Myriad Genetics Inc (MYGN) 2012 Q1 法說會逐字稿

Welcome to Myriad Genetics fiscal first-quarter earnings 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 November 1, 2011. I would now like to turn the conference over to Rebecca Chambers, Director of Investor Relations. Please go ahead ma'am.

Thank you Lindsey. Good afternoon everyone and welcome to the Myriad Genetics first-quarter 2012 earnings call. During the call we will review the financial results we released today and the progress we have made on our strategic directives, after which we will host a question and answer session. If you not had a chance to review the earnings release it can be found in the investor relations section of our website at www.Myriad.com.

Presenting today will be Pete Meldrum, President and Chief Executive Officer; Mark Capone, President Myriad Genetics Laboratories; and Jim Evans, our Chief Financial Officer. This call can be heard live via webcast along with a slide presentation at www.Myriad.com. The call is being recorded and will be archived in the investor section of our website.

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 the actual events or results may differ materially and adversely from these expectations for a variety of reasons. We refer you to the documents the Company has filed 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. With that I will now turn the call over to Pete.

Thank you, Rebecca. Myriad's strategy is to become a leader in the commercialization of transformative molecular diagnostic tests that save lives and improve the quality of life for patients with chronic diseases. In an effort to implement this strategy we are focusing on 3 strategic directives. One, to grow existing tests and markets. Two, to develop an international presence. And three, to launch new tests. Both as a result of investment in in-house research and development and through the acquisition of new tests and technologies which expand our disease focus. We believe the successful implementation of these directives will position Myriad as an international molecular diagnostic leader with transformative tests across all disease indications.

Today I will discuss the Company's key initiatives to introduce new tests and to expand internationally. Each of which I believe will move us closer toward achieving our goal. Mark will provide an update on our first strategic directive, to grow our existing tests and markets. In September, Myriad announced a significant deal with Crescendo Biosciences. A molecular diagnostic company focused on auto immune and inflammatory diseases. Myriad loaned Crescendo $25 million and secured an exclusive 3 year option to acquire all of their outstanding shares at a predetermined formula price based on Crescendo's revenues and growth rate at the time the option is exercised.

The loan is secured by Crescendo's intellectual property rights in the United States and carries an interest rate of 6% with interest payable annually. If Crescendo is successful with its commercial plans and Myriad exercises its option to acquire Crescendo, the loan will be applied to the purchase price. If Myriad decides against the acquisition, the loan is payable at the end of the 6 year term. We believe this transaction is an attractive low risk strategy to position Myriad in the auto immune and inflammatory disease markets. Crescendo's initial product Vectra DA is the only blood based molecular diagnostic test on the market that determines the level of disease activity in patients with rheumatoid arthritis. There are over 1.5 million Americans living with this debilitating disease and 100,000 additional Americans will be diagnosed with rheumatoid arthritis this year.

Vectra DA goes beyond the outward signs and symptoms of the disease to provide a deeper biological understanding of disease activity. This insight will enhance the health care management of all patients with rheumatoid arthritis. This deal has the potential to complement Myriad's expanding disease focus by adding auto immune and inflammatory disease products to our current portfolio of tests in oncology, women's health, urology, dermatology and neuroscience. No other molecular diagnostic company has Myriad's breadth of opportunities in development across multiple disease indications.

Complementing our strategy of diversifying across disease indications we continue to make progress with the integration of Myriad RBM in Austin, Texas. We have projected Myriad RBM's companion diagnostic services revenue for this fiscal year to be between $24 million and $26 million. Therefore we were pleased that the companion diagnostic service revenue for the first fiscal quarter was $6.5 million, which is trending toward the upper end of our guidance. Additionally, 5 of the candidates and their product pipeline which have the most significant commercial potential are being developed and are proceeding toward future commercialization.

We were also aggressively expanding internationally. Our laboratory facilities in Munich, Germany have been completed and we are now in the process of equipping and staffing them. We remain on track with the laboratory accreditation and we should be fully certified to perform molecular diagnostic testing by the end of December. This means we will be generating European revenues in January 2012. Our current facility will have sufficient capacity to generate over $50 million in revenues each year. And we hope to meet this level of revenue within the next 5 years.

Our European headquarters have been established in Zurich, Switzerland, and we have hired the country's sales managers for Germany, Switzerland, and France and will soon add Spain and Italy to our territory. We have reimbursement for BRACAnalysis, Prolaris, and COLARIS AP and are making progress on obtaining reimbursement for Prolaris. The international opportunity is an exciting one for Myriad and we were pleased that we were able to achieve and accelerate entry into Europe by a full-year.

