Salt Lake City Nov 4, 2015 (Thomson StreetEvents) -- Edited Transcript of Myriad Genetics Inc earnings conference call or presentation Tuesday, November 3, 2015 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Mark Capone Myriad Genetics, Inc. - President & CEO * Bryan Riggsbee Myriad Genetics, Inc. - CFO ================================================================================ Conference Call Participants ================================================================================ * Scott Gleason Stephens Inc. - Analyst * Amanda Murphy William Blair & Company - Analyst * Doug Schenkel Cowen and Company - Analyst * Jack Meehan Barclays Capital - Analyst * Tycho Peterson JPMorgan - Analyst * Bill Quirk Piper Jaffray & Co. - Analyst * Ann Edelstein BofA Merrill Lynch - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by and welcome to the Myriad Genetics first-quarter 2016 financial earnings call. (Operator Instructions) As a reminder, this conference is being recorded Tuesday, November 3, 2015. I would now like to turn the conference over to Mr. Scott Gleason, VP Investor Relations. Please go ahead. -------------------------------------------------------------------------------- Scott Gleason, Stephens Inc. - Analyst [2] -------------------------------------------------------------------------------- Thanks. Galena. Good afternoon, and welcome to the Myriad Genetics first-quarter earnings call. My name is Scott Gleason and I am the 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 on 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 pertains 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, it's quarterly reports on form 10-Q and it's current reports on for 8-k. These documents identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. With that, I'm pleased to turn the call over to Mark Capone. -------------------------------------------------------------------------------- Mark Capone, Myriad Genetics, Inc. - President & CEO [3] -------------------------------------------------------------------------------- Thanks, scott. Good afternoon, and thank you for joining the call today. I'm pleased to provide an overview of our fiscal first-quarter 2016 financial results and our progress towards our five-year plan that we presented at Investor Day in September. In the first quarter we are very pleased with our results, having generated revenue of $183.5 million and adjusted earnings per share of $0.41, which exceeded our first-quarter guidance and represents year-over-year revenue growth of 9% and adjusted earnings per share growth of 64%. As result, for FY16 we are maintaining our full-year guidance of $750 million to $770 million in revenue and adjusted earnings per share of a $1.60 to $1.65. Recently we introduced our five-year goals to achieve revenue growth of greater than a 10% compound annual growth rate, to have seven products with revenue greater than $50 million, to achieve operating margins greater than 30% and to generate international revenue greater than 10% of total revenue. The key to delivering on these goals is execution on our three strategic imperatives. First, transitioning and expanding the hereditary cancer market; second, diversifying our revenue by commercializing our four-and-six new product pipeline; and third, increasing our international contribution by investing in major countries with both reference and kit-based tests. I would like to report on our recent progress on each of these priorities. During the first quarter our hereditary cancer business generated revenues of $157 million, which represented a year-over-year growth of 4%. This was above expectation, given the typical seasonality in the first quarter, and supports our belief that we did not see any additional discernible market losses with our targeted physicians. Importantly, we have now converted all of our targeted physicians with approximately 80% of incoming samples being rewarded as Myriad myRisk tests. The rapid adoption by our targeted customer base and scale-up of an extremely complex next-generation laboratory process over the last 18 months has been an outstanding accomplishment. The myRisk process has over 850 manufacturing steps performed on 23 major equipment platforms with over 100 proprietary software applications that require more than 40,000 work hours of programming, and has expanded our variant database to over 40,000 variants. But most importantly, it is a process that is engineered for perfection to reflect the customer expectations for such an important clinical test. I am extremely proud of the entire team that made the myRisk launch such a tremendous success as it underscores the unmatched execution this team can deliver. As we stated on the last call, we have now implemented a telephone outreach program through our customer service team to aid in transitioning nontargeted physicians to the myRisk test. The goal of this program is to determine physician interest, and then direct additional training resources as required. To date, this program has been highly effective at driving additional conversion, with 55% of doctors contacted by our customer service group transitioning to myRisk after this outreach. Based upon the success of this program to date, we believe we will have converted the vast majority of our hereditary cancer business to myRisk by the end of this fiscal year. Additionally, Myriad continues to develop evidence to support broader indications for use for hereditary cancer testing. We made additional progress throughout September in contracting with payers on a new colon and endometrial cancer NCCN guidelines. We now have approximately 45% of insurance plans that have expanded coverage policies to the broader criteria. As a reminder, these additional colon cancer and endometrial cancer indications will increase the total addressable markets by $250 million per year when contracting is completed. We also have submitted data for publication for the first pivotal breast cancer market expansion study, which is a 600-patient study evaluating mutation frequency in an unselected population and conducted in partnership with Dana Farber Cancer Institute. This data and two additional studies will be submitted to the NCCN Committee as evidence for expanding criteria for hereditary breast cancer testing. We believe this data supports the testing of all breast cancer patients under the age of 60 based upon historical eligibility criteria utilized by NCCN. If accepted, this would expand the percentage of newly diagnosed patients eligible for hereditary cancer to 60% from 37% today. While it takes some time for payers to adopt new NCCN criteria, this could lead to an increase in total addressable market of $150 million per year. We are also building evidence to support broader pancreatic cancer testing, and we recently submitted a data package to NCCN showing up to 10% of pancreatic cancers have a hereditary component. Additionally, we have completed one clinical study and have a second study underway. Every year in the United States approximately 45,000 new cases of pancreatic cancer are diagnosed, and we believe 100% of these patients should be offered hereditary cancer testing based upon the risk of carrying a deleterious mutation in 1 of the 25 genes in the myRisk hereditary cancer panel. Myriad's exceptional commitment to accuracy in both sequencing and interpretation remains a key differentiator with our customers. In addition, we are the only laboratory with a demonstrated lifetime commitment to patients and physicians to ensure notification for any reclassified uncertain variance at any point in the future. Our variant classification program is branded as myVision and has historically included Myriad proprietary techniques such as Pheno, MCo and three-dimensional structural protein analysis. We continue to demonstrate our innovation in variant classification with key data presented on two new techniques at