Myriad Genetics Inc (MYGN) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Myriad second quarter earnings 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, February 5, 2013. I would now like to turn the conference over to Scott Gleason. Please go ahead, sir.

Thank you. Good afternoon, everyone and welcome to Myriad Genetics' second quarter fiscal year 2013 earnings call. My name is Scott Gleason, VP of Investor Relations here at Myriad Genetics Inc. During the call we will review the financial results we released today after which we will host a question-and-answer session. If you have not had a chance to review the earnings release, it can be found on the Investor Relations Section of our website at Myriad.com. Presenting for Myriad today will be 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 via live webcast along with the slide presentation at 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 actual events or results may differ materially or adversely from these expectations for a wide variety of reasons. We refer you to the documents the Company files from time to time with the Securities and Exchange Commission, specifically the Company's annual report on Form 10-K, its quarterly reports on Form 10-Q and its current reports on Form 8-K. These documents identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. With that I'll now turn the call over to Pete.

Thank you, Scott. To begin I will highlight our financial results for the second fiscal quarter of 2013. Myriad again delivered a very strong performance exceeding Wall Street expectations. Total Company revenue increased 21% year-over-year to a new record of $149.1 million representing our sixth consecutive quarter of top line growth greater than 20%. Of particular note was BART testing which significantly exceeded our expectations and guidance during the second fiscal quarter. Another area of strength was the companion diagnostic revenue which grew 63% over the same period last year to $8.5 million. Much of this growth was fueled by our recently announced diabetes collaboration with Sanofi.

Operating margins grew to a healthy 37.3% of revenues resulting in net income of $35 million, a 24% increase over the same quarter of fiscal 2012. Diluted earnings per share increased 27% over the prior-year period to $0.42 per share. In light of the strong second quarter results, we are tightening our revenue guidance for the 2013 fiscal year. We are currently projecting revenue of $575 million to $585 million for fiscal 2013, an increase of $5 million to the lower end of the previous guidance range. This represents a 16% to 18% growth over our prior fiscal year. I'm also pleased to announce that we are increasing our earnings guidance for the second time this year. We are now projecting diluted earnings per share of $1.55 to $1.58, up from the previous guidance range of $1.50 to $1.55 per share. This represents a 19% to 21% growth over fiscal 2012.

Myriad continues its strong commitment to return cash to its shareholders and I am pleased to report that during the second fiscal quarter, we repurchased $33.7 million worth of Myriad stock representing 1.2 million shares. We have now repurchased nearly one quarter of the Company's outstanding stock. Even with our aggressive share repurchase program, Myriad ended the quarter with $468 million of cash. By the end of January we had completed the current share repurchase program and I am pleased to announce that Myriad's Board has approved another $200 million share repurchase authorization.

This quarter's financial results are reflective of the successful execution of our long-term growth and diversification strategy. This strategy starts with a deep commitment to the patient. We are passionate about developing novel transformative products that save lives and improve the quality of life for patients with cancer and other major diseases. Our molecular diagnostic tests provide essential information to physicians concerning their patients ' risk of disease or disease recurrence and their patients' likelihood of benefiting from particular therapies. Armed with this critical information, physicians can make better healthcare management decisions for their patients.

Myriad's strategy encompasses three major growth initiatives. First we are expanding the existing markets for our current portfolio of tests and taking steps to increase our penetration in these markets. This strategic initiative was primarily responsible for the 21% revenue growth that we achieved for the first half of our fiscal 2013 fiscal year. Second, we are extending our global reach with operations in Europe and a distribution network in 61 countries around the world. This international capability will contribute to our future revenue growth in the near-term. Third, we are dedicated to enhancing our portfolio of transformative test beyond oncology, urology and women's healthcare to now encompass new medical specialties such as pathology, neuroscience, and autoimmune disease.

Driving this expansion effort is our industry-leading product pipeline of 13 molecular diagnostic candidates. Several of these candidate products have a global market potential in excess of $1 billion annually. Companion diagnostics is the future of drug discovery and drug development. And Myriad is at the center of this exciting paradigm shift. We have entered into collaborations with over 20 major pharmaceutical companies around the world to assist them in identifying the subset of patients who would likely benefit from their new candidate therapies. In order to identify these patients, Myriad employs a suite of proprietary technologies in protein analytics, DNA sequencing, and RNA expression to identify novel biomarkers that are highly predictive of patient response.

Exemplifying this commitment to improving patient healthcare is our recently announced collaboration with Sanofi. Under the Sanofi collaboration, Myriad will perform biomarker research on over 8,000 serum samples from patients with prediabetes or early type two diabetes. The goal of this collaboration is to use biomarkers to identify prediabetic patients and early diabetic patients who are at high risk of experiencing a cardiovascular event. This life-saving research may result in better healthcare for millions of patients suffering from this terrible disease. Under the terms of the collaboration, Sanofi will pay Myriad approximately $10 million to analyze the patient samples using our discovery map immunoassay panel.

