. This 27% increase in revenue is primarily due to increased molecular diagnostic testing volume for all of our tests including the recently launched myRisk Hereditary Cancer test and the recently acquired VectraDA test. Revenues during the year ended June 30, 2014 were negatively impacted by approximately $6 million due to a January 1, 2014Medicare pricing adjustment that was subsequently reversed in part on April 1, 2014. Sales of our BRACAnalysis test accounted for 66% of our total revenues in fiscal 2014 compared to 75% in the prior year. We believe that our increased sales, marketing, and education efforts resulted in wider acceptance of our molecular diagnostic tests by the medical community and increased patient testing volumes. However, there can be no assurance that our revenue will continue to increase or remain at current levels or that we will be successful in transitioning our existing product portfolio to our new tests, launching other new tests and performing additional pharmaceutical and clinical services, or expanding the sale of our tests outside the United States. Total revenue of our molecular diagnostic tests and pharmaceutical and clinical services and revenue by product as a percent of total revenue for the year ended June 30, 2014 and 2013 were as follows: June 30, % of Total Revenue (In thousands) 2014 2013 % Change 2014 2013 Molecular diagnostic revenues: BRACAnalysis $ 517,902$ 460,272 13 % 66 % 75 % BART 89,427 59,140 51 % 11 % 10 % COLARIS & COLARIS AP 59,109 51,938 14 % 8 % 8 % Myriad myRisk 53,680 - N/A 7 % N/A VectraDA 13,970 - N/A 2 % N/A Other 14,110 11,042 28 % 2 % 2 %



Total molecular diagnostic revenue 748,198 582,392

28 %

Pharmaceutical and clinical service revenue 30,018 30,773 -2 % 4 % 5 % Total revenue $ 778,216$ 613,165 27 % 100 % 100 % 47



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Our molecular diagnostic sales force is currently focused on three major market segments, oncology, women's health, and rheumatology. Oncology, women's health and rheumatology revenue was 52%, 46% and 2% of total molecular diagnostic testing revenue, respectively, during the year ended June 30, 2014; however, we acquired Crescendo on February 28, 2014, so we had only four months of sales during our fiscal year in the rheumatology market. Sales of molecular diagnostic tests in each major market for the year ended June 30, 2014 and 2013 were as follows: June 30, (In thousands) 2014 2013 % Change

Molecular diagnostic revenues: Oncology $ 392,461$ 370,257 6 % Women's Health 341,767 212,135 61 % Rheumatology 13,970 - N/A Total molecular diagnostic revenues $ 748,198$ 582,392 28 %



Certain prior period reclassifications to oncology and women's health revenue have been made to conform to current period presentation.

Cost of molecular diagnostic testing revenue for the year ended June 30, 2014 was $96.1 million, compared to $64.4 million for the same period ended June 30, 2013. This increase of 49% in molecular diagnostic testing cost of revenue is primarily due to the 28% increase in testing revenue, the additional costs associated with processing samples from our three newly launched tests and our newly acquired Vectra DA test that have yet to receive full reimbursement and are operating at levels that have not yet achieved economies of scale. Cost of pharmaceutical and clinical services for the year ended June 30, 2014 was $13.1 million, compared to $15.2 million for the same period ended June 30, 2013. This 14% decrease in pharmaceutical and clinical services testing cost of revenue is due to technology improvements resulting in increased efficiencies in our pharmaceutical and clinical services laboratory. Gross margins for molecular diagnostics for the year ended June 30, 2014 was 87% compared to 89% for the year ended June 30, 2013. Many of the costs associated with the performance of our pharmaceutical and clinical services are fixed; consequently, gross margins will vary as we experience fluctuations in our pharmaceutical and clinical services service revenue. 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 13 current molecular diagnostic tests and costs incurred for the discovery, development and validation of our pipeline of molecular diagnostic and companion diagnostic candidates. Research and development expenses are comprised primarily of salaries and related personnel costs, laboratory supplies, equipment and facility costs. Research and development expenses incurred during the fiscal year ended June 30, 2014 were $67.5 million compared to $53.7 million for the prior fiscal year. This increase of 26% was primarily due to the following:



• an increase of approximately $6.8 million in internal research and

development activities and clinical studies to support creating

alternative or modified processes related to, and expanding the use of,

our current molecular diagnostic products and to support future molecular

diagnostic testing products; • an increase of $6.2 million of research and development expenses as a



result of the Crescendo acquisition, which includes one-time non-cash

expenses of $3.8 million;



