Myriad Genetics Inc (MYGN) 2003 Q1 法說會逐字稿

Welcome to the Myriad Genetics earnings announcement. I will now turn the program over to you host, Peter Meldrum.

Thank you and good morning. It's my pleasure to welcome you today to the Myriad Genetics earnings conference call. My name is Peter Meldrum and I am the President and Chief Executive Officer. I am joined today my Dr. Mark Skolnick, our Chief Scientific Officer, Mr. Jay Moyes our Chief Financial Officer, and Dr. Gregory Critchfield President of our subsidiary Myriad Genetic Laboratories. I will begin begin the discussion this morning with a brief review of our financial results for the first quarter ending September 30, 2002. Dr. Skolnick will discuss our recently announced discovery of a major cause of hereditary obesity. Dr. Critchfield will then discuss the status of our direct consumer marketing campaign. At the end of the discussion, I will turn the call over to the operator for our question and answer portion.

Please note that some of the information presented here today may contain projections, or other forward-looking statements regarding future events or future financial performance of the company. These statements are only predictions and acatually events or results may differ from management's expectations. We refer you to the documents that the company files from time to time with the Securities Exchange Commission; specifically the 10-K and 10Q reports. 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.

For the first fiscal quarter, ended September 30, 2002 product revenues increased to a record $7.9 million as compared to $5.5 million in the same quarter of the prior year. This record sales level is particularly impressive since it has occurred in what is historically our weakest sales quarter due to the summer vacation period. The improvement resulted from increased sales and marketing efforts, the introduction of new products like Colaris AT and Melaris and acceptance of our more established products by the medical community. The gross profit margin for our predictive medicine buiness also increased to a record 62.9% as compared to 58.9% for the first fiscal quarter of '01. This improvement in gross profit margin resulted primarily from price increases in our product line, economies of scale as a result of increased testing volume, and gains in efficiency in operation of our predictive medicine business. In addition, we are in the process of replacing our current gel sequencers with new 96 lane capillary sequencers. After we have completed the transition to capillary sequencing, we expect to see continued improvement in our gross profit margins. Research revenues which include $600,000 in related party revenue were $7.6 million in first quarter and September 30, 2002, as compared to $7.7 million for the same quarter in 2001.

This small decrease in research revenue is primarily attributable to greater emphasis on our internal research and development programs. Research and development expenses for the three months ended September 30, 2002, were $10.9 million dollars compared to $8.3 million dollars for the same period -- three-month period in 2001. This increase of 33% was primarily due to increased costs associated with development of an impressive therapeutic pipeline of 15 candidate drugs in pre-clinical testing, and our ongoing clinical trials in prostate cancer and Alzheimer's disease.

Total revenues for the first three months ended December 30, 2002, were $15.5 million dollars compared to $13.2 million for the same period in 2001. The increase in total revenues ruled from an increase in our predicted medicines revenues. Selling general and administrative expenses for the first three months ended September 30, 2002, were $7.7 million dollars compared to $5.6 million dollars for the same three-month period in the prior year. This increase of 37% was primarily attributable to the increase in our sales force. Plus marketing costs associated with our direct to consumer marketing campaign to support our predicted medicine business. We anticipate that this larger sales force and increased marketing effort will enable us to increase awareness of our predicted medicine business. The net loss reported by the company for the first three month period ending September 30, 2002, was $5.3 million dollars or $0.22 cents per share. Compared with a net loss of $6.8 million dollars or $0.29 cents per share for the previous three-month period ended -- ended June 30, 2002. Our net loss for this quarter represents a 22% decrease as compared to the net loss last quarter. We continue to maintain a low cash burn rate. The company ended the quarter in a strong financial position with $103.7 million in cash and investments. Additionally the company has no debt, and no convertible debentures, rounding out a strong and conservative balance sheet. It is now my pleasure to turn the conference call over to Dr. Mark Skolnick.