Continuing along the theme of companion diagnostics and personalized medicine, Myriad recently presented exciting new data on our HRD test at the San Antonio Beast Cancer Symposium. A clinical study in triple negative breast cancer patients using our HRD test was recently conducted by researchers at the Stanford University School of Medicine. Triple negative breast cancer tends to be a more aggressive form of breast cancer and historically has not been amenable to targeted therapies. Myriad's HRD test accurately identifies if a patient's tumor has lost the ability to repair DNA damage, and this can predict patient response to DNA damaging chemotherapy such as the platinum drugs. In the Stanford Study breast cancer patients were given a carboplatin-based treatment regime and their HRD score was determined.

The HRD test significantly predicted whether or not triple negative breast cancer patients would benefit from carboplatin therapy. 70% of the patients with a high HRD score saw their tumors shrink and had minimal residual disease. While only 12% of the patients with a low HRD score responded to carboplatin therapy. We believe these results address a strong clinical need to delineate likely responders and non responders to platinum-based therapies. Platinum drugs are used in cancers affecting approximately 490,000 patients annually.

I'm also pleased to announce a new product under development at Myriad for the initial diagnosis of prostate cancer. While Prolaris provides critical information about the aggressiveness of prostate cancer to better guide the treatment of a patient who has already been diagnosed with prostate cancer, our new prostate cancer product is designed to diagnose prostate cancer in men with rising PSA levels. This new product analyzes prostate tissue from a biopsy and is able to detect the presence of cancer even if the biopsy were to miss the tumor and be classified as negative. Over 1 million men have prostate biopsies each year in the United States and unfortunately, 25% to 30% of these biopsies produce a false negative result. Where the men actually have cancer but the tumor is missed by the biopsy needle. Frequently this requires a second biopsy to find the missing cancer or confirm the original finding.

Myriad's test looks at changes that occur at the molecular level in normal cells surrounding the tumor, a field effect. Our research has shown that these changes provide a signal of the presence of cancer even though no tumor tissue is present in the sample. We will be presenting data on the prostate cancer diagnostic test at two up-and-coming urological meetings later this year. Our goal is for this test to provide greater sensitivity and specificity relative to existing products on the market. While this market will take time to develop, we believe that it represents a $1 billion market opportunity for Myriad.

Finally, we know there has been a great deal of focus surrounding the upcoming Supreme Court case. Our current expectation is that the hearing for oral arguments will occur in mid-to-late April with a final decision by June 30 of this year. Myriad continues to believe that regardless of the Court's decision, we have strong proprietary intellectual property surrounding BRACAnalysis. In conclusion, our products are benefiting patients throughout the world and our pipeline is full of new growth opportunities. Our employees are passionate about helping cancer patients by providing critical information to better manage their healthcare, and we see a bright future for Myriad. It is now my pleasure to turn the call over to Mark Capone.

Thanks, Pete. I am pleased to provide updates on two of our corporate strategic directives. Increasing penetration of existing products in existing markets and diversifying our business through new product introductions. We are very pleased with second quarter results with overall revenue growth for molecular diagnostics of 20%. Both of our business segments showed impressive growth with oncology growing at 16% and our women's health segment growing at 27%.

We continue to make excellent progress on the reimbursement for our BART test. For the second quarter approximately 65% of newly ordered BRACAnalysis tests included a BART test exceeding our 50% forecast. Our managed markets team has successfully established contracts with most of the progressive national and regional payers as well as Medicare. We believe it will take longer to finalize contracts with the remaining payers and are therefore anticipating only a modest increase to the 65% of BART to BRACAnalysis ratio for the remainder of the fiscal year.

Additionally it should be noted that a portion of the BART revenue in the second quarter was attributed to a bolus of patients who had BRACAnalysis testing in previous quarters. The higher than expected BART sample volume as well as the increased complexity of providing both test results simultaneously has increased our laboratory turnaround time a couple of days. The result of this additional work in progress was to slightly lower the year-over-year BRACAnalysis revenue growth in the second quarter when compared to growth rates in recent quarters.

COLARIS revenue growth this quarter was completely demand driven as the second quarter of last year fully reflected the addition of the PMS2 gene. This revenue growth was also impacted by increased work in progress since COLARIS utilizes the same customer service and laboratory processes as BRACAnalysis. To increase our market share in addition to increasing market penetration, we are launching a clinical study this quarter to evaluate the inclusion of a fifth gene MYH with every COLARIS test result. Preliminary data shows that the MYH mutation prevalence rate is at least equivalent to that of the PMS2 gene. If this study verifies the preliminary data then guidelines could be changed to recommend MYH for every hereditary colon cancer patient.