• an increase of $2.0 million due to external research and development

activities to develop proprietary technologies; • an increase of $1.6 million in share based compensation; and • a decrease of approximately $2.8 million in internal development



activities to support our pharmaceutical and clinical research services

business. 48



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Our selling, general and administrative expenses include costs associated with growing 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, legal, finance and accounting, information technology, human resources, and allocated facilities expenses. Selling, general and administrative expenses for the fiscal year ended June 30, 2014 were $327.1 million compared to $251.8 million for the prior fiscal year. The increase in selling, general and administrative expense of 30% was primarily to support the 27% increase in revenue and include:



• an increase in sales and marketing expense of approximately $27.8 million

to support new marketing initiatives, added sales force headcount and

increased sales commissions associated with the increase in revenue;

• an increase of $23.4 million in selling, general and administrative

expenses as a result of the Crescendo acquisition, which includes one-time

non-cash expenses of $8.4 million;



• an increase of approximately $6.7 million in general administrative

expenses to support revenue growth;



• an increase of approximately $6.1 million in international selling and

administrative costs to support our international business;



• an increase of approximately $6.0 million in legal fees associated with

legal proceedings to enforce our intellectual property; • an increase of approximately $5.9 million in bad debt expense due to

increased testing volumes;



• an increase of approximately $1.1 million in share based compensation; and

• a decrease of approximately $1.7 million in administrative fees associated

with the pharmaceutical and clinical services research services business.

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. Interest income for the fiscal year ended June 30, 2014 was $5.4 million, compared to $5.5 million for the prior fiscal year. Interest income consists primarily of interest income recorded from the note receivable from Crescendo that was extinguished in connection with the closing of the acquisition in February 2014. Income tax expense for the fiscal year ended June 30, 2014 was $101.6 million, for an effective rate of approximately 37%, compared to income tax expense of $86.1 million and an effective rate of approximately 37% in the 2013 period. Our tax rate is a product of a U.S. federal effective rate of 35% and a blended state income tax rate of 2%. 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 period to period. For the year ended June 30, 2014 we realized $11.1 million of excess tax benefits from share-based compensation as a reduction of taxes payable. Excess tax benefits from share-based compensation are credited directly to additional paid-in-capital and are not included in income tax expense. Accordingly, they do not impact our effective income tax rate. (See Note 8 in the fiscal 2014 Notes to Consolidated Financial Statements.) Net income for the fiscal year ended June 30, 2014 was $176.2 million compared to $147.1 million in the prior fiscal year, an increase of 20% over the prior fiscal year. This 20% increase was primarily due to an increase in revenues partially offset by cost of revenue expenses and selling, general and administrative expenses. Earnings per diluted share was $2.25 for the fiscal year ended June 30, 2014 as compared to $1.77 for the prior fiscal year, an increase of 28%. This increase was due to increased net income and a reduced number of weighted shares outstanding during the 2014 fiscal year due to our share repurchase program. 49



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Years ended June 30, 2013 and 2012

Revenue was comprised of sales of our molecular diagnostic tests and pharmaceutical and clinical services. Total revenue for the fiscal year ended June 30, 2013 was $613.2 million compared to $496.0 million for the prior fiscal year, an increase of 24%. This 24% increase in revenue was primarily due to increased molecular diagnostic testing volume for our BRACAnalysis, Colaris and Colaris AP, a significant increase in BART testing volume as a result of revised medical guidelines, and a significant increase in pharmaceutical and clinical services due to increased research collaborations, as disclosed in the table below. Sales of our BRACAnalysis test accounted for 75.1% of our total revenues in fiscal 2013 compared to 81.7% in the prior year. We believe that our increased sales, marketing, and education efforts resulted in wider acceptance of our molecular diagnostic tests by the medical community and increased patient testing volumes. Total revenue of our molecular diagnostic tests and pharmaceutical and clinical services and revenue by product as a percent of total revenue for the year ended June 30, 2013 and 2012 were as follows: June 30, % of Total Revenue (In thousands) 2013 2012 % Change 2013 2012 Molecular diagnostic revenues: BRACAnalysis $ 460,272$ 405,478 14 % 75 % 82 % COLARIS & COLARIS AP 51,938 43,277 20 % 8 % 8 % BART 59,140 13,587 335 % 10 % 3 % Other 11,042 10,048 10 % 2 % 2 % Total molecular diagnostic revenues 582,392 472,390 23 % Pharmaceutical and clincal service revenues 30,773 23,615 30 % 5 % 5 % Total revenues $ 613,165$ 496,005 24 % 100 % 100 % Our molecular diagnostic sales force during fiscal 2013 and 2012 was focused on two major markets, oncology and women's health. Sales of molecular diagnostic tests in each market for the fiscal years ended June 30, 2013 and 2012 were as follows: June 30, (In thousands) 2013 2012 % Change

