Salt Lake City Aug 12, 2015 (Thomson StreetEvents) -- Edited Transcript of Myriad Genetics Inc earnings conference call or presentation Tuesday, August 11, 2015 at 8:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Scott Gleason Myriad Genetics, Inc. - VP of IR * Mark Capone Myriad Genetics, Inc. - President & CEO * Bryan Riggsbee Myriad Genetics, Inc. - CFO ================================================================================ Conference Call Participants ================================================================================ * Bill Quirk Piper Jaffray & Co. - Analyst * Doug Schenkel Cowen and Company - Analyst * Unidentified Participant William Blair & Company - Analyst * Tycho Peterson JPMorgan - Analyst * Dan Leonard Leerink Partners - Analyst * Isaac Ro Goldman Sachs - Analyst * Derik de Bruin BofA Merrill Lynch - Analyst * Peter Lawson Mizuho Securities USA - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by. Welcome to the Myriad Genetics fourth-quarter and year-end 2015 financial earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded Tuesday, August 11, 2015. I would now like to turn the conference over to Scott Gleason. Please go ahead. -------------------------------------------------------------------------------- Scott Gleason, Myriad Genetics, Inc. - VP of IR [2] -------------------------------------------------------------------------------- Thanks, Edison. Good afternoon. Welcome to the Myriad Genetics' fourth-quarter earnings call. My name is Scott Gleason and I'm VP of Investor Relations. During the call, we will review the financial results we've released today, after which we will host a question-and-answer session. If you have not had a chance to review the earnings release, it can be found in the Investor Relations section of our website at myriad.com. Presenting for Myriad today will be Mark Capone, President and Chief Executive Officer, and Bryan Riggsbee, Chief Financial Officer. This call can be heard live via webcast at myriad.com. The call is being recorded and will be archived in the Investor section of our website. In addition, there is a slide presentation pertaining to today's earnings call on the Investor section of our website. Please note that some of the information presented today may contain projections or other forward-looking statements regarding future events or the future financial performance of the Company. These statements are based on management's current expectations. And the actual events or results may differ materially and adversely from these expectations for a variety of reasons. We refer you to the documents the Company files from time to time with the Securities and Exchange Commission, specifically the Company's annual report on Form 10-K, its quarterly reports on Form 10-Q, and it's current reports on Form 8-K. These documents identify important risk factors that could cause the actual results to differ materially from those contained in our projections and forward-looking statements. With that, I'll now turn the call over to Mark. -------------------------------------------------------------------------------- Mark Capone, Myriad Genetics, Inc. - President & CEO [3] -------------------------------------------------------------------------------- Thanks, Scott. Good afternoon and thank you for joining us today. I am pleased to provide an overview of our fourth-quarter and full-year financial results and business performance. We made solid progress, executing upon our business strategy in a number of key areas throughout the fourth quarter, which is reflected in our financial results. We delivered revenues of just under $190 million, which was above the consensus forecast, and earnings per share of $0.41, which was in line with the consensus forecast. While we did not meet our original financial goals for FY15, we did make substantial progress towards our three strategic imperatives. First, transitioning and expanding the hereditary cancer business; second, diversifying our product portfolio; and third, increasing our international contribution. Regarding our first strategic imperative, despite two years of competition, we believe we have maintained over 90% hereditary cancer market share and demonstrated a two-year compounded annual revenue growth of over 6% for hereditary cancer revenue. In addition, we began this fiscal year with 30% myRisk conversion, and ended the fourth fiscal quarter with over 72% conversion. Our second strategic imperative is to diversify our product revenues. Much of the shortfall in our original FY15 guidance was attributed to delayed reimbursement, but the underlying progress in our diversification efforts was significant. In FY15, we generated a 63% increase in Prolaris volume, and delivered a 25% increase in Vectra DA volume. Additionally, myPlan Melanoma showed 119% increase in volume; myPlan Lung Cancer was up 205% in volume; and Ovarian Cancer testing volume was up greater than 40% in the second half of the year, following the launch of BRACAnalysis CDx, our leading companion diagnostic for Lynparza. Also, we were successful at transferring our first two products from Myriad RBM into Stage I development, including a product for differentiating bipolar disease from depression and a product to identify early-stage pancreatic cancer. Lastly, our pioneering science was on display, with over 140 publications and presentations made throughout the year, including 35 accepted manuscripts. Our third strategic imperative is to increase our international contribution. And in FY15, we grew our international revenues 72%, with a run rate in the fourth quarter equaling 4% of total revenue. This progress continued in the fourth quarter. With regards to our first strategic imperative, we were pleased to see solid hereditary cancer revenue this quarter, with a 3% sequential increase to $164 million. We were, again, unable to identify any discernible market losses this quarter. And we estimate our market share remained at approximately 90% of the market. The Academic and Genetic segment, where most of our share loss has occurred, grew from 7% of revenue last quarter to 8% of revenue this quarter. As a reminder, in the third quarter, we completed the expansion of our myRisk Hereditary Cancer operations. Therefore, in the fourth quarter, we initiated additional physician conversion among our targeted doctors. And ended the quarter with 72% of percent of incoming samples being ordered as myRisk, compared to 58% at the end of the third quarter. We are very pleased with the pace of conversion and the near universal acceptance of the product by the physician community. And we are on track to complete the conversion of all of our targeted physician customers by the end of the first quarter. We believe this will result in approximately 80% of incoming hereditary cancer tests ordered as myRisk by the end of the first quarter of FY16. The other 20% of our volume comprises non-targeted physicians that order the test infrequently and therefore have very limited, if any, sales interaction. We have piloted an outreach program to educate non-targeted physician customers about myRisk when they place orders for legacy tests. Based upon this program, we would expect the percentage of samples ordered as myRisk to continue to increase throughout the end of FY16. Over time, we will assess whether to continue offering Colaris and BRACAnalysis through our Clia Laboratory. But will continue to offer BRACAnalysis CDx as a companion diagnostic through our FDA-approved laboratory. We are also making excellent strides on expanding the addressable hereditary cancer market for patients diagnosed with cancer. As a