Myriad Genetics Inc (MYGN) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Myriad Genetics third quarter fiscal 2008 results conference call. During the presentation, all participants will be in a listen only mode. Afterwards we'll conduct a question and answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Tuesday, May 6, 2008.

It's now my pleasure to turn the conference over to Mr. Peter Meldrum, Chief Executive Officer. Please go ahead, sir.

Thank you. Good morning, and welcome to the Myriad Genetics earnings call for our third fiscal quarter ending March 31, 2008. My name is Peter Meldrum, and I'm the President and Chief Executive Officer. I am joined today by Jim Evans, our Chief Financial Officer; Gregory Critchfield, President of Myriad Genetic Laboratories; and Adrian Hobden, President of Myriad Pharmaceuticals. I will begin the discussion this morning with a brief review of the past quarter and will be followed by Mr. Evans who will discuss our financial results. Dr. Critchfield will review the company's molecular diagnostic business and Dr. Hobden will discuss our drug development activities. At the end of the presentation, I will turn the call over to the operator for the question and answer portion.

Please note that there is some information presented here today that 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 those expectations for a variety of reasons. We refer you to the documents the company files from time to time with the Securities and Exchange Commission, specifically the company's annual report on Form 10-K, its quarterly reports on Form 10-Q, and its current reports on Form 8-K. These documents identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

Thanks to the hard work of the entire Myriad team, I think we had a pretty good quarter. Once again, our molecular diagnostic business achieved record revenues of $59 million for the three months ended March 31, 2008, as compared to $38 million for the same period in the prior year, an increase of over 55%. I'm also pleased to report that we experienced double digit quarter to quarter growth from all five of our molecular diagnostic products. Importantly, we continue to see strong growth in the Northeast region as a result of our direct-to-consumer marketing campaign which concluded at the end of the last month. The DTC campaign has clearly had a significant impact on our revenues over the past two quarters, and our sample volume has remained strong during the month of April. To assess the staying power of the DTC campaign, we will be calculating a return on investment in June 30 of 2008 and again on December 31, 2008. However, we are pleased enough with the initial results that we have decided to continue the DTC campaign again this fall. Dr. Critchfield will discuss the new campaign in more detail later on in this call.

With most of the Northeast DTC campaign spend behind us, the net operating profits for the molecular diagnostic business increased to a record $28 million, resulting in a net operating margin of 47%. This compares favorably with the prior year's third quarter profits of $16 million and a 43% net operating margin. Since the launch of our first test about a decade ago, Myriad has offered a compassionate use program for individuals who lack insurance coverage. These individuals can receive our testing free of charge. In light of our consistent impressive net operating results, we have decided to expand this program and be more aggressive in advertising it to our physician customers so that everyone with a family history of cancer can benefit from this important genetic predisposition information. We do not expect this endeavor to have a noticeable effect on the company's gross profit margins.

Myriad pioneered the field of molecular diagnostics a decade ago with the launch of the first genetic predisposition test for a major common disease, breast cancer. Myriad's mission is to remain a leader in this exciting industry by discovering, developing, and Marketing novel molecular diagnostic products that enable physicians to make more informed decisions concerning the management of their patients' healthcare, and in doing so, help their patients live longer, healthier, more productive lives. Myriad continues to pioneer new advances in personalized healthcare and we are excited about the future as a major player in this important and growing industry.

Turning our attention now to our therapeutic business, the company continues to make excellent progress in advancing its drug candidates toward market approval. I am pleased to report that last patient in the U.S. Flurizan Phase III clinical study has now completed the trial and moved on into the open label study. Remarkably, after 1.5 years in the Phase III study, 84% of the patients who completed the study have elected to continue on Flurizan in the open label study rather than switch to another experimental drug trial. This high retention rate implies that Flurizan is reasonably well tolerated and that patients, caregivers and physicians believe that Flurizan is providing a benefit in the treatment of Alzheimer's disease.

The co-primary end points for this study are ADAS-cog and ADCS activities of daily living. If the results for both end points are statistically significant, we plan on submitting an NDA to the FDA before the end of this calendar year. All Alzheimer's drugs to date have been approved in approximately six months. On the assumption the FDA will approve our drug within historical timeframes, the company has made plans for the commercialization of Flurizan and will be ready to launch Flurizan in July 2009. The global Phase III study is also proceeding on schedule and is approximately six months behind the U.S. study. It will conclude on October 20, 2008. After the data has been collected and cleaned, and the database locked, we will unblind the study and we expect to report our top line results for that study in December 2008. If the global Phase III study also meets statistical significance on its two clinical end points, we will submit Flurizan to the EMEA for approval and will be prepared to launch Flurizan in Europe in late 2009.

