MYRIAD GENETICS INC (MYGN) FY 2024 MD&A

Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the audited Consolidated Financial Statements and accompanying notes thereto included elsewhere in this Annual Report on Form 10-K. This Management’s Discussion and Analysis of Financial Condition and Results of Operations provides an overview of our business and 2024 financial highlights and describes principal factors affecting the results of our operations, financial condition and liquidity, as well as our critical accounting estimates that require significant judgment and thus have the most significant potential impact on our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

The discussion and analysis below includes year-to-year comparisons between the year ended December 31, 2024 and the year ended December 31, 2023. Discussions of comparisons between the year ended December 31, 2023 and the year ended December 31, 2022 that are not included in this Annual Report on Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission on February 28, 2024.

Unless otherwise noted, all of the financial information in this Annual Report on Form 10-K is consolidated financial information of the Company.

Overview

We are a leading molecular diagnostic testing and precision medicine company dedicated to advancing health and well-being for all. We develop and offer molecular tests that help assess the risk of developing disease or disease progression and guide treatment decisions across medical specialties where molecular insights can significantly improve patient care and lower health care costs. Our molecular tests provide insights that help people take control of their health and enable healthcare providers to better detect, treat, and prevent disease.

Personalize molecular data and digital and virtual consumer trends are converging to transform traditional models of care. We believe that engaging with providers and patients throughout their consumer or patient journey will better enable us to execute our strategies and fulfill our mission. We believe there are significant growth opportunities in addressing the pressing healthcare needs of patient populations through innovative molecular diagnostic testing and precision medicine solutions and services. Our focus is on innovation and growth in three key areas where we have specialized products, capabilities, and expertise: Oncology, Women's Health, and Pharmacogenomics.

Our long-term growth strategy is built on investments in science and innovation, technology-enabled operations, an enhanced customer experience, strong commercial execution, and scalable operations. To drive continued growth, we plan to accelerate electronic medical records (EMR) integrations, expand our sales channels, including into large health systems, cross sell our portfolio of testing products to providers, enhance our testing products within medical guidelines, demonstrate our clinical differentiation and value compared to the standard of care, and optimize our revenue cycle processes. For example, in June 2024, we launched the Universal Plus Panel to our Foresight Carrier Screen Test, which is an expanded carrier screening test. We also continue to invest in clinical evidence development to support the growth of our existing products and launch of new products, such as FirstGene, Precise Liquid, and Precise molecular residual disease (MRD) which we expect will help us continue to grow. We intend to continue to develop and enhance our products and services to support growth, improve patient and provider experience, and reach more patients of all backgrounds. In addition, by investing in technology-enabled commercial tools, new laboratory facilities, advanced automation, and standardized processes and technology, we believe we will be able to reduce complexity and cost, while enhancing our ability to scale and grow. For example, in early 2025, we plan to complete the transition of all of our laboratory activities to our next generation laboratory facilities, which we believe will improve the efficiency of our operations. We are committed to making molecular testing accessible and actionable for patients and providers while driving long-term growth and profitability.

Our consolidated revenues consist primarily of sales of genetic tests through our wholly-owned subsidiaries. During the year ended December 31, 2024, we reported total revenue of $837.6 million, a net loss of $127.3 million, and basic and diluted loss per share of $1.41.

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During the fourth quarter of 2024, UnitedHealthcare updated its medical policy for pharmacogenetic testing to no longer provide coverage for certain multi-gene panel pharmacogenetic tests, including our GeneSight test, under its commercial and individual exchange benefit plans and certain managed Medicaid plans. The change took effect for commercial and individual exchange benefit plans on January 1, 2025, and is expected to take effect for impacted managed Medicaid plans during the first half of 2025. We anticipate that the change in UnitedHealthcare coverage will negatively impact our revenue, profitability, and cash flow in 2025 and thereafter. While we intend to continue our engagement with UnitedHealthcare regarding its decision to change its GeneSight coverage policy, there is no guarantee that our efforts will be successful or that our GeneSight test will be covered by UnitedHealthcare or other payers in the future. For additional information regarding the impact of UnitedHealthcare's change on goodwill in our Pharmacogenomics reporting unit and our business, please refer to Critical Accounting Estimates below and the risk factors "If the government and other third-party payors fail to provide coverage and adequate payment for our existing and future tests, if any, our revenue and prospects for profitability will be harmed" and "Impairment in the value of our goodwill or other intangible assets could have a material adverse effect on our operating results and financial condition" included in Part I, Item 1A, of this Annual Report on Form 10-K.