As a reminder, Myriad has the exclusive worldwide rights to both composition of matter and method of use patents for MYH which extend to 2022. This would allow Myriad to have the most sensitive proprietary hereditary colon cancer test. The MYH gene also will be included in the broad hereditary cancer panel currently under development. During this clinical study, Myriad intends to add the MYH gene without changing the price of COLARIS.

The oncology segment continued to demonstrate a strong 16% growth as the result of our ongoing implementation of three strategic initiatives. First, expanding into new BRACAnalysis indications of triple negative cancer, DCIS and ovarian cancer. Second, working with physician providers through protocol integrations to identify all appropriate BRACAnalysis patients. And lastly, sales force expansion into our patient specific teams. Growth is primarily being driven by new indications and sales force additions with the expectation that our protocol integration contributions will accelerate in the last half of the year.

The women's health segment again demonstrated excellent growth at 27% in the second quarter sustaining the strong growth we saw in the first quarter. This growth continues to be driven by outstanding execution of four strategic initiatives. Protocol integrations, sales force additions, radiology expansion, and interactive marketing. All four strategies are showing significant growth in a market that remains less than 10% penetrated.

In the second quarter a protocol integration paper was published in OBG Management entitled Hereditary Cancer Risk Assessment in Obstetrics and Gynecology, The Evolving Standard of Care. This study was published by Dr. Richard Frieder, a practicing OB/GYN, and Dr. Steven Berlin, an expert in medical liability. We believe this paper is demonstrative of the changing perceptions surrounding the role and responsibilities of genetic testing in gynecology. We continue to see significant return on our interactive marketing programs with 35,000 women to date having self identified as at risk using our hereditary cancer quiz.

I would now like to provide a brief update on the CMS molecular pathology code pricing process. Myriad has proactively provided information to Noridian consistent with the four elements of the legislative gap fill process. This included Medicare payment history, median private payer reimbursement, stack code comparisons between tests, and the cumulative resources expended. All four of these methodologies continue to support BRACAnalysis pricing in the $3,100 to $3,300 range. While we have had multiple productive discussions with Noridian, we do not know what the reimbursement rate on the new molecular pathology codes will be for calendar year '13 and beyond. We continue to anticipate hearing preliminary reimbursement prices from Meridian by April and final pricing by CMS in September.

We also made significant progress on our corporate strategic directive to diversify our business through the launch of new products. And I'm pleased to provide you with more detail on three of these products. During the second half of the fiscal year, we will be making a significant investment in each of these new product candidates. First, Prolaris continues to amass significant published data with study Pro004 accepted for publication in the Journal of Clinical Oncology and Pro005 under review. These five studies total 1,600 patients all correlated to an outcomes endpoint as opposed to just pathology. These studies show that the independent contribution of Prolaris as distinct from pathology is important to accurately predict outcomes. We have also initiated a registry study, PROCEED, to provide the additional clinical utility data in support of our reimbursement request to Medicare with the goal of providing this data within the next five months.

Additionally, we will be presenting three posters on Prolaris at the ASCO GU meeting this month. Second, we are actively planning the early access launch program for our lung cancer prognostic test with an eight person specialty sales team. The verification studies have been submitted for publication and the validation studies have been completed and will be submitted for presentation at an upcoming conference. Third, we are recruiting an eight person dermatology sales team to begin our early access program with MELAPATH, a molecular diagnostic that will more accurately diagnose melanomas. Finally, given the abundance of new product opportunities that we are currently developing, and those being prepared for commercial launch, we recently completed a pipeline evaluation and decided to return rights for OnDose to Saladax. While we continue to believe in the market potential for OnDose, the opportunity costs including prospective clinical studies relative to our anticipated returns did not meet our return on investment threshold.

Before concluding, I would like to celebrate an important milestone in the history of Myriad. This quarter we will provide test results to our one millionth patient. The information we have provided over the past 16 years has transformed the lives of millions of patients and their families. And our outstanding Myriad employees continue to treat every one of these patients as family members while striving for timely perfection in everything we do. We look forward to testing our next million patients in a fraction of the time it required us to test the first million. Now I would like to turn the call over to Jim Evans.