With over $400 million in cash marketable securities and investments, we have tremendous flexibility to diversify our business across multiple disease indications and grow our business both domestically and abroad with the singular goal of becoming a global leader in this exciting field of high value molecular diagnostics. Now it is my pleasure to turn the call over to Mark Capone.

Thank you, Pete. As Pete mentioned, our first strategic directive is to grow our existing tests and markets. On the last earnings call, I laid out our strategic plan to grow BRACAnalysis, COLARIS, and Prolaris. I would like to provide a brief update on the progress we have made during the first fiscal quarter. I am pleased to report that the oncology segment grew 12% this quarter driven by continued execution of the BRACAnalysis initiatives focused on developing triple negative breast cancer, carcinoma in situ, and ovarian cancer indications. These indications increased the addressable oncology market for BRACAnalysis by approximately $200 million to an annual market of $650 million. In total these new indications grew 21% this quarter compared to the first quarter of last year. And we continue to see significant opportunity for growth in the oncology segment.

Specifically, we have seen progress in our efforts to identify triple negative breast cancer patients. During the quarter, we published a paper in the journal Cancer which detailed the prevalence of BRCA mutations in 246 triple negative patients. This publication demonstrated that 11% of patients with triple negative breast cancer had a BRCA mutation, a positive rate which exceeds the typical threshold for testing. This publication also noted that increasing the patient age threshold from the current NCCN guidelines of 60 or younger to 65 or younger would have identified all of the BRCA carriers. We have also been successful in updating reimbursement criteria to reflect the NCCN guideline changes for triple negative breast cancer with 100% of our top payers having adopted new reimbursement criteria.

The womens health segment grew 15% year-over-year during the first quarter. We were pleased to achieve this level of growth despite lower reported OBGYN office visits during the first fiscal quarter which were down 4% versus the prior year according to Thompson Reuters data. Our ability to achieve double-digit revenue growth in this segment in the face of continued economic head winds was driven by the impact of the same store sales initiatives, the additional sales representatives added in the first quarter of fiscal 2011, and our DTC and DTP interactive media campaign.

We have been particularly encouraged with the results of new approaches to further same-store sales as existing territories grew [11%] year-over-year during the first quarter. As one small example of our lean systems efforts, a sales and medical professional worked with an OBGYN practice in the Mid West to map out process improvements in patient identification. As a result, this office with 3 OBGYNs increased testing from 9 patients per quarter to 72 patients per quarter following the process change. We have also continued to see an impact from the new territories added in the summer of fiscal 2011 which grew 26% year-over-year in the first quarter.

Lastly our initial efforts to shift our DTC and DTP programs away from conventional television advertisements towards interactive media have shown significant promise. By way of example, we completed a social media campaign that generated 8.5 million impressions at a cost per impression equal to 2% of our historical mass media campaigns. We also completed a direct-to-physician campaign that with a very nominal investment added 100 new physician customers. We are developing plans to increase the scope of these interactive media efforts in future quarters.

Next I would like to provide an update on how we are progressing with COLARIS. I am pleased to report COLARIS revenue grew 35% this quarter driven by both an increase in demand and higher per test revenue due to the inclusion of a fourth gene PMS2. Approximately one-third of this revenue growth resulted from increased demand and two-thirds was from the addition of PMS2. We expect the product to continue to grow in the double-digits for the rest of this fiscal year. To this end, we continue to execute the strategic plan set forth including educational out reach to professional societies and key opinion leaders on the important findings of the health economic study for COLARIS published in the Cancer Prevention Research last November.

Payers have been very receptive to this message and approximately 70% of our top payers now reimburse for PMS2. We have also fully hired and trained a colon cancer specialist sales team during the first quarter. As a reminder, this is a new sales team in our oncology segment that is exclusively selling our 4 colon cancer products. We look forward to updating you on this pilot program as it progresses.

Lastly, I would like to provide an update on Prolaris. Our goal with Prolaris is to offer a test which can distinguish between indolent and aggressive prostate cancer in 2 different indications. The pre-prostatectomy indication is appropriate for the 241,000 prostate cancer patients diagnosed yearly to help determine whether active surveillance, surgery or radiation is the most appropriate course of action for the patient. The need for Prolaris has become even more critical with the recent USPSTF recommendation that PSA testing on healthy men may do more harm than benefit because physicians can't distinguish between patients with a slower growing cancer and those with an aggressive form of the disease. As a result, many patients are over-treated and there is an unnecessary burden on the health care system.