the American Society of Human Genetics annual meeting. The first is an advanced artificial intelligence literature search algorithm called Lit View that has increased our ability to identify variant references at a rate 36% higher than that identified by public databases. The second new technique, called Insight, is a proprietary methodology that evaluates the impact of a specific DNA variant on the transcription and functionality of the resulting RNA. These additional innovations further strengthen the quality advantage that Myriad's myVision variant classification program delivers relative to the methods used by other laboratories. Additionally, we continue to make progress with insurance contracting to establish long-term fixed-price hereditary cancer contracts. I am pleased to announce that since Investor Day in early September we have signed multiple additional Blue Cross/Blue Shield affiliates to long-term contractual agreements. And we now have approximately 50% of our revenue covered by these long-term pricing arrangements. We believe the willingness of payers to commit to long-term three-year contracts is a direct reflection of the economic value our superior quality offers in driving down long-term healthcare costs and providing the best care for patients. I would now like to transition to our second strategic imperative to diversify our new product revenues through our four-and-six pipeline strategy which will deliver the additional six products that we believe will generate over $50 million in revenue by FY20. These include Vectra DA, Prolaris, myPath Melanoma, our companion diagnostics and myPlan lung cancer. Our first new product with significant potential is Vectra DA with a global total addressable market of $3 billion and a current reimbursed market of $600 million in the United States. Vectra DA volume in the first quarter was approximately 38,000 tests, which was a slight decline from the fourth quarter which was anticipated due to summer seasonality. We expect to see volumes increase as a result of Crescendo's new sales and marketing initiatives to drive breadth and depth of testing with rheumatologists. From a breadth perspective, Vectra DA is now ordable through Lab Corp and its national service network of more than 1700 patient service centers. Crescendo Bioscience continues to be the sole provider of Vectra DA in its CLIA-certified, CAP-accredited clinical laboratory. Crescendo Biosciences will continue to be responsible for billing patients and third-party payers for Vectra DA. As a reminder, approximately one-quarter of rheumatologists do not have access to in-office phlebotomy services, and more than one-third of doctors we surveyed said they would order more tests if they had access to Lab Corp patient service centers. From a depth perspective, Crescendo's early success with practice integration has led to accelerated efforts to expand the program. The first rheumatology office in the pilot practice integration program experienced volume increases of 37% after implementing the program. Therefore, we will expand practice integration training to 20% of our field sale force in the second quarter and we will complete the training of our remaining sales force by January. We believe the strategy will be pivotal in driving expanded utilization among our existing physician ordering base, further penetrating the existing $600 million Medicare market. This week we will have three important new presentations at the upcoming American College of Rheumatology meeting in San Francisco, including some of the first clinical studies to show the potential of Vectra DA to guide treatment regimens. The ability to choose therapy that can provide the best clinical outcome for patients while delivering health economic benefits presents a promising opportunity. The first study evaluated the ability of Vectra DA to predict responses to two treatment regimens, triple therapy or biologics in patients who failed to respond completely to methotrexate therapy. In this study those patients with lower Vectra DA scores were more likely to respond to less expensive triple therapy while those patients with higher Vectra DA scores were more likely to respond to anti-TNF therapy. The second study evaluated the ability of Vectra DA to predict flares in patients discontinuing anti-TNF therapy. In this study patients with a high Vectra DA score had a risk of flair within 12 months that was twice as high as patients with a low Vectra DA score. The third study evaluated the ability of Vectra DA to predict relapse in patients tapering their disease-modifying antirheumatic drugs. In this study Vectra DA scores were significantly higher in patients relapsing relative to those in stable remission. These last two studies could provide guidance to physicians in determining which patients could taper their drug therapies, thereby reducing treatment burden and costs while maintaining patient care. From a payer perspective, we continue to execute our three-pronged strategy for private payer reimbursement. We are in the process of updating the current reimbursement dossier and health economics model to more favorably represent our substantial existing clinical validation utility and economic validity data. This update will incorporate past publications and upcoming new publications at ACR to show the potential of Vectra DA to guide treatment decisions for patients while reducing costs to the healthcare system. Using this revised dossier we have re-initiated dialogue with private payers to discuss the clinical utility of Vectra DA in managing their RA patients. Additionally, we are completing the plans for our prospective clinical utility study and plan to initiate enrollment in early calendar year 2016. Finally, I would like to address the recent Medicare pricing comments for the new of Vectra DA CPT code. As most of you are probably aware, Medicare made a surprising preliminary recommendation to crosswalk a number of advanced diagnostic tests to existing clinical fee schedule codes rather than to gap-fill these new codes. Vectra DA was included in this group of tests with the crosswalk that represents approximately a 60% decrease in price. The industry strongly believes that this methodology is inappropriate for a number of reasons. First, this recommendation ignores the gap-fill already conducted by Medicare contractors that appropriately considers the extensive analytical validation, clinical validation and clinical utility studies that were a requirement to receive Medicare coverage in the first place. Second, the decision to crosswalk this code is inconsistent with the recommendations from virtually all industry stakeholders, Medicare's own advisory panel and Medicare's previous commentary which stated that gap-filling was the appropriate methodology for pricing of these complex diagnostic tests. Additionally, the advisory panel recently met a second time, and the public result of that meeting were released last week. The panel once again voted by a 10 to 2 majority to recommend gap-filling for the Vectra DA CPT code. Lastly, it is in direct conflict with the intention of Congress which passed the panel legislation to base advanced diagnostic prices of medium private payer prices starting in 2017. Myriad, along with an extensive array of extremely concerned stakeholders including physicians, patients, legislators and the majority of the precision medicine industry have commented on this preliminary recommendation. We anticipate final revisions will be published in November when the calendar year 2016 clinical laboratory fee schedule is published. Our second new product with significant potential is Prolaris with a global total addressable market of $1.5 billion and a current reimbursed market of $200 million in the United States. In the first quarter Prolaris orders were up 16% on a quarter-over-quarter basis to almost 2900 samples, which was exceptional given the seasonality