Molecular diagnostic revenues: Oncology $ 370,257$ 320,106 16 % Women's Health 212,135 152,284 39 % Total molecular diagnostic revenues $ 582,392$ 472,390 23 % Cost of revenue was 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 fiscal year ended June 30, 2013 was $64.4 million compared to $51.5 million for the prior fiscal year. This increase of 25% in molecular diagnostic cost of revenue was primarily due to the increase in molecular diagnostic testing volumes. Cost of pharmaceutical and clinical services service revenue for the fiscal year ended June 30, 2013 was $15.2 million compared to $13.2 million for the prior fiscal year. Many of these costs associated with the performance of our pharmaceutical and clinical services are fixed; consequently, gross margins will vary as we experience fluctuations in our pharmaceutical and clinical services service revenue. 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 nine molecular diagnostic test offerings and costs incurred for the discovery, development and validation of our pipeline of molecular diagnostic and pharmaceutical and clinical services test candidates. Research and development expenses are comprised 50



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primarily of salaries and related personnel costs, laboratory supplies, molecular and pharmaceutical and clinical services development, equipment and facility costs. Research and development expenses incurred during the fiscal year ended June 30, 2013 were $53.7 million compared to $42.6 million for the prior fiscal year. This increase of 26% was primarily due to the following:



• an increase of approximately $5.0 million due to the internal development

of future molecular diagnostic product candidates;



• an increase of approximately $3.0 million in internal development to

support our pharmaceutical and clinical services business;



• an increase of approximately $1.9 million in internal development

activities and clinical studies to support creating alternative or

modified processes related to and expanding the use of our current

molecular diagnostic products and to support future molecular diagnostic

testing products; and • an increase of approximately $0.8 million in costs associated with the



in-license of new molecular diagnostic product candidates.

Our selling, general and administrative expenses included costs associated with growing our molecular diagnostic and pharmaceutical and clinical services businesses domestically and internationally. Selling, general and administrative expenses consisted 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 fiscal year ended June 30, 2013 were $251.8 million compared to $208.4 million for the prior fiscal year. The increase in selling, general and administrative expense of 21% was primarily to support the 24% increase in revenue and include:



• an increase in sales and marketing expense of approximately $29.3 million

due to various marketing programs and initiatives, added headcount and increased sales commissions;



• an increase of approximately $8.5 million in bad debt expense, a portion

of which was associated with the 24% increase in revenues; and



• an increase of approximately $5.2 million in costs from our international

operations.

Interest income for the fiscal year ended June 30, 2013 was $5.5 million, compared to $4.6 million for the prior fiscal year. Interest income consisted primarily of interest income recorded from our note receivable from Crescendo.

Income tax expense for the fiscal year ended June 30, 2013 was $86.1 million, for an effective rate of approximately 37%, compared to income tax expense of $72.4 million and an effective rate of approximately 39% in the 2012 period. Our tax rate is a product of a U.S. federal effective rate of 35% and a blended state income tax rate of 2%. 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 period to period. For the year ended June 30, 2013 we realized $7.9 million of excess tax benefits from stock-based compensation as a reduction of taxes payable. Excess tax benefits from stock-based compensation were credited directly to additional paid-in-capital and were not included in income tax expense. Accordingly, they did not impact our effective income tax rate. Due to the realization of these excess tax benefits that offset our taxes payable, our current income tax expense in fiscal 2013 was higher than our actual cash paid. (See Note 8 in the fiscal 2013 Notes to Consolidated Financial Statements.) Net income for the fiscal year ended June 30, 2013 was $147.1 million compared to $112.2 million in the prior fiscal year. This 31% increase was primarily due to an increase in revenues partially offset by higher research and development expenses and selling, general and administrative expenses. Earnings per diluted share were $1.77 for the fiscal year ended June 30, 2013 compared to $1.30 for the prior fiscal year, an increase of 36%. This increase was due to increased net income and a reduced number of weighted shares outstanding during the 2013 fiscal year due to our share repurchase program. 51