Business Updates and Financial Highlights

During the year ended December 31, 2024, our significant business updates and financial highlights include the following:

•Revenue growth of 11% year-over-year, driven by 23% growth in Pharmacogenomics, 17% growth in Prenatal and 11% growth in Hereditary Cancer.

•Ranked among Best Large Workplaces in Health Care by Fortune and achieved a Great Place to Work® Certification for 2024.

•In February 2024, we acquired select assets from Intermountain Healthcare's Intermountain Precision Genomics (IPG) laboratory business, including the Precise Tumor test and the Precise Liquid test. IPG's laboratory operations were successfully integrated into our west Salt Lake City facility during the fourth quarter of 2024.

•In May 2024, we announced the reorganization of our International operations, which included the sale of our EndoPredict business. We have licensed the rights to continue to produce and sell EndoPredict as a laboratory developed test in the United States.

•Announced a series of ongoing research collaborations to study the use of MRD testing in breast cancer using our Precise MRD test. These research collaborations involve researchers at The University of Texas MD Anderson Cancer Center, the University of Rochester Medical Center, the National Cancer Center Hospital East in Japan, and a study partnership with Aptitude Health.

•Announced the USPTO issued multiple new patents that further advance our ability to bring our tumor-informed, high-definition, MRD assay, Precise MRD, to market.

•Announced a collaboration with Flatiron Health, a leading health technology company dedicated to point of care solutions in oncology. This collaboration allows physicians to order our MyRisk Hereditary Cancer Test and view the results of the test directly in Flatiron’s cloud-based EMR platform, OncoEMR.

•Announced an agreement with Lumea Inc. to integrate our Prolaris and MyRisk tests into Lumea's digital pathology platform in order to streamline the ordering and delivery of the tests.

•Announced the appointment of Mark S. Davis to our Board of Directors, effective in December 2024, expanding the Board of Directors from eight to nine members. Mr. Davis was also appointed to the Audit and Finance Committee.

On February 24, 2025, Paul J. Diaz, our President and Chief Executive Officer, announced that he will step down from those positions, and resign from our Board of Directors effective April 30, 2025, after which Mr. Diaz will continue to serve as a consultant for another year. Having engaged in a robust succession planning process, our Board of Directors appointed Samraat S. Raha, our current Chief Operating Officer, to succeed Mr. Diaz as our President and Chief Executive Officer and a member of our Board of Directors effective April 30, 2025. On February 24, 2025, our Board of Directors also appointed Mark S. Verratti, our current Chief Commercial Officer, as our Chief Operating Officer as of April 30, 2025 to succeed Mr. Raha in this position.

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Seasonality

We have historically experienced seasonality in our testing business. The quarters ending March 31 and September 30 are typically weaker due to the annual reset of patient deductibles in the beginning of each calendar year and vacation schedules in the summer. The quarter ending December 31 is typically stronger due to increased demand as patients meet their deductibles throughout the year; however, due to various factors, including disruptions in workflows arising from EMR integrations, volumes were less than expected for the quarter ended December 31, 2024. Seasonal patterns were disrupted in previous years as a result of the COVID pandemic and certain other factors, but we believe pre-COVID seasonality impacted 2024, particularly in the third quarter. Additionally, operating results for the twelve months ended December 31, 2024 may not necessarily be indicative of results to be expected for any year.