Thank you, Mark. It is my pleasure to present a more detailed look at Myriad's financial results for the second quarter of fiscal 2013. Myriad's revenues of $149.1 million for the first-- for the fiscal second quarter was another record for the Company. This revenue was comprised of molecular diagnostic revenue of $140.7 million which grew 20% year-over-year and companion diagnostics services revenue of $8.5 million which grew 63% over the same quarter of last year. The increase in the companion diagnostics services revenue, as Pete discussed, was driven in large part by the Sanofi collaboration. This agreement did have some front end loaded requirements which resulted in a very strong revenue quarter. While companion diagnostic revenues will likely trend down some in the second half of the fiscal year, we expect revenues from companion diagnostics to come in toward the high end of our original guidance range for that business segment of $25 million to $28 million.

The increase in molecular diagnostic revenue was driven by increased patient demand and sample volumes of our existing tests and the continued strong demand and improved reimbursement environment for BART. Our breakdown of revenue by product revealed that BRACAnalysis provided revenue of $110.3 million, COLARIS and COLARIS AP contributed $12.1 million, and BART added $15.8 million. Myriad's other tests accounted for $2.5 million of revenue. We are pleased with the growth in BART revenues this quarter. While we are very excited about the strong uptake of BART and expansion of payer coverage, we believe BART growth will moderate on a sequential basis in the second half of the fiscal year for two region reasons. First this quarter saw the benefit of a meaningful bolus of revenue tied to legacy BART testing which likely will not repeat in future quarters to the same magnitude. Additionally it is difficult to predict when the remaining private payers will expand coverage for BART. Consequently we currently anticipate BART penetration rates will remain relatively flat over the near term.

Turning to Myriad's operating expenses, this quarter research and development expense increased to $14.1 million, an increase of 38% as compared to the same quarter of last year. Myriad continues to put a premium on developing our industry-leading product pipeline and supporting our current products with additional clinical information. We continue to estimate fiscal 2013 R&D spend to approximate 9% of total revenue as we've previously guided although it will continue to be lumpy as samples for clinical trials are acquired and research milestones are reached.

First quarter SG&A expense was $59.6 million as compared to $51 million in the same period of last year. The 17% increase in SG&A was due primarily to support the 21% increase in revenue. From our customer from our customer service and billing teams to our shipping and receivers, our administrative support staff has worked extremely hard to manage the significant influx in the numbers of samples we handle as a result of the rapid BART adoption. Other drivers of the increase in SG&A include increased commissions associated with higher revenue and additional investments in our European operations.

As Mark mentioned, we are aggressively preparing for the launch of several new products as well as making meaningful investment in Prolaris. With the additional sales force expansion, prelaunch marketing initiatives, clinical support of medical guidelines, and reimbursement efforts, I believe our SG&A expense as a percentage of revenue should increase modestly in the second half of the fiscal year. Additionally, we will be spending more on our international sales and marketing over the next two fiscal quarters. However, we believe that operating income impact from international operations will not exceed $10 million this fiscal year. Operating income for the quarter was up 22% to $55.6 million compared to $45.5 million in the second quarter of the prior year, with operating margins improving to 37.3% or 170 basis points higher than the first quarter of fiscal 2013.

The second quarter effective tax rate was 39%. We continue to believe that for the full fiscal year our effective tax rate will approximate 40%. The rate will continue to be impacted by the timing and magnitude of tax deductions associated with incentive stock options, the amount of expenditures outside the United States for our international operations, and changes to tax laws and rates. Diluted weighted average shares outstanding were 84.2 million shares, and as Pete mentioned, during the first quarter we bought back $33.7 million or 1.2 million shares of our common stock. To date Myriad has repurchased over 23 million shares at a weighted average price of $21.50 per share or $500 million worth of MYGN common stock.

As Pete mentioned, the Board of Directors has just authorized an additional $200 million for stock repurchase. Repurchases under the $200 million authorization may be made through open market or privately negotiated accelerated purchases. The amount and timing of the stock repurchases will depend on business and market conditions, stock price, trading restrictions, acquisition activity, and other factors. Diluted earnings per share grew in the second quarter by 26% to equal $0.42 which exceeded analyst consensus forecast of $0.38.

Moving onto the balance sheet and cash flow we ended the second quarter of fiscal 2013 with $468 million in cash and investments, representing approximately $5.56 in cash per fully diluted share. This compares to $428 million at December 31, 2011, an increase of 9 %. Cash from operating activities equaled $22.1 million during the fiscal 2013 second quarter and capital expenditures were $4.5 million.

Turning to our financial guidance, we are tightening the range from for our top line guidance for fiscal '13 which calls for revenues of $575 million to $585 million. We would note that we typically see meaningful seasonality in the third quarter with deductibles resetting, new high deductible plans being implemented, and 125C healthcare savings plans needing to be reestablished. All of these headwinds may be exacerbated this year given difficult weather comps from the mild winter of 2012 and the lapping of a 91 day Leap Year quarter from last year. Consequently our expectation is that revenues, as in prior years, may be flattish sequentially in the third quarter following our exceptionally strong second quarter.

Moving onto bottom line guidance, our expectations for earnings per share for the 2013 fiscal year has increased to $1.55 to $1.58. These anticipated results are up from our most recent guidance of $1.50 to $1.55 earnings per share. The new EPS guidance represents growth in the range of 19% to 21% versus the original EPS guidance growth of 11% to 14%. Our EPS guidance takes into account the impact of stock buybacks completed to date but does not factor any impact of future buybacks. The timing and size of future buybacks will continue to be opportunistic and dependent on market conditions. With that I'll turn the call back over to Scott for the Q&A.

Thank you, Jim. It 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 in the queue. Operator, we are now ready to turn over to the Q&A portion of the call.

(Operator Instructions)

Bill Quirk.

Great, thanks, good afternoon and great quarter, guys. First question for me, on Noridian, Jim, perhaps you could elaborate a little bit more -- I assume that they've been paying you something because the government tends to pay pretty rapidly, so I they currently paying under the 2012 rates and then when they release the '13 they'll have some type of adjustment factor?

Bill, actually we have not received our first payments of 2013 from Medicare yet. We're still within the payment window that we would usually anticipate, but we have not seen payments be processed by Noridian yet at this time.

Okay, got it. Then a related financial question, the extended turnaround time on BRACAnalysis, if my math was right here, it looks like that probably trimmed about $3.5 million out of your quarter. So can you talk to us a little bit about the time to get that turnaround time amended such that it's going to be consistent with where we've been in the past? Thanks.

Thanks, Bill. This is Mark. We did add about a couple of days of WIP which you can work through the numbers for that. It's not clear right now when that WIP will be reduced to what we have historically run. There is substantial additional complexity required with approving our customer service operations for BART, as well as running both BART and BRACAnalysis, so at this point we're not necessarily anticipating a reduction of that WIP. This is something that over time we may start to see that come down but not necessarily something we'd expect in the third quarter.

Got it. Thanks, guys.

Amanda Murphy, William Blair.

I had a follow-up to Bill's question on the BRACAnalysis growth. I appreciate obviously the commentary around the turnaround time impacting growth but I'm curious has anything changed just if you were to separate out that issue and then BART from just the BRAC franchise? Has anything changed in terms of the sustainable growth rate? I think you guys have said that you're targeting a mid-15% growth range there. I'm curious, is that still the case?

Yes. Thanks, Amanda. Obviously we updated our guidance. We're not providing specific guidance by product. And so we're not going to probably going to that level of detail. What I can say is the underlying market dynamics in our mind have not changed. We're only about 50% penetrated in the oncology market.

There are still lots of opportunities including having only penetrated those newer indications around 30% at this point, so we still see substantial opportunity for growth in the oncology market. And as you know in the women's health side, we are less than 10% penetrated, we really have just started to scratch the surface in that market, and we are clearly seeing some very nice traction in all of the strategic initiatives that we've launched into the women's health segment. So we haven't seen anything that has changed our thoughts on what the market potentials are for both of those segments. And the success that we think we can drive with some of the initiatives that we've already launched.

Okay. Got it. Just a follow-up on the international side, any updates on discussions with some of the hospital networks that you have mentioned in the past in terms of Germany or wherever else that you can provide?

Thank you, Amanda. Discussions are continuing to progress with some of the major hospitals and networks in the region. Again our marketing strategy does have a three-pronged approach. We are going after key opinion leaders and key genetic opinion leaders. We are certainly focused on the major hospitals and networks, but we've also directed our attention to physicians who directly order the tests as well. With our laboratory now open and in full operations, and with the high quality and rapid turnaround time that we can offer, we're still very excited about the potential in Europe, and we have no change in our current projections that the European operations will have a negative total net impact of $10 million to the bottom line. And I think we feel very comfortable that it will be certainly no worse than that.

Okay. Thanks, guys.

Doug Schenkel, Cowen and Company.

Good afternoon and thanks for taking the questions guys. My first question relates to BART. You indicated that BART was done with 65% of BRACAnalysis patients in the quarter. This is obviously a huge increase sequentially. Last quarter you indicated that 35% of patients were covered for BART at that point. And that you expected to get the 50% coverage in Q2. And you also talked about plans to integrate BART and BRACAnalysis as an integrated product. So I'm curious, how much of growth was driven by that effort to integrate versus coverage? Any color you could provide would be appreciated. And I guess if you'd provide specific details on insurance coverage coming out of the quarter, that would also be appreciated.

