Myriad Genetics Inc (MYGN) 2010 Q3 法說會逐字稿

Welcome to the fiscal 2010 third quarter financial results conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions) as a reminder this conference is being recorded Tuesday, May 4, 2010. I would like to turn the conference over to Peter Meldrum, President and CEO of Myriad Genetics. Please go ahead.

Thank you. Good afternoon and welcome to the Myriad Genetics earnings call for our third fiscal quarter ended March 31, 2010. 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, Mark Capone, President of Myriad Genetics Laboratories, and Jerry Lanchbury, our Chief Scientific Officer.

I will begin the discussion this afternoon with a brief review of the past quarter and will be followed by Mr. Evans who will discuss our financial results. Mr. Capone will review the Company's molecular diagnostics business and Dr. Lanchbury will discuss the recent clinical data for two of our new products.

At the end of the presentation, I will turn the conference call over to the operator for a question and answer period. Please note that some of the information presented here 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 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 10K, its quarterly reports on form 10Q and its current reports on form 8K. 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. As you know, during the past quarter, Judge Sweet of the Southern District Court of New York ruled that 15 out of 179 claims and seven of our 23 patents relating to the testing for breast and ovarian cancer were invalid. Regardless of the final outcome of this court decision or the loss of those 15 claims, we do not believe there will be a material negative impact on our revenues or our future operations.

Even so, the Company will appeal Judge Sweet's decision to the Federal Circuit Court of Appeals and anticipates a favorable ruling from the higher court in about a year. It is important to note that all seven patents included in this this legal proceeding which now encompass 164 claims remain in full force and effect. These patents combined with our other patents relating to BRACAnalysis that were not involved in this litigation give the Company very strong intellectual property protection.

From time to time, the Company reviews the cost of operating its laboratories and the pricing structure of its products. Typically, we do not have an annual price increase, but defer the price increase for 18 to 24 months. Since our last price increase was in September of 2008, it is time for an appropriate price adjustment for our products. On April 1, 2010, we implemented an average price increase of approximately 7%.

We strive to keep our tests as affordable as possible and we believe that our prices are very competitive and that the clinical value and benefit greatly exceed their cost. In fact, the HHS Secretary's Advisory Committee on genetics, health and society released a report last year that stated and I quote, "one surprising finding from the case studies was that the per unit price of the full sequence bracket test, which is often cited as being priced very high, was actually quite comparable to the price of other full length sequencing tests done by preliminary chain reaction at both nonprofit and for profit testing laboratories." Based on this price increase the current list price for BRACAnalysis is $3,340. For COLARIS it is $3,150. For PROLARIS it is $3,400. For COLARIS AP it is $2,050. For OnDose it averages $2,400. For Theraguide 5-FU it is $1,175. For MELARIS it is $900 for PREZEON it is $500.

Now it is important to remember that these price increases will take effect on the contract anniversary date with each of our insurance payors. Insurance reimbursement of our products remains very strong. Approximately 96% of our revenues last quarter were billed to insurers. We currently have more than 2,600 insurance payors which reimburse BRACAnalysis and our other products. And we receive reimbursement from more than 80,000 separate health insurance plans covering over 130 million lives. Because of the economy and the rising healthcare insurance costs many of the insurance plans have increased their deductibles or raised their copay amount.

However, the average patient out of pocket costs for our products is still under $100. Additionally, our bad debt expense has recently improved to a modest 4.9% of sales. We are confident that the Company will continue to enjoy the same excellent reimbursement levels in the future that we have been able to achieve in the past. I believe it is also important to note that over the past several years Myriad has provided free BRACAnalysis testing to over 3,000 women who did not have insurance coverage or otherwise could not have afforded the test. Last quarter, the Company announced the launch of its eighth molecular diagnostic product, PROLARIS which guides a physician in assessing whether a patient diagnosed with prostate cancer is likely to have a slow growing cancer appropriate for a watchful waiting strategy or a more aggressive cancer requiring radical prostatectomy or radiation therapy.

We are very excited about the commercial opportunity for POLARIS and Dr. Lanchbury will discuss additional clinical data concerning our prostate cancer product later on in this call. The Company is on schedule to launch its next molecular diagnostic product this fall for the genetic predisposition of pancreatic cancer.

Additionally Myriad has a very strong product pipeline and is well positioned to meet its goal of launching at least one new molecular diagnostic product each year. We believe these new products will become very important revenue growth derivers for the Company within the next several years. Revenues for our third fiscal quarter were $90.8 million compared to $86.5 million for the third fiscal quarter of last year and revenues for the nine months ending March 31, 2010, grew 12% to $268.7 million compared to $240.4 million for the same period of the prior year.