We hope to address this unmet clinical need with the launch of the Prolaris pre-prostatectomy indication this fiscal year. To date we have published a 337 patient study on Lancet Oncology and have completed and submitted a second 350 patient study for publication which was based on data presented in June at ASCO. Both of these studies have shown that the Prolaris score is the strongest predictor outcomes and more significant than either Gleason or PSA. We believe that the publication of this second pivotal study on biopsy tissue will accelerate our reimbursement and physician adoption efforts.

We have also initiated a 250 patient Phase IV study with a clinical research organization that represents 25% of the urologists in the United States. The goal of this study is to document the distribution of Prolaris scores and characterize the impact these scores had on physician and patient decision making. We expect to complete this study by the end of the fiscal year. In addition, we have another 800 patient biopsy study underway which should be completed within the next calendar year. Upon completion of these additional studies we will have correlated the Prolaris score to outcomes for over 1,700 pre-prostatectomy patients.

A second Prolaris indication will enable post-prostatectomy patients to determine whether radiation or additional adjuvant therapy might be necessary. There are approximately 1 million men who have undergone prostatectomies in the last 5 years that might benefit from this indication. To date we have published a 366 patient study in Lancet Oncology and recently completed a second study in 413 post-prostatectomy patients. The results of this second study will be submitted for presentation at the GU Symposium in February 2012. Both of these studies have also shown that the Prolaris scores the best predictor of the aggressiveness of prostate cancer. Lastly a 350 patient study is in progress that will evaluate biochemical recurrence after surgery with or without radiation as a function of Prolaris score. After all 7 of these studies have been completed, we will have published Prolaris data on over 3,000 prostate cancer patients.

In summary I am pleased with the success we demonstrated this quarter in executing our strategic plan to grow our existing products in markets. We will continue to focus on these initiatives in an effort to deliver strong financial results and further our mission of preventing disease and improving the lives of our patients. Now I will turn the call over to Jim for a detailed review of our first fiscal quarter results.

Thank you, Mark. Good afternoon everyone. It's my pleasure to present a more detailed look at Myriad's financial results for the first quarter of fiscal 2012. Myriad's revenues for the first fiscal quarter were $110.5 million, an increase of 20% over the same period in the prior year. Molecular diagnostic revenue grew 13% year-over-year to $104 million. Of this 13% growth, price contributed 1.5%, while the remaining 11.5% came from an increase in sample volumes and new products. A break down of revenue by product shows BRACAnalysis revenues grew 11% to $89.5 million compared to $80.7 million in the same period last year and represented 81% of total revenues. Revenue from COLARIS and COLARIS AP increased 35% year-over-year to $9.6 million or 8.7% of total revenues. Companion diagnostic services equaled $6.5 million and represented 5.9% of total revenue. Myriad's other molecular diagnostic products grew 20% year-over-year and accounted for 4.4% of total revenues or $4.9 million.

Moving down the income statement, first quarter SG&A expense equaled $46.1 million. This represented an increase of 17% over the prior year and was used to support the Company's 20% revenue increase, and included $2.6 million in administrative costs from Myriad RBM and $1.1 million associated with our international expansion. Research and development expense was $8.5 million or 7.7% of revenue, a 48% increase versus the $5.8 million reported in the first quarter of last year.

As we have discussed in the past, Myriad is investing more in R&D to grow our business. R&D expense tends to be lumpy given the timing of sample acquisitions and external costs associated with our ongoing clinical trials. We continue to expect full-year R&D expense to be approximately 9% of total revenue as we are committed to investing in new product research and developments and furthering the clinical evidence for the Company's newer products such as Prolaris and OnDose.

Operating income for the quarter was $41.5 million resulting in an operating margin of 37.5%. This level of operating margin represented a 120 basis point contraction year-over-year, which was primarily a result of higher R&D expenses to ensure future revenue growth and diversification and the impact of increased SG&A costs associated with Myriad's European subsidiary, Myriad GMBH and Myriad RBM.

The first-quarter effective tax rate was 40% as compared to the 38% tax rate in the second period of the prior year. This rate will continue to fluctuate depending on a number of factors including the timing and magnitude of tax deductions associated with incentive stock options, the amount of expenditures outside the US for our international expansion, and the distribution of revenue among states with higher or lower taxes. This quarter due to the utilization of net operating loss carry forwards that offset the majority of our taxes payable, the Company continues to pay very little cash taxes.