reminder, our goal is to double the size of the Oncology segment by expanding indications in four cancers: breast cancer, colon cancer, endometrial cancer and pancreatic cancer. In total, we expect these additional indications to expand the oncology market potential to $1 billion per year, an increase of $500 million to the total addressable market. Achieving this goal requires three steps: data publication, professional society guidelines, and expanded payer coverage policies. At ASCO this year, we presented data showing that deleterious mutations occurred at frequency of approximately 9% in endometrial cancer patients tested with myRisk. We believe these data further bolster the recent NCCN Guidelines that recommend hereditary cancer testing for all endometrial cancer patients. This market represents an opportunity of approximately 50,000 patients per year in the United States. And we currently test less than 2% of this population annually. In addition, in April, the NCCN Guidelines were updated to expand the indication for hereditary cancer testing in colon cancer patients to all patients with a 5% chance of testing positive. Based upon these guidelines and data, we are currently in discussions with payers about expanding coverage for both colon and endometrial cancer. Furthermore, we have successfully completed three market expansion studies in breast cancer and one market expansion study in pancreatic cancer. We believe there's potential for NCCN to expand guidelines for breast cancer throughout FY16 and for pancreatic cancer in FY17. Overall, we continue to believe these efforts to expand the oncology market will lead to significant opportunities for revenue growth over the coming years. Our second strategic imperative is to diversify our product revenue beyond hereditary cancer. And I would like to provide updates from our fourth quarter on new products in our Oncology, Urology, Autoimmune and Dermatology business units. First, in our Oncology business unit, we continue to make substantial progress toward our goal of becoming the global leader in companion diagnostics for DNA-damaging agents. Our first companion diagnostic is BRACAnalysis CDx, which is indicated as an aid in identifying ovarian cancer patients with deleterious or suspected deleterious germline BRCA variants eligible for treatment with Lynparza. As a reminder, we launched this product in the third quarter and saw a 40% sequential increase in ovarian cancer patient testing. As expected, this included a bolus of ovarian cancer patients that have been waiting for the drug approval. Despite that bolus, we still saw a 3% sequential increase in ovarian cancer patient testing in the fourth quarter. And continue to be very pleased with the launch of this test, which was the first laboratory-developed test ever approved by the FDA. This quarter, we made several key presentations at ASCO relating to the ability of myChoice HRD to predict response to both platinum agents and PARP inhibitors. The first study we presented was with GeparSixto data, which evaluated the ability of myChoice HRD status to predict response to carboplatin-containing chemotherapy in 193 patients with triple-negative breast cancer. The highest response rate of 64% was seen in patients with high HRD scores, who received both carboplatin and standard of care chemotherapy, which compared favorably to the 30% in the low HRD patient population. In conjunction with our strategic partner, Tesaro, we also presented data at ASCO around the ability of myChoice HRD to identify responders to Tesaro's investigational therapeutic. Niraparib. In a study of 106 patients with advanced ovarian cancer, myChoice HRD identified 100% of responders to the drug. FY16 will see a number of key milestones for our companion diagnostic franchise as we prepare for broader commercialization in FY17 and beyond. We are constructing FDA laboratories for both myChoice HRD and tumor BRACAnalysis CDx, and plan on submitting IDEs for both tests later in the fiscal year. We also plan to initiate multiple new trials with our strategic pharmaceutical company partners in new tumor types. Next, I would like to provide an update on our progress in our urology franchise with Prolaris. From a volume standpoint, Prolaris grew 10% sequentially this quarter, representing an annual run rate of 10,000 tests. We are entering FY16 with a great deal of momentum in our Urology business and are excited about the prospects of having Medicare coverage, which is typically a growth catalyst for new diagnostic products. We also are pursuing broader indications for Prolaris for all patient risk categories and expanded private payer coverage. However, our guidance does not assume any additional reimbursement this fiscal year beyond very low and low-risk Medicare patients. Regarding Medicare, we received the final LCD for Prolaris from Palmetto and the MolDX program on January 15, 2015. Subsequently, we were informed that for billing purposes, we would also require an LCD from Noridian, and have been awaiting this final LCD. We have now been informed by Noridian that because of the transition from ICD-9 to ICD-10 codes, all Medicare contractors have been instructed to refrain from posting any new LCDs until CMS has converted all previous LCDs to the ICD-10 format. We've also been informed by Noridian that they are intending to have the Prolaris LCD in ICD-10 format with an October 1, 2015, effective date. In addition, we have been providing Medicare pricing for Prolaris at the level we anticipated, which is consistent with our goal for an average selling price of over $3,000 per test. For purposes of guidance, we are assuming reimbursement for Prolaris beginning on October 1, 2015. However, given the extended period of time since Palmetto's final LCD, we also will be seeking retroactive reimbursement. Given the uncertain reimbursement related to these legacy claims, we will not include them in our FY16 guidance. During the fourth quarter, we presented important new data on our definitive active surveillance threshold for Prolaris at the American Urological Association meeting. We have received outstanding feedback from the urology community on the importance of having a defined cutoff to make a definitive decision for patients regarding active surveillance. Patients below this active surveillance threshold have less than a 3% risk of 10-year prostate-cancer-specific mortality, where patients above the threshold have an average mortality risk of approximately 20%. Based on our commercial samples, 60% of patients would fall below this threshold and could confidently pursue active surveillance, compared to the 15% to 20% that currently chooses this approach. Additionally, we presented the final data on our landmark PROCEDE 1,000 study at AUA that incorporated results from 1,206 patients. The final data showed a 48% change in treatment recommendations, in which 35% of patients saw a reduction in therapy and 13% saw an increase in therapy. These studies once again demonstrate the unique ability of Prolaris to stratify patients and drive significant changes in care. Also during the quarter, we publishED the largest validation study conducted for prostate cancer prognostic test. The study analyzed Prolaris' ability to predict prostate-cancer-specific death in a biopsy cohort of 761 men. The hazard ratio associated with the per-unit change in Prolaris test was 2.17 and was highly statistically significant, with a P value of 10 to the minus-20. This data adds to multiple other study showing Prolaris' ability to predict prostate-cancer-specific mortality, which is the gold standard endpoint for men trying to make vital decisions