To help investors gain a more thorough understanding of our expected yearly results, we will now begin providing annual Company guidance for both top line and bottom line numbers. We are projecting total revenues for the fiscal year ending June 30, 2010, in the range of $360 million to $365 million and earnings per diluted share in the range of $1.30 to $1.35. This guidance represents an approximate 11% revenue increase and 54% earnings per share increase over the prior fiscal year. The Company has a very strong balance sheet with over $511 million in cash, cash equivalents and marketable securities at March 30, 2010 compared with $392 million at June 30, 2009. We are generating over $40 million of free cash flow each quarter and have no debt, no convertible debentures and no other restrictions on this cash.

Our first priority for the use of this cash is to reinvest it in growing our molecular diagnostic business and in financing the planned expansion to our European operations. However, we also have sufficient cash reserves to begin returning value to our shareholders. At a board meeting held yesterday, the Board of Directors approved the repurchase of $100 million of Myriad common stock. This stock buyback program should be completed by the end of this calendar year.

Mr. Evans will provide additional information about our stock repurchase program later on in the call. The team at Myriad firmly believes that molecular diagnostics will revolutionize the practice of medicine and dramatically improve patient healthcare and outcomes while lowering the overall healthcare costs. It will shift the focus of healthcare from just treating disease to focusing on prevention of disease. It will identify patients who will respond to certain classes of drugs and differentiate them from the nonresponders who should be given other therapies to treat their disease. It will ensure that patients receive an optimal dose of the drug so that their disease is being treated effectively without unnecessary toxicity or side effects.

Myriad continues to be a pioneer in this field and expects to be a global leader in molecular diagnostics. Now it is my pleasure to turn the call over to Jim Evans.

Thank you, Pete. It's my pleasure to present a more detailed look at Myriad's financial results for our third fiscal quarter ended March 31, 2010.

As Pete mentioned, molecular diagnostic revenue for the March, 2010 quarter were $90.8 million, an increase from $86.5 million for the same quarter of the prior year. As I touched on during last quarter's earnings call, we historically face a headwind caused by the resetting of deductibles and the impact from the December holidays during the January to March time frame.

Additionally, the markets in which we operate are still experiencing high unemployment and other economic challenges which has had a negative impact on our revenue growth. Cost of goods sold of $10.9 million for the third fiscal quarter again resulted in gross profit margins of 88%, a 1% improvement over the same period of the prior year.

We believe that these gross profit levels are sustainable with potential upside as we continue to identify efficiencies to our lab procedures and as the price increases described by Pete are integrated over the next year into our managed care insurance contracts. Research and development expenses from continuing operations for the third fiscal quarter ended March 31, 2010, remember $5.9 million compared to $4.5 million in the same quarter of the prior year.

The increase in R&D expense over the 2009 quarter continues to be driven by our efforts to provide additional support for the clinical value of our current products as well as bringing new products to market. These efforts have resulted in the launch of PROLARIS and are ongoing to assure the launch of Myriad's pancreatic cancer susceptibility test that is scheduled for introduction in the second half of calendar 2010. Selling, general and administrative expenses from continuing operations for the quarter ended March 31, 2010, were $40.8 million compared with $35.5 million for the same quarter last year.

The 16% increase in SG&A was primarily attributable to the increased number of sales reps in the field, the expansion of our DTC campaign to include two territories and efforts to increase peer to peer activities. We expect that 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.

Myriad's net income for the third quarter of fiscal 2010 improved to $33.3 million or $0.33 per share fully diluted compared to $25.3 million or $0.25 per share fully diluted for the March 31, 2009 quarter.

One component of Myriad's statement of operations that will be changing significantly in the future is income taxes. So I would like to address this complex issue. Myriad currently has a tax asset comprised of approximately $300 million of net operating loss carry-forwards and R&D tax credits. Historically, Myriad has maintained a valuation allowance against 100% of this deferred tax asset.

This is required for companies that are generating losses or have recently turned profitable but have no guarantee of creating future tax liabilities. Once it becomes apparent that the deferred tax asset will have value as an offset to future tax liabilities, generally accepted accounting principles dictate that the valuation allowance must be removed.

As those of you who have been following Myriad since the spinoff of our pharmaceuticals business can attest, the Company is now very profitable and the uncertainty of our ability to utilize the deferred tax asset no longer exists. As a result, in consultation with our auditors, we are planning on reversing the valuation allowance in our fiscal 2010 fourth quarter which will result in an income tax benefit.

Per GAAP accounting, we will also begin recording an ordinary income tax expense for book purposes at the same time even though we will be pay no income taxes other than a 1% to 2% alternative minimum tax and certain state taxes. Consequently, for book purposes in the fourth quarter we will record both an income tax benefit and an income tax expense that will net to result in an estimated net income tax expense in the $4 million to $6 million range for the quarter ultimately determined by Myriad's profitability during the quarter.

Beginning in fiscal 2011 we will book an ordinary income tax expense based on an approximate 37% effective tax rate which includes the impact of both state and federal taxes. Again, we still have approximately $300 million of NOL's and R&D tax credits that we will use to offset future taxable income in determining the actual cash taxes paid to the IRS, but for book purposes we will begin to record full income tax expense in fiscal 2011 even though we will have no tax liability. For the quarter ended March 31, 2010, Myriad recognized $1.2 million of tax expense primarily for alternative minimum tax and state taxes.

Switching now to our strong balance sheet, we believe that our accounts receivable are of a high quality and reimbursement continues to be strong. We have achieved a very impressive days sales outstanding of just 48 days. Cash, cash equivalents and marketable investment securities for the Company continue also to be strong.

As of March 31, 2010, Myriad's cash, cash equivalents and marketable investment securities were $511.2 million as compared to $457.6 million as of December 31, 2009. Free cash flow defined as net cash provided by operations less capital expenditures was $41.8 million for the quarter ended March 31, 2010.

As Pete mentioned, the Board of Directors has approved a $100 million stock repurchase program to return some of this cash to shareholders. The company intends to purchase Myriad's stock from time to time in open market purchases as determined by the Company's management. Our intention at this time is to complete the purchase of the entire authorized amount by the end of calendar 2010. You will be able to track the progress of the program in future SEC filings. And now to conclude, it is my pleasure to state that Myriad has absolutely no debt and no convertible securities. With that I will now turn the call over to Mark Capone.

Thank you, Jim. As Jim mentioned, physician visits continue to trend below historical levels which includes routine medical treatment such as mammography which are reported to be 20% below normal. In addition, according to a recent survey conducted by the Association of Community Cancer centers, 52% of oncologists saw a decrease in patient volume with 73% reporting an increase in the number of uninsured or underinsured patients. To respond to this issue we have continued to increase our focus on consumer awareness activities.

The Midwest DTC campaign continues to perform consistently with previously successful campaigns and the south campaign has demonstrated incremental revenue growth but not as large as in the Midwest. So we are extending both campaigns until Memorial Day. In addition, we have evaluated a number of opportunities for direct to consumer campaigns in our next fiscal year. Based on our analysis we will conduct our next regional campaign in the mid-Atlantic and southeastern portion of the country.

The states to be included in this campaign currently comprise about 15% of our total revenue and include Georgia, Tennessee, Mississippi, Alabama, Virginia, North Carolina, South Carolina, Louisiana and Arkansas. We expect this campaign to cost approximately $1 million in fiscal year 2010 for direct to physician activities and $6 million in advertising during fiscal year 2011. At this point we are not planning any additional pulse campaigns in fiscal year 2011 for direct to consumer advertising.

In addition, we have significantly increased our efforts to leverage social networking sites to drive patient awareness. Through efforts with Facebook, Twitter and YouTube we are able to cost effectively approach those patients that would otherwise forego physician visits. Lastly, we have launched an extensive raise the red flag Internet campaign with a focus on educating patients on colon cancer and our COLARIS products.

Even when patients choose to make office visits they and their physicians are more sensitive to any out of pocket costs associated with testing. This has become particularly important since average deductibles for patients have increased with rising healthcare costs. To address these concerns we will be launching some additional campaigns. First, we are promoting a 24 month no interest payment plan that can help a patient manage their expenses. This financing program is particularly helpful for a patient with a high deductible plan because it helps them spread their out of pocket costs over a longer time frame.

Lastly, we are helping patients that are no longer covered by employer insurance programs by working with individual state Medicaid programs and are pleased to say that we now have coverage in states which represent over 70% of all Medicaid patients. With unemployment hovering near 10% Medicaid will provide access to hereditary cancer testing for a significant number of patients.

Having addressed declining office visits and affordability, we have also reviewed our programs to encourage physicians to offer testing at levels consistent with professional society guidelines. We have continued to implement peer to peer programs at levels consistent with those in the second quarter. We have also continued sales incentive programs to reward both growth in new physicians and increased testing from existing physicians.

In addition, we are implementing changes in our salesforce deployment and in our direct to physician marking programs to increase the frequency of our interactions with healthcare providers. Admittedly in this unique economic environment, it is difficult to predict the effects of these efforts. However, we believe we are taking the appropriate strategic actions. We will continue experimenting, learning, changing, and executing innovative approaches to develop the significant potential that still exists in the hereditary cancer market.

We continue to make progress with our new personalized medicine products. OnDose has a market potential of over $400 million and the key to realizing this potential depend on addressing three critical areas, publishing additional data, obtaining Medicare reimbursement and simplifying sample handling to assure convenience and reliable results. Dr. Lanchbury will be discussing a review article that highlights the success of the OnDose approach in the standard combination drug therapy used in the United States.