I believe this quarter's accomplishments and the upcoming results of our Phase III clinical trial on Flurizan will underscore the strength of our corporate strategy. It is one that combines a profitable, rapidly growing molecular diagnostic business with an explosive growth opportunity in pharmaceuticals. Our goal is to provide our shareholders with significant upside on the therapeutic front while maintaining the stability and financial security of a profitable operating business. In this regard, I believe that Myriad represents a unique investment opportunity. Now, it is my pleasure to turn the call over to our Chief Financial Officer, Jim Evans.

Thank you, Pete. It is my pleasure to present a more detailed look at Myriad's financial results for our third fiscal quarter ended March 31, 2008. Myriad's total revenues for the quarter ended March 31, 2008 were $61.8 million as compared to $41 million for the same period of the prior year. This impressive growth was fueled by the 55% increase year-over-year of molecular diagnostic revenues. As Pete previously mentioned, molecular diagnostic revenues for the quarter were $59 million, which is an increase of $21 million over the same quarter of our previous fiscal year. Sequentially, molecular diagnostic revenues grew 11% during our third fiscal quarter as compared to our second quarter of this fiscal year. It is important to note that Myriad has not increased prices on its molecular diagnostic tests for two years. All of the growth that we are seeing in testing revenues has been driven by increases in sample flow, which continue to be strong during April. Actual product revenues of $59 million for the third fiscal quarter compare favorably to the average analyst projection of $56.8 million.

Costs to produce the 55% growth in molecular diagnostic revenues for the quarter ended March 31, 2008 increased by only 9% over the same quarter of the prior year. Myriad has been remarkably successful in implementing technological and systematic improvements for processing samples. We continue to evaluate the latest advancements in sequencing technology, information processing and workflow enhancements, with an expectation that gross margins will continue modest improvements over the next year or two. Net operating margins for the molecular diagnostics segment climbed to an astounding 47% for the quarter ended March 31, 2008. This result is all the more impressive when compared to a net operating margin of 39% for the quarter ended December 31, 2007.

A closer look at the numbers shows a dramatic reduction in marketing spend, specifically DTC spend, during the March 31 quarter as our DTC campaign wound down. We spent approximately $2 million less this third fiscal quarter on the direct-to-consumer campaign than we did during our first and second quarters of this fiscal year. Research and Development expenses for the quarter ended March 31, 2008 were $31.2 million compared to $22.9 million in the same quarter of the prior year. Research and Development was primarily comprised of the costs associated with our six ongoing human clinical studies, the open label continuation of the U.S. Phase III Flurizan trial, and the data collection and analysis from the recently completed U.S. Flurizan Phase III trial. Additionally, we continue to invest heavily in developing new molecular diagnostic products and plan on launching at least one additional new product this year. Since we expect to move additional drug candidates into the clinic and advance our current drug programs as well as develop new molecular diagnostic products, we believe our Research and Development expenses will continue to fluctuate over the next several quarters.

Selling, General & Administrative expenses for the quarter ended March 31, 2008, were $30.2 million compared to $30.5 million for the prior quarter ended December 31, 2007. This small decrease over the prior quarter was attributable to the reduction in DTC costs, offset by expenses incurred to support the 11% quarter to quarter growth in our molecular diagnostic revenues. We expect our Selling, General and Administrative expenses will continue to fluctuate depending on a variety of factors, including the number and scope of new product launches, growth in molecular diagnostic revenue and future non-cash stock option expense. Our net loss for quarter ended March 31, 2008, was $4.6 million or $0.10 per share. This favorable result represents a 22% improvement over the same quarter in the prior year, which was $5.9 million or $0.14 per share and also beat the Thomson First Call consensus loss of $4.7 million. Of the $4.6 million loss for the quarter, $4.4 million is directly attributable to the non-cash stock option expense.

Cash, cash equivalents and marketable investment securities actually grew from $303 million at December 31, 2007 to $310 million at March 31, 2008. During our last earnings call, I discussed Myriad's conservative investment policy and the fact that there are no mortgage backed or asset backed securities in Myriad's investment portfolio. Since that call, the market for auction rate securities has been decimated, resulting in many failed auctions. As I'm sure most of you are aware, when an auction fails, the interest rate paid by the security increases to the maximum as stipulated by the prospectus. With the increased costs of these debt instruments, many of the issuers of asset backed securities are calling back the securities at par with a plan of raising funds through cheaper means. Today, of the $310 million in cash, cash equivalents and marketable investment securities held by Myriad, only $4.9 million is in auction rate instruments. While the liquidity of these securities has been impacted, we are very comfortable with the underlying credit strength of the issuers and we do not anticipate the need to access the $4.9 million in the near future, allowing us to enjoy the higher interest rate being paid by these issuers. We believe that Myriad's entire portfolio continues to be sound with preservation of capital as our number one priority.