Good morning. It is my pleasure to describe our major break through announced last week. The discovery of the HOB1 gene. The first gene known to be significantly involved in human obesity. This discovery is particularly exciting as previous obesity-related genes have only been found to be an important cause of obesity in animal models of human disease. Most importantly, this gene is druggable which is not always the case for important disease predisposing genes. The mutation in the gene that predisposes to serious obesity appears to be a gain of function mutation. In general, it is far easier to block a gain of function in a gene with small molecules than it is to replace a lost function. Of course, we have initiated pharmaceutical development at Myriad using HOB1 as a target.

High throughput screening assays for small molecules are under development. These assays will be run against Myriad's compound library. Therapeutic rights to the novel HOB1 are owned exclusively by Myriad. However, we are planning on partnering our obesity and diabetes target discovery and drug development program in the near future. It is also significant that the HOB1 gene was discovered independently by both Myriad's analysis of obesity families and by Myriad's protein/protein interaction analysis of proteins involved in the diabetes pathway. The genetic analysis of these obesity families localized a major disease gene for severe obesity on chromosome four, a result which was published recently in the American Journal of Human Genetics. Our analysis is noteworthy in that the odds for linkage were greater than 100 billion to one. The gene was discovered to our persistence and believing that major genes for common complex disorders can be localized in very large families, that the region containing the gene can be well defined, and that our proprietary mutation screen software can uncover the underlying gene which contributes to the disease.

Most importantly, this process produces the best validation possible for new drug targets, as it relates human disease to the causal gene. When the HOB1 obesity gene was discovered through genetic analysis, we turned to ProNet to develop its protein/protein interaction pathway. To our surprise, we found that the HOB1 proteins interactions were already in our database. They had been discovered independently at Myriad as part of the diabetes drug target discovery program. This result provided immediate biologically independent confirmation that we had found an obesity gene and pointed to a specific part of the large diabetes protein/protein interaction network which was not genetically validated for drug development for both diabetes and obesity.

It has long been known that diabetes and obesity are clinically related. Myriad's discoveries are providing with us the first biological proof, both from the genetic analysis of obesity that these diseases are highly related in the underlying genetic causality. Drug screens which used HOB1 and other proteins in its immediate pathways targets may discover drugs which function to combat either or both of these extremely common diseases which are so debilitating to affected individuals and expensive to society. For me personally, this is the most exciting genetic discovery since BRAC1, the breast and ovarian cancer susceptibility that we discovered in 1994. In the wake of such a discovery, there's always renewed enthusiasm for the scientific era we live in, as there should be. Unfortunately, this enthusiasm often turns to impatience from immediate medical impact. The truth is that the same patients and persistence that was required to make this discovery is required to utilize it in drug development. Please rest assured that we feel strongly, the opportunity that this discovery provides as well as the responsibility of --it carries to convert scientific advance into practical application as quickly as possible. Thank you for your attention.

Good morning. I'm Greg Critchfield, President of the Myriad Genetics Laboratories. It's a pleasure to speak to you about our predictive medicine business and update you on Myriad's Direct Consumer Campaign.

As Pete mentioned, Myriad achieved predictive medicine revenues of $7.9 million dollars during the first quarter, compared to $5.5 million for the same quarter the year before. This record sales level ask a result of our talent and dedicated sales force. The sales force calls on the major U.S. cancer centers and oncologists providing them with important information on our life-saving tests. This past excellence in sales continues in the future with a new addition to our sales team. I'm very pleased to announce the appointment of Mark Capone as our Vice President of Sales. Mark joins with us 16 years of experience A very seasoned sales executive with Eli Lilly and company. Mark had profit and loss responsibilities for Eli Lilly's legacy products. With over $600 million in sales and more recently was a senior sales director overseeing 11 district sales managers. He received his MBA and masters in chemical engineering from MIT. Mark takes over leadership for all predictive medicine sale activities.

I would like to give a brief update on Myriad's Direct Consumer Campaign for BRAC analysis. The DTC campaign was successfully launched in our two test market, Denver and Atlanta on September 12, 2002. We are now beginning week number eight of the campaign which will run to February 2003. Television ads have been running on major network programs including E.R., the premiere of CSI Miami, Oprah, Regis & Kelly, The Practice, the "Today" show and Providence, as well as others. Advertisements have occurred on radio and in print, including People Magazine, Better Homes and Gardens, Lady's Home Journal, Women's Health Monitor and others.

