Myriad Genetics Inc (MYGN) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Myriad Genetics third quarter 2014 financial 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, May 6, 2014. I would now like to turn to conference over to Mr. Scott Gleason, VP Investor Relations.

Thanks, Jamie. Good afternoon, everyone, and welcome to the Myriad Genetics third quarter fiscal year 2014 earnings call. My name is Scott Gleason, Vice President of Investor Relations here at Myriad Genetics. During the call we'll review the financial results we've released today, after which we'll host a question and answer session. If you have 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 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 live via webcast at myriad.com. The call is being recorded and will be archived in the investors 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 the expectations for a variety of reasons. We refer you to the documents the Company files from time to time with the Securities and Exchange Commission, specifically, the Company's annual report on Form 10-K, its quarterly report 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. I'm pleased to announce that Myriad once again delivered double-digit top and bottom line growth this quarter. Third quarter revenues were $182.9 million, an increase of 17% year-over-year. Fully diluted earnings per share for the third quarter were $0.48, which included a one time noncash charge associated with the acquisition of Crescendo Bioscience.

In order to facilitate a more complete analysis of the Company's operating results and allow for a comparison of results across historical reporting periods, we are providing additional information to investors that excludes the noncash acquisition expense. Therefore, our adjusted earnings per share for the third quarter were $0.60, an increase of 31% over the same quarter of the prior year.

Given our stronger than anticipated third quarter financial results, I am pleased to announce that we are once again increasing our financial guidance for the 2014 fiscal year. We are now projecting revenues of $770 million to $775 million representing 26% revenue growth over fiscal year 2013. On the bottom line, we are projecting adjusted earnings per share of $2.37 to $2.40, representing 34% to 35% year-over-year growth. Jim will provide more detail surrounding our financial guidance later on in the call.

I am very pleased with our strong financial performance in the third quarter which supports our focus of growing and diversifying our business to achieve the goal of building a world-class leading molecular diagnostic Company providing exceptional patient care across all major diseases. I will begin by focusing my remarks today on Myriad's efforts to advance our strategic initiatives of expanding our core hereditary cancer market, growing our international business, and launching new life saving products.

We achieved a major milestone this quarter by signing a transformational Payer contract with United Healthcare for our myRisk hereditary cancer test. Mark will talk in more detail about the contract later on in the call, but we see this contract as a strong validation of the clinical importance of myRisk. United is our second largest payer and is a leader in hereditary cancer testing and personalized medicine.

This three year contract not only provides for myRisk coverage for all United Healthcare members, but also provides coverage for myRisk update testing for those patients who have been previously tested by one of Myriad's single cancer tests. Our continued confidence in obtaining universal myRisk reimbursement stems from several key studies that we will be publishing over the coming months including another clinical validation of myRisk, several clinical utility studies and a health economic model for myRisk. Armed with this extensive and persuasive data, we are optimistic that we will be announcing additional myRisk coverage decisions over the next few quarters.

I'm also pleased to note that the Society of Gynecological Oncology recently updated their guidelines to include language highlighting the advantages of cancer gene panels. These advantages include a reduction in healthcare costs and improvement in efficiency and an increase in sensitivity with a more informative test result. The new guidelines also acknowledge the fact that a negative test is more reassuring to patients because it eliminates concerns about an inherited risk for all known cancer genes, not just a couple of genes.

We will continue to work with guideline organizations to update recommendations surrounding cancer panel tests such as myRisk. Finally, I'm pleased to note that we remain on track to fully convert our hereditary cancer business to myRisk by the summer of 2015.

We have also made significant progress in the expansion of our core hereditary cancer testing market, and we're very pleased to see the National Comprehensive Cancer Network update their professional guidelines surrounding hereditary colon cancer testing. The new guidelines represent a significant expansion of our addressable market opportunity for assessing risk of developing colon cancer or endometrial cancer.