Our accounts receivable are of a high quality, and the average collection period as measured by the number of days sales outstanding improved to 61 days for the quarter ended March 31, 2008 as compared to 65 days for the quarter ended December 31, 2007. To conclude, it is my pleasure to state that Myriad has no debt and no convertible securities, and that the total number of shares outstanding at March 31, 2008 was a modest 44.6 million shares. With that, I will now turn the call over to Dr. Greg Critchfield.

Thank you, Jim. It is a great pleasure to speak with you today about our molecular diagnostics business. As Jim mentioned, the quarter 3 fiscal '08 revenues for molecular diagnostics business were $59 million, a new record representing a 55% increase over our previous year's quarter 3 revenue of $38 million. This was achieved with an 11% quarter to quarter increase in revenue for the third quarter of fiscal year 2008.

As testing volumes grow, we continue making improvements to efficiently process the samples and to improve the quality of our testing procedures. We continue to implement higher throughput instruments and robots that allow us to achieve excellent turnaround time for our tests, with the in laboratory analysis averaging near seven days. We've announced a program to our customers where we have streamlined insurance verification, the pre-laboratory part of our process, and we anticipate during the next fiscal year the total turnaround time for our customers from the time the test is ordered to the time the information is back in the hands of the doctor will be two weeks or less. This more rapid turnaround time enables medical decisions to be made earlier for patients diagnosed with cancer, further improving the clinical impact of our testing. We've achieved these efficiencies through deployment of lean systems quality paradigms and our enhanced computer database. We continue to believe that all these operational efforts, both in our laboratory operations and our information technology architecture, position us well to support the exceptional growth we are experiencing as a leader in molecular diagnostics.

A number of factors have contributed to the outstanding growth in molecular diagnostic revenues, including the recent expansion of our salesforce into the OB-GYN market segments and guidelines by the American Cancer Society and the Society of Gynecological Oncologists that emphasize the importance of identifying individuals with mutations for hereditary cancer. Another factor in the growth of our business is the positive impact we are seeing from the BRACAnalysis public awareness campaign activities conducted from September 2007 through March 2008 in the northeast United States. I will discuss more on this campaign in a moment.

The OB-GYN segment of the market for BRACAnalysis represents our largest market segment. This segment is many times larger than that of individuals newly diagnosed with cancer. Strategically, we look at this market segment as the one where our tests have the potential to make the greatest public health impact by preventing disease before an individual has cancer. During this fiscal year, we have completed several initiatives to raise the awareness of our products among OB-GYN physicians, including expansion of our OB-GYN salesforce. Our experience shows that new OB-GYN sales representatives achieve profitability as rapidly as new oncology sales representatives. In light of these data, we will continue the expansion of our OB-GYN salesforce during next fiscal year to approximately 90 sales representatives.

I would like to highlight the purpose and share the results of our Northeast BRACAnalysis public awareness campaign. The campaign has the goal of increasing the number of physicians who are routinely identifying individuals in their practice who are at high risk of hereditary cancer so that these individuals can avail themselves of lifesaving medical technologies. The consumer awareness campaign focused on the demographic of women between the ages of 25 to 55 who have a strong personal and/or family history of breast or ovarian cancer. The message of the campaign was simple, yet powerful. If breast or ovarian cancer runs in your family, you need to speak to your physician because there's a test that can help identify your risks. This target audience saw on average 20 BRACAnalysis ads during the seven month period of the campaign. Because of the interest generated by the campaign, we also received a tremendous amount of free publicity that accompanied the launch of the campaign, including major articles in both the Wall Street Journal and New York Times, national network coverage, articles in leading women's magazine, local television and radio coverage as well as internet articles.

Physicians are our customers, and are a key element in the campaign. In strong contrast to some companies offering molecular diagnostic products to consumers without physician involvement, Myriad's policies require that a prescription be written and that the healthcare provider evaluate the patient before ordering the test. The physician then works with the patient after the test to determine the appropriate medical management strategy for that individual. Our approach is entirely consistent with established medical society guidelines emphasizing that appropriate individuals be identified and a decision on testing be made in consultation with the patient's physician. The results from the Northeast public awareness campaign thus far have been better than expected. There were tens of thousands of visits to our BRACnow website. We've had an increase in the number of physicians who order our tests, the primary goal of the campaign. We also achieved a 79% increase in the revenue from quarter 3 last year in the campaign territory. To assess the value of the campaign, we will be conducting an ROI analysis at the end of this fiscal year -- June 2008 -- and at the end of the calendar year. However, in order to conduct a further public awareness campaign next fall, we need to secure airtime this spring.