Components of Consolidated Operations

Revenue. Our tests are designed to analyze genes and their expression levels to assess an individual’s risk for developing disease, determine a patient’s likelihood of responding to a particular drug, assess a patient’s risk of disease progression, identify factors which could lead to serious conditions in pregnancy, or provide other prenatal insights. Revenue is recognized when the test results have been released to the healthcare provider and/or patient.

Expenses. Personnel-related costs for each category of costs and expenses include salaries, bonuses, employee benefit costs, employer payroll taxes, and stock-based compensation.

Cost of Revenue. Cost of revenue consists primarily of costs related to laboratory supplies, personnel-related costs, and overhead costs.

General and Administrative Expense. General and administrative expenses include executive management, billing and collections, finance and accounting, information technology, legal, and human resources. These expenses include personnel-related costs and third-party costs for items such as audit fees, legal expenses, consulting costs, and information technology services.

Sales and Marketing Expense. Sales and marketing expenses include costs associated with growing our business and providing customer service. The expenses consist primarily of personnel-related costs and third-party costs for items such as advertising, and trade shows.

Research and Development Expense. Research and development expenses consist primarily of personnel-related costs and laboratory supplies, which includes costs incurred in formulating, improving, validating and creating alternative or modified processes related to and expanding the use of our current test offerings and costs incurred in the discovery, development, and validation of our pipeline of test candidates.

Legal Settlements. Legal settlements related to litigation, including the reversal of a previously expected contingent settlement payment. For more information, see Note 12–Commitments and Contingencies in the Notes to Consolidated Financial Statements, included in Part II, Item 8 of this Annual Report on Form 10-K.

Goodwill and Long-Lived Asset Impairment Charges. Goodwill and long-lived asset impairment charges include the impairment loss recognized on our goodwill or long-lived assets, including impairments recognized on intangible assets and right-of-use (ROU) lease assets.

Other Income (Expense). Other income (expense) includes interest income earned on our cash, cash equivalents, and restricted cash held in short-term interest-bearing accounts; interest expense associated with our debt and amortization of deferred financing costs and original issue discount costs; gains or losses on the sale of assets or businesses; and foreign currency gains and losses, realized gain or loss on marketable securities, and other nonrecurring income and expenses.

Income Tax Expense (Benefit). Income tax expense (benefit) consists of current and deferred components, which include changes in our deferred tax assets, our deferred tax liabilities, and our valuation allowance.

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Results of Operations

Year Ended December 31, 2024 Compared to the Year Ended December 31, 2023

Revenue

The following table summarizes year-over-year revenue changes in our core product categories:

The following table summarizes testing volume changes in our core product categories:

Revenue for the year ended December 31, 2024 increased $84.4 million compared to the prior year due to an increase in the average revenue per test primarily due to changes in contracted price and operational improvements as well as an increase in testing volume across the majority of our products. Additionally, for the year ended December 31, 2024, we recorded $18.5 million of revenue as a change of estimate related to tests delivered in prior periods as compared to the year ended December 31, 2023, in which we recorded $7.2 million in revenue as a change of estimate related to tests delivered in prior periods. Additionally, for the year ended December 31, 2024, we recognized $3.0 million in revenue due to a retroactive coverage change by a payor for one of our prenatal products.

Hereditary Cancer revenues increased $36.7 million due to a 6% increase in the average revenue per test and a 5% increase in testing volume. Pharmacogenomics revenue increased $31.7 million compared to the prior year due primarily to an 11% increase in the average revenue per test, partially due to change in estimated revenue per test related to prior periods, and to a 10% increase in testing volume. We expect that Pharmacogenomics revenues in 2025 and thereafter will be negatively impacted by UnitedHealthcare's recent change in GeneSight test coverage under its commercial and individual exchange plans and certain managed Medicaid benefit plans. Prenatal revenues increased $25.8 million due primarily to a 10% increase in the average revenue per test and a 7% increase in testing volume. Tumor Profiling revenues decreased $9.8 million, primarily driven by declines in volume from MyChoice CDx studies in the current year compared to the prior year period.