Diluted weighted average shares outstanding were 87 million shares. As previously announced during the first quarter we repurchased approximately $28 million of stock that completed our third $100 million authorization ahead of our fourth quarter earnings call on August 9. Over the rest of the quarter we repurchased an additional $9 million under the new $200 million buy back authorization announced on August 15. Earnings per share including book tax were $0.29 fully diluted for the first quarter of fiscal 2012. An increase of 21% over the $0.24 reported in the same period of the prior year.

Moving on to the balance sheet and cash flow, our ending cash and investments for the quarter were $401.7 million. This compares to $417.3 million at the end of the fourth quarter. Uses of cash during the quarter included $37 million on share repurchases and a $25 million loan to Crescendo Bioscience. Cash from operating activities equaled $31.9 million. Capital expenditures were $2.1 million and included purchases of new instrumentation for research and development use in addition to leasehold improvements at the Myriad RBM facility. Total cash generated during our first physical quarter equaled $46.8 million.

Through the first fiscal quarter we were very pleased with the trends that we have seen in sample flows and demand for our tests. And in October we have continued to see good sample volumes even in light of what can be characterized as very choppy macroeconomic backdrop. At this point our guidance for fiscal 2012 remains unchanged with revenue in the range of $445 million to $465 million, with molecular diagnostic revenue of $421million to $439 million and companion diagnostic service revenue of $24 million to $26 million. This level of revenue is expected to result in diluted earnings per share of $1.20 to $1.25. As a reminder this EPS guidance included the impact of the [$28 million] stock buy back completed ahead of the last earnings call but does not take into consideration the impact of any additional buy backs. At this time we are not changing our EPS guidance for the impact of additional buybacks due to uncertainty around the timing and magnitude of those buybacks.

Lastly as of September 30, we have approximately $38 million in net operating loss carry forwards. We expect to fully utilize these NOLs by the end of the second quarter and will begin paying cash taxes in the back half of the year. And finally the timing and magnitude of buy backs under the new authorization will be opportunistic and dependent on market conditions. As such we do not expect to complete the entire $200 million authorization in this fiscal year. With that, I will hand it back over to Rebecca for Q&A.

Thank you, Jim. In order to ensure broad participation in today's Q&A session, please limit your questions to one plus a related follow-up and then jump back into the queue. Lindsay, we are now ready for the Q&A portion of the call.

(Operator Instructions) Scott Gleason, Stephens.

I guess the first question is just that when we look at the data that you guys are building around Prolaris, can you give us any anecdotal information regarding your guy's conversations with carriers about potential coverage or any sense for maybe what type of timeline we're maybe operating under where we can see potential coverage decisions for Prolaris?

Yes, this is Mark. Thanks for the question. Just a general comment on Prolaris. What we know is that based on data probably only around 10% of men that are diagnosed with prostate cancer actually need some form of surgery or radiation and yet in the United States probably 80% plus of men actually get some form of treatment. So that's a story you might imagine plays very well with payers. I think they all recognize it's well-known even with the USPSTF recommendations that there is a lot of over-treatment in the United States and that a test that can help differentiate and find the 10% that truly need to be treated is something that payers are willing to embrace. They are very interested in the data. As to timing for those discussions, as I mentioned, the biopsy data that we have provided top-line results on and have submitted for publication, we believe the publication of that which will be a third study and a pivotal study will really allow us to begin the dialogue with payers on exactly the type of reimbursement that we could expect for Prolaris and we expect that publication to happen yet this fiscal year.

Great. And then I guess when we look at the RBM acquisition and the partnership that they had with the US military on schizophrenia, is there is any new developments in terms of potential use of VeriPsych for the military population or any new developments on that front?

Thank you, Scott. The military is looking at VeriPsych and doing additional analysis on the discovery map that Myriad RBM has developed. And so we are very excited about the potential application of identifying individuals in the military before they are sent overseas and put in a stressful combat situation of identifying those individuals that might suffer a traumatic episode. And so I think there is great potential for the product in that application. And we are working very closely as we speak with the military on that.

Okay. Thank you for taking my questions guys.

Jon Wood, Jefferies.

This is for Mark Capone. Mark, you kind of blended the 3 new indications of BRAC, CIS ovarian, and TMBC together. Would you call out the TMBC growth rate and remind us where the penetration is for that product. I know the guidelines were just updated so looking to get a little bit more color on that specific indication.