surrounding their disease. A number of payers were awaiting this peer review publication, so it will be an important addition to our dossier. Transitioning to our Autoimmune business, I am pleased to report that Vectra DA returned to strong growth this quarter, with test volumes increasing 12% sequentially to approximately 40,000 tests. We believe that this strong volume performance is a direct reflection of the outstanding leadership brought by our new President of Crescendo, Bernie Tobin, and his very talented team. Many of the tactics we are utilizing to drive further penetration into the $600 million Medicare market include several of the same tactics we successfully utilized in our preventive care business. Bernie and his team are in the very early stages of implementing this new strategy. And we continue to see substantial growth opportunities, since we are currently less than 5% penetrated in the Medicare market. In addition, we are proceeding on the longer-term strategy to expand private payer coverage for Vectra DA, which will increase the market potential from $600 million per year to $1.5 billion per year in the United States. Not surprisingly, data requests from payers were diverse, with needs along a continuum including data mining, retrospective studies, and/or prospective studies. Data mining activities are already underway, and samples for retrospective analysis have been identified. We also are currently engaged with both physician and payer stakeholders to assist in the design of our prospective clinical utilities study. And we look to have a finalized protocol in the near term. Because these activities will require some time, we have not included any additional reimbursement in our guidance for FY16. However, we remain very confident that the strength of our existing data and the results of these additional studies will result in broad reimbursement coverage for Vectra DA. Transitioning to the Dermatology franchise, we continue to make excellent progress with our myPath Melanoma test that differentiates melanoma from benign skin lesions. To date, 18% of the1,200 practicing dermatopathologists in the country ordered a myPath Melanoma test. We have successfully completed our second validation study and have assembled an extensive dossier with all of the relevant data. During FY16, we will begin discussing the dossier with payers and will pursue the final publications for our clinical validation and clinical utility studies. Lastly, I would like to discuss our progress in the third strategic imperative to expand our international contribution. International revenue during the quarter accounted for approximately 4% of total revenue, including the recently-completed clinic acquisition in Germany. We're excited by the prospect of having an MVZ designation in Germany. And are beginning to contract with physician networks, which could have a positive impact on international revenue in the second half of this fiscal year. As in the US, we are seeing rapidly-increasing demand for myRisk, with myRisk comprising 32% of our international hereditary cancer revenue. We expect this number to increase significantly throughout FY16 as more clinical data is published. And as institutional laboratories recognize the substantial complexity associated with sequencing and interpreting these panels with a turnaround time requirement that is consistent with legacy products. Additionally, we continue to see growing interest in our breast cancer prognostic kit, EndoPredict. International laboratories desire a kit-based solution because it allows the test to be run in their internal laboratories and enables institutional reimbursement. In the fourth quarter, we had seven additional instrument placements, bringing our global install base to 40 systems. Additionally, our international companion diagnostic business is awaiting reimbursement for Lynparza in most of the major European markets, which should lead to utilization of our tumor BRACAnalysis CDx test. AstraZeneca is continuing to negotiate with European payers. And as these decisions are made, we would expect to see physicians seek out our CE-approved test that can identify the largest potential responder group for Lynparza. Lastly, I would like to provide some perspective on FY16 guidance. Both Bryan and I are very committed to achieving the financial and operational targets we provide to investors. At the same time, we operate in an industry that is known to have less predictable reimbursement. Therefore, our goal is to provide transparent guidance, with clarity around the underlying base case assumptions and commentary around the upside opportunities and downside risks. As I have previously stated, our FY16 guidance will only include known reimbursement. However, investors should recognize that we have hundreds of employees dedicated to projects focused on potential upsides. But their uncertainty makes inclusion in guidance inappropriate. To that point, Bryan will provide a more detailed look at our guidance later in the call. But we are guiding to FY16 revenues of $750 million to $770 million, and earnings per share of $1.60 to $1.65. This guidance implies top-line growth of 4% to 6% and bottom-line growth of 10% to 13%. In closing, I'm exceptionally honored and excited to take the reins as CEO of this truly unique Company and lead its outstanding employees. We see tremendous opportunity for the growth of personalized medicine on a global basis. And Myriad is uniquely positioned to lead this revolution in patient care. During my tenure as CEO, I plan to continue the aggressive company transformation that we started five years ago when I assumed the role of President of Myriad Genetic Laboratories. We have made excellent progress. And I believe the fruits of these strategies and investments are beginning to emerge. Executing on our three strategic imperatives to transition and expand our hereditary cancer markets, to diversify our product portfolio, and to expand our international contribution, offer ample opportunity for future growth. I'm looking forward to having a more in-depth discussion on our five-year plan at our upcoming Investor Day on September 14, 2015, at the NASDAQ Market site in New York City. And I hope you will join me and the rest of our talented executive team. Now I would like to turn the call over to Bryan to provide a detailed overview of our financial results and FY16 guidance. -------------------------------------------------------------------------------- Bryan Riggsbee, Myriad Genetics, Inc. - CFO [4] -------------------------------------------------------------------------------- Thanks, Mark. I am pleased to provide an overview of our financial results for the fourth quarter. Fourth-quarter total revenues were $189.9 million, compared to $188.8 million in the same period in the prior year. Importantly, we returned to growth this quarter, with revenue increasing 1% year over year and 5% on a sequential basis. And looking forward, we believe we are in excellent position to grow on a year-over-year basis throughout each quarter of FY16. Hereditary Cancer revenue was $164 million this quarter and was down 3% year over year but increased 3% on a sequential basis. As Mark mentioned, we ended the quarter with 72% of incoming samples being ordered as myRisk. And for the full quarter, myRisk comprise 62% of total Hereditary Cancer revenue. We were exceptionally pleased to see strong sequential and year-over-year growth at Crescendo this quarter, with total revenue growing 12% sequentially to $11.8 million compared to $10.5 million in the previous quarter. As Mark mentioned earlier, total test volumes increased to just under 