Cost of Sales

Cost of revenue for the year ended December 31, 2024 increased $16.0 million compared to the prior year due primarily to an increase in testing volumes in Pharmacogenomics, Prenatal and Hereditary Cancer.

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Research and Development Expense

Research and development expense for the year ended December 31, 2024 increased by $24.7 million compared to the prior year primarily due to additional investments in new products and features including expanded screening for our existing Prenatal products and advancement in the development of our MRD test. We incurred approximately $11.2 million of additional compensation costs in 2024 than compared to the prior year due to an increase in the average compensation expense per employee and an $8.5 million increase in laboratory expenses.

Sales and Marketing Expense

Sales and marketing expense decreased $5.1 million for the year ended December 31, 2024 compared to the prior year primarily due to a decrease in compensation expense from a revised commission structure and a decrease in expense from sales events.

General and Administrative Expense

General and administrative expense decreased by $7.8 million for the year ended December 31, 2024 compared to the prior year primarily due to a $14.8 million decrease in expenses associated with our real estate optimization strategy, including a decrease in depreciation expense, facility costs, and expense associated with a lease termination in the prior year. These decreases were partially offset by a $5.3 million increase in compensation expense.

Legal Settlements

Legal settlements decreased by $134.1 million for the year ended December 31, 2024 compared to the prior year. In the prior year, we incurred $112.8 million for legal settlements, including $77.5 million related to the securities class action settlement and $34.0 million in connection with the Ravgen settlement. As part of the Ravgen settlement, we agreed to pay Ravgen $21.3 million if it successfully concluded in its favor all of Ravgen's litigations and patent reexaminations pending at the time of the settlement agreement. As of the effective date of the settlement in 2023, we determined that the contingent payment was probable and estimable. In the year ended December 31, 2024, based on updated information, we determined that the payment is no longer probable and reversed the expense related to the contingent payment.

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Goodwill and Long-lived Asset Impairment Charges

Goodwill and long-lived asset impairment charges for the year ended December 31, 2024 included $43.0 million of expense for the impairment of the developed technology intangible asset for our GeneSight test and $12.4 million of losses in connection with the sale of our EndoPredict business. There were no corresponding impairment charges in the prior year.

Other Income (Expense)

Other expense, net decreased $4.8 million for the year ended December 31, 2024 compared to the prior year primarily due to a $2.2 million gain recognized on the February 2024 acquisition of Precise assets and laboratory from Intermountain Health and a $1.5 million loss on the sale of investment securities recognized in the prior year.

Income Tax Expense

Our tax rate is the product of a U.S. federal statutory rate of 21.0% and a blended state statutory tax rate of approximately 3.3%. 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.

Income tax expense for the year ended December 31, 2024 was $3.8 million and our effective tax rate was (3.1)%. Income tax expense for the year ended December 31, 2023 was $1.1 million and our effective tax rate was (0.4)%. For the year ended December 31, 2024 and 2023, our recognized effective tax rate differs from the U.S. federal statutory rate primarily due to the recognition of valuation allowances.

Liquidity and Capital Resources

Our primary sources of liquidity are our cash and cash equivalents, our expected cash flows from operations, and, in certain circumstances as discussed below, amounts available for borrowing under our ABL Facility. As of December 31, 2024, we had cash and cash equivalents of $102.4 million and our availability under the ABL Facility was $56.0 million. Our capital deployment strategy focuses on use of resources in the key areas of research and development, technology, and acquisitions. We believe that investing organically through research and development and new product development or acquisitively to support our business strategy provides the best return on invested capital.

Our ABL Facility has a total maximum principal commitment of $115.0 million. The ABL Facility requires that we and our subsidiaries guaranteeing the indebtedness, on a consolidated basis, maintain a fixed charge coverage ratio of at least 1.0 to 1.0 if availability under the ABL Facility is less than the greater of (a) $10.6 million and (b) 12.5% of the lesser of the maximum commitment amount and the borrowing base. As of December 31, 2024, we had $40.5 million outstanding under the ABL Facility.