Sure, thanks Jon. As I mentioned in the call if you lump all 3 those together we saw 21% year-over-year growth rate in those 3 indications which relative to the oncology growth rate overall of 12% is a nice uptick and was obviously part of that 12% growth. I think the triple negative breast cancer, the other 2 indications actually had already been in guidelines, so both the carcinoma in situ and the ovarian cancer indications had already been in guidelines and much of our work there is just to remind -- or physicians that in fact those are the guidelines. For triple negative breast cancer, that was actually new to guidelines and as we discussed, we were able to make some very significant progress in getting those guidelines established just this past quarter. And so we still have -- we still believe we are only about 30% penetrated in that particular indication. And so there is still a significant opportunity for us to continue to grow that and with guidelines established, payers now establishing criteria, we think that's still an engine for growth in the upcoming quarters.

Okay, great. Thanks for that color. My unrelated follow-up is for Jim. On the stock buy back front, it's safe to say you've built nothing else and besides the $10 million or so you did in the first quarter for the rest of the year, is that a fair assumption?

Yes. On the guidance that we provided it does just have the amount that we had actually built in or had discussed on our last call that had taken place. The $9 million that we have done subsequent to that point and anything else we do going forward were not taken into consideration with our earnings per share guidance.

Okay, great. Thanks, Jim. Bye.

Amanda Murphy, William Blair.

I had a question actually on the OBGYN side of the business. If you look over the past few quarters that's been growing in the mid-teens or so for awhile now. I'm curious, do you see that growth rate accelerating at all, whether it's in a better macroenvironment or I don't know where we stand with the payers having to waive the co-pay on the preventative side. But just curious if you can give a perspective there.

Sure. Thanks Amanda. You are right. We have been growing in the mid-teens. Just first of all commentary on the market as a whole, we think we are 7% penetrated in the OBGYN market. There is significant opportunity in that market and I think the initiatives we have been working on over the past couple of quarters are designed to try to penetrate that market faster than we have been able to do in the next few quarters. Obviously there are still some headwinds in there. As we mentioned, we are seeing declines in OBGYN visits year-over-year. That 4% decline that we need to combat with some of these other initiatives. It's obviously unclear where that's going to go. There is -- as Jim said it's a bit choppy right now and so it's unclear what those economic headwinds may be and how that would affect OBGYN visits in the future. But we still think there is a lot of opportunities there. We think some of the initiatives that we are working on really will provide opportunities to penetrate that market faster. That's our goal and that's what we are going to try to make happen in the coming quarters.

Okay. Then I guess I have also a sort of unrelated follow-up. If you look at the revenue guidance you given on both side of business can you just remind us what the swing factors are sort of between the low and the high end at this point?

Yes, Amanda. This is Pete. The revenue guidance we have given assumed the economy would stay basically the same as when we gave that guidance last summer. So if the economy improves we will trend toward the upper end of the guidance. And if the economy deteriorates, we still think we will achieve guidance but it will tend toward the lower end of the guidance.

Okay. Thanks very much.

Tycho Peterson, JP Morgan.

Maybe first question on COLARIS, you had talked last quarter about some delays ahead of the launch of the four gene product. How much what you saw this quarter was maybe pent-up demand or should we think of this as a decent run rate? And then as an add on, you talked in the past about maybe going back and retro speculatively looking at samples with the fourth gene. How do you view that opportunity?

Thanks Tycho. Yes. We did talk about the fact that there was some pent-up demand as we transitioned into this. I would say that as a small part of what we saw in 35% growth rate, some of that was in there. But the growth rate was really pretty significant overall. Now as I mentioned in my talk, we continue going forward expect double-digit growth rates. And we expected from both sides both in overall demand plus just the contribution of PMS2 as another gene in the entire test. As to the second question Tycho, what was the follow-up?

Reassessing.

As far as patients from the past. We see some opportunity there, in general that's more difficult because that requires a physician to contact the patient and bring them back into the office. So most of really what we saw in this past quarter were generally newer patients, they were not necessarily patients that were doing what we would call a catch-up test for PMS2. That opportunity exists, we certainly remind physicians about that opportunity. But we don't see that necessarily as large of an opportunity.

And then follow on as we think about Prolaris and appreciate the commentary on reimbursement. As we think of your go-to-market strategy here, you obviously got the dynamic with radiation therapy and you've got surgery and then you'll have competition from PCA3 and other tests. And how should we think about your approach, will it be a similar kind of DTC approach ultimately when you bring the test-to-market? Or how do we think about building the sales channel and ultimately advertising?