we typically see in the quarter. We implemented the new active surveillance threshold in a revised Prolaris report in the first quarter. As a reminder, the active surveillance threshold provides a definitive cut-point where 60% of newly diagnosed prostate cancer patients fall below the threshold and have less than a 3% 10-year risk of prostate-cancer-specific mortality. This compares with patients above the threshold who have an average of a 20% 10-year risk of prostate-cancer-specific mortality. To date, the feedback from the clinical community has been outstanding. Physicians prefer having a definitive cut-point for patients validated with the most relevant and stringent endpoint of 10-year prostate-cancer specific mortality. After implementing the new report we ran a confirmatory marketing study evaluating the impact on patient treatment decisions based upon the new report format. In this study we found that 85% of treatment recommendations from physicians were consistent with the recommendation provided by the Prolaris combined score and active surveillance cut-point. This was encouraging and provides dividing strong evidence that physicians are trusting and following the incremental information provided by the Prolaris test. I'm also pleased to announce that we are now submitting Medicare claims for low and very low risk patients and anticipate recognizing Prolaris revenue in the second quarter. In addition, we recently announced that we have signed a contract with our first commercial insurer, Tufts Health Plan, which covers localized prostate cancer patients in all risk categories. The Tufts Health Plan agreement is a value-based contract which takes advantage of Prolaris' unique active surveillance threshold calibrated to prostate-cancer-specific mortality. This threshold instills confidence in patient and physician decision-making, and has been shown to drive a significant increase in the number of patients who choose active surveillance. We believe this innovative approach to contracting will be difficult to replicate for competitors who cannot demonstrate the same level of clinical utility as Prolaris. We are actively working to expand private payer coverage on Prolaris, and we'll update you on our progress during future calls. Our third new product with significant potential is myPath Melanoma with a global total addressable market of $600 million. We continue to see increased utilization of our myPath Melanoma test by the dermatopathologist community, with 22% of US dermatopathologists having ordered the test in the first two years after launch. Importantly, 20% of the ordering dermatopathologists in the first quarter were first-time ordering physicians, demonstrating a broadening of demand for this important test. As reminder, we have completed two large clinical validation studies for myPath Melanoma which both showed a diagnostic accuracy over 90%, including all relative subtypes which is significantly better than any previous melanoma diagnostic. To supplement this validation data, our collaborators at Cleveland Clinic presented additional data at the American Society for Dermatopathology Annual Meeting. This data showed the ability of myPath Melanoma to accurately correlate with clinical outcomes by evaluating 127 patients with melanocytic lesions. Of the 65 lesions that were classified as melanomas by pathologists, myPath Melanoma results agreed with 61 of these classifications, representing a sensitivity of 97%. Importantly, myPath Melanoma identified 100% of the 14 lesions which went onto become metastatic melanoma. Of note, the Cleveland Clinic who was our partner in this study recently updated the practice guidelines to include gene expression testing for difficult to diagnose melanomas. Also at the American Society for Dermatopathology Annual Meeting, Myriad presented a clinical utility study evaluating changes and treatment recommendations using the myPath Melanoma test. In this study patients who received a benign test result saw a 33% reduction in excisions. Conversely, patients who received a malignant test result saw a 36% increase in the use of additional treatments. These results demonstrate the ability of the myPath melanoma test to drive meaningful changes in patient care. Our next group of products with significant potential is our suite of three companion diagnostic tests, which in total have a global total addressable market of $6 billion. Importantly this month we are initiating the early access launch for the CLIA version of myChoice HRD for platinum indications. There have been seven studies that have demonstrated the ability of myChoice HRD to predict response to platinum agents for both ovarian and triple-negative breast cancer patients. As a result, we are seeing significant interest from academic thought leaders and rapidly completed enrollment in this early access program. Additionally, we're in the process of completing our second major validation study with myChoice HRD in triple-negative breast cancer. This validation will comprise almost 400 triple-negative breast cancer samples and will demonstrate the ability of myChoice HRD to predict pathologic complete response with platinum agents. We believe this data, which we hope to present at ASCO in May, will be sufficient additional evidence to support professional guidelines recommending the use of myChoice HRD in patients with triple-negative breast cancer. We also completing construction of our FDA laboratories for myChoice HRD and tumor BRACAnalysis CDx which should be finished in the second quarter. This will allow us to submit pivotal data from Phase III clinical studies as a companion diagnostic for use with PARP inhibitors and other agents. And we are making significant progress with these pharmaceutical companion diagnostic programs. At ESMO this year we presented new data on our myChoice HRD as a companion diagnostic for PARP inhibitors. First, we presented data showing that approximately 55% of tumor samples obtained from the NOVA study conducted by our partners TESARO had high HRD scores and were candidates for a PARP inhibitor. Additionally, Myriad presented data showing that the HRD score, which consists of three proprietary technologies: LOH, TAI, and LST, was more effective in identifying patients who may be potential responders to DNA-damaging agents that to LOH alone. The last new product included in our five-year plan is myPlan long cancer with a global total addressable market of $200 million. We presented key new studies at the International Association for the Study of Lung Cancer Meeting during the first quarter. The first study compared the myPlan long cancer scores to inter-pathological risk factors and found that out of 183 patients that were designated as high risk by the myPlan long cancer test in the study, less than 50% had three or more high risk features and would have been designated as low risk utilizing standard pathology. Additionally, we presented our analytical validation of the myPlan long cancer assay, demonstrating that the results were highly consistent and reproducible with only 1% of deviation in scores among multiple sample runs. As with our myPath Melanoma test, we are compiling the final components of our clinical dossier and are awaiting final publications to initiate coverage discussions with payers. Lastly, I would like to discuss our progress in expanding our international business. International revenue in the first quarter represented 4% of total revenue, which was consistent with the fourth quarter. As reminder, our goal was to grow this to 10% of total revenue by FY20 on a substantially larger revenue base. We plan on achieving this by focusing our investments in 10 countries that in total represent a market 20% larger than the United States and by offering both reference laboratory tests for complicated products and kits for the majority of our other products. We continue to make significant progress with