Because of the early indications of success and because we are very encouraged by the results of the campaign to date, I am pleased to announce the launch of a second regional BRACAnalysis public awareness campaign to be held in the Southern region of the U.S., principally Texas and Florida. This campaign area represents 18% of the U.S. population. We currently have experienced OB-GYN sales and medical support teams in place. The direct to physician phase of the campaign has already commenced with a physician education phase that needs to precede the media advertising to consumers. As with this year's public awareness campaign, the new consumer advertising phase of the campaign will run from September 2008 through March 2009. The cost of the Southern BRACAnalysis public awareness campaign will be about the same as the Northeast campaign, even though it is a larger territory.

You may have heard recently about the passage of GINA, the Genetic Information Non-discrimination Act. This bill has been passed by the House and the Senate with broad bipartisan support. GINA provides sweeping protections against discrimination by insurers and employers for individuals undergoing genetic testing. We feel that GINA's passage will have a positive impact on our product revenues.

Our molecular diagnostic products make a significant difference in the lives of individuals at high risk for cancer and in treating cancers. We're pleased to be helping more individuals as our business continues to grow. Thank you. I'd like now to pass the microphone to Dr. Adrian Hobden.

Thank you, Greg and good morning. As Pete has already told you, we are very actively involved in cleaning the data from the U.S. Phase III trial of Flurizan. It was a huge amount of data generated in the trial, since it involved 1,684 patients who had efficacy and safety assessments made on them every three months for 18 months. This means that we have a lot of checking to do on the data before we can unblind the trial. For example, we have to confirm that efficacy and safety data was entered for all of the patients at all of the time points and that lab values for blood measurements make sense and were not generated by error. We are making excellent progress with this work and are on schedule for the release of top line results. I'm also happy to announce our principal investigator on the trial, Dr. Bob Green from Boston University, is scheduled to present a full analysis of the data at the International Congress on Alzheimer's Disease on July 29, in Chicago.

Despite the huge effort that Myriad is expanding on cleaning the U.S. Phase III trial and running the global study, we continue to work hard on our other development programs. I thought I would take this opportunity to give an update on interesting observations from some of those programs.

Our Clinical Development program for Vivecon is progressing very well. Vivecon is a novel maturation inhibitor for the treatment of HIV infection and it has now completed several dose escalations in healthy volunteers. We are able to confirm that Vivecon is orally bioavailable in humans and in fact appears to be very well absorbed. Furthermore, the half life of the drug in humans is very long, on the order of two to three days, which means that it will be possible to administer Vivecon as a daily or even less frequent dose. We have already reached plasma concentrations of drug that exceed the IC50 for inhibition of HIV replication. Vivecon appears to be very well tolerated and we have not seen any drug related adverse effects to date. We are actively planning to initiate a multiple ascending dose study in HIV positive but treatment naive patients in the fall.

At a previous earnings conference call, I mentioned our excitement about our novel HSP90 inhibitor MPC-3100 that is currently in pre-clinical development. We expect to submit an IND for MPC-3100 early in 2009. Of course I don't have any human data to share with you, but the animal data on MPC-3100 is very encouraging. As you will be aware, there are a number of HSP90 inhibitors in clinical development and we have compared MPC-3100 to many of these compounds in head-to-head studies. Our review of the competitive landscape for HSP90 inhibitors suggest that compounds can be divided into two classes, semi-synthetic based on the natural product geldanamycin and completely synthetic small molecules which bear no resemblance to geldanamycin. MPC-3100 falls into the second class.

HSP90 is a molecular chaperone which stabilizes oncogenic proteins such as HER2, AKT, and BRC/ABL. In addition, oncogenes often acquire mutations that confer drug resistance or inappropriate activation, and these mutant forms depend on HSP90 to function. HSP90 inhibitors are most effective when dosed on a daily schedule, which means for practical purposes, an oral drug form is essential. The natural product geldanamycin validated HSP90 as a countertarget in tumor cells, but was too toxic for use in animal models. Modified geldanamycins are still limited by organ toxicity, for example, in the liver, kidney, and pancreas. They are given by infusion and cannot be administered orally.

There are a number of synthetic HSP90 inhibitors in development, but most are not orally available. Therefore, we believe that those drugs will be less attractive as compared to our orally available drug. MPC-3100 is a highly potent and specific inhibitor of HSP90 and has very good oral bioavailability and pharmacokinetics in animals. In head-to-head comparison with competing compounds, it reduced tumor volume in an NCI-N87 HER2 positive gastric tumor xenograph model without showing any evidence of toxicity. In contrast, a competing compound could reduce the rate of tumor growth, but did not show any reduction of tumor volume at its maximum tolerated dose. The standard chemotherapy for tumors of this type, 5-fluorouracil, caused significant weight loss and was also less efficacious.

We are currently exploring the range of tumor types that are sensitive to MPC-3100 and find it to be very large. Coupling this observation with the apparent low toxicity of the compound, we believe this new class of anti-cancer compound has the potential to have a profound impact on the treatment of cancer. Thank you for your attention, and I will now hand the call back to Pete.