40,000 in grew 12% sequentially as well. Revenue associated with our Pharmaceutical and Clinical Services business was $11 million, and was up 88% year over year and 58% sequentially. Our recent German clinic acquisition accounted for a little under $5 million in the quarter, compared to approximately $2 million in the previous quarter. Gross margins continued to improve in the fourth quarter and were 80.3% compared to 79.4% during the third quarter. The primary driver of improved gross margin this quarter was improved efficiencies in our myRisk Laboratory, which was offset by some lower gross margin clinic revenue. Moving on to our operating expenses, Research and Development expenses were $18.7 million in the fourth quarter and declined 7% relative to the fourth quarter of last year. Our Research and Development spend in the fourth quarter of last year was exceptionally high, based on the timing of clinical trials and myRisk development costs. GAAP SG&A expense this quarter was $97.5 million and increased 16% relative to last year. The increase in SG&A this quarter is attributable primarily to one-time executive transition costs of approximately $8.3 million in the quarter and the impact of having a full quarter of clinic expenses. As a reminder, the clinic has a relatively neutral impact on our overall profitability. Adjusted operating income was $48.2 million in the fourth quarter and declined 14% relative to the fourth quarter of last year. The decline in operating income as the result of higher investments across our portfolio of products and some declines in profitability associated with the transition of myRisk in our Hereditary Cancer franchise. Adjusted net income was $29.4 million and adjusted earnings per share were $0.41 for the quarter, compared to $37.2 million and $0.48 per share, respectively, in the fourth quarter of last year. Or fully diluted share count decreased sequentially to 72.4 million shares, from 73.9 million shares in the prior quarter, driven by our share repurchase program. During the quarter, we used approximately $45 million to repurchase 1.3 million shares of Myriad common stock, which was relatively in line with our free cash flow generation during the quarter. As of the end of the fourth order, we had approximately $155 million remaining on our approved share repurchase authorization. I would now like to provide a more detailed look at our updated FY16 financial guidance. As Mark mentioned, we are guiding to revenue of $750 million to $770 million and adjusted earnings per share of $1.60 to $1.65. Let me walk through the assumptions that underlie our guidance. First, looking at our Hereditary Cancer business, we are assuming our market losses this year are equivalent to market growth, implying that Hereditary Cancer is flat on a year-over-year basis. To the extent that market growth exceeds market losses or vice versa, this would represent upside or downside to our forecast. Also in Hereditary Cancer, we are not assuming any impact from expanded coverage for colon and endometrial cancer patients based upon the recent NCCN guideline expansion. We also are not assuming any additional Prolaris reimbursement beyond very low and low-risk patients for Medicare. So any additional coverage for Prolaris, Vectra DA, myPath Melanoma, or myPlan Lung Cancer would represent upside to our guidance. Moving on to product-specific guidance, we are guiding to Vectra DA revenues of $50 million to $55 million, implying 14% to 26% year-over-year growth, which assumes only existing reimbursement. For Prolaris, we are guiding to revenue of $10 million to $12 million, which assumes only Medicare-coverage for low- and very low-risk patient populations, beginning in the second quarter. Finally, for our Pharmaceutical and Clinical Services segment, we are guiding to full-year revenue of approximately $40 million. From a profitability standpoint, we would expect to see continued gross margin improvement throughout the year, based upon increased efficiencies in our myRisk Laboratory and Medicare reimbursement for Prolaris. From an operating margin standpoint, we are targeting adjusted operating margins, which exclude approximately $14 million in amortization of intangible assets tied to the acquisitions of Crescendo Bioscience and Myriad RBM, to be approximately 25% to 26% of revenue. We are assuming a 40% effective tax rate for the year. And our guidance does not assume the impact of additional share repurchases, which is equivalent to a fully diluted share count for the full year of approximately 72 million shares. Moving on to our first quarter, we typically see seasonality in this quarter due to the summer vacation season with both our Hereditary Cancer franchise and with Vectra DA. Additionally, as we mentioned earlier on the call, we are not expecting to recognize Prolaris revenue until the second fiscal quarter. Due to this typical seasonality, we are guiding to first-quarter revenues of approximately $176 million to $178 million. And first quarter-earnings per share of approximately $0.34 to $0.36. This degree of seasonality is identical to what we saw in the first quarter of FY15. Our goal with guidance is to provide transparency into our assumptions for the different components of our Business throughout FY16 that will allow investors to clearly measure our progress throughout the year. We look forward to providing a broader update on the five-year financial outlook for the Company and our strategic positioning within the global personalized medicine market at our upcoming Investor Day on September 14, 2015. There is a tremendous opportunity as healthcare fundamentally changes to reflect the advancements of the genomics age. And we strongly believe Myriad will play a leading role in driving that transition. With that, I would now like to turn the call back over to Scott. -------------------------------------------------------------------------------- Scott Gleason, Myriad Genetics, Inc. - VP of IR [5] -------------------------------------------------------------------------------- Thanks, Bryan. As a reminder, during today's call, we used certain non-GAAP financial measures. A reconciliation of the GAAP financial results to non-GAAP financial results, and a reconciliation of GAAP to non-GAAP financial guidance, can be found on the Investor Relations section of our website. Now we are ready to begin the Q&A session. In order to ensure broad participation in today's Q&A session, we're asking participants to please only ask one question and one follow up. Operator, we are now ready for the Q&A portion of the call. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Bill Quirk with Piper Jaffray. -------------------------------------------------------------------------------- Bill Quirk, Piper Jaffray & Co. - Analyst [2] -------------------------------------------------------------------------------- First question for me is regarding myRisk reimbursement. No specific mention of expansion of covered lives or anything like that, Mark. I was curious, maybe you can fill in some of the blanks there on the reimbursement coverage progression in the quarter and then I've got a follow-up, as well. Thanks. -------------------------------------------------------------------------------- Mark Capone, Myriad Genetics, Inc. - President & CEO [3] -------------------------------------------------------------------------------- Good. Thanks, Bill. We continue to make progress on myRisk reimbursement. Just as a reminder for everybody on the call, our strategy has been to try to sign long-term contracts, typically three-year contracts for myRisk, so that we can have some additional pricing visibility for a longer period of time, which benefits both us and payers. We do continue to make progress along that path. In fact, at Investor Day on September 14, we will actually quantify that progress for you. But as a reminder, what we had said a couple of calls ago, is with the BlueCross BlueShield association agreement that we've signed, were we able to get all of the affiliates to sign onto that agreement, we would achieve 75% of our private pay revenue as covered. So we continue to progress towards that and like I say, I will provide a quantitative update for you at Investor Day. -------------------------------------------------------------------------------- Bill Quirk, Piper Jaffray & Co. - Analyst [4] -------------------------------------------------------------------------------- Okay. Great. Just as a somewhat related follow-up around reimbursement, you mentioned that you were going to consider pursuing some back payment for Prolaris, regarding CMS. I'm just curious, Mark, if you're successful, what sort of numbers are we talking about? -------------------------------------------------------------------------------- Mark Capone, Myriad Genetics, Inc. - President & CEO [5] -------------------------------------------------------------------------------- Well, I don't think we are prepared to quantify that, Bill, just obviously, given some of the uncertainty around reimbursed and legacy claims. I do think we've given you some information on this call that you can reflect upon. We did say that we did 10,000 tests this year. We've obviously, previously given out data on the percentage of tests that are Medicare and the percentage of tests that are in the low-risk category. I think that can give you some sense, at least, of the magnitude of legacy claims that we would look towards from the final date that Palmetto posted the LCD, which was January 15. Again, it would probably be way too early to speculate on the eventual resolution of those claims. Certainly, we think it's appropriate to submit those and appeal those. -------------------------------------------------------------------------------- Bill Quirk, Piper Jaffray & Co. - Analyst [6] -------------------------------------------------------------------------------- Very good. Thank you. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- Doug Schenkel, with Cowen and Company. -------------------------------------------------------------------------------- Doug Schenkel, Cowen and Company - Analyst [8] -------------------------------------------------------------------------------- I'm going to ask one intertwined, multi-part question on commercial reach and related to it, capital deployment. The first part is, I believe you guys have identified six commercial channels for your products, of which three are at national coverage status, women's health, rheumatology, and oncology. Is this right? How should we think about the capacity for each of these channels to handle additional products? Any specific metrics you can provide, like revenue per rep in these built-out channels and what the capacity could be, would be helpful. The follow-up is a transition to capital deployment. You guys have spent a lot of money over the last year on share repurchases. Your guidance assumes a flat share count. I'm just wondering if that's how you guys want us to think about things in the same way you have the last couple of years, or is there a change here? Because if you're -- I guess what I'm wondering is, should we expect you to be spending more money or deploying more capital pursuant to products that you could bring in to funnel through these channels? Thank you. -------------------------------------------------------------------------------- Mark Capone, Myriad Genetics, Inc. - President & CEO [9] -------------------------------------------------------------------------------- Thanks, Doug. Appreciate the question. I'll handle the first one and I'll have Bryan talk about the capital deployment piece. So, you are correct. We have identified six different business units and the three that you mentioned -- our oncology is fully fleshed out in order to get coverage for that entire market, as is the rheumatology team. For the preventive care piece, we currently have capacity to cover about 50% of the OB/GYN market. So, there still remains opportunity to continue to look to expand that sales team in the future. By reference, that's one of the reasons why, when I mentioned that we see about 20% of samples coming from non-targeted physicians, a big source of that is actually those OB/GYN's and primary care physicians that we don't currently call on. To your question as to capacity for those three, we have sufficient capacity with those channels to sell all of the products that are currently in our development pipeline, and so I think that's one of the things we see in the future, is the ability to generate some significant operating leverage by deploying more products into those channels. In fact, we will provide some significant additional granularity on this when we go into our September 14. Now, to the other three areas, neuroscience, we don't have any sales team deployed, yet. For our dermatology team, for our dermatopathology channel, we still have opportunity to continue to expand that group. There's only eight salespeople for that team. You could probably triple the size of that team, eventually, as we get reimbursement. For our urology team, we currently have about 40 field salespeople. There still is an opportunity to continue to expand that team to get broader coverage. Again, all of those decisions will hinge on reimbursement so that we ensure that we are generating some operating leverage with those expanded sales teams. So that's a quick rundown on our channels and will provide a little more detail in September. Bryan, would you -- why don't you talk about deployment? -------------------------------------------------------------------------------- Doug Schenkel, Cowen and Company - Analyst [10] -------------------------------------------------------------------------------- Thanks, Doug. With respect to capital deployment, we'll be providing for more detail at our Investor Day, generally speaking. However, we had been purchasing shares back at a rate that exceeded our free cash flow for some time. I think for purposes of 2016, what you should model or expect is to see share repurchases more in line with free cash flow. From a guidance perspective, we've never assumed, and don't assume, in this guidance to have any share repurchase, so that's why we've not included it. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- Amanda Murphy with William Blair. -------------------------------------------------------------------------------- Unidentified Participant, William Blair & Company - Analyst [12] -------------------------------------------------------------------------------- This is Anthony in for Amanda. First question, in regard to the Q1 2016 guidance, I guess 2016 guidance in general, how for Prolaris, you are expecting the reimbursement to begin in 20 -- or, in Q2. I guess, what's the confidence level with that target that being Q2, just given the lack of visibility into the LCD finalization timeline? -------------------------------------------------------------------------------- Mark Capone, Myriad Genetics, Inc. - President & CEO [13] -------------------------------------------------------------------------------- Thanks, Anthony. Obviously, the journey for Prolaris has been a long one. We are in constant communication with both Noridian and with Palmetto and the MolDx program. The first thing to recognize is that all of these delays from the Palmetto posting on January 15 of the final LCD have really been administrative in nature. Noridian had explained that for billing purposes, they were going to have to process another LCD and so that led to one delay. This latest delay is the direction from CMS in Baltimore that they wanted to wait until all of the LCDs, the existing LCDs were converted to ICD-10 codes, because there was substantial amount of work in order to do that and they didn't want to add to the workload by piling on new LCDs so, again, yet another administrative delay. What's important, if you look at underneath the comments that we received during all of the public comment period and in fact, the MolDx program summarized many of those comments on a recent document that was posted on their website, have all been very favorable to Prolaris and in fact, have been very favorable about Prolaris' ability to predict risk across all risk categories, not just necessarily low risk. We know that the commentary has been very favorable and because of that, and because of the direct communications we've had that in fact the final LCD would be posted in the ICD-10 format, it would be effective October 1 and that it will be identical to the draft LCDs. Those are the things that give us the confidence to include Prolaris in our guidance beginning on October 1. -------------------------------------------------------------------------------- Unidentified Participant, William Blair & Company - Analyst [14] -------------------------------------------------------------------------------- That's perfect. Thank you. Then as a follow-up, I guess with the pharmoclinical services revenue, it seemed like quite a step up. What are the assumptions regarding the pharmoclinical services revenue in 2016? -------------------------------------------------------------------------------- Mark Capone, Myriad Genetics, Inc. - President & CEO [15] -------------------------------------------------------------------------------- For pharmoclinical services, the increase in the current quarter was entirely driven by the acquisition of the clinic. I think that business has been relatively steady over the last couple of years and I think included in our guidance, we had $40 million on one of the slides that showed for the pharma and clinical services,. That would be how I would think about it for next year. The primary driver in the current quarter was the full quarter of the clinic revenue. -------------------------------------------------------------------------------- Unidentified Participant, William Blair & Company - Analyst [16] -------------------------------------------------------------------------------- Excellent. Thank you, guys. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- Tycho Peterson with JPMorgan. -------------------------------------------------------------------------------- Tycho Peterson, JPMorgan - Analyst [18] -------------------------------------------------------------------------------- A couple quick ones. Just on the hereditary cancer guidance, you called for flat. Can you maybe talk what's embedded in that for share versus price from your perspective? -------------------------------------------------------------------------------- Mark Capone, Myriad Genetics, Inc. - President & CEO [19] -------------------------------------------------------------------------------- Thanks, Tycho. A couple things as we think about hereditary cancer guidance for FY16. Obviously, the three parameters that play, here, are what's happening in market growth, what is occurring in share and price. Let me touch on the three of those so that you can get some insight into our thinking, there. First, from a market growth perspective, one of the things that we saw in 2015 was a year-over-year market growth that was lower than what we had historically seen for the hereditary cancer market. Now, that's not a surprise because the baseline was 2014, which was impacted by some significant tailwinds associated with celebrity publicity, so it probably isn't a total surprise that we saw year-over-year growth in the market, at least to the best that we can determine, slowed in 2015. Now long-term, we continue to believe that this market is underpenetrated, that there is substantial opportunity for growth. But, given the year-over-year lower growth in 2015 we thought it was prudent to take that into consideration in our 2016 guidance and contemplate at least in this guidance some market growth lower than what we would have historically seen, or what we would hopefully see even further into the future. Second part as a relates to share, as you can see from our slides and commentary, that we had to the best of our ability seen shares stabilized over the last half of the year. Despite that, again, we believe it's prudent to assume that we have some incremental market share decline throughout FY16 and so our guidance contemplates some additional share decline throughout the year. Lastly from a pricing perspective, we can't, obviously, get into details of pricing in a competitive market. Maybe a couple things I can point to that you can reflect upon, first, is that in FY15, you saw that throughout the year, we saw increasing gross margins and that was without any additional reimbursement in the rest of our portfolio. So that gives you some, I think, understanding of some pricing stability throughout that transition with myRisk. The second thing I'll point to is that our guidance implies an operating margin of 25% to 26% in FY16 and that's up over 200 basis points compared to FY15. So again, I think that points to some understanding of pricing stability that has been factored into our guidance numbers. That becomes more apparent as we negotiate long-term contracts and fix in pricing for a longer period of time. I think those are really the puts and takes on the three parameters, market growth, market share and market price and why we're guiding to hereditary cancer revenues that are about 1% growth year over year for FY16. -------------------------------------------------------------------------------- Tycho Peterson, JPMorgan - Analyst [20] -------------------------------------------------------------------------------- Maybe if I could ask one follow-up. It seems like the emphasis on the value of the variant databases is growing and there has been maybe more public backlash over the public database. Any comment on whether you think that's been the case and should we expect any follow-on studies for you guys highlighting the accuracy of your data compared to what's in the public database? Because the gap seems to be widening a little bit. -------------------------------------------------------------------------------- Mark Capone, Myriad Genetics, Inc. - President & CEO [21] -------------------------------------------------------------------------------- Yes. I think there is, certainly, increased recognition that the data that is in the public databases is one that needs to be approached with caution. I think people recognize those databases were all originally put together for research purposes, which as you know, Tycho, is a very different application than for clinical purposes, where a patient is going to make some very significant medical management decisions and therefore requires a very high level of accuracy. I think the appreciation is growing that there are some concerns. I think the recent [Vale] publication that came out just in the last few months, where Myriad did 25,000 patients sequentially and we assessed the varying classifications that we would have using our database, relative to what was available in the public databases; and I