Sure. Thanks, Doug. As you mentioned, we exceeded what we had expected to for the second quarter, 65% of the newly ordered BRACAnalysis tests did have BART run in association with those tests. As I also underscored we think we've probably got a lot of the more progressive plans already and think it will take some significant additional effort to get some of the remaining plans, in particular many of the large plans have already made decisions and are covering BART, and therefore it takes the same amount of effort to do a smaller plan as it does one of the larger plans. But obviously much fewer covered lives so as a result we don't expect -- we only expect modest increases in that ratio.

We have moved to the integrated BRACAnalysis product on our test request form. What that really does is just offers convenience for our physicians. Before they would have -- it would have required the physician to remember to order both BRACAnalysis and BART, where now they can just check one box, and if in fact BART is covered, it will immediately be processed. And so really the integrated BRAC was really part of an effort to make things more convenient for our physicians. It will still require us to follow through and get additional coverage from these insurance companies despite the fact that it's now being ordered as integrated BRAC. In the event that an insurance company does not cover BART, and a physician has checked the integrated BRAC product we then follow-up with the physician and ask them if they are interested in ordering comprehensive BRAC instead of the integrated product, or if in fact the patient would be interested in paying for the BART test out-of-pocket. And so as we continue to get insurance coverage, that's the process we'll go through the rest of the year.

Okay. And in your prepared remarks you talked about this being the sixth straight quarter where total revenue has grown in excess of 20%. If I'm doing the math right, your guidance seems to imply that this is not going to continue in the second half. Is this largely just a function of annualizing the changes in guidelines on COLARIS? Is that the key driver to the moderation in growth in the second half?

When the Company gives guidance, we take a very close look at what the year, or in this case the second half of the year, looks like. And as Jim pointed out on his comments, the third quarter fiscal quarter for Myriad does tend to be a more challenging quarter. It does tend to be more flattish. Than what we see in some of the other quarters. And so we certainly take that into consideration when we put forth the guidance. And then I think Myriad has demonstrated that we tend to try to give reasonable but conservative guidance going forward. So I think you can take those two factors into consideration and draw your own conclusions.

Okay. Thanks for taking the questions, guys.

Derik de Bruin, Bank of America.

Hi, good afternoon. One of the major overhangs in the stock right now is the upcoming Supreme Court decision and what that means for the competitive landscape. So could you give us what your current thoughts are on if that ruling were to go against you, how soon you think a competitor could enter the market? And on the flip side of that given the addition of BART to the portfolio, how much of a barrier to entry does BART provide to you for the competition?

Thank you, Derik. Myriad does believe that regardless of the outcome of the Supreme Court case, we have very defendable intellectual property, very strong patent protection around BRACAnalysis with the 24 patents that have been granted to the Company. That protect the product through the 2018 timeframe. I would also comment that I think BART, which has patent protection going out to 2025 gives us an added layer of protection because BART is responsible for up to 10% of the mutations. Those mutations in BRCA1 or BRCA2 that cannot be detected through conventional sequencing, so it's a critical part of giving a patient the most informative answer. I will note however that there will be competition likely in the market after 2018.

And I would argue that Myriad competes very effectively. And surrogate to how Myriad might compete in a post patent era for BRAC I think would be COLARIS. Our COLARIS product which is growing well and doing extremely well over the last several quarters has no patent protection, no competitive advantage, we compete on a completely level playing field with major reference labs, with major, very prestigious hospital and university laboratories, as well as smaller venture capital backed startup labs. And yet we dominate that market with 70% market share. So I think even on a level playing field, and with a premium priced product, which is what we have in the COLARIS market, our greater accuracy, our turnaround time, our customer service, all allow Myriad to compete very effectively in the post patent era.

Great. If I can do just one quick follow-up, when you look at rules-based medicine how do you classify that? Has that deal delivered what you hope for it, hoped it would deliver for you? Is it on track with whatever you thought the business would be right now?

Absolutely. We couldn't be more delighted with the acquisition of Myriad RBM. There are three primary reasons that drove that acquisition. The first is we do believe in the future of companion diagnostics. And we think drug development will be made in conjunction with companion diagnostics that can identify patients who are likely responders for these candidate drugs of the future. In order to identify biomarkers that form the basis of future companion diagnostics, there are three I think essential technologies.

And Myriad is somewhat unique and having very strong capabilities in all three. That being the nucleic acid technologies, DNA sequencing, RNA expression, as well as the protein analytics and the protein technologies. And we have the nucleic acid strength and through the acquisition of RBM we have a world leading protein analytics capability where we can multiplex and simultaneously analyze over 500 proteins from a single sample of blood. Secondly, we were very interested in moving into the neuroscience space and we've been very excited and very pleased with the candidate products that have been transferred from Myriad RBM to Mark's group up here in Salt Lake and are winding their way through our product pipeline. And then finally, we like the collaborations that Myriad RBM has developed with major pharmaceutical companies and very pleased that they're on track this year to have an absolutely outstanding year in terms of pharmaceutical services revenue. So it's been an outstanding acquisition in our mind.