Thank you, Adrian, and I'll turn it over to the operator for the question and answer period.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Jason Emeott with Bengal Capital. Please proceed.

Hi. It was noted that with the Flurizan Phase III data that excellent progress was being made to unblind that data and it was on schedule to report top line results. I was just wondering, on schedule, what date can be expected to get those top line results versus those full results that will be presented at the ICAD meeting?

The Company has indicated that it anticipates providing top line results in June of this year, and then of course, as Adrian mentioned, Bob Green will present the full data set at ICAD on July 27. So you should anticipate topline results in June.

So some time, any time in June. Any view on will it be towards the earlier part of the month, later part of the month, coming sooner rather than later?

No, we haven't given any guidance on exactly when in June. And as Adrian mentioned it's a fairly complex process to go through in terms of cleaning the data set and the data set has to be cleaned and locked before we unblind it. So right now, we are on schedule and we do anticipate providing those top line results via press release in June.

Okay, so just some time during the month. Obviously recognize it's a complex process, but as I'm sure you're well aware, people are quite anxious to get a hold of that data. So thank you.

Thank you for your question.

Our next question comes from the line of Ian Sanderson with Cowen.

Good morning, thanks for taking the question. This is another Flurizan question. Given the emergence of another or alternative potential end point here in the NTB for other trials, should you fail to show statistical significance on the co-primary end points being used, would you contemplate conducting another study of Flurizan using an alternative end point as well as perhaps some biomarkers? Or should this fail, is Flurizan done?

Let me answer that and then I'll ask Adrian to comment and give you an update on NTB. We have powered the Phase III study and it is very well powered. It's at 95% confidence level to achieve statistical significance with a fairly modest effect size of 30% based on ADAS-cog, which is the least sensitive and most difficult to achieve significance on. So we have a very high degree of confidence that if the drug in fact does provide benefit toward Alzheimer's disease, that we will see it and it will be statistically significant. If unfortunately we do not achieve statistical significance with ADAS-cog, it really probably means the drug is not effective in Alzheimer's disease, and we would proceed to abandon the drug. We would not consider doing additional studies with other clinical end points or with other biomarkers. But Adrian, maybe you can comment a little bit on NTB.

As Pete said, ADAS-cog is the least sensitive, but it is unfortunately the established standard for cognitive assessments and the outcome measures that the FDA has seen many times. NTB is widely regarded as being more sensitive, but it's never been used for submission to regulatory authority and therefore it's an unknown quantity. In addition, our Phase II study used ADAS-cog, so we know exactly what to expect in terms of decline over 18 months for the patients and the standard deviation of that outcome. We actually don't have that information for NTB. We are interested in NTB to see how sensitivity is in comparison with ADAS-cog, and for that very reason we put it in as a secondary outcome in our global study, the second study. So we will be able to report at that time the relative sensitivity of the two. But as Pete said, we're very confident that we powered our studies for ADAS-cog, and we see no reason to use NTB at this time.

Thank you very much.

Our next question comes from the line of Ted Tenthoff with Piper Jaffrey. Please proceed.

Great. Thank you very much, and I guess maybe just asking one other thing. With the co-primary end points, say we get kind of a split result here, like for example, Assisted Daily Living hits but ADAS-cog misses, how do we stand there? And I know we're trying to kind of guess at what may be happening, but what would your thoughts be along those lines?

Well, it's an interesting hypothesis or question, Ted. Again, we feel very confident that study's been powered to achieve significance on ADAS-cog, and it being less sensitive, if we hit ADAS-cog, we'll have no trouble with ADCS Activities of Daily Living. Because of the close proximity of the global study, if we had a split result on the U.S. study, we would continue to proceed with the global study. As I mentioned it ends in October, and we would want to turn over that card and see those results. If the global study were to hit on both end points, then we would have discussions with the FDA, because as you're aware, Namenda was approved with one of the studies meeting both end points statistically significantly while the other study missed one of their end points. And so there is precedence for submitting an NDA based upon a split result that you've hypothesized. I don't think that's a very strong likelihood of occurring. Again we think the study is powered very well to achieve both of the end points, but we do have the second global Phase III study to look at in a very short proximity to our U.S. Phase III study.

Great. That's really helpful to help understand your thinking on it, so thank you.

And our next question comes from the line of Alastair Mackay with GARP Securities. Please proceed.

Good morning. This is partly a Flurizan question. Could you talk a little bit about what you see as any diagnostic opportunity in the area of Alzheimer's disease in terms of biomarkers or molecular diagnostics and if that might connect with a successful set of trials with Flurizan?