Under the new guidelines, 30% of colon cancer patients and 100% of endometrial cancer patients now qualify for our myRisk hereditary cancer test. This change nearly doubles the incident market to 90,000 patients per year in the United States.

In the asymptomatic market, the new guidelines dramatically expand the number of patients from approximately three million Americans to more than nine million individuals. The hereditary colon and endometrial cancer market now represents a $1.5 billion market opportunity in the United States and a $3 billion market opportunity globally. More importantly, we are less than 1% penetrated in the asymptomatic market and only about 10% penetrated in the oncology market, which means there's room for significant growth.

Additionally, the new guidelines eliminates the requirement for micro satellite instability and the immunohisto chemistry pretesting prior to performing the genetic testing. Historically, pretesting has been an impediment to adoption among physicians and compliance among patients and has generated additional complexity in the ordering process.

We believe the removal of these pretesting requirements will increase patient access and streamline the test ordering and billing process for patients. We've already begun talking to private payers about these new guideline changes.

We are very pleased to see that one of our commercial partners, AstraZeneca, received priority review status for olaparib from the FDA. AstraZeneca has been granted a PDUFA date of October 3, 2014, setting them up for a potential approval in the United States later this calendar year. In support of AstraZeneca we submitted the first module of our PMA to the FDA on BRACAnalysis CDX, our companion diagnostic for olaparib.

As Mark will discuss in more detail later on in the call, we are seeing increased interest in ovarian cancer testing as we move closer to the important milestone of the first companion diagnostic for a PARP inhibitor receiving FDA approval. In addition to ovarian cancer, AstraZeneca recently announced that it is initiating three clinical studies in breast cancer, including indications for metastatic cancer and neoadjuvant and adjuvant therapy. Combined, these indications reflect 80% to 90% of all newly diagnosed breast cancer patients, potentially tripling our core breast cancer oncology market.

Beyond breast and ovarian cancer, AbbVie recently announced a Phase III study in non-small cell lung cancer using BRACAnalysis CDX. This indication of approximately 170,000 patients per year in the United States represents an entirely new market opportunity for Myriad. In fact, based upon the clinical trial information on [Clemtrials.gov], our pharmaceutical collaborators are investigating PARP inhibitors in almost every major solid tumor cancer, including the three largest cancers, breast cancer, lung cancer, and prostate cancer. The approval of PARP inhibitors across multiple cancers will further position Myriad as a leading global diagnostic Company and represent a market opportunity for our BRACAnalysis CDX test of over $1 billion annually in the United States.

Now, I'd like to discuss our international business. We continue to make meaningful progress as revenues once again increased more than 100% this quarter. While there are several reasons to be optimistic surrounding our international business, we believe one of the most notable catalysts is the potential approval of olaparib in the European market later this calendar year.

The approval of PARP inhibitors in Europe will alter the European landscape for BRCA testing in several important ways. First, Myriad will be launching the first tumor-based BRCA test in Europe later this year. Tumor BRCA testing will pick up both somatic and germ line mutations which will identify 30% more patients that may benefit from olaparib, thus expanding the market size for olaparib by 30%. We believe this more informative tumor test will make it highly attractive to physicians, patients, and payers alike.

Additionally, the availability of olaparib will create the need for much more rapid turnaround times. Myriad's turnaround time of 7 to 10 days is a significant competitive advantage compared to the current three to six months of other European labs. Physicians are unlikely to accept waiting up to six months for a result before beginning olaparib treatment for their patient.

Finally, our competitors' reliance on public databases with high VUS and error rates will further restrict patient access to this life saving medicine. The initial indication for olaparib in Europe will be in platinum sensitive ovarian cancer which represents a $100 million market opportunity for Myriad. However, the market size will increase significantly if PARP inhibitors are approved for other cancers.

In the area of new product introductions, our pipeline has never been stronger. Looking out five years, we believe that revenues from our pipeline products have the potential to be at least as large as our entire hereditary cancer testing business today.