think that pointed out the magnitude of the issues that exist for public databases. For example, over 30% of the variants that we identified weren't in any public database and another thing that was important, that for deleterious mutations, which are obviously the ones you want to make sure our right, for those deleterious mutations that appeared in all five of the databases that we surveyed in that study, there was only 3% of those that were shown to be deleterious in all five databases. So, I think as data such as these become available, people recognize that there is some caution associated with that. I think, to your last point, because Myriad is doing so much volume in myRisk, we're actually seeing our variant database grow substantially, relative to just what it was before and so the gap is widening. In fact, in September, we'll provide some additional data updates on exactly where variant database stands at this point. But, we are uncovering quite a few variants. We're classifying quite a few variants and we're continuing that extensive research that we've always done on classification of variance. -------------------------------------------------------------------------------- Tycho Peterson, JPMorgan - Analyst [22] -------------------------------------------------------------------------------- Okay. Thank you. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- Dan Leonard with Leerink Partners. -------------------------------------------------------------------------------- Dan Leonard, Leerink Partners - Analyst [24] -------------------------------------------------------------------------------- Just a follow-up question on reimbursement. I was wondering if you can comment on the reimbursement levels for the companion diagnostic BRACAnalysis as compared to the traditional [all] BRACAnalysis and your assumptions around that going forward. -------------------------------------------------------------------------------- Mark Capone, Myriad Genetics, Inc. - President & CEO [25] -------------------------------------------------------------------------------- BRACAnalysis CDx reimbursement, right now, is identical to the contractor rate we have for the BRACAnalysis germ-line products. At this point, there are no differences. I know, historically, that FDA-approved diagnostics and in some cases have received some pricing premium associated with those. Those are conversations that we will continue to have with payers. Despite that, I think from a standpoint of guidance, we would be expecting BRACAnalysis CDx to continue at the same pricing as BRACAnalysis germ-line. We are not assuming any premium associated with that in our FY16 guidance. -------------------------------------------------------------------------------- Dan Leonard, Leerink Partners - Analyst [26] -------------------------------------------------------------------------------- Okay. Thank you. -------------------------------------------------------------------------------- Operator [27] -------------------------------------------------------------------------------- Isaac Ro with Goldman Sachs. -------------------------------------------------------------------------------- Isaac Ro, Goldman Sachs - Analyst [28] -------------------------------------------------------------------------------- Another question on hereditary cancer, but it was really more on the cost side. Just given that the academic and genetic counselors are considered thought leaders in their communities, just trying to think about how you plan to keep them from influencing PCPs to switch to lower-cost providers. Generally speaking, your thoughts on how you defend and grow the PCP side of the business? -------------------------------------------------------------------------------- Mark Capone, Myriad Genetics, Inc. - President & CEO [29] -------------------------------------------------------------------------------- Thanks, Isaac. One thing I'll note, I know it was in the script, but worth noting again that actually, in this quarter, for the first time in some time, we actually saw the percentage of revenue from the genetic segment increased from 7% to 8% and again by reference, before we had the advent of competition, the genetic segment was responsible for about 15% of our revenue. We actually were able to see some progress in that segment over this past quarter. I think as you point out, Isaac, the community segment is really a fundamentally different segment than that for genetics. I think in the genetic segment, we have outstanding healthcare providers that are clearly experts in the field and feel very capable of assessing different types of panels and have done that with different laboratories. I think in the community setting, it's really a very different market. In that particular market, you need extensive education for those healthcare providers and they really rely on the extensive field force that we have with both the sales team, with our genetic counselors that we have in the field, with our medical staff that we have in the field and here in the home office. The level of support required for that group is dramatically different. That's one of the key differentiators is that we've unable to provide as opposed to other competitors that just don't have those relationships and that deep expertise that we've developed over the years. I think the key thing for that segment, in order to continue to grow that, as we've seen really nice growth in the preventive care segment, is to continue that -- those educational efforts. As I mentioned earlier, we only cover now about 50% of the OB/GYNs and a smaller fraction of the primary care physician base, so one of the key opportunities will be continue to expand our educational efforts to a broader set of those physicians as we move forward. The other thing is, we continue to do things like protocol integration, that Bernie Tobin is using with Crescendo, that allow us to penetrate deeper into physician offices because in many cases, while they are testing patients, they are only a fraction of the appropriate patients. I think it continues to be those types of things. The last thing we have done is some extensive direct-to-patient efforts with social media and other interactive media. That is proven to be very effective at driving patients to inquire with their physicians about opportunities for hereditary cancer testing. We continue to invest heavily in that area and think that area offers continued promise to drive growth both depth and breadth into those -- that preventive care channel. -------------------------------------------------------------------------------- Isaac Ro, Goldman Sachs - Analyst [30] -------------------------------------------------------------------------------- That's helpful. Maybe just a follow-up on that same topic. Will be there be a point where you guys might be willing to talk a little bit about how you guys achieve incremental margins or unit economics that are favorable to the Company in the context of getting these educational procedures done, things like a more expensive procedure. -------------------------------------------------------------------------------- Mark Capone, Myriad Genetics, Inc. - President & CEO [31] -------------------------------------------------------------------------------- Thanks, Isaac. In fact, Bryan will spend time on that at Investor Day on September 14. We'll actually break out our view of margins over the next five years and what we think that might look like. I do think you'll see some additional granularity there that will answer that specifically. -------------------------------------------------------------------------------- Isaac Ro, Goldman Sachs - Analyst [32] -------------------------------------------------------------------------------- Thanks very much. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- Derik de Bruin from Bank of America. -------------------------------------------------------------------------------- Derik de Bruin, BofA Merrill Lynch - Analyst [34] -------------------------------------------------------------------------------- A couple of questions. Where are you including CDx in the model? I'm just curious on this because if it's in the hereditary cancer, wouldn't that be sort of adding to the revenue growth in hereditary cancer? I'm just curious, what is your assumption for the overall hereditary cancer growth market? -------------------------------------------------------------------------------- Mark Capone, Myriad Genetics, Inc. - President & CEO [35] -------------------------------------------------------------------------------- Good question. We've chosen to include BRACAnalysis CDx in the hereditary cancer line, as you suspected. The reason is because the BRACAnalysis product has the same indications for use as BRACAnalysis CDx for all ovarian cancer patients and trying to actually divide that out would probably create more confusion than it would help. So because of the overlap of indications we have chosen to include BRACAnalysis CDx in the hereditary cancer line item. Now, as we reflect upon 2016 guidance, of course, that assumption would reflect the guidance we gave of $638 million to $649 million for hereditary cancer revenues. One of the things that we had to take into consideration, and as we outlined on the call, while we did see a very large bolus of incremental ovarian cancer patients going from Q2 to Q3, we saw a 3% increase from Q3 to Q4. That's the type of sequential increase that reflected upon our thoughts for guidance for hereditary cancer in FY16. -------------------------------------------------------------------------------- Derik de Bruin, BofA Merrill Lynch - Analyst [36] -------------------------------------------------------------------------------- And the assumption for the growth rate of the market? -------------------------------------------------------------------------------- Mark Capone, Myriad Genetics, Inc. - President & CEO [37] -------------------------------------------------------------------------------- Sorry. As far as growth rate, we won't provide an actual number. I think the qualitative commentary I gave, Derek, should give you some reflection. Historically, we've always said this market has grown at 10%. Obviously, the growth rate was lower than that, in our view, in FY15. We've factored that lower growth rate into FY16. I don't think we feel comfortable providing an exact numerical assumption. -------------------------------------------------------------------------------- Derik de Bruin, BofA Merrill Lynch - Analyst [38] -------------------------------------------------------------------------------- I mean, I guess I'm just a little confused because I thought myRisk was supposed to help accelerate the market growth. -------------------------------------------------------------------------------- Mark Capone, Myriad Genetics, Inc. - President & CEO [39] -------------------------------------------------------------------------------- I think, right now, certainly what myRisk has been doing is really converting the existing market, the existing legacy market into -- over to myRisk. What we have said all along is that we expect that the additional indications that myRisk will foster will allow us to grow that market faster. As we pointed out in one slide, we're just in the early stages of contracting with payers for those additional indications and we have not factored that into guidance for 2016. When those additional indications are contracted with payers, then you are right. That will, potentially, expand our penetration into what is now a larger market. But those were not things we assumed for FY16 guidance. -------------------------------------------------------------------------------- Derik de Bruin, BofA Merrill Lynch - Analyst [40] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [41] -------------------------------------------------------------------------------- Peter Lawson with Mizuho. -------------------------------------------------------------------------------- Peter Lawson, Mizuho Securities USA - Analyst [42] -------------------------------------------------------------------------------- Just wondering if you would give us a breakdown and how much volume is coming from clinical trials for the BRACAnalysis? As an unrelated follow-up, the contribution for 2016 guidance from Europe? -------------------------------------------------------------------------------- Mark Capone, Myriad Genetics, Inc. - President & CEO [43] -------------------------------------------------------------------------------- Obviously, the clinical trial volume is confidential. That's something that our partners -- we don't have liberty to disclose and so that's something that we won't necessarily make public. We, obviously, are engaged in a number of clinical trials with partners for a variety of PARP inhibitor indications. We are excited about those. Those are things that are continuing in FY16. You're right that those sample volumes are reflected in our numbers, but we haven't disclosed either those volumes or the cost or price associated with those tests. Your second question, Peter, on FY16? -------------------------------------------------------------------------------- Peter Lawson, Mizuho Securities USA - Analyst [44] -------------------------------------------------------------------------------- Just the contribution from Europe? -------------------------------------------------------------------------------- Mark Capone, Myriad Genetics, Inc. - President & CEO [45] -------------------------------------------------------------------------------- Oh, international contribution. Yes, we are not providing specific guidance on the international market. I think for the first time, we did provide at least a run rate, so you know that 4% of revenue in FY15 Q4 was provided by the international markets. We are going to give some additional color on our strategy in the international market. Gary King will provide that in September, so you will get an update on where we see the business evolving for the international market, but we aren't giving specific guidance for the international segment. -------------------------------------------------------------------------------- Peter Lawson, Mizuho Securities USA - Analyst [46] -------------------------------------------------------------------------------- Great. Thank you so much. -------------------------------------------------------------------------------- Operator [47] -------------------------------------------------------------------------------- That is all the time we have for questions. I'll turn it over to you now, Mr. Gleason, for closing remarks. -------------------------------------------------------------------------------- Scott Gleason, Myriad Genetics, Inc. - VP of IR [48] -------------------------------------------------------------------------------- This concludes our earnings call. A replay will be available via webcast on our website for one week. Thank you again for joining us this afternoon. -------------------------------------------------------------------------------- Operator [49] -------------------------------------------------------------------------------- Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.
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