As you probably are aware, there are no validated biomarkers or imaging techniques in Alzheimer's disease. And so at present, there are no surrogate markers that we could use and we do rely on the psychiatric battery of tests like ADAS-cog NTB Activities of Daily Living. Myriad is very interested developing diagnostics around Alzheimer's disease and particularly around Flurizan. And I'll let Greg talk a little bit about some of the work that's going on here at Myriad.

As you may be aware, there are several companies that have done some early work in looking at diagnostic tools for the assessment of Alzheimer's or the proclivity of a person to develop Alzheimer's disease. Myriad has some internal programs. We have collected specimens in our own trials that could be analyzed at some point in time and could be part of the discovery efforts. So this is an area that we are actively looking at and are quite interested in the developments as these technologies are moved forward.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of David Jackson with Think Panmure. Please proceed.

Sorry for the pause, gentlemen. Congratulations on the quarter. This question is for Adrian. About NPC-3100. I wondered if the company has taken the compound into any of the human cell toxicity models that might suggest a little bit more about its potential toxicity?

I'm wondering what specifically you're thinking about. In any studies we do, we always look to see whether there's non-specific toxicity of the compound. We really don't see any evidence of profound toxicity with the compound. I'm sure we could go to a high enough concentration in -- any compound could be taken to a high enough concentration and show toxicity. But certainly at the levels that we're showing efficacy and in the animal models, we have no obvious acute sense of toxicity of the compound, which might be shown typically in a xenograph model as weight loss in the animals. But we don't see anything like that, the animals being perfectly healthy but the tumors shrink. So we're thinking the compound looks extremely safe, but I don't want to say that we dwon't find a concentration with some toxicity level.

I wasn't referring to necessarily in the animal model, but some of the I guess I call them ex view of cellular models of, for instance, hepatotoxicity.

We don't have any evidence for that right at this moment.

Okay.

I think as we go on, maybe, but at the moment we don't see any signs of toxicity. Often that's related to a metabolism of the drug, and the drug is metabolized by people. But we don't have any evidence for any overt toxicity at this time.

All right, thank you, Adrian.

(inaudible) and like we see with geldanamycin, for example.

Okay, great. Might I ask another question of Greg?

Sure.

All right, thank you. I'd like to know if the soon to be launched next molecular diagnostic is either a predictive or perhaps more of a personalized medicine product?

As you know, we've been working on developing new molecular diagnostic tests and the next product will be an oncology test. We've not specified whether it will be predictive or a personalized test.

Great. Thanks again, gentlemen.

Thank you.

And our next question comes from the line of William Ho with Banc of America Securities. Please proceed.

Hi, guys, thanks for taking my question and congratulations on a strong quarter. I guess the question I have is with respect to the upcoming Flurizan trial, what do you spend annually on that program? And should that fail, how quickly do you think you could get the spend down and how much do you think your R&D and SG&A expenses would come down by?

Thank you, Will. Currently the Company spends about $120 million on R&D, and about $20 million of that is directed specifically toward diagnostics. The remaining $100 million is of course focused on therapeutic drug development, and Flurizan represents the majority of that. I would estimate about $60 million. If the Flurizan study were to fail, as I mentioned earlier, we would abandon the drug. We would not try to do additional studies or stay married to the drug. As Adrian has pointed out, we have a very strong pipeline, a number of very exciting drug candidates both in the clinic and about to enter the clinic. And we would certainly pursue those drug candidates, but we would stop development on Flurizan. The Flurizan study for Europe, the global study is so close to being completed we would continue to run that through its conclusion. And then there are some costs in terms of winding down the Flurizan study, but my guess would be about $50 million of the $60 million could be saved almost immediately should the Flurizan study fail.

Great. And just a follow-up to your other question on pursuing other drug candidates, Adrian, could you possibly discuss what pre-clinical evidence do you have that gives you confidence in the maturation inhibitor?

Vivecon, you're talking about?

Yes.

Well, we have very good anti-viral activity of the compound in cell lines with no evidence of toxicity of the compound. We've looked against the range of different viral strains particularly against virus resistant to the current classes of compounds and we see good potency, in fact no reduction in potency against protease resistant strains and reverse transcriptase resistant strains. So across the variety of clinical license of HIV, we see good activity. I guess that's the answer to your question.

Great. And how long do you think that first phase, I guess the proof-of-concept in HIV patients would take?

We're envisioning it as a dose escalation study. We really, it was also a safety study, but the idea is to be clear in patients what dose you need to get to to get anti-viral activity. The complication in this is the compound is protein bound, so we need to understand what effect protein binding has on potency of the compound. And so it's not, you can't automatically assume that you've got to anti-viral concentration just based on calculations, so that's what we expect but we won't be going to very high doses. We're going to doses that give us an effective reduction in viral load. So we expect that to go fairly rapidly.

Great. Thanks.