Let me give you a sense of how things are going. So far, the response has been excellent. We are on plan with our projections that the ads will reach over 90% of homes in the target market and average of 16.5 times apiece during the five-month campaign. Several important parameters are being tracked during the campaign. Some are qualitative, others quantitative. We are keeping track of calls into our toll-free number. The call volume is strong. We tally the number of hits to our website that occur as a result of the campaign. We are seeing significant difference in the test markets versus controls and indeed versus all of our markets.

On the Myriad testing website, 40% of all searches by individuals interested in finding centers and physicians practices that provide genetic counseling services are coming from the two test markets. Remember, they only -- these test markets only compromise 3% of the U.S. population. Healthcare providers in these test regions are monitoring calls that they receive for information about BRAC analysis. For example, one major managed care organization reports that the number of calls requesting information during the time that the ads run is as high as 100 per day. And that the number of referrals for genetic testing has doubled. We are seeing increases in the number of calls to doctors and centers providing genetic counseling. The ads appear to be working well, in capturing the attention of the target audience. Women between the ages of 25 and 64 with a strong personal or family history of breast and ovarian cancer. While this increased awareness is gratifying, it is still too early to draw any conclusions concerning the success of the DTC campaign or whether there will be any positive impact on revenues. The reason for doing such a campaign is to correlate the activities I've mentioned with the increased number of samples that we anticipate receiving. We will compare the increase in a number of BRAC analysis historically with a number of controlled markets. This analysis will occur in our fourth fiscal quarter ending June 30, 2003. If the pilot is successful, we would anticipate a rollout of a national program in early 2004.

This is a very exciting time for our business. As we provide the best testing and information for professionals and for the public, Myriad's innovative predictive medicine products are being used to help their families live longer and healthier lives. Let's go back to Pete.

Thank you, Greg. Now we'll turn it back to the operator for the question and answer portion of the conference call.

At this time if you have a question, just press the one on your touch-tone phone. If you need to remove that, just press the pound key. Again if you'd like to ask a question, press the one on your phone now. Please register and we'll have our first question in a second. Our first question from Jennifer Davis, RBC Capital. Go ahead.

Good morning, gentlemen. I had couple of quick questions for you. First, could you go through for us your cash usage for the quarter? It looks like the ending balance of about $104 million includes some other spending like capex beyond what you earned in just general operations. And then second, can you give us an update on your pipeline? Are you still expecting to file another I&D this year, and can you talk about where things are with your HIV drug target? Thanks.

Thank you, Jennifer. You're right the cash burn did include significant capex during the quarter. I'll ask Jay Moyes, our Chief Financial Officer to address the cash position.

Thanks Jennifer. Cash and investments decreased by $20 million during the quarter. Primarily as a result of timing in the receipt of payments from collaborators. Also, increase in the leasehold improvements, resulting from expansion of the pharmaceutical laboratories as Pete mentioned including expansion of the medicinal chemistry and high throughput screening facilities. We added about 60,000 square feet this past quarter. We also had a reduction of if accounts payable result of certain required annual payments. And we also had an increase in accounts receivable as a result of our record October sales.

I think it's important to note that we believe our future payments from collaborators along with minimal future capital expenditures and predictive medicine revenues that are continuing to increase will enable Myriad to complete our fiscal year in June 2003 with cash and investment balances in the low $90 million dollar range.

Thank you, Jay. With regards to the pipeline, we're making excellent progress in terms of moving a number of drugs through late-stage pre-clinical development towards human clinical trials. In particular, our two lead compounds 49839, which is the anti-HIV drug and 176716, our broad anticancer drug are making exceptional progress. And we believe that both of these have a good opportunity of being in human testing by the end of this fiscal year. It is also Myriad's goal to remove from our pipeline of over 15 candidate drugs at least two of those into human clinical testing each year for the foreseeable future.