Great. Thank you.

Isaac Ro, Goldman Sachs.

Good afternoon, thanks for taking the question. Wanted to touch on the new prostate cancer test you mentioned in the beginning there. Interested in first of all understanding how you expect to market that product alongside Prolaris, and secondarily, when you expect to launch it and sort of what kind of economics you might get, you mentioned $1 billion opportunity so I'm just wondering what color you can put around how you tap into that opportunity.

Thank you, Isaac. It is a very exciting opportunity and an area of huge unmet medical need. As I mentioned, some million patients who have prostate biopsies, 20% to 25% of them come back negative -- sorry -- of the ones who come back negative, 20% to 25% of those are false negatives where the man actually has cancer even though the biopsy was negative, because the needle missed the tumor. So this is a huge problem and one that we don't think is being addressed as well as it could be in terms of the accuracy and informative nature of other products in this market. So we see it as a significant opportunity if an individual, even if the tumor is missed, can be accurately diagnosed as having a malignancy, that's much better on the patient it avoids an unnecessary second prostate biopsy or at least confirms in those patients those that should have those and will certainly improve healthcare. Many men who get a negative do not go onto a second biopsy and in those individuals have cancer and probably should be treated differently given that information. We are in the very early stages of product development. We've not yet announced pricing or strategy about this new product but it would be sold in our current sales force that handle Prolaris and other products that the Company offers.

Okay. And when might we get a little more color on that? Is it fair to say this time this calendar year or --

We are going to be presenting data at two urological society meetings upcoming this year. So you'll definitely see much more data as the year progresses.

Okay. Great. Thanks a bunch.

Jon Wood, Jefferies.

Thanks a lot, good afternoon. Either Mark or Pete, can you talk about -- or try to quantify the backlog from BART? You talked about a surge related to prior brackets tests. How big order of magnitude was that effect in the quarter?

Thanks, Jon. As Jim mentioned there was definitely a significant backlog. I think you can get some perspective on that if you take that 65% number, 65% of the BRACAnalysis test results that were delivered had a BART test results delivered with that. If you use that math and then take a look at the BART revenue which we've disclosed as $15.7 million, I think you can get some sense, Jon, for the magnitude of what that backlog is. And it was significant this quarter. We had specifically -- knowing that insurance companies were making decisions on BART, we specifically decided to hold the DNA just to avoid having to make a patient come back for a second trip. And so that DNA being held in our storage system we were able to very quickly turn that around into some additional bolus of BART tests.

Understood. Mark, is the pricing on BART still tracking in line with your history? Something like 8% to 10% discount off a list is your commercial average. Is that the right number for BART?

Yes. So you're correct, Jon, historically for BRACAnalysis we've seen about an 8% discount off of list price. We anticipated -- and we are seeing more significant discount on BART off of list price. And so we haven't provided ASP yet because we're obviously still in the middle of a number of negotiations and don't really want to get ahead of ourselves. But we are anticipating a more significant discount on BART off of what we've seen historically.

All right. Appreciate it. My follow-up for Jim is on the DSOs. Looks like those spiked quite a bit sequentially, so love any color you can give on if that's a BART effect or is there some Medicare delay in that? Anything you're willing to offer on that metric, please?

It's actually more of an impact of the new molecular diagnostic codes being implemented by private pay. And them getting their systems set up to be able to accept the billing under those new codes. As a reminder, we have already negotiated reimbursement using the new codes with our private payers. They then had to make changes within their systems to accept the new codes which slowed down payments. There were actually a number of them that had asked us to hold off on even submitting our invoices until they were able to get their own systems updated. We were able to get all of those in before the end of the quarter, but it did increase our receivables at the end of the quarter. We would expect that those balances will normalize over the next couple of quarters to the kind of day sales outstanding levels that are consistent with what we've seen in our recent history.

Great. Thank you.

Dan Leonard, Leerink Swann.

I'm sorry, I'm here, I just can't hear the operator. My first question, is one of the primary levers to reduce the turnaround time for BRACAnalysis at this point, is it increased payer adoption of BART? Are you in a situation where 35% of your BRAC orders you're calling back the physician and explaining to them that BART is not covered and so that needs to change?