our RNA kit initiative in coordination with our instrument partner, ThermoFisher Scientific. Development of work is progressing rapidly for Prolaris, myPlan lung cancer and myPlan renal cancer. Additionally, we're planning other -- another expression kit for the myPath Melanoma test. At the European Society for Medical Oncology Meeting we also presented data from our EMPATHY European clinical utility study on Prolaris, which evaluated 502 patient biopsy samples from key European markets. In this study we demonstrated that 54% of European men had a risk profile that was different than expected by using standard pathology. Based upon this data and another nine studies published on Prolaris, we're in the process of obtaining a CE mark for Prolaris, which we expect to occur by the end of the second fiscal quarter of 2016. Following the completion of this process we will submit for reimbursement to the National Health System in the UK and with AJS, the public health system in France. With our reference laboratory tests outside the United States, we continue to expect additional growth in the second half of the year based upon the positive impact of the German clinic acquisition and our ability to sign partnerships with hospitals and physician networks in the German market. Additionally, we believe we are positioned to generate revenue in the second half of the fiscal year from tumor BRACAnalysis CDx, as major European markets establish reimbursement for AstraZeneca's PARP inhibitor, Lynparza. In closing, we continue to make substantial progress in transforming Myriad into a diversified global pioneer in personalized medicine. As is evident in my commentary, the level of scientific output and scientific innovation has never been greater at the Company. Additionally, the significant investments we have made over the last several years in our urology, autoimmune and dermatology business units, as well as our international expansion remain on track to achieve our five-year strategic goals. In addition, we expect to deliver year-over-year growth every quarter this fiscal year, and to begin to demonstrate financial leverage from our previous investments. Now, I would like to turn the call over to Bryan to provide a detailed overview of our financial results and an update on our FY16 financial outlook. -------------------------------------------------------------------------------- Bryan Riggsbee, Myriad Genetics, Inc. - CFO [4] -------------------------------------------------------------------------------- Thanks, Mark. I am pleased to provide an overview of our financial results for the first quarter. First-quarter total revenues were $183.5 million compared to $168.8 million in the same period in the prior year. Importantly, we delivered our second sequential quarter with year-over-year growth with revenue increasing 9% compared to the same quarter in the previous year. As a reminder, we believe we are in an excellent position to grow on a year-over-year basis throughout each quarter of FY16. Hereditary cancer revenue was $157 million this quarter, and was up approximately 4% year over year and down approximately 4% on a sequential basis due to summer seasonality. As Mark mentioned, we ended the quarter with 80% of incoming samples being ordered as myRisk. Vectra DA revenue in the first quarter was $11.4 million, which was up 8% year over year. As Mark noted earlier, we performed approximately 38,000 test in the first quarter. Revenue associated with our pharmaceutical and clinical services business was $11.6 million and was up 168% year over year. As with last quarter, our German clinic generated approximately $5 million of revenue in the quarter, which accounted for most of the year-over-year increase. Our Myriad RBM subsidiary generated $6.5 million of revenue in the quarter. Gross margins were 80.1% in the first quarter compared to 79.3% during the first quarter of last year. The main driver of gross margin expansion has been improved efficiencies in our myRisk hereditary cancer laboratory, which was offset some by lower margin clinic revenue. Excluding the impact of the clinic in the quarter, our gross margins would have been 81.3%. Looking forward to the second quarter, we should continue to see incremental margin improvements based upon the positive impacts of Medicare reimbursement for Prolaris and higher fixed cost absorption associated with increased hereditary cancer revenue. Moving onto our operating expenses. Research and development expenses were $17.2 million in the first quarter and declined 24% relative to the first quarter of last year. Our research and development spend in the first quarter of last year was high based on the timing of clinical trials and myRisk development costs. GAAP SG&A expense this quarter was $86.5 million, increasing 1% relative to last year, and would actually have been down year over year excluding the impact of the clinic which added a little over $2 million to SG&A in the first quarter. We believe our expense trends in the quarter demonstrate the Company's focus on leveraging our existing infrastructure and the substantial investments we have made in support of new product development and international expansion over the last three years. Non-GAAP SG&A was $83.4 million and excluded $3 million of non-cash amortization expense tied to the acquisitions of Crescendo Bioscience and Myriad RBM. Adjusted operating income was $46.5 million in the first quarter, an increase 59% relative to the first quarter of last year. The significant increase in operating income was driven by higher revenue, lower research and development costs, improved operational efficiencies in our myRisk laboratory and leverage in SG&A. Adjusted net income was $29.8 million and adjusted earnings per Share were $0.41 for the first quarter compared to $19.4 million and $0.25 respectively in the first quarter of last year. Our fully diluted share count decreased sequentially to 72.1 million shares from 72.4 million shares in the prior quarter driven by our share repurchase program. During the quarter we used approximately $38 million to repurchase 1.1 million shares of Myriad stock. This level of repurchase activity reflects our goal to gauge repurchases at levels relatively consistent to our free cash flow. Our cash and cash equivalent balance at the end of the first quarter was $199 million compared to $185 million at the end of FY15. As of the end of the first quarter, we had approximately $170 million remaining on our approved share repurchase authorization. I would now like to provide an update on our FY16 financial guidance. As Mark mentioned, we are maintaining our full-year financial guidance which calls for total revenues of $750 million to $770 million and adjusted earnings per share of $1.60 to $1.65. Now I will provide you with some granularity in terms of how we are tracking with each of our product categories relative to our original assumptions. First, hereditary cancer. We exceeded our first quarter expectations and grew our hereditary cancer revenue by 4% in the first quarter, which is above our guidance for 1% growth for the year. Additionally, we have seen sample trends consistent with our normal positive seasonality throughout October. Despite these trends, given that we are early in the year, we are maintaining our full-year hereditary cancer expectation for $638 million to $649 million. Moving onto Vectra DA. We are awaiting the final Medicare reimbursement decision on whether the current crosswalking methodology Mark discussed will remain in place. If Medicare maintains the current crosswalking methodology and the current proposed pricing, it will detrimentally impact Crescendo revenues by $9 million to $11 million in the second half of FY16. However, given our current pricing expectations we are maintaining our full-year revenue guidance of $50 million to $55 million. For Prolaris we saw strong volume trends throughout the summer