Sure. So we have right now an 8 person urology team that is out. They have been doing market development work for the past year or so. They have done a great job of targeting those physicians that they believe would be the rapid adopter physicians. Those that are most interested in using Prolaris in either of those 2 indications. And so their launch plans are pretty well set to focus on those and particularly as the biopsy indication and we published that data in the coming months they have identified the physicians that are most interested in pursuing active surveillance which is the alternative for urologists if they choose not to do surgery.

So that's where we will focus first. As we look at the adoption in those physicians and we see increasing adoption, we'll look to expand our penetration into the urology marketplace with additional sales teams as well. And so DTC will not be something we focus on in at least the initial months. We will actually -- not at least in the traditional sense. What we will look at is bringing in interactive media as a DTC alternative. We will do that once we really educated the physicians so that they are prepared to answer any of the questions that they may get from patients that sell select and come into the office asking specifically about Prolaris.

Okay. Thank you.

Michael Yee, RBC Capital Markets.

Question on Europe. I know you said you are getting validated and certified and that's all or should be up and running by the end of the year. How do you expect revenue to sort of come on I guess early calendar '12 and this is going to be small revenues, a couple million, few million? And have you or can you confirm if you've actually signed deals with consortiums to assure yourself a business there? How are you thinking about that?

Thank you, Michael. Yes, discussions are progressing well with a number of the major networks across the region. Our strategy in Europe is to address both the major networks in the form of a collaboration. But also to address the market directly with physicians who order tests for their patients. As I mentioned, Europe will be up and running January 2012, generating revenues for the Company. Our fiscal year ends June 30 so we only have 6 months and it's in a ramp up phase so anticipate those revenues to be modest. But we will give you more color when we give our guidance for next fiscal year in terms of what we anticipate for Europe.

But certainly the overall opportunity is significant. We see the European market about 75% the size of the US market. So certainly many hundreds of millions of dollars for the products that we have. And we are very excited by the fact that 3 of our major products, BRAC, Prolaris, and COLARIS AP have already received reimbursement levels in each of the countries that we initially intend to operate in.

Thanks.

(Operator Instructions) Isaac Ro, Goldman Sachs.

First item I wanted to touch on was COLARIS. I think it was touched on earlier but maybe if you could put some more color around the sequential acceleration there, it was pretty sizable. I think maybe 25% or 26%. If you can kind of adjust for the pent-up demand that you mentioned before and really kind of give us a better sense of the rest of the sequential increase there, what really drove that, that would be helpful.

Sure. Thanks for the question Isaac. I think as I mentioned there was -- while there was some pent-up demand, generally the growth rate we've seen came from -- first of all there has been a lot of interest in PMS2. Over the last couple of years, it's become apparent that the prevalence of PMS2 in patients that have familial colon cancer is actually relatively significant and as significant as another gene MSH6. Because of that knowledge, there has been increasing interest from physicians to add PMS2 to the product. And so I think that's one of the primary drivers. So two-thirds of that growth was really attributed to the fact that physicians that have been previously ordering Prolaris were now ordering that fourth gene which has a list price of $1,400. So that's one portion of that.

The second is because this is somewhat of a competitive market, there are other laboratories that are offering tests as Myriad now is able to offer the complete test and we think the most comprehensive and in fact our PMS2 test has been extremely well developed and is very sensitive that then we have been able to bring people to Myriad and that's the source of the increased demand is that we've got those physicians that may have been choosing to go other places are now coming to Myriad to get this four gene profile which they believe to be the most sensitive from Myriad.

In addition to that, we have as we talk about on BRACAnalysis, it's also true for COLARIS. We have the lowest uncertain variant rates because we do such a large volume of testing for COLARIS. We're able to interpret more of those tests than other laboratories might. And so when you combine that sensitivity with the quality of the answers that we are able to provide we think that's what's driven a lot of the interest in the increased demand side as well as the addition of PMS2 to already existing demand. So we continue to believe that COLARIS has significant growth opportunities in the double-digit range in coming quarters. And we are excited about that opportunity. The COLARIS is a significant market, several hundred million dollars annually potential for the Company. And we are only about 7% penetrant in that market, far less than we are for example with BRACAnalysis. And we see this as an exciting opportunity and one that we want to aggressively pursue. And as Mark mentioned on the call, we are running a pilot COLARIS sales force that is specifically focused on COLARIS and COLARIS AP. That is working very well and I think you'll see it will expand our direct sales efforts in COLARIS in the future to continue to drive growth.