We'll take our next question from Meirav Chovav, UBS Warburg. Go ahead.

Hi. It's Derek DeBruin. With respect to the end margin improvement. Can you gives an idea of what the product mix was, the difference between the fourth quarter and the first quarter? Also, could you talk a bit more about what your partnering strategies are looking at in terms of the diabetes and obesity? Thanks.

Thank you, Derek. The product mix was pretty much the same between our fourth fiscal quarter ending June 30th and this first fiscal quarter of '03 ending September 30th. So the margins didn't really come from -- the margin improvement didn't come from any change in the product mix. We saw a good growth in all of our product lines during this past quarter. They really came with the result of the increased testing volume and efficiencies and improvements that are being made in the laboratory itself. So we're very pleased with the significant improvement in margins and we anticipate to see continued improvement as I mentioned because of the transitioning to full capillary sequencing in the not too distant future. The company is excited about, obviously the predictive medicine business, and excited about the progress it's making in gross margin improvement, and anticipates that when we reach full capacity and make the transition to capillary sequencing the gross profit margins will eventually peak out in the 70's.

How much was the price increase? Was there a price increase associated with that? How much was that?

Well, there was no price increase this particular quarter. But we did have a price increase on all of our products in April of this year. And I'm sorry, what was the second part of your question?

I was just curious about just discuss in a little bit more detail some of your plans for the diabetes campaign.

Very good. As you have noted, Myriad's focused in terms of internal drug development is on cancer and antiviral. So as exciting as the obesity/diabetes gene discovery is, this is a drug target and a project that we wouldn't want to partner with a major pharmaceutical company. We have already had discussions with a number of organizations. That's tremendous amount of excitement being generated about this discovery. Not only is it a very druggable target, one that is very amenable to small molecule drug intervention, but it is a drug target that definitely is a major factor in the cause of human obesity and this represents a huge potential market opportunity.

The other thing that is generating I think excitement by the pharmaceutical companies that we have had discussions with is a fact that while clinicians have known for many years that there's a link between obesity and diabetes, this is really the first genetic validation that in fact the two diseases are very much linked at the molecular level. So we definitely do plan on partnering this. It's not a project we would undertake ourselves. It's outside of our primary field or focus. We are very excited about the prospects for this particular discovery.

Have you retained the diagnostic on this?

Yes. We are retaining the diagnostic rights, and in particular the ability to develop a predictive medicine test that allows an individual to assess his or her risk for developing Type II diabetes later in the future has tremendous clinical utility. If you were aware that you had a heightened risk for the development of diabetes, you could take action early in life with regards to lifestyle and diet changes that could have a significant impact in terms of delaying the onset and possibly even preventing the development of diabetes. So this is very high priority within Greg's group.

Thank you very much.

We go to David Whitskey, Morgan Stanley. Go ahead.

Good morning. I'm here with Hanley as well. First question, the financial side. Are we still on track for $38 million in predictive medicine revenues and are you still comfortable with the $23 million loss guidance?

With respect to predictive medicine revenues, we're comfortable with the consensus projections and we are on track.

And relative to the loss for the year, we're very comfortable that our loss will be in that range if not even better.

Okay. How should we look at the SG&A for this year? Obviously, it was up again this quarter. But going forward, will this drop off significantly?

The SG&A will definitely drop off going forward. This quarter is somewhat unusual in that we did launch a major direct consumer marketing campaign which involved the purchase of major time on the national network -- sorry the local market of the national networks for television for the DTC campaign. And this campaign will cost the company somewhere in the vicinity of $3 to $5 million dollars in the test market city, and a good portion of that appeared in the quarter with regards to all of the preparation of the ads and the actual then purchase of some of the time. So the SG&A is distorted somewhat given that large impact on this major DTC campaign. And we definitely anticipate it to come back in line with more traditional levels as the year progresses.

And that's about $6 million more traditional?

Um, 3 to 5 million would be the total DTC campaign. -- and some of those costs will occur in next quarter since the campaign will run to the beginning of February. So not all that in the quarter, but a significant portion is.