In addition, one additional prospective study has been completed and will be submitted for publication in the near future. Another is already in process and we are in the planning stages for three additional studies. Second, a reimbursement discussions with Medicare are progressing well and we are providing them with additional feedback from physicians on the clinical utility of OnDose. Lastly, we announced the introduction of a room temperature sample handling protocol which uses a chemical stabilizer to prevent 5-FU degradation thereby replacing the more cumbersome cold processing and shipping protocol.

This will greatly simplify office procedures which we estimate were too complicated for approximately one-third of all oncology practices. The continued acceptance of OnDose was evidence at a recent hematology oncology pharmacy association meeting where 78% of the 300 attending pharmacists specializing in oncology drug administration stated that there was sufficient evidence to use OnDose testing for monitoring 5-FU therapy.

In addition, a publication in March has implications for other 5-FU product Theraguide which evaluates the status of the DPD gene and can help prevent toxic reactions to 5-FU therapy. Yang , et al. in cancer chemotherapy and pharmacology published a paper that concluded that, "although nonrandommized this study strongly suggested prospective determination of DPD status has an immediate clinical benefit by reducing the drug induced toxicities incidents in patients treated with 5-FU. Our preliminary results thus advocate for systemic DPD screening in patients eligible for treatment with 5-FU drugs in head and neck cancer. "

While the short term economic environment provides challenges the significant untapped potential in the hereditary cancer market and our growing portfolio of products for personalized and prognostic medicine offer excellent promise for future growth. I would now like to turn the call over to Dr. Jerry

Thank you, Mark. I'd like to use my time today to provide an update on some of Myriad's recently launched molecular diagnostic products. As Pete mentioned, we introduced our eighth product, POLARIS in March.

POLARIS is a 46 gene prognostic test which for the first time provides the physician with quantitative information to assess the aggressiveness of a man's prostate cancer. The test is carried out on messenger RNA which can be extracted from human tissue or bodily specimens. The gene panel consisting of self-cycle genes is designed to provide a precise quantitative measure of the proliferative capacity of the tumor which in turn predicts the tumor's aggressiveness and capacity to recur after treatment.

In the United States each year approximately 192,000 men are diagnosed with prostate cancer and around 80,000 of those men will undergo a radical prostatectomy, the surgical procedure that removes the prostate gland and some surrounding tissue. Approximately 35% of these men will eventually have a biorecurrence indicating the return of their prostate cancer. Current models based on clinical variables cannot effectively predict in which of these men the disease will recur.

The initial findings on which the POLARIS product is based were presented in all sessions at the 2010 cancer symposium in San Francisco by Gregory P. Swanson MD, University of Texas Health Science Centers San Antonio and colleagues. As I mentioned earlier, around 192,000 men are diagnosed with prostate cancer each year in the US. Each of these men is a potential candidate for a POLARIS test to determine whether they should receive aggressive treatment or the benign option of active surveillance or even watchful waiting in very low risk cases.

I'm delighted to be able to tell you that we have progressed rapidly in our studies of POLARIS in a large retrospective observational cohort and have demonstrated that the same gene panel is highly predictive of prostate cancer specific death over a 10 year observation period. Men with a favorable POLARIS score of less than zero had only a 2% chance of dying of prostate cancer over that 10 year period compared to men with an unfavorable POLARIS score of greater than 1.4 whose risk of dying of prostate cancer was 60%. One very important factor is that the POLARIS score was far more predictive than either PSA level or Gleason score.

This suggests to us that POLARIS in addition to the standard clinical measures has the potential to establish a new standard of care following prostate cancer diagnosis as well as offering important information after prostatectomy. We are pursuing the validation of these and earlier findings through an aggressive series of retrospective clinical studies in multiple locales.

I want to turn now to OnDose. This product is a nano particle immunoassay that allows the routine monitoring of five flurizan levels in the plasma of patients undergoing chemotherapy. There is an emerging consensus that pharmacokinetic dosing of 5-FU would enable physicians to achieve better cancer responses and outcomes while minimizing the often life threatening side effects associated with such therapy.

In a recent review article in the Journal of the National Cancer Institute Dr. M and colleagues stated in the conclusion of their article and I quote, "studies have shown that only 20% to 30% of patients treated with a 5-FU based regimen, have 5-FU levels that are in the appropriate therapeutic range. Approximately 40% to 60% of patients are underdosed and 10% to 20% of patients are overdosed."

The article reveals a multi-center study of 157 colon cancer patients receiving a modified FOLFOX 4 regimen. The census that used the OnDose approach improved progression free survival 60% while reducing grade three to four diarrhea, mucositis and neutropenia by 86%, 95% and 28% respectively compared to centers in which traditional BSA-based 5-FU dosing was used.