and have begun billing Medicare for claims as of October 15. We remain comfortable with our guidance of $10 million to $12 million in revenue. We still don't have clarity on retrospective reimbursement for Medicare, but should know where we stand at the end of the fiscal second quarter. As a reminder, we have not included any retrospective claims in our full-year guidance. Additionally, while our initial guidance did not incorporate Tufts Health Plan coverage, since they are a relatively small payer it will not materially alter our revenue in FY16. If we are successful in signing larger private payers however, it could drive potential revenue upside relative to our current guidance. Pharmaceutical and clinical service revenue of $11.6 million in the quarter was slightly ahead of the run rate needed to hit our $40 million revenue guidance. However, the Myriad RBM business can be lumpy on a quarter-to-quarter basis, so we are maintaining our full-year guidance of $40 million. Finally, other revenue in the quarter was consistent with our full-year forecast and we are maintaining our full-year guidance of $12 million to $14 million. We're off to a good start to deliver on our full-year revenue guidance of $750 million to $770 million. Looking at how we are tracking on the bottom line, our adjusted operating margins in the first quarter were 25.3%, which is on track to meet our objective of 200 to 300 basis points of operating margin expansion for the full year, or adjusted operating margins of 25% to 26%. Additionally, our GAAP tax rate of 39% came in below our guidance for our full-year expected tax rate of 40%. As you know, there are many factors that impact the tax rate on a quarterly basis, and thus we are still expecting a full-year rate of approximately 40%. For the full year we are maintaining our adjusted earnings per share guidance of $1.60 to $1.65. Looking to the fiscal second quarter, we're guiding to revenues of $188 million to $190 million, representing 2% to 5% sequential revenue growth, which is consistent with normal seasonal trends. And adjusted operatings per share of $0.40 to $0.42. Both first-quarter SG&A and R&D expense were a little light relative to our expected run rate for the remainder of the year. We continue to expect a GAAP tax rate of approximately 40%. So despite higher revenue expectations in the second quarter, we expect relatively flat adjusted earnings per share. Overall we're very pleased with the way we started the year and are on track to deliver on our financial targets for the full fiscal year. Importantly from a growth perspective, as we have lapped the impact of celebrity publicity and have seen the competitive landscape stabilize, we are in an excellent position to continue to grow on a year-over-year basis throughout this year as the impact of new products like Prolaris begin to contribute to revenue. As this occurs, we will leverage many of the investments we have made in developing new products and expanding our business internationally. As we showed in our five-year plan at our Investor Day, we believe our future looks exceptionally bright, and achieving our five-year goals will create substantive value for shareholders. With that, I am now pleased to turn the call back over to Scott. -------------------------------------------------------------------------------- Scott Gleason, Stephens Inc. - Analyst [5] -------------------------------------------------------------------------------- Thanks, Bryan. As a reminder, during today's call we use certain non-GAAP financial measures. A reconciliation of GAAP financial results to non-GAAP financial results and a reconciliation of GAAP to non-GAAP financial guidance can be found under the investor relation section of our website. Now we are ready to begin the Q&A session of our call. (Caller Instructions) Operator, we are now ready for the Q&A portion of our call. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Amanda Murphy, Blair William (sic). -------------------------------------------------------------------------------- Amanda Murphy, William Blair & Company - Analyst [2] -------------------------------------------------------------------------------- Good afternoon. I have a couple questions on the CDx product. Actually, the first one really is about the hereditary cancer business. In terms of the growth rate this quarter, you guys, I think, said before that you expected kind of market shares losses to offset any market growth. I was curious, given the 4% growth this quarter, how to think about the contributions from the CDx product vis-a-vis kind of broader market growth? Trying to get a sense of those two dynamics in the quarter. -------------------------------------------------------------------------------- Mark Capone, Myriad Genetics, Inc. - President & CEO [3] -------------------------------------------------------------------------------- Thanks, Amanda. A couple comments. I think from the CDx products perspective, as we've discussed on other calls, we include BRACAnalysis CDx in the hereditary cancer only because the patients that are eligible for that are all ovarian cancer patients. And that is the same patient group that's eligible for an hereditary cancer test. And because of that, it's difficult to tease those out separately. So we include CDx in and that number. So that 4% year-over-year number would include any additional patients that -- ovarian cancer patients that had BRACAnalysis CDx. But recognize some of those ovarian cancer patients may have had, in the prior year, may have had a myRisk test. That's why it gets difficult to actually tease that apart. We look at all of that as a singular line item in hereditary cancer. I think the 4% year-over-year growth that we saw in the first quarter, just as reminder in the guidance that we provided. We provided guidance for the full year. There was a 1% year-over-year revenue growth for hereditary cancer. Obviously the 4% growth we saw in the first quarter is ahead of that number. That's why we felt comfortable maintaining our guidance for the year, which continues to look towards a 1% year-over-year hereditary cancer rate. To your other question on market share, it's again, it's difficult for us to really discern precisely what market share is and what market growth is because no other laboratories, with the exception of one, report out their volumes. And so to discern that we are left at looking at our targeted market and our targeted physicians, and trying to understand their patterns of behavior. What we saw on a sequential basis was actually above our expectations for the quarter with hereditary cancer. And so we were pleased to see that for the first quarter. And again, rationale for why we've maintained guidance for the full year. -------------------------------------------------------------------------------- Amanda Murphy, William Blair & Company - Analyst [4] -------------------------------------------------------------------------------- Got it. A follow-up to something you just said about patients being retested with the CDx platform. It seems like payers are -- there's sort of a wide variety in terms of how payers are treating the CDx assay vis-a-vis covering BRACA test from other labs, or even allowing patients who've had previous test to get the CDx test in addition. And then also just in terms of how people are thinking about, or payers are thinking about BRACA testing for CDx versus myRisk. Can you give us a sense of how that is evolving? Are you're seeing payers -- is there anything that you can point to in terms of standardization in terms of how payers are thinking about the CDx assay specifically? -------------------------------------------------------------------------------- Mark Capone, Myriad Genetics, Inc. - President & CEO [5] -------------------------------------------------------------------------------- Yes, thanks Amanda. Evolving is probably a good word. I don't