And our next question comes from the line of Charles Duncan with JMP Securities. Please proceed.

Hi, guys. Let me add my congratulations on a very strong quarter. I had a question on the drug side, specifically on Flurizan. I also have a follow-up in terms of the PM business. Regarding Flurizan, Adrian, I'm wondering if you could give us some insight on the types of patients that you were able to enroll in the trial with regard to their baseline Alzheimer's severity. As well as perhaps Jim could expound on the cost of the pre-launch activities that you spoke about.

As you probably are aware, Charles, the patients enrolled in our trial were mild Alzheimer's patients. That's defined as MMSC score 20 to 26, 20 being the most severe and 26 the mildest -- 1,684 patients in the mild category of disease. And when we look across the distribution from MMSC 20 to 26, we see a fairly even distribution across there. So the average MMSC score involved in this trial was 23, which is the same factors of the Phase II study. So very similar demographics to the Phase II study in terms of average MMSC, and average age in fact. Hopefully that answers your question.

Yes, it does. It's helpful, and Jim in terms of the cost of pre-launch activities?

Well, we'll be going through -- if the data is positive, we're all lined up to start hiring on additional people, getting salesforce built, and bringing the drug supply up to the magnitude that we'll need for launch. I think we've pointed this out in the past, with the rules require us to expense any of the drug supply that we build up into the point that the FDA approves the drug. And so those will be significant dollars that we're talking about. I think drug supply alone, we're $60 million or something along in those lines just to get the drug supply built up, as well as the cost of recruiting and bringing the people on board that we are going to need. So there will be significant costs associated with preparing for the launch.

Charles, if I can add, we've already put together a commercial development team under Wayne Laslie. Wayne was responsible for the launch of Abilify, which has proven to be a very successful drug at launch and since its launch. And he's assembled I think a very strong team -- a VP of Marketing, VP of Sales. I would estimate that this year, we've spent around $20 million in terms of working with the key opinion leaders presentations at conferences, and preparing for the commercialization activities that as Jim pointed out will increase dramatically once Flurizan is successful. Let me also clarify that should Flurizan prove successful, as Jim pointed out we do intend to hire a specialty physician salesforce, a sales force that would address neurologists, geriatric psychiatrists, leading KOLs in the area. The that salesforce is probably in the 200 to 250 person range and represents about a third of the scripts that are written for Alzheimer's disease. The company does, however, plan to seek a corporate partner for the primary care component. Primary care physicians will write scripts on the remaining two-thirds of patients for the Alzheimer's area.

That makes sense to me, Pete. Thanks a ton. Could I ask a question on the sustainability of the PM business?

Sure. Go ahead, Charles.

Okay, specifically, you saw pretty good top line growth due to the Northeast campaign. Can you tell us if that has really impacted demand for BRACAnalysis specifically or are there other benefits to or from other -- from some of your other products?

I'm going to ask Greg to answer that, Charles, but let me point out that this quarter, like last quarter, we did see significant growth, 55% year-over-year of strong double digit quarter to quarter growth. About a third of that the is due to the DTC campaign in the Northeast. But two-thirds, a larger portion, is organic growth on across all of our product lines throughout the entire country. So I don't -- while we're very excited about the DTC campaign, I don't want to give the impression that that represented the share of our top line growth.

Yes, and I'll give you some information on the effect of educating a physician to identify patients routinely for hereditary cancers. This of course is the primary purpose of the DTC activities. What we found is that once a physician becomes accustomed to identifying patients say for BRACAnalysis, they also are easier to convert into thinking about other hereditary cancers. And I think there's a benefit that goes beyond just the BRACAnalysis portion of the campaign.

That makes sense. And the IP on the BRACA test as well as the value of the rest of the database -- do you see that long term, long life, and sustainable?

We do, Charles. As you know, we filed -- well, we've received 22 issued patents in the United States, including composition of matter patents on the genes themselves, any fragment of the gene, any mutation of the gene, the protein encoded by the gene, and monoclonal antibodies that bind to the protein. We also have method of use patents backing that up, but we feel we have blocking patent protection until about 2018 to 2019, based upon our composition of matter patent that have been awarded to the company. Method of use patents and other specific mutation patents will go out into the early 2020's. But you've touched on a very important point, and that is Myriad has tested hundreds of thousands of patients and has compiled a proprietary database of difficult to characterize mutations. And so that proprietary database, we think, gives us a very strong competitive advantage once our patents have expired and there's competition from other organizations. But again I don't see that until we approach 2020.

Thanks, Pete. I'll hop back in the queue.

And our next question comes from the line of Geoff Meacham with JPMorgan. Please proceed.