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Liquidity and Capital Resources

Cash, cash equivalents, and marketable investment securities decreased $260.5 million, or 49%, from $531.1 million at June 30, 2013 to $270.6 million at June 30, 2014. This decrease was attributable to the repurchase of $287.7 million of our common stock under our share repurchase programs, the use of $223.5 million for the acquisition of Crescendo, payments of $108.2 million in estimated income tax obligations, and operating expenditures during fiscal 2014; partially offset by increased sales of $165.1 million and $64.8 million in proceeds from issuance of common stock under share-based compensation plans. Net cash provided by operating activities was $190.2 million, $173.9 million and $141.8 million during the fiscal years ended June 30, 2014, 2013 and 2012, respectively. During the year ended June 30, 2014, our net income was reduced by non-cash charges in the form of share-based compensation and depreciation and amortization, which totaled $27.1 million and $13.8 million, respectively. Net cash provided by operating activities for year ended June 30, 2014 was also impacted by changes in bad debt expense, trade accounts receivable, prepaid taxes, accounts payable, inventory, and accrued liabilities. Our investing activities used cash of $17.7 million, $75.6 million and $38.9 million during the fiscal years ended June 30, 2014, 2013 and 2012, respectively. Cash used in investing activities for the fiscal year ended June 30, 2014 was primarily comprised of the use of $223.5 million for the acquisition of Crescendo and $161.8 million for the purchase of marketable investment securities offset by $381.9 million in proceeds from maturities and sales of marketable investment securities. Capital expenditures for equipment and facilities for the year ended June 30, 2014 were $14.3 million. Cash used in investing activities from the prior fiscal years ended June 30, 2013 and 2012 was primarily due to the purchase of marketable investment securities and issuance of a $25 million note payable to Crescendo offset by proceeds from maturities and sales of marketable investment securities as well as capital expenditures for research and laboratory equipment. Financing activities used cash of $211.8 million, $80.6 million, and $69.2 million during the fiscal years ended June 30, 2014, 2013 and 2012. Cash utilized from financing activities in these years was primarily due to the purchase of $287.7 million, $146.3 million and $128.5 million respectively, of our common stock through our share repurchase program. The cash used in the share purchase was partially offset by cash provided by the exercise of stock options and sales of our shares under our share-based compensation plans. We believe that with our existing capital resources and expected net cash to be generated from sales of our molecular diagnostic tests and pharmaceutical and clinical services, we will have adequate funds to maintain our current and planned operations for the foreseeable future, 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 financing. 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:



• failure to sustain revenue growth or margins in our molecular diagnostic

testing and pharmaceutical and clinical services businesses; • termination of the licenses underlying our molecular diagnostic tests and



pharmaceutical and clinical services or failure to enter into product or

technology licensing or other arrangements favorable to us; • delays or other problems with operating our laboratory facilities;



• the costs and expenses incurred in supporting our existing molecular

diagnostic tests and pharmaceutical and clinical services; • the progress, results and cost of transitioning from our current product



portfolio to our new molecular diagnostic tests, as well as developing and

launching additional molecular diagnostic tests and offering additional

pharmaceutical and clinical services;



• potential business development activities, in-licensing agreements and

acquisitions, such as our acquisition of Crescendo; 52



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• our ability to successfully integrate and achieve the expected benefits of

our business development activities, in-licensing agreements and acquisitions; • changes in the government regulatory approval process for our tests;



• the progress, costs and results of our international expansion efforts;

• the timing and amount of repurchases of our common stock; • the costs, timing, outcome, and enforcement of any regulatory review of



our existing or future molecular diagnostic tests and pharmaceutical and

clinical services;



• the costs of preparing, filing and prosecuting patent applications,

maintaining and enforcing our issued patents and pursuing or defending

intellectual property-related claims; • the costs, timing and outcome of any litigation against us or that we pursue; • the introduction of technological innovations or new commercial tests by

our competitors;



• changes in intellectual property laws covering our molecular diagnostic

tests and pharmaceutical and clinical services and patents or enforcement

in the United States and foreign countries;



• changes in the governmental or private insurers reimbursement levels for

our tests; and



• changes in structure of the healthcare system or healthcare payment systems.

Off-Balance Sheet Arrangements

None.

Contractual Obligations

The following table represents our consolidated contractual obligations as of June 30, 2014 (in thousands):

Less than More than Total one year 1-3 Years 4-5 Years 5 years Operating leases $ 72,253$ 11,235$ 22,328$ 12,499$ 26,191 Purchase obligations 48,410 15,006 33,404 - - Total $ 120,663$ 26,241$ 55,732$ 12,499$ 26,191 As of June 30, 2014, Crescendo has approximately three years remaining under an unconditional purchase obligation with a vendor to purchase goods and services used in the Company's diagnostic processes. The agreement specifies certain minimum quantities and pricing terms. The expected timing of payment for the obligations listed above is estimated based on current information. Actual payment timing and amounts may differ depending on the timing of goods or services received or other changes. The table above only includes payment obligations that are fixed or determinable. The table excludes royalties to third parties based on future sales of any of our product candidates that are approved for sale, as the amounts, timing, and likelihood of any such payments are based on the level of future sales of tests and are unknown. Effects of Inflation



We do not believe that inflation has had a material impact on our business, revenues, or operating results during the periods presented.

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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 Annual Report on Form 10-K contains such "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "may," "anticipate," "estimate," "expects," "projects," "intends," "plans," "believes" and words and terms of similar substance used in connection with any discussion of future operating or financial performance, identify forward-looking statements. All forward-looking statements are management's present expectations of future events and are subject to a number of risks and uncertainties that could cause actual results to differ materially and adversely from those described in the forward-looking statements. These risks include, but are not limited to: the risk that sales and profit margins of our existing molecular diagnostic tests and pharmaceutical and clinical services may decline or will not continue to increase at historical rates; risks related to our ability to transition from our existing product portfolio to our new tests; risks related to changes in the governmental or private insurers reimbursement levels for our tests or our ability to obtain reimbursement for our new tests at comparable levels to our existing tests; risks related to increased competition and the development of new competing tests and services; the risk that we may be unable to develop or achieve commercial success for additional molecular diagnostic tests and pharmaceutical and clinical services in a timely manner, or at all; the risk that we may not successfully develop new markets for our molecular diagnostic tests and pharmaceutical and clinical services, including our ability to successfully generate revenue outside the United States; the risk that licenses to the technology underlying our molecular diagnostic tests and pharmaceutical and clinical services tests and any future tests are terminated or cannot be maintained on satisfactory terms; risks related to delays or other problems with operating our laboratory testing facilities; risks related to public concern over our genetic testing in general or our tests in particular; risks related to regulatory requirements or enforcement in the United States and foreign countries and changes in the structure of the healthcare system or healthcare payment systems; risks related to our ability to obtain new corporate collaborations or licenses and acquire new technologies or businesses on satisfactory terms, if at all; risks related to our ability to successfully integrate and derive benefits from any technologies or businesses that we license or acquire; risks related to our projections about the potential market opportunity for our products; the risk that we or our licensors may be unable to protect or that third parties will infringe the proprietary technologies underlying our tests; the risk of patent-infringement claims or challenges to the validity of our patents; risks related to changes in intellectual property laws covering our molecular diagnostic tests and pharmaceutical and clinical services and patents or enforcement in the United States and foreign countries, such as the Supreme Court decision in the lawsuit brought against us by the Association for Molecular Pathology et al; risks of new, changing and competitive technologies and regulations in the United States and internationally; and other factors discussed under the heading "Risk Factors" contained in Item 1A of this Annual Report. In light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained in this Annual Report or in any document incorporated by reference might not occur. Stockholders are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Annual Report. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent forward-looking statements attributable to us or to any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.



Market, Industry and Other Data

This Annual Report on Form 10-K contains estimates, projections and other information concerning our industry, our business and relevant molecular diagnostics markets, including data regarding the estimated size of relevant molecular diagnostic markets, patient populations, and the perceptions and preferences of patients and physicians regarding certain therapies, as well as data regarding market research and estimates. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties 54



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and actual events or circumstances may differ materially from events and circumstances that are assumed in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources that we believe to be reliable. In some cases, we do not expressly refer to the sources from which this data is derived. In that regard, when we refer to one or more sources of this type of data in any paragraph, you should assume that other data of this type appearing in the same paragraph is derived from the same sources, unless otherwise expressly stated or the context otherwise requires.


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