Then on the predictive medicine side are you seeing any traction yet with the LabCorp alliance? And which tests in particular are most likely to benefit?

Actually, we're seeing excellent progress with our LabCorp alliance. We've coordinated very carefully as I mentioned in our direct consumer campaign markets. We have seen the benefit of that and that's going very well. As well as the effort nationally. All of our predictive medicine profit -- products are benefiting from the attention that LabCorp and our sales staff are giving it. So I think this has been very positive for us. No one product in particular. They're all showing significant increases, and the revenues continue to grow with the LabCorp related activities.

I would like to point out, however, that we spent a tremendous amount of effort training the LabCorp sales force, getting them prepared to address the primary care physician market. And LabCorp began activity selling Myriad's product partway through this past quarter ending September 30th. And so what we're seeing is the tremendous amount of interest and demand from the primary care physician market as a result of their efforts. We have yet to see that translate into significant revenue increases. But we anticipate that will occur over the next several quarters. As Jay reiterated, we are very comfortable with the revenue projection for this year for predictive medicine.

I guess finally, I guess Europe poses different challenges for predictive medicine. Can you discuss the obstacles there in your strategy for Europe?

Yes. Our primary focus has been in the United States, and in excess of probably 90, 95% of our revenues come from the United States. We have developed our own marketing and distribution network in the United States with over 106 full-time, dedicated Myriad sales reps. The LabCorp relationship and major initiatives like the DTC campaign. Europe is very different because unlike the United States which is predominantly private health insurance, most of the company countries in Europe have federally supported health insurance for the populace. This means the company has to work very closely with the governments of each of the countries in terms of developing a marketing distribution network in Europe. But that is something that we're working on at the present time. We do see Europe as a significant market opportunity for future growth and expansion for our products and Greg, if you mind elaborating a little bit.

Yeah, what I would add is that in Europe, it will take a longer period of time for Europe to come on line with strong sales, once it happens in Europe, when a national health insurance entities decides to go ahead and fund activities for predictive testing, it will available be available to everybody in the country. So what we're doing is spending our time with the governments, discussing the importance of predictive medicine, working with them on a cost benefit model, helping them to understand what this is going to do for their population, and we again anticipate that it will take longer for Europe to develop than the U.S. market.

Is it too optimistic to think that '04 could have a meaningful impact on revenues from Europe?

It's difficult to say right now, but it's certainly feasible that we could see meaningful revenues flowing from Europe in Myriad's fiscal '04.

Thank you.

Once again, if you have a question, press the one on the phone. If you need to withdraw that, press the pound key. We go to James Rosen, Brean Murray. Go ahead.

Hello, everybody. The -- let's see, we were wondering, Jay, if you could give us actual numbers for some of the balance sheet items, like deferred revenue and accounts payables and receivables, and actual number for capex for the quarter.

Jimmy, I have no problem giving them out, but I think it might be a little tedious for the conference call. I'd be happy to cover that with you after the conference call. Otherwise I'd be reading a lot of numbers off here.

That fine. If you can tell me one other thing, and that is the $632,000 in related party research, that's from proteomics right, and is that going to continue at the same rate going forward?

You're correct. The related party transaction is with the joint venture company formed with Oracle and Hitachi, Myriad Proteomics. This is to do high throughput sequencing for Myriad Proteomics in its efforts to map the proteum and that will continue in the future. We have a contract with Myriad Proteomics that goes through the end of this fiscal year, and should continue at about this rate each quarter going forward.

Okay. Sorry, one other thing quickly, Pete, if you can help us understand what is -- what does transitioning from gel to capillaries sequencers entail for the company? What is the QAQC process and how do you make that transition?

I'm going to defer the majority of the question to Greg. But it's a significant event for the company to move to a new testing platform. And as you have anticipated, there's a tremendous amount of QAQC that needs to go in before we're comfortable making the switch. A tremendous amount of software development, a tremendous amount of robotics and additional chemistry that has to be done to validate our tests on a new testing platform. But Greg, maybe you can go into a little more depth.