Hi, this is Matt Roden. Thanks for squeezing us in here towards the end of the call. My first question is on the geographic expansion of the DTC into the Southern region of the U.S. Just wondering if you guys are going to focus exclusively on OB-GYN and oncologists and if there's anything really different that you're doing in the Southern region that is compared to the Northeast.

So it's a great question, Matt. What we're doing in the Southern region is essentially the same strategy we used in the North. The lessons we learned are that OB-GYNs are an excellent target for the primary campaign. We're also involving oncologists. We've begun the physician training phase, the DTP portion of the campaign already, linking up the oncologists and primary care physicians and making sure that people understand how to order the test. Where the patients can be referred for genetic services is an important part of the campaign and we're going to move forward with that. Our feeling is the more we involve physicians early, the better results that we have. And clearly that's been the case in our experience with the Northeast campaign. Our preliminary discussions with the thought leaders in the South are very very favorable. They're excited about the campaign. They like the fact we're helping them to educate their patients about hereditary cancer risk.

Thanks, Greg, and then would it be correct to assume that the increased operating margin this quarter is primarily a result of the decreased DTC spending?

That is a significant part of the improvement that we saw this quarter, and so we will be giving some of that back as we launch our next DTC campaign.

Okay, and then just lastly, a quick one on Flurizan. Is there any update to the discontinuation rates in both the U.S. and global trials?

I think we've said this publicly before. The calculation that we made for discontinuation rates would be that there would be 40% discontinuation over 18 months. That is to say the expectation was 40%. Obviously with the U.S. trial having finished we have an exact number for the discontinuation in the trial, and I'm pleased to say that it's well less, well short of 40%. So the actual power of the study has obviously gone up as a result of having less dropouts in the trial. We will be revealing those numbers I guess at ICAD, but up to that point we won't be talking about it. And in the global study, the dropout rates are actually even less than they were in the United States. I think that's probably a reflection of of different behavior patterns for physicians in Europe versus United States, but it's in line with other people's expectations.

Thanks, it's really helpful and congratulations on a good quarter.

Thank you.

And our next question comes from the line of Annabel Samimy of UBS. Please proceed.

Hi, thanks for taking my call. I just wanted to go over some of the outcomes for the Flurizan study. What would you do in a scenario where you don't meet statistical significance of 0.01 but you reached 0.05? How would you proceed at that point, and how would the FDA view results like that?

Well, obviously, to achieve statistical significance, you need 0.05, not 0.01. We did power to 0.01 because we anticipate submitting an NDA to the FDA based on the U.S. study with our Phase II study as supporting data. If the FDA were to require 0.01 instead of 0.05 for a single Phase III study, and we hit only 0.05 in the U.S., as I mentioned, the global study is only about six months behind. So it delays slightly the approval of Flurizan. But 0.05 is statistically significant, and with two Phase III studies, we should have no difficulty submitting an NDA to the FDA based on those studies.

Okay, can you just talk -- does the FDA require 0.01 or is it just powered for 0.01?

The study is powered for 0.01, and the FDA really can decide as they please what their requirements are. As I mentioned with Namenda, the drug was approved when they didn't even achieve 0.05 on one of their end points and they still got drug approval. Historically the FDA requires two Phase III studies at 0.05 or they have typically looked at a single Phase III study of 0.01 with supporting data with the Phase II. Obviously in oncology, you can get a drug approved off of a Phase II study and then do a post-market Phase IV, so there is quite a bit of flexibility within the FDA. We powered the study for 0.01. We're planning on submitting the NDA based on a 0.01, which is the most conservative approach in terms of the FDA. But obviously they, based on the efficacy of the drug and the need for drugs in the Alzheimer's disease area, accept or not a less high hurdle or standard.

Okay, and really quickly, just on the predictive medicine business, when you mentioned that you're going to expand your DTC campaign to another region, and you said there would be really no significant impact to the bottom line, could you just give us an idea of whether the 47% operating margin is sustainable or might we see a little bit of compression of that going into the fall?

I think we'll definitely see compression of that. As we pointed out the gross profit margin a year ago for the March 31 quarter was 43%, and we have seen the impact of the spend on the DTC campaign, which is about $8 million for the campaign spread over a number of different quarters. So that definitely has an impact. And we saw the benefit of the 47% margin because of reduced DTC spend primarily. So when we ramp up fully in the South, you will see those margins be reduced to more historical levels. Once the DTC campaign is over, however, we do anticipate going back to the 47% net operating profit range.

Okay, great. Thank you very much.

It definitely has an impact on our bottom line, no question.

Okay, thanks.

And gentlemen, we have reached the end of the time period allotted for the question and answer session. I'll now turn the conference back to you. Please continue with your presentation or closing remarks.

Well, I'd like to thank everybody for attending and listening in on the earnings conference call for our third fiscal quarter ending March 31, 2008. This does conclude the conference call, and again, thank you for your attendance.

And ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.