know that there is yet a consistent approach from each of the payers. They are very different. In some cases patients that have been previously tested with BRCA, they don't require retesting with the FDA-approved version. Recognize that is actually a relatively small number of patients in that category because most of those patients we hadn't before the launch of BRACA CDx hadn't penetrated the ovarian cancer market very deeply, and this only applies to a subset of patients. And those patients would have had to have been positive with BRCA tests, which is only about 15% of ovarian cancer patients. The pool of previous tested positive patients is relatively small. And that's why I think payers generally have accepted previous test results. Most physicians like the assurance they get with the BRACAnalysis CDx test relative to those that have not been through the rigors of an FDA approval process. But at the same time in the event that they are negative, they would like to also have the benefit of the broader myRisk test with the additional 23 genes that are not included in BRACAnalysis CDx. So you do see generally a significant number of physicians wanting to reflex ultimately to myRisk. I think this is one that will continue to see evolve. It's obviously new for payers, new for physicians. I think the good news is Myriad is the only Company positioned with an FDA-approved test with myRisk as well. And therefore we can provide the physician the entire array of solutions, depending on what they would like to see and depending on what payers would like as well. -------------------------------------------------------------------------------- Amanda Murphy, William Blair & Company - Analyst [6] -------------------------------------------------------------------------------- Got it. Thanks very much. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- Doug Schenkel, Cowen and Co. -------------------------------------------------------------------------------- Doug Schenkel, Cowen and Company - Analyst [8] -------------------------------------------------------------------------------- Good afternoon, guys. Thank you for taking the question. Some nice continued momentum outside the US. I apologize if I missed this in your prepared remarks, but is your expectation that as a percentage of sales, international sales will continue to grow from here? And if that is the case, would that imply that you're expecting US hereditary cancer testing revenue growth in the low single digit level? And I guess related to that, if that is the case, recognizing you believe share loss has stabilized and that there is continued market growth, should we conclude that there is some assumed pricing headwind built into guidance and is that likely a function of the fact that you are maybe giving up a little bit of price opportunistically to lock in payers over three-year periods? Thank you. -------------------------------------------------------------------------------- Mark Capone, Myriad Genetics, Inc. - President & CEO [9] -------------------------------------------------------------------------------- Thank you, Doug. I will see if I collected all those questions with the answers. First from an expectation on the international piece, we don't provide specific guidance for the international segment of the business separately. What we did say for the quarter is that saw 4% of revenues attributed to the international business. That was consistent with what we had seen in the fourth quarter. We also have stated that we expect the international business to grow to 10% of total revenue over the next five-year timeframe. But recognize that is, of course, on a base that's growing as well. That would represent some pretty nice growth for the international business over that five-year timeframe. From a hereditary cancer perspective, what we've said is that we expect 1% growth during the year in revenue. And recognize that hereditary cancer number does include both international numbers and the US market is in that international. We've suggested 1% in the guidance. We also said on our five-year plan that we had expected 3% revenue growth over the five-year timeframe for hereditary cancer. Now, one of the reasons is that we ultimately do expect the market to return to growth. We have seen market growth in hereditary cancer to the best of our ability slowed over the last year or so as we emerged from the celebrity publicity effect that we had seen previously. We still believe this is a highly under-penetrated market, less than 10% penetrated. We have opportunities to expand indications, and that's why we believe in the long term you're going to see this market ultimately return to growth, which is why we had put in a 3% expectation in outward years for growth. From a pricing standpoint, we don't comment specifically on prices that are in those contracts. I will points to a couple of data points that we articulated today. The first is that we are at 94% of pricing where it was before the advent of competition. Average selling price we maintained at 94%. The second thing you should note for this year that in fact if you look at the gross margin line, this quarter if you took at the impact for the clinic, you actually saw 200 basis point increasing gross margins this quarter. And recognize that those long-term contracts we've signed are already embedded into these quarter's numbers. I think that gives you some perspective. We've also for the quarter -- for the year guided to the fact that we expect somewhere around a 230 basis point increase in operating margins. So again, I think that gives you some insight into our thoughts from a profitability standpoint. And lastly, we did share at Investor Day our expectations for operating margin impacts from hereditary cancer. We had embedded some long-term price declines in that market that we laid out in our five-year plan that would weigh against long-term operating margins. But those would be more than offset by advances in operating margins in some of our newer products. Hopefully that addresses the array of questions, Doug. -------------------------------------------------------------------------------- Doug Schenkel, Cowen and Company - Analyst [10] -------------------------------------------------------------------------------- Super helpful, Mark. Thank you so much. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- Jack Meehan, Barclays. -------------------------------------------------------------------------------- Jack Meehan, Barclays Capital - Analyst [12] -------------------------------------------------------------------------------- Thanks, and good afternoon. I wanted to start and ask one more about the gross margin. And I appreciate the commentary about breaking out the clinic. I was wondering if you could maybe give a little bit more granularity around the hereditary business versus maybe the headwind from Prolaris and Vectra was, if you have that available? -------------------------------------------------------------------------------- Mark Capone, Myriad Genetics, Inc. - President & CEO [13] -------------------------------------------------------------------------------- Thanks, Jack. I think probably the best we can do is to break out the clinic impact. And as we said, once you break that out you had an 81.3% gross margin number. Recognize that in this quarter, because we didn't see any revenue from Prolaris, that there really wasn't any change in the relative impact of Prolaris to that gross margin. And so we didn't see that in this quarter. Bryan, any other comments? -------------------------------------------------------------------------------- Bryan Riggsbee, Myriad Genetics, Inc. - CFO [14] -------------------------------------------------------------------------------- I would say we've continued to see the improvements in the myRisk lab that we had talked about last year. That has certainly taken place, and you've see, nice