Yeah. What we do, we make a transition like this, it's very important that the quality of our test increase in the transition. So what we -- have --because we have qualitative parameters that we measure, as we perform BRAC analysis, or COLARIS, COLARIS AP or any other tests, we have an idea of how well the data are being replicated in the new system versus the old system. We do extensive validation. The validation includes specimen tracking, because of course we have to be able to track specimens flawlessly to make sure that the growth of the system, we know which specimen, which individual. And we look at the quality of the data. The extensive validation that occurs, we have bio statisticians here at Myriad that help us design studies to make sure that we are improving the quality of our test as we move forward. All of this takes a number of months. In fact, it takes man years of effort to make the transition like this. At the end of this time, what we'll is the ability to process specimens more rapidly to even improve the accuracy of what is a stellar test already and provide this service day in and day out and achieve the improvement in the margins that Pete talked about earlier.

This is Mark Skolnick and I had a few comments. We've been using capillaries in research for nearly four years, and specifically for looking at heterozygotes such as the BRAC analysis test for extensively for about two years. So the transition to diagnostics really comes on the heels of having fully integrated the technology into Myriad Genetics as a whole, before we even start trying to transfer it into the diagnostic laboratory.

Okay. Thank you. That's very helpful.

Jimmy? I was informed that our 10-Q will be filed and available on Edgar today. It -- anyone can take a look at those, the balance sheet detail.

Okay. Thanks, guy.

We'll go to Tony Forrestman, Forrestman Asset Management. Go ahead. Do you have a question?

I don't, Thank you.

We'll go to George Sasich, with Dominick & Dominick.

As LabCorp gains experience in peddling you tests, and if they become a greater mover of your products, will such a trend stagnate the gross profit margins or is the SG&A including their fees?

That's an a excellent question. The LabCorp revenues that we get through the collaboration as they address the primary care physician market really have no impact on our gross margins whatsoever. The relationship with LabCorp is we simply pay them a sales commission. And it's a very good relationship because right now the deal with LabCorp is that we pay them a sales commission that is slightly less than 10%, and the actual sales expense sales, travel expense of our own sales force is slightly greater than 10%. So we actually make a little profit on the LabCorp sales than we do on the Myriad generated sales. But all of that is in SG&A has no impact on the gross margins, and so our gross margins would not stagnate, but continue to improve with the LabCorp relationship.

Thank you.

We'll go to Charles Duncan, Private Investor. Go ahead, please.

Good morning. Gentlemen, congratulations on a good revenue quarter, at least with regard to predictive medicine testing. My question is on the R&D revenue. We've noticed kind of a trend with a couple of your mind share competitors that R&D revenue is light this year, and you guys are flat year on year, but were down on a sequential basis. I'm wondering is this --does this represent a secular trend, and secondarily, if you could help us understand how an emphasis -- a greater emphasis on internal R&D results in decreases in R&D revenue?

Thank you, Charles. Myriad has announced this past 12 month period three major strategic alliances with Pharmacea, Abbott and DuPont. So unlike some of the other peer groups, we have seen strong interest in our -- in our research revenues and have seen actual quarter to quarter growth in our research revenues. If you look at June 30, 2002, research revenues were $6.4 million, and this quarter they were $7.6 million up approximately $1.2 million dollars. So even though they were pretty much up from the prior year, quarter to quarter growth was a dramatic improvement and we will actually see research revenues higher this year than our last fiscal year. And in part this is due to the new strategic alliances, the company is entering into. So while you're right in the peer group, we have seen a falling off, both of deals and revenues associated with those deals, we don't see that yet at Myriad. In fact with the obesity/diabetes gene discovery we see even a stronger interest in collaborations for the company in the future.

Okay. That concludes the Q&A. I'll hand the call back over to management for any final comments.

Thank you very much. We appreciate everybody's participation and attendance in the Myriad earning conference call. As Jay mentioned, the Q will be available on Edgar today and we appreciate very much your continued support in Myriad. Thank you.

That concludes our program for this morning, thank you for dialing in.