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We believe that our existing capital resources will be sufficient to meet our projected operating requirements for at least the next 12 months. Our available capital resources, however, may be consumed more rapidly than currently expected, or may be insufficient for our business needs for many reasons, including as a result of our operational cash needs, capital expenditures, and litigation related costs not covered by, or above the limits set forth in, our insurance. In addition, we are subject to covenants under our ABL Facility which could limit our ability to incur additional indebtedness or impact our ability to pursue other financing. If we do not generate sufficient cash from operations, if our capital resources are consumed more rapidly than expected, or if we no longer have access to additional funds under our ABL Facility and we are unable to secure additional funds on acceptable terms, or at all, we may be forced to delay, scale back or eliminate some of our sales and marketing efforts, research and development activities, or other operations; or delay development of our tests in an effort to provide sufficient funds to continue our operations. If any of these events occurs, our ability to achieve our development and commercialization goals could be adversely affected.

From time to time, we enter into purchase commitments or other agreements that may materially impact our liquidity position in future periods. In April 2024, we entered into an amendment of our lease in west Salt Lake City, Utah to include approximately 63,000 additional square feet. The amendment has a term of 12 years and is expected to commence in fiscal year 2026 with future rent payments totaling approximately $18.2 million. Future rent payments remaining under the lease and the amendment total $94.3 million payable over the next 14 years.

In December 2024, we entered into an agreement to purchase information technology between January 2025 through December 2027, with minimum total commitment of $10.5 million over that time period.

Third-party payors, including state and federal health care programs such as Medicare, managed care organizations, and other private health insurers, are increasingly attempting to contain health care costs by limiting or denying coverage for certain tests and reducing reimbursement rates for both new and existing tests. We have experienced and may continue to experience coverage limitations or denials for many of our products. For example, UnitedHealthcare updated its medical policies for pharmacogenetic testing to no longer provide coverage for certain multi-gene panel pharmacogenetic tests, including our GeneSight test, under its commercial and individual exchange benefit plans and certain managed Medicaid benefit plans, effective during the first half of 2025. For the year ended December 31, 2024, we recognized approximately $45.0 million of revenue for GeneSight testing from UnitedHealthcare, consisting of approximately $40.0 million for UnitedHealthcare commercial and approximately $5.0 million for impacted UnitedHealthcare managed Medicaid plans. We anticipate that the change in UnitedHealthcare coverage will negatively impact our revenue, profitability, and cash flow in 2025 and thereafter.

The following table represents the balances of cash, cash equivalents and marketable investment securities as of the dates set forth in the table below:

The decrease in cash, cash equivalents and marketable investment securities as of December 31, 2024 as compared to December 31, 2023 was primarily driven by $8.7 million in cash used by operations, $19.0 million in cash used for capital expenditures, $10.7 million in cash used for the capitalization of internal-use software, and $7.5 million in cash used for the payment of withholding tax for the issuance of common stock, net of proceeds from the issuance of common stock. The decrease in cash was partially offset by $8.8 million in cash received from the sale of our EndoPredict business. The following table represents the Consolidated Cash Flow Statement for the periods presented:

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Cash Flows from Operating Activities

We used $102.2 million less of cash for operating activities for the twelve months ended December 31, 2024 compared to the prior year. Cash used for operating activities for the year ended December 31, 2023 included $82.8 million of payments for legal settlements. In addition, our core operations have improved in the current year driven by an 11% increase in revenue and a 7% decrease in expenses as a percentage of revenue, excluding non-cash expenses for goodwill and long-lived asset impairment charges and accrued legal settlements. In the year ended December 31, 2023, we received $16.3 million in tenant improvement allowance reimbursements that did not reoccur for the year ended December 31, 2024.