Yes, Dan. That is certainly part of the increased turnaround time. For the 35% that aren't necessarily covered, we need to call them back and ask them what they would like to do, either have the patient pay out-of-pocket or just order comprehensive without that, so that to and fro between the physician and potentially the patient as well to understand their perspective on this, that can add certainly some time to our customer service turnaround time, so that's a portion of that. The other portion is just that it's -- BART's a complicated test, sophisticated technology to make sure both the sequencing and the large rearrangement tests come at the same time and then are presented to the doctor at the same time. It's just added some additional logistics and complexity in the laboratory.

Obviously our turnaround time is still far better than anybody else in the world by many, many weeks. But given our history of such incredibly short turnaround times, this additional complexity in the laboratory has added some time as well. Both of these things over time we would expect to see those diminish as more BART is covered by insurance companies. We will cease to have to make some of those additional phone calls and as we get more facile at doing both of these tests at same time we should trim some of that additional time we've seen in the laboratory, but as we've cautioned, that can still take some time. It's not like we would expect to see that decrease over the next quarter. That will take some time to work through.

Okay. Thank you, Mark. My follow-up, why would the BART backlog flush or bolus as you called it in the December quarter, why wouldn't that persist given that you said you've tested 1 million patients for BRAC, the results are usually negative? These are all people that have some hereditary risk? So why wouldn't there be a much larger backlog that would persist over a period of multiple quarters?

Good question, Dan. So a couple of different things are at play here. Because we had anticipated some of this insurance coverage increase we had actually held DNA for patients that had comprehensive BRACAnalysis tests but then subsequently we were able to then very quickly take that DNA and then run the BART test on that. So we did not have to go back to patients, physicians didn't have to call patients back in or any of the other logistics associated with that. That was really a one-time phenomenon from -- in Q3 and beyond, you're right, there is a large backlog of patients, a good portion of that million patients that have not had BART run, but in those instances that will require a physician to go back and call those patients in to consent those patients, send a test in. And we know from an historical perspective that that just generally is far less effective than what we saw in the second quarter which were samples that were just banked and in our DNA store house so we will see some BART ordered from historical patients. It's just historically we haven't seen that be a very large percentage of the testing that we would do.

Okay. That's very helpful. Thank you.

Michael Yee, RBC Capital Markets.

Question going back to something that was asked earlier was BRAC oncology sales. You typically give out the whole BRACAnalysis sales and then you give out women's health. Obviously, if you subtract the two you can get BRAC oncology. And I know that there was some work in progress revenues that probably were impacted this quarter. If you go back the last couple quarters it's sort of sequentially flatter or actually down. Is there anything seasonal or lumpy or anything going on there that would impact sequential trends? And then my follow-up question is on Prolaris I've been closely watching this and I know you've been in a work in progress there in terms of getting CMS reimbursement. Where do you think you actually stand on that and if it were to get reimbursement say, next year, how fast do you think revenues would actually come on?

Thanks, Michael. This is Mark. If you take a look at the oncology specific BRAC revenues, you are correct that the increased work in progress did impact what would have been a higher year-over-year growth rates. And so without question because the majority of our sales are in oncology it was more impacted by that increase in WIP than you would have expected in women's health. We continue to believe that there are significant opportunities in the BRACAnalysis market in oncology with only 50% penetrated. We still have the other have to go. And so we think some of the initiatives that we have in place, particularly the protocol integration initiatives, those are things that by experience we know would have more likely to have impacts later on in the year as our salespeople get more proficient at actually implementing those protocol integrations. So we still think there's ample opportunity for growth in that oncology market. Obviously the base is much higher so the percentages have historically been lower than what we've seen in the women's health side.

On the second question as far as Prolaris, we as you know, we had a no coverage decision for Medicare in September. Medicare is the most important payer for Prolaris. We think 65% of patients will be Medicare patients. And so we think that will be the bellwether for an inflection point in revenue for Prolaris once we get Medicare approval. Medicare was very receptive to the clinical and analytical validity data that we presented in that initial round. They had asked for some additional clinical utility data and the PROCEED study that we just initiated in the third quarter is designed to provide what we believe is the only additional data that Medicare might require in order to have a coverage decision for Prolaris.

So as I mentioned, we expect within five months to be able to provide the data from that study and we would hope that that would be sufficient for Medicare to make a decision. Again this is a decision that Medicare is predisposed to make because the savings that could accrue to Medicare are substantial as a result of avoiding all the unnecessary treatment that occurs in the Medicare patients. As to what revenue ramp would look like, again, because that's the primary payer for this, we think a positive Medicare decision would have a very significant impact on the inflection point in the revenue. We haven't guided to any particular numbers, and probably a little premature yet, but we do think that would be an inflection point in the lifecycle of the product.

Okay. Perfect. Thank you.

This concludes our earnings call. A replay will be available via webcast on the website for one week. Thank you again for joining us this afternoon.

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