The conclusion of the article stated and I quote, "a simple, cost effective and rapid testing method of 5-FU level would further help replace body surface area dosing with pharmacokinetic guided 5-FU dose management." Myriad's OnDose service product offers such a tool for achieving the replacement of body surface area dosing to facilitate reduced toxicity with the potential for better outcomes. We expect future studies to confirm the utility of pharmacokinetic testing dosing of 5-FU-based regimen with regard to lower toxicity and enhanced outcomes. At this point I'd liked to hand the call back to Pete.

Thank you, Jerry, and I'll hand the call back to the operator for the question and answer portion of the call.

(Operator Instructions) Our first question comes from the line of Sun Gina with JM Morgan. Please proceed.

Hi. Thank you for taking my questions. Pete, just a question about your guidance. You guys in the last quarter call had talked about how consensus of the time around $381 million was achievable and kind of, you know, giving the revision in the outlook. What would you say are kind of the biggest factors kind of contributing to the revision there?

Thank you. Yes. The company felt that it was important that it begin giving its own guidance and so we're going to start with this year but we'll continue in 2011 and going forward. Unfortunately we are still facing high unemployment. As Mac mentioned, physician office -- as Mark mentioned, physician office visits have come up a little bit, but they're still well below historical levels and our third fiscal quarter is historically a weaker quarter because of what Jim mentioned with the holidays toward the end of December and the resetting of deductibles and that combined with other factors caused us to achieve a 5% revenue increase which was below what the consensus guidance number would be and so that was taken into account when we set our own company guidance at $360 million to $365 million this fiscal year.

Okay. And some of the other companies that reported recently that are also exposed to kind of physician visits talked about an uptick in the month of April compared to, you know, what they saw -- the declines they saw in the March quarter. Did you guys kind of see any kind of trend similar to that?

We have not given specific guidance about the quarter ending June 30th, 2010, or any information about what we've seen in terms of an uptick in physician office visits, but I think you can get a feel for how we think the June quarter will go by looking at the annual guidance, then backing out the March number.

Okay. And my final question is you know, in terms of your strategy of expanding into Europe, what are some of the first steps that you need to take as a company kind of in terms of, you know, having meaningful growth there in the next three years?

You're absolutely correct. The company has made a commitment to establish a presence in Europe within the next three months. The first aspect of doing have -- or sorry, within the next three years. The first aspect of doing that would be to formulate a strategy with regards to which products we take to Europe first and in which countries. The five major market countries in Europe are in order Germany, France, Italy, Spain and the UK, but each of those markets is very different and each of those markets represent different opportunities for the Company products. So the first step will be to establish a strategy with regards to which products and which countries we want to move into Europe.

Then we would implement that either by building facilities in Europe ourselves, by partnering with a European company who already has a presence in Europe or by acquiring a company in Europe and those are I think the major stems over the next one -- steps over the next one to two years we would take before we begin actually selling in Europe. Obviously once we have established a presence in Europe we need to get reimbursement for our products. Reimbursement is handled not only on a country by country basis, but within some countries individual regions have their own reimbursements.

For example, in Switzerland that we would need to get reimbursement in each separate Canton. There's not a national reimbursement. And the Company would have to obtain regulatory approval for its products which would involve obtaining a CE mark for our products. So that lays out I think kind of the process we go through as we move the Company toward Europe and we are very comfortable at the present time that we can achieve the goal of having a significant presence many Europe within three years. in Europe within three years.

Great. Thank you very much.

Thank you.

Our next question comes from line of Scott Gleason with Stephens. Please proceed.

Pete, Jim, thanks for taking my questions. I guess the first question, you talked about on the fourth quarter call about January volumes being pretty strong. I guess can you give us a better idea about how the quarter progressed and what you guys kind of saw throughout February and March?

Yeah. This quarter was strong compared to other third quarters. Revenues did grow from $86 million to $90.8 million, but as Jim tried to highlight on the December quarter call, seasonally this quarter does face some challenges because of the reset of deductibles and because of the holiday period toward the end of December. So I think that while we did see a 5% year-over-year growth we certainly did not see growth quarter-over-quarter and I think the continued high unemployment and other employment challenges continue to present a headwind for the Company.

Okay. And then I guess if we look at the price increase can you give us an idea of how the phase-in will work there? Obviously with your noncontracted accounts that could take place immediately, but I guess when we look at the contracted payors, can you give us an idea of when those kind of contracts from a timing standpoint whether they're evenly distributed throughout the year or whether it's kind of clumped in a certain time period in terms of how that will take place?

Yes. They are pretty evenly distributed throughout the year. Whenever we negotiate a contract with a major insurance payor, the day we sign the contract so that can be any day of the year is the date of the anniversary. So for modeling purposes I would assume that approximately 1/12 of that price increase will be impacting our revenues each month over the next 12 months beginning on April 1st.