Cash Flows from Investing Activities

The increase in cash flows used in investing activities for the twelve months ended December 31, 2024 compared to the cash flows provided by investing activities in the same period in the prior year was primarily due to the $96.2 million decrease in cash flows from maturities and sales of marketable investment securities compared to the prior year, partially offset by a $44.2 million decrease in capital expenditures in the current period in connection with the completion of the build-out of new facilities in the prior year and the $8.8 million received from the sale of our EndoPredict business in 2024.

Cash Flows from Financing Activities

The increase in cash flows used in financing activities for the twelve months ended December 31, 2024 compared to cash flows provided by financing activities in the same period in the prior year was primarily due to proceeds of $117.6 million from the underwritten public offering and the initial borrowing on our line of credit of $40 million that occurred in the twelve months ended December 31, 2023, which did not reoccur during the twelve months ended December 31, 2024.

Effects of Inflation

While inflation returned to more moderate levels in 2024, inflation has had, and may continue to have, an impact on the labor costs we incur to attract and retain qualified personnel, costs to generate sales and produce testing results, and costs of laboratory supplies. Inflationary costs have previously impacted our profitability and may continue to adversely affect our business, financial condition and results of operations. In addition, increased inflation has had, and may continue to have, an effect on interest rates. An increase in interest rates in the future may adversely affect our borrowing rate and our ability to obtain, or the terms under which we can obtain, additional funding.

Critical Accounting Estimates

Critical accounting estimates 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 estimates are as follows:

•revenue recognition;

•intangible assets;

•goodwill; and

•income taxes.

Revenue Recognition.  Revenue is recognized when, or as, performance obligations under the terms of a contract are satisfied, which occurs when control of the promised products or services is transferred to a customer. We exclude sales, use, value-added, and other taxes we collect on behalf of third parties from revenue. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or services to a customer.

We generate revenue primarily by performing genetic testing. Control is transferred, and revenue is recognized, once test results are released to the healthcare provider and/or patient. Revenue from the sale of tests is recorded at the estimated transaction price. We have the right to bill our customers upon the completion of performance obligations and thus do not record contract assets.

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Significant judgments are required in determining the transaction price in connection with satisfying performance obligations under the revenue standard. In determining the transaction price, we include an estimate of the expected amount of consideration to be received. We apply this method consistently for similar contracts when estimating the effect of any uncertainty on an amount of variable consideration to which it will be entitled. An estimate of transaction price does not include any estimated amount of variable consideration that is constrained. In addition, we consider all the information (historical, current, and forecast) that is reasonably available to identify possible consideration amounts. In determining the expected value, we consider the probability of the variable consideration for each possible scenario. We have significant experience with historical discount patterns and we use this experience to estimate transaction prices.

The estimate of revenue is affected by, among other factors, assumptions for changes in payor mix, payor collections, current customer contractual requirements, experience with collections from third-party payors, and changes in medical policies. When assessing the total consideration for insurance carriers and patients, revenue is further constrained for estimated refunds. We reserve certain amounts in accrued liabilities in the Consolidated Balance Sheets in anticipation of requests for refunds of payments made previously by insurance carriers, which are accounted for as reductions in revenue in the Consolidated Statements of Operations and Comprehensive Loss.

Cash collections for certain tests delivered may differ from rates estimated due to changes in the estimated transaction price for contractual adjustments, obtaining updated information from payors and patients that was unknown at the time the performance obligation was met, settlements with third-party payors, or as a result of third-party payors disputing our bills or denying payment for tests that we have performed, among other reasons. As a result of this new information, we update our estimate of the amounts to be recognized for previously delivered tests. For example, during the year ended December 31, 2024, we recognized $18.5 million in revenue, or 2% of revenue, in which the performance obligation of delivering the test results was met in prior periods.

Intangible Assets. We review our intangible assets for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Intangible assets are initially recorded at their acquisition date fair value and are subsequently amortized over their useful lives.