Okay. That's helpful. Thank you for that. Then Jim, again, secondly on the tax rate, I think you guys were a little ahead of guidance this quarter. Assuming the rest of the year plays out the way you think it will, is it still fair to say 38% for the end of the year?

It is difficult to say. There are a number of items that drive the effective tax rate. We are still thinking it's going to be in that 38% to -- 40% would be on the high end, I would think, but it's still going to be in that range that we had talked about previously. Certain events could actually drive it down. As I mentioned one of the drivers is the deduction that we get in association with our incentive stock options. If we see more option activity that would actually drive the effective rate down. In periods that we see lighter activity that rate goes up. So there is a number of items that we don't have a lot of control over that will move the effective tax rate. But I think we are still in that same ballpark.

Okay. Fair enough. Thank you.

Bill Quirk, Piper Jaffray.

It's actually Dave Clair here for Bill. The first question I have is just on the RBM pipeline. You said I think in the commentary you have 5 companion diagnostic assets that are kind of progressing through the pipeline there. When should we expect to see data on these and when would the first one be launched?

The Company is very excited about a number of the products that have potential in the pipeline with Myriad RBM. And even though we have highlighted as high priority 5 of those, we were still working on the other 3, and moving those forward as well. Just at a slightly lower priority. The ones that we are most excited about and have prioritized are number one kidney damage detection candidate product that would detect kidney damage at a very early stage and in patients with diabetes. A psychotic differential diagnostic candidate that may aid physicians in differentiating between patients with bipolar disorder and patients with major depression. Early on often that's very difficult to ascertain for a psychiatrist.

Third product is a kidney transplant candidate for the early detection of kidney transplant rejection. An NCI Alzheimer candidate product that may aid physicians in differentiating between patients with mild cognitive impairment and patients with Alzheimer's disease. And finally a colon cancer detection candidate that may enable physicians to detect colon cancer from a blood sample at a very early stage. All of these are very exciting and all of these are moving toward eventual commercialization.

We have not given specific information on the timing of those 5, but I will point out that the next product we expect to launch is a product from the Melanoma Diagnostic agreement and we expect that to be launched at the end of this fiscal year. And that product will allow dermatologists to determine whether or not a skin lesion is cancerous or benign. Current pathology analysis is unable to determine malignancy in about 300,000 skin biopsies done each year in the United States. This test could provide a molecular answer for physicians that would improve the health care management of their patients. And again we expect that product to be launched this fiscal year.

Okay. And then one quick one for Jim here. And I think you mentioned that the spend in Europe was about $1 million in the quarter. What should we expect for the fiscal year as far as spend to buildout Europe?

Yes. In the first quarter we did spend about $1.1 million in the SG&A line as we have been establishing operations, hiring some of the positions that had been discussed earlier, getting the office space up and running in Zurich. We are estimating that we will spend about $6 million on the international operation buildout in this fiscal year.

Thank you.

Ashim Anand, Natixis.

Recently the Department of Health and Human Services had advocated direct patient access to laboratory developed tests and obviously there were hurdles in terms of [PLEA] and HIPAA. So I just wanted to ask where it maybe stands on that issue considering that there could be significant benefit in terms of patients pulling the revenue. On the other hand, consumer genetics which has its own risks that can be propagated also by that. And if you afford that like how would the campaign -- direct-to-consumer campaign change if that indeed becomes a rule?

Great. Thanks for the question, Ashim. Yes, so the secretary obviously in a move towards allowing patients to get more visibility into their health care has put forth the thoughts that at least for Medicare, that patients should have direct access to their test results. And as asked for comments on that particular position, ACLA amongst other are putting together commentary on that. And while ACLA is supportive of that as is Myriad there are some particular unique aspects as it's related to genetic testing results, specifically what ACLA is concerned about is that these test results are complicated and require interpretation from physicians. And that providing direct access to that information without that intermediary interpreting that information you could actually end up doing more harm to patients than good. So while this is well intentioned for genetic tests there needs to be some caution as to whether that information should go directly to a patient without physician interpretation. And so I think that discussion is ongoing right now. And we will see ultimately where that ends up.