Great. And then, Pete, you know, I know you guys aren't ready to give your fiscal year '11 guidance yet but just in light of how the quarter came in kind of relative to expectations and the huge variance in 2011 revenue projections can you give us a sense for kind of what your guys' opinion of kind of the long term three year growth rate the business looks like at this time?

Well, the Company is very excited about the products it has. We think there's still significant upside with BRACAnalysis. As we've mentioned in the past, we are less than 10% penetrated in the OB/GYN market for BRACAnalysis. I think that will be a significant growth driver in the future. We are particularly excited about both OnDose and PROLARIS, our two most recent product launches and believe that those products actually could ramp up faster than BRACAnalysis did, but I would caution investors that all of these products are very novel unique products that have a substantial benefit on the healthcare system both in controlling costs in healthcare as well as improving patient outcomes and quality of life for patients, but because they're so novel and new, there's a tremendous amount of physician education that is required and new guidelines have to be established by the various medical professional societies and reimbursement has to be obtained by Medicare and other payors and so we anticipate that meaningful impact of those new products on our revenues won't take place for about one to two years from product launch, but eventually those products will kick in and we're very bullish on those. I am excited about the European opportunity. We certainly will be within Europe within the next three year horizon and I feel very comfortable that the Company can continue to launch exciting new novel products that will drive future growth revenue. So I think the outlook for the Company over the next three years is very bullish. Obviously the Company is still being impacted by the current high unemployment rate and the economy and we're going to continue to try new strategies to work through some of those headwinds. So hopefully that gives you a little bit of a flavor without giving you hard numbers because obviously I'm not prepared at this time to try to give you any sort of three year financial projection.

Okay. Thanks for taking my questions.

Our next question comes from the line of Derek Francis with UBS. Please proceed.

Hi, good afternoon.

Hi, Derek.

Pete, I have to ask an obviously question here which is given the fact that the last four quarters have been, you know, less than stellar, you know, the question I keep getting from investors is how can we be sure that what we're seeing here is not the economy but just simply the fact that the oncology setting has been fully penetrated and that, you know, the opportunity in OB/GYN is a lot harder to crack than that? Could you address particularly the first one the penetration in the oncology market and why we're not at full penetration?

Yes. Under current professional guidelines and most insurance companies look at NCCN or ASCO guidelines, we should be testing approximately 1/3 of newly diagnosed cases of breast and ovarian cancer and we're currently testing about 17%. So we believe we're about 50% penetrated in the oncology market taking both the combination of breast and ovarian cancer together. We believe that we can achieve about a 75% market penetration, so there's still a nice upside in terms of growing the oncology market.

However, as Mark pointed out, even with a situation where a woman is diagnosed with cancer, a physician office visit even in the oncology setting are down and the oncologists are faced with more and more women who don't have insurance. Myriad has put in place a number of financial assistance programs. We have expanded our Medicare coverage and we're doing a number of things to try to penetrate this market even in light of this more challenging economic environment, but again I think you just have to look at the growth in the oncology setting. I think we reported last quarter oncology revenues were up about 4%.

Even in this bad economic environment and I believe that for this year they'll also be up at least 4% and we'll continue to work toward penetrating that market, but clearly there is upside in the oncoming setting. There's no question that OB/GYN's are a more challenging physician group to address than the oncologist. They are a very busy physician group. They are slower to adopt professional society guidelines and slower to adopt new technologies. However, we have made significant progress with the adoption of the ACOG guidelines and those are only about a year old now. So we do believe that over the next I think at the investor day meeting Mark mentioned that it takes about two years for those guidelines to fully click in and I think we're very comfortable with the ability to achieve that over time and again we are forecasting about a 20% growth this year in the OB/GYN setting. Yeah, we're very excited about both and we don't think either represent insurmountable challenges to the Company.

I mean as you look at your R&D spend it was up, you know, a little bit more than we were looking for you know, a little bit more than we were looking for in the quarter. It's kind of like when you look at the year on year growth rate kind of like a 10% growth rate year on year number excluding obviously the impact from spinout, but is the current run rate about 5.8, is that going to creep a little bit higher, particularly as you go out in the next year?

I think you can look at a about a 15% increase year over year in the R&D expenditures assuming that this year is going to be in the ballpark of $25 million again we are investing heavily in clinical studies supporting our product and obviously as you launch new products and have more products on the market, there are more studies to support that current product line.

Okay. Yeah. 25 -- given what your run rate is for the first three quarters 25 -- you'd have to spend a lot in the 4th quarter in order to get to the 25.

It will probably be a little less than 25, yes, but it won't be at I believe the $5.8 million level. So if you took it up 10% to 15% on top of 25, I think that puts you in the ballpark for fiscal 2011.

Great. Thank you.