During the fourth quarter of 2024, UnitedHealthcare announced that it would no longer provide coverage for certain multi-gene panel pharmacogenetic tests, including our GeneSight test, under its commercial, individual exchange, and certain managed Medicaid plans, effective during the first half of 2025, which caused us to perform a recoverability test for the Pharmacogenomics asset group during the fourth quarter of 2024. We performed the recoverability test by comparing the carrying value of the asset group to its estimated undiscounted future cash flows. The analysis indicated that the carrying value exceeded the recoverable amount, requiring us to determine the fair value of the asset group. The fair value of the developed technology was determined using a discounted cash flow model. The approach considered projected revenue, including the impact of the change in coverage by UnitedHealthcare, profitability associated with the developed technology, discount rates reflective of the risk-adjusted cost of capital of 10.0% and the expected remaining useful life of the developed technology. As the carrying value for the developed technology asset exceeded the relative fair value, we recognized an impairment charge of $43.0 million during the year ended December 31, 2024, related to the developed technology intangible asset, which is included in "Goodwill and long-lived asset impairment charges" in the Consolidated Statements of Operations. The impairment reduced the carrying value of the developed technology to its estimated fair value of $89.0 million as of the impairment date.

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Goodwill.  We test goodwill for impairment by reporting unit on an annual basis and in the interim 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 before calculating the fair value of the reporting unit. If the qualitative assessment suggests that impairment is more likely than not, a quantitative impairment analysis is performed. The quantitative analysis 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, residual growth 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, and other relevant entity-specific events. Goodwill impairment testing requires us to make a number of assumptions and estimates concerning future levels of revenue growth, operating margins, and other financial assumptions, which are based upon our long-term plan. The discount rate is an estimate of the overall after-tax rate of return required by a market participant whose weighted average cost of capital includes both debt and equity, including a risk premium. While we use the best available information to prepare our cash flows and discount rate assumptions, actual future cash flows and/or market conditions could differ significantly resulting in future impairment charges related to recorded goodwill balances. While there are always changes in assumptions to reflect changing business and market conditions, our overall methodology used has remained unchanged. 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, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. 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.

As of December 31, 2024, we have recorded goodwill of $286.3 million on our Consolidated Balance Sheets. This goodwill is attributable to the Pharmacogenomics, International, and Women's Health reporting units. As noted above, UnitedHealthcare announced that it would no longer provide coverage for certain multi-gene panel pharmacogenetic tests, including our GeneSight test. As a result, the Company performed a quantitative impairment review of goodwill for the Pharmacogenomics reporting unit during the fourth quarter of 2024. The Company also elected to perform a quantitative impairment review of goodwill for its Women's Health and International reporting units.

We measured the fair value of the Pharmacogenomics reporting unit utilizing the market approach and the discounted cash flow method under the income approach. The income approach considered projected revenue, taking into account the impact of the change in GeneSight coverage by UnitedHealthcare, and the projected profitability of the reporting unit and a discount rate reflective of the risk-adjusted cost of capital of 10.0%. The resulting fair value of the Pharmacogenomics reporting unit exceeded its carrying value by 43.6%.

We measured the fair value of the International reporting unit utilizing the market approach and the discounted cash flow method under the income approach. The income approach considered management’s business plans and projections as the basis for expected cash flows and a discount rate reflective of the risk-adjusted cost of capital of 10.5%. The resulting fair value of the International reporting unit exceeded its carrying value by 234.0%.

We measured the fair value of the Women's Health reporting unit utilizing the market approach and the discounted cash flow method under the income approach. The income approach considered projected revenue and profitability associated with reporting unit and a discount rate reflective of the risk-adjusted cost of capital of 10.5%. The resulting fair value of the Women's Health reporting unit exceeded its carrying value by 82.0%.

Additionally, we corroborated the reasonableness of the estimated reporting unit fair values by reconciling them to our enterprise value and market capitalization.

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 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.

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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 strategies, including the determination of deferred tax assets and liabilities and any estimated valuation allowance we deem necessary to offset deferred tax assets. 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, an 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

See Note 1–Organization and Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for a description of recent accounting pronouncements.