Now as it relates specifically to how this would impact any direct-to-consumer campaigns, we don't think there would be any impact to that. Again our direct-to-consumer campaigns are shifting more toward interactive media. The idea behind those campaigns is actually to make patients aware of the fact that they may be at risk for certain diseases like hereditary cancer and that they should in fact go to their physicians and talk to their physicians about that. And so in many ways this campaign is very aligned to that. It's empowering patients suggesting they understand more about their healthcare but it certainly is pointing those patients towards physicians where they can actually have this testing done. All of our tests have to be ordered by a physician. And so even where a patient interested, they would need to make an appointment and go in to see their physician and we don't view ourselves as offering direct-to-patient testing. We only look to provide direct-to-patient information that would then enable them to have a discussion with their physician.

Second unrelated but I was wondering your other revenue part has done relatively well and I was wondering if there is an outside contribution from MELARIS considering the recent success of Zelboraf and [Beraxlor] campaign and diagnostic testing, though it's not directly related to what MELARIS does but I was wondering if that has increased the interests of dermatologists in that product.

Thank you again for the question. The other products have grown nicely, 20% year-over-year this particular quarter. And as the contributors within the other product category get larger, the Company will be breaking those out separately so you can see the growth rate of those individual products. With regards to MELARIS. The overall market for MELARIS is relatively small just because melanoma is a smaller cancer compared to say breast, colon, or prostate cancer. But as I mentioned with our planned launch of a melanoma diagnostic product it could differentiate between a benign nevi or skin lesion and a malignant one. We have been aggressive in terms of increasing our communications with dermatologists and that's certainly going to benefit the MELARIS product as well as facilitate the launch of the diagnostic product to determine malignancy in patients with skin lesions.

Thank you.

Peter Lawson, Mizuho Securities.

Jim, I just wondered if you could talk through the gross margins, they look like there's some weakness sequentially. Just wondered what the reason was there.

Yes. So I think if you look at the gross margins on the molecular diagnostic side of the business, they continue to be very robust at the 89% level that we have seen over the last number of quarters. What has had a bigger impact on the melded margin is the increased revenues from the RBM side of the business from the companion diagnostic side. Given the nature of what they do, it's more of a specialized product where every agreement that they enter into has its own profile of work that they will do for a client. And so they are going to see a range of gross margins depending on the complexity of particular engagement that they would enter into. So their margins are more in the 50% range rather than in the high 80%s that we see in the rest of our business. This is our first quarter with a full quarter of RBM contribution. And so that has impacted the combined gross margin for the Company. But it really is nothing being drawn down on the molecular diagnostic side. No additional expenses that we did not anticipate there. It's really having a larger contribution from the companion diagnostic services.

Thank you. And then on the 20% add in the OBGYN channel, you starting to see a benefit from that. There's just great growth in that business despite the office visits down.

Yes, thanks, Peter. You're correct. We did add additional OBGYN sales people this year. We completed the training and deployment of those sales people in the first quarter. Typically it takes 6 to 9 months before we see significant impact from those sales people. So we'd expect that probably to occur more in the third and the fourth quarter of this year. But we were able to complete the hiring and the training and deployment of those sales people. As we discussed on the call, if you go back a year prior, those sales people we added in fiscal year '11 actually showed a 26% year-over-year revenue growth in the first quarter of this year so that's the type of impact ultimately that we expect a sales person to have. It just takes probably 2 to 3 quarters for them to ramp up to that type of impact.

Great. Thank you so much.

Laura McGuigan, B Riley.

Just a follow-on question with respect to the international opportunity. Has the recent economic turmoil in Europe tempered your near-term expectation for the opportunity there? And I guess what if to any extent has the current environment factored into that 5 year timeframe to reach the $50 million in revenue?

Yes, we did factor in the current challenges that the various countries within Europe are facing right now. We think that it can impact the Company with regards to the fact that only about 10% of patients in Europe have private insurance, about 90% have the national insurance from the countries themselves. And as economic pressures are placed on those countries, that certainly is potentially at risk. But that has been factored into our projections in Europe. And despite that, we see Europe as a very exciting opportunity just because there isn't a lot of testing presently for breast, ovarian, colon, and uterine cancer. And with those 3 products that Myriad offers having reimbursement, we are very excited to go to Europe, deliver a much more accurate high value test with turnaround times that are a fraction of what Europe is currently experiencing. So I think even though Europe faces challenges financially, we are going to see a very exciting opportunity for the Company to take advantage of superior products and in a market with unmet medical need

Miss Chambers, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Thank you very much. Thank you, everyone. This concludes our first quarter earnings conference call. A replay will be available via webcast on our website for a week. Thank you again for joining us this afternoon and have a lovely evening.

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