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

Hi, guys. Thanks for taking the question. First of all, I was a little disappointed in your prepared remarks. You spent so much time talking about OnDose versus market dynamics, though the few questions that have come since have been helpful. Pete, I'm wondering if you could address the affordability, you know, kind of implementation or steps that you're taking or implementing to improve the affordability for the OB/GYN market. Could you give us some color on how that could have impacted the quarter had it been in place maybe a quarter ago or how long do you think that that can help to, you know, improve demand in the OB/GYN segment?

I'm going to let Mark Capone address the first part of the question, but we will try a number of strategies as we try to improve patient acceptance and affordability for the Company products and obviously until we try those we don't know if they're going to be successful or not. So we really can't comment on what would have happened last quarter had we implemented them then. We'll implement them now and see what happens next quarter, but let me ask Mark to comment specifically on some of the things we're doing to address the affordability issue.

Thanks for the question, Charles. Let me outlook lion a couple programs. The first I did mention was 24 month interest free which again if you have a very high deductible plan that's quite attractive as opposed to paying $3,000 let's say at the beginning of this calendar year. You could spread that out over 24 months.

The second thing we've done is in the event that there is any uncertainty on the physician or the patient's part as to exactly what the out of pocket costs would be for a patient particularly given the fact that their deductibles may have changed for this year, we've also instituted a program whereby they can determine exactly what those out of pocket costs are before making a decision to release the tests and the removal of that uncertainty is particularly useful in an OB/GYN setting. So that's the second program that we've introduced and the third thing is the progress we've made with Medicaid over the past 18 months we've more than doubled the access our Parishes have to Medicaid programs -- patients have to Medicaid programs and so that we expect going forward will continue to provide testing opportunities for patients that we had not previously been able to address. So I think it's -- to Pete's point it's difficult to say what the impact of all of these would be in retrospect, but we think all of those would help address some of the uncertainties that are out there in this economic climate going forward.

If you were to look back in the last quarter and the one before that at various operating metrics for tracking whether or not you're getting traction with your OB/GYN efforts, could you honestly say that you're getting traction within that segment and, you know, perhaps if you corrected for the down office visits or some of the other metrics that you mentioned like mammography that things would be better or are you getting pushback in that segment that you didn't anticipate?

No, we are not getting any pushback in the segment that we didn't anticipate and as we've indicated on other conference calls, we're not seeing any new challenges in the OB/GYN market that we didn't see and successfully address in the oncology market. As I mentioned, however, the OB/GYN is a very busy physician and it does take a few more sales calls to convert that to a customer and that is a market that the test is a little more discretionary. So it is more impacted by the recession and the current economic environment then say the oncology sector, but no, we don't see any challenges there that we haven't seen and met with our previous marketing efforts.

Okay, Pete. I also appreciate that you gave the different prices for the different tests, but could you give the percentage of revenue contribution for the different tests?

We're going to be doing that next year, Charles. Yes, we will.

Okay. That's very good. Also if I could ask with regard to pancreatic cancer tests that you talked about which I'm pretty interested in, can you give us a little bit of understanding of the data that you'll have when you launch that test, not the specific data, but the body of evidence behind it and the clinical utility that you foresee for that test?

Yes. There are a large number of peer review journal articles surrounding the three genes that will comprise the pancreatic cancer test which is pal B2, BRAC2 and P16 and all of these tests have shown the role that these genes play and the genetic predisposition to pancreatic cancer and because all of these genes are in some fashion involved in the DNA repair mechanism, we believe that there will be very interesting utility and previously diagnosed pancreatic cancer patients in terms of guide be therapies where DNA damaging agents may prove to be the most beneficial form of treating those disease -- that disease.

So it will be therapeutic utility or predisposition? I'm not sure I heard you correctly.

Both, yes. Definitely we think the test has advantage for individuals who do not yet have pancreatic cancer but have a family history of pancreatic cancer to assess risk of developing pancreatic cancer later in life where they can undergo increased surveillance to catch the disease earlier where it's more treatable and if they have a higher likelihood of surviving the disease, but we also believe based on the function of the genes involved in pancreatic cancer predisposition that even a patient diagnosed with pancreatic cancer would be benefited by testing in terms of guiding that therapy for the treatment of their disease.

Okay. And my final question is on PROLARIS and thank you for taking all my questions. Have you made any progress on reimbursement so far?

Well, let me ask Mark, have Mark address that and I may end up stealing all of his thunder. Because of the insurance contracts that we have negotiated when we launch a new product, in many of these contracts they're automatically covered and we do have almost 100 million lives under coverage right now for PROLARIS. One of the big factors, though, that we focus on with PROLARIS would be Medicare coverage and we are in the process of proceeding to obtain Medicare coverage but have not yet obtained Medicare coverage and Mark is shaking his head that I did steal successfully all of his thunder and didn't have anything to add to that. Thank you, Charles.

Thanks for the added color.

Our next question comes from the line of Ashim Anand with Natixis. Please proceed.

Hi, guys. How are you guys doing?

We're good. Thank you.

I was wondering if you guys would be willing to give us a breakout of oncology versus OB/GYN revenue this quarter?

We will be doing that at the end of the year. Traditionally at the end of each fiscal year we do break out the percentage of oncology versus OB/GYN revenues. At the end of last year it was 70% oncology, 30% OB/GYN and we'll certainly be getting that information at our next quarterly call for this fiscal year.

Okay. Now it's a housekeeping question. Last quarter you had around $112 million in long term investment securities. So most of the increase in short term cash and securities, is that coming from that $112 million?

No. I mean most of the new cash coming in is collection of our receivables and cash from operations.

Okay. So you still have that on the balance sheet, long term investment securities?

Yes, yeah. We have the three different categories. We have basically cash and cash equivalents. Then we have short term marketable investment securities and then long term marketable investment securities. So there's three different captions on the balance sheet that you want to make sure you add together when coming up with our full cash, the cash balances. So again at the end of March it was $511.2 million in cash and cash equivalents.

Okay. Now long term business question. Considering the macroeconomy has more effect on OB/GYN and they are also difficult physicians to penetrate and unlike so many other companies you're not a one product company and the penetration of other products other than BRAC is pretty low in oncology market. So what would be the case against actually pushing into oncology mark much more rather than OB/GYN market with the non-BRAC products?

Well, thank you for the question and we don't mean to imply that we're ignoring the oncology market either for BRAC and COLARIS which are generating significant revenues or for some of the newer products. We are addressing the oncology market in addition to as well as the OB/GYN market. So we certainly have expanded our speaker bureau program and done a number of initiatives in the oncology market to try to penetrate that market more deeply and for the newer products to expand and grow those products in the oncology setting .

How about, you know, more salesforce? Would that be prudent at this time?

We're not planning on increasing the salesforce in the oncology market at the present time. That salesforce we believe is at the right size and fully capable of addressing the oncology segment. As Mark mentioned, at the investor day the majority of the oncologists are using Myriad's product. They're not using it at the professional society guidelines yet. So our focus is really at increasing same store sales rather than trying to create new sales. So for that I think our existing oncology salesforce is more than adequate and we don't plan on growing it in the near future, nor do we believe that would be a wise expenditure to do so.

Okay. Thank you, guys.

Thank you.

Our next question come from the line of Lucy Lu with Citigroup. Please proceed.

Thank you. Can you please talk about the performance of the DTC campaign in the Midwest and also the south and maybe, in a quantitative way, you could and also has that ended by the end of March as planned?

Thanks, Lucy. This is Mark. The Midwest campaign is performing similar to what we've seen in the other naive DTC areas which means it looks like it will clear our double-digit hurdle rate for return on investment. So we're pleased with the performance that we've seen in the Midwest. In the sow where we came back and did a pulse campaign which is the first time that we've revisited a particular region, we saw incremental revenue benefit, but it was not at the same level that we saw in the Midwest and because it didn't achieve the same level of return we've chosen not to do a pulse campaign in fiscal year 2011. Nonetheless because both of those campaigns were contributing incremental revenue we've chosen to extend those campaigns all the way through until Memorial Day and so those advertisements are, in fact, still running in both of those regions and will be for the next three or four weeks.

Okay. And then just based on the past experience I guess mostly in northeast, how long does the effect of DTC campaign last after you finish the campaign?

Well, if you look at the northeast campaign, we did see a 78% increase in new physician customers and as you look at that a year later we retain the vast majority of those customers. So the increased revenue that we got from the increase in physician customers is sustainable and did continue for at least a year after the ads stopped running and the commercials were no longer on air. You also get a bow husband phenomenon where patients -- a bolus phenomenon where patients see the ad and that bolus of patient demand benefit our revenues as long as the ads are running, but as soon as the ads symptom, that bolus symptoms as well, but again we're focus on building our customer base and that is sustainable beyond the DTC campaign.

Okay, great. Just one last question on PROLARIS. Two studies, one obviously mentioned in this press release. I believe there's another one. Can you please comment what percentage of patients had actually low score and high score which means the scores are, you know, you can easily interpret the results and what percentage maybe had some kind of intermediate score and therefore may not be as predictive Thank you.

Yeah. Those figures I mentioned they're actually quartiles. So the quartile with the best PROLARIS score that would be a minus two to a zero. It's roughly 25% of people and at the other end the individuals with a 1.46, that's also 25% and that group has a 60% death rate. So those were given in quartiles.

Okay. Thank you.

And, Mr. Meldrum, I will now turn the call back to you for your closing remarks.

Thank you and I want to thank everybody who's listened in on the Myriad Genetics earnings call for our third fiscal quarter ending March 31, 2010, and this does conclude the earnings call. Thank you.

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