improvement year over year. I think that's about all we can say. -------------------------------------------------------------------------------- Jack Meehan, Barclays Capital - Analyst [15] -------------------------------------------------------------------------------- Got it. One on Vectra DA and the volumes and the trajectory from here. I was curious if maybe you can talk anecdotally how things -- or what happened in the operating environment after the Lab Corp agreement kicked in? Just the level of visibility into some of the sales practices kicking in? -------------------------------------------------------------------------------- Mark Capone, Myriad Genetics, Inc. - President & CEO [16] -------------------------------------------------------------------------------- Thanks, Jack. Obviously early in the Lab Corp agreement at this point. We have been very pleased with the partnership in the month or so that we have been working together, or in the couple of months we have been working together. As we mentioned, there is one-quarter of rheumatologists that don't have access to phlebotomy services. And so that logistic for this protein-based test really made it very difficult, if not impossible, for them to use the test. We've been very pleased at the receptivity by those doctors about the logistics now that we're able to access the PSCs from Lab Corp. Early to report on any trends, but certainly we've so far have been very pleased with that ability to at least broaden the penetration into that market. And then from -- the other major initiative, of course, is practice integration. We saw enough promising signs of that, that we have now begun training a larger portion of the sales force earlier than we had originally anticipated. We will train 20% of them this quarter. And then we will be training the rest of them in the third quarter so that we can begin to roll out this program. Again, probably too early to make broad commentary since we just have started that additional training. All of the early signs would suggest that the success we've had with that approach in the preventive care segment is one that we would hope to replicate in the rheumatology segment. -------------------------------------------------------------------------------- Jack Meehan, Barclays Capital - Analyst [17] -------------------------------------------------------------------------------- Got it. Okay. Thanks, guys. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- Tycho Peterson, JPMorgan. -------------------------------------------------------------------------------- Tycho Peterson, JPMorgan - Analyst [19] -------------------------------------------------------------------------------- Thanks. Wondering if you can call out -- there was some kind of one-timers, I guess, in the quarter. Prolaris, the impact of CMS reimbursements from October 15 versus the original expectation of October 1. And then on hereditary, you lost a week a year ago so the comp was quite easy. Can you maybe talk about what the normalized growth would have been against the hereditary business if you didn't have that missing week a year ago? -------------------------------------------------------------------------------- Mark Capone, Myriad Genetics, Inc. - President & CEO [20] -------------------------------------------------------------------------------- Thanks, Tycho. When we did the call last, I think, last quarter we had expected reimbursement beginning on October 1. That in the final LCD actually slipped to October 15. Obviously that is a couple of weeks that we will have to rely on retrospective reimbursement as opposed to prospective reimbursement. As Bryan mentioned, we are obviously pursuing retrospective reimbursement because the final LCD was posted by Palmetto in January 2015. And so those two weeks would fall into that category of retrospective reimbursement, if in fact we are successful at obtaining any of that. Despite that two weeks, that's obviously offset by the good news that Tufts Health Plan has decided to cover Prolaris, and importantly decided to cover Prolaris across all risk categories. So as a result, we've got some upside to that that was not built into additional guidance offset by a couple of weeks that would have to be retrospective. And the net of that is we chose not to modify our guidance for Prolaris in this year. I think from an hereditary cancer comparable, I think you're referring to the last year when we were in the midst of transitioning a large percentage of the market from traditional single syndrome testing to myRisk testing which we did see an impact from that transition last year. And so that 4% year-over-year number would be modified by any of the impact we saw from that transition a year ago. Obviously we took all that into consideration when we provided guidance in the first place. And that was all Incorporated into that 1% guidance revenue increase for myRisk this year for hereditary cancer this year. So all of that was factored into that. Again, we saw 4% year over year, which was ahead of our expectations and have maintained out year-end guidance of a 1% growth in hereditary cancer. -------------------------------------------------------------------------------- Tycho Peterson, JPMorgan - Analyst [21] -------------------------------------------------------------------------------- Then I know you don't like to give a lot of granularity on specific payer plans, but United I think has come out with a policy now to require genetic counseling from third parties as of January 1. This has kind of been out there for a while, but it seems like they formalized it a bit. Can you maybe just talk on that dynamic, and whether you see other payers potentially following suit? -------------------------------------------------------------------------------- Mark Capone, Myriad Genetics, Inc. - President & CEO [22] -------------------------------------------------------------------------------- Yes, I think the United Healthcare policy requires a appropriate authorized healthcare provider to provide genetic counseling prior to testing. This has been a recommendation, actually, from a variety of sources for many years, that a healthcare provider ensure that they have appropriate education and training in order to provide counseling. That's what United formalized. They will require an attestation from a physician that in fact they are capable of providing that genetic counseling. And the details of that attestation have yet to be finalized on exactly what that might look like. I know that a variety of medical professional societies, including SGO, SABS and ASCO, ACOG all firmly believe they've invested millions of dollars in training their healthcare providers for decades. And in the fact that those healthcare providers are capable of providing this type of counseling, as they do with many other situations that they face as a healthcare provider. And so I think they certainly believe that by that fact that their healthcare providers would all be appropriate and to provide those types of counseling. Those are all details that I think are being worked out. But from our perspective, we don't see an impact to our business since we have invested heavily as well in training for all the variety of healthcare providers, as well as all these other medical professional societies have invested in their training as well. We'll have to see as that finalizes here over the next few weeks and takes effect on January 1. But we expect all our very experienced healthcare providers to attest that they have the expertise to provide this. -------------------------------------------------------------------------------- Tycho Peterson, JPMorgan - Analyst [23] -------------------------------------------------------------------------------- Okay. Thank you. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- Bill Quirk, Piper Jaffray. -------------------------------------------------------------------------------- Bill Quirk, Piper Jaffray & Co. - Analyst [25] -------------------------------------------------------------------------------- Thanks, and good afternoon. First question. Mark, I just wanted to clarify. In your prepared comments you mentioned that 50% of all revenue is under long-term contracts. I think in the past you've referred specifically to 45% and referred to myRisk. I wanted to clarify, is that 50% number related to myRisk, or are you talking about the entire business? Thanks. -------------------------------------------------------------------------------- Mark Capone, Myriad Genetics, Inc. - President & CEO [26] -------------------------------------------------------------------------------- Thanks, Bill. That 50%, and in fact given the complexities of this, the way we've really talked about this, I think at Investor Day and even before that, is the percent of our hereditary cancer business. Because trying to tease that out separately gets very difficult. And so it's 50% of our hereditary cancer revenue is under long-term contracts. Now, you're correct, that was 45% when we had Investor Day in September. Over the past few months we have been able to expand that through additional Blue Cross/Blue Shield contracts. And that's what's now driven that number from 45% to 50% of our hereditary cancer revenue is under long-term contract. -------------------------------------------------------------------------------- Bill Quirk, Piper Jaffray & Co. - Analyst [27] -------------------------------------------------------------------------------- Got it. And then as a follow up. Just, I guess, I have a competitive dynamic question. You mentioned at the Analyst Day that your market share, specifically within the OB and the onco call channel, remains particularly strong relative to the genetic segment. And I'm curious whether or not you've seen any increased competitive activity in those two other physician groups, or is it still -- are they still predominantly calling on the genetic counselors? Thank you. -------------------------------------------------------------------------------- Mark Capone, Myriad Genetics, Inc. - President & CEO [28] -------------------------------------------------------------------------------- Thanks, Bill. We haven't, as I mentioned in the prepared comments, we really haven't seen discernible changes in Q4 to Q1. Now, recognize that that is not perfect information. But to the best of our ability, we haven't really seen any discernible changes in market conditions. So we continue to believe we have very high shares in the community setting. And that the share loss that we had is still be concentrated in that genetic segment. But obviously, as we have shown, based upon our assessment we have seen that stabilize here over the last few quarters. So no real changes, at lease from our perspective, on the competitive front. -------------------------------------------------------------------------------- Bill Quirk, Piper Jaffray & Co. - Analyst [29] -------------------------------------------------------------------------------- And Mark, sorry. I guess I wasn't necessarily referring to shares changes per se, but rather just activity in terms of, are you seeing more sales people calling on those two other physician segments? Or do you still see mostly just the competitive call activity within the genetic counseling segment? Thanks. -------------------------------------------------------------------------------- Mark Capone, Myriad Genetics, Inc. - President & CEO [30] -------------------------------------------------------------------------------- I think activity, I do know that we could say we've see much change in activity either. Certainly if we had, it hasn't produced any change in result. But I don't think we've really have seen much change from the activity front either. -------------------------------------------------------------------------------- Bill Quirk, Piper Jaffray & Co. - Analyst [31] -------------------------------------------------------------------------------- Very good. Thanks, guys. -------------------------------------------------------------------------------- Operator [32] -------------------------------------------------------------------------------- Ann Edelstein, Bank of America Merrill Lynch. -------------------------------------------------------------------------------- Ann Edelstein, BofA Merrill Lynch - Analyst [33] -------------------------------------------------------------------------------- This is Ann calling in for Derik. The first question is maybe how much more do you guys expect to drive out of the lab optimizations, the myRisk lab optimizations that have helped you in the last couple of quarters? And then a longer-term question on the PAMA legislation. I think that there's been some confusion around how that impacts you when it goes into effect in 2017. Just thinking about the reimbursement risk of the 2016 preliminary schedule out for Vectra. How exactly do the 2016 (inaudible) reimbursement determination play into your (inaudible)? -------------------------------------------------------------------------------- Bryan Riggsbee, Myriad Genetics, Inc. - CFO [34] -------------------------------------------------------------------------------- Ann, this is Bryan. I will take the margin question. We haven't talked -- we would expect to continue to gain efficiencies in the myRisk lab as we implement new processes, work with vendors and suppliers. What we have guided on for the year is 200 to 300 basis point expansion in our operating margins. We think we are well on track to do that. We will continue to work on those through the year. As we said on the call, we expect -- we were a little light in our R&D and SG&A spend in the quarter. So that was a helper this quarter and it is what got us already to the 25.3% level adjusted, but we would expect to continue to drive efficiencies in that lab. -------------------------------------------------------------------------------- Mark Capone, Myriad Genetics, Inc. - President & CEO [35] -------------------------------------------------------------------------------- And then Ann, on the PAMA legislation, so I think the intent of PAMA was to begin to take effect in 2017. We're obviously in the period of time where CMS has to promulgate regulations consistent with that legislation. Those have been late by six months, and we're now in that -- saw the first draft of proposed regulations around PAMA that we are all actively commenting on. I think from a big picture perspective, the idea behind PAMA was to ensure that Medicare is paying the median weighted price, private payer price for diagnostic tests, which gives us as an advanced diagnostic company some line of sight into exactly how Medicare is going to price products. And any changes in pricing would be reflected in that same mechanism. To the extent that private payer pricing remains consistent and constant, so would Medicare pricing. I think for advanced diagnostics, it provides that line of sight and visibility and transparency on precisely how pricing will be determined, which we think overall is a very good thing for the industry and for Medicare, that has consistently had questions about how their payments compare to private payers. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- We now turn the conference over back to Mr. Scott Gleason. -------------------------------------------------------------------------------- Scott Gleason, Stephens Inc. - Analyst [37] -------------------------------------------------------------------------------- Thank you. This concludes our earnings call. A replay will be available via webcast on website for one week. Thanks again joining us this afternoon. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- Ladies and gentleman, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.
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