One of the most important components of our future product growth will come from the recent acquisition of Crescendo. As you are aware, we completed the acquisition of Crescendo on February 28 and immediately began the integration of our two businesses. Our research team has identified several complementary areas of research collaboration with the Crescendo team.

Our managed care team is also working with Crescendo to utilize our established managed care relationships to begin expanding private insurance coverage for Vectra DA, and we are optimistic that we can ramp private payer coverage over the next 12 to 18 months. During the third quarter, Crescendo expanded its base of ordering doctors, and now over 25% of all rheumatologists are routinely ordering Vectra DA for some of their patients in their practice.

In addition to myRisk, three of Myriad's internally developed products, including Prolaris, myPath melanoma and BRACAnalysis CDX are poised to be significant growth drivers during the next calendar year. We recently submitted the clinical utility study for Prolaris to Medicare which completes our dossier, and we are waiting to hear back from Medicare on a coverage decision.

We also anticipate receiving FDA approval for BRACAnalysis CDX this year and are preparing to support AstraZeneca's olaparib product launch in the United States which could occur later this calendar year. Finally, we will be submitting a dossier to Medicare for myPath melanoma next year. Each of these three products has the potential to generate global revenues of over $100 million in the next five years.

Finally, I would like to mention that during the quarter we also announced initial results from a landmark study of immune system response through our research collaboration with the prestigious institute Pasteur using our TruCulture product. The study looked at establishing baseline readings of normal immune system activity and comparing those baseline readings with immune system responses to different stimuli associated with infectious diseases, autoimmune disorders, and cancer.

The TruCulture system provides a low cost platform to perform clinical studies on patients, and its point of care collection capabilities make it an ideal platform for these studies. We are currently exploring commercial collaborations with pharmaceutical companies in the areas of cancer autoimmune therapy, vaccine response and autoimmune disease therapy.

In conclusion, I am very proud of the Myriad team and the progress we have made as a Company. We are expanding the markets for our core hereditary cancer products, penetrating our international markets and perhaps most importantly, we are diversifying our business across multiple disease states and launching new innovative tests in billion dollar global markets. Myriad now has commercial products in oncology, dermatology, urology, and rheumatology, as well as women's health.

It is now my pleasure to turn the call over to Mark to provide a broader operational update.

Thanks, Pete. I'm happy to provide a more in-depth look at our operational performance in the third quarter. First, I would like to provide a recap of our segment performance during the third quarter, followed by some additional color on the myRisk hereditary cancer conversion strategy, progress on our diversification efforts through new product introductions and finally, provide an update on our legacy hereditary cancer market.

Starting with our business segment performance, our women's health segment continues to perform exceptionally well and posted year-over-year growth of 53%. We remain very optimistic about our ability to continue to drive strong growth in the women's health channel as we remain less than 5% penetrated in a $50 billion asymptomatic patient market for hereditary breast, ovarian, and colon cancers.

This quarter, our oncology revenues were down 4% year-over-year; however, it is important to note that all of our Medicare revenues are recognized in the oncology segment which was impacted by the Medicare price reduction. We estimate this impact reduced year-over-year revenue by 6%.

In the absence of this price reduction, revenues in the oncology segment would have increased by 2%. As you are aware, Medicare recently increased its calendar year 2014 price for BRACAnalysis by 37%. Consequently, going forward, this impact will be less significant.

Our myRisk launch is proceeding exceptionally well. Starting in February, we began recruiting additional physicians to use the test. Given the time for enrollment, training, and lab processing, we started to see the revenue impact from these new providers in the second half of the quarter.

Additionally, in late March, we expanded the enrollment process for myRisk to all of our genetics customers. We expect to see more meaningful increases in myRisk revenues starting in the fourth quarter and continuing to gain momentum as we work towards our goal of full conversion by the summer of 2015.

Our data supporting the use of myRisk continues to expand significantly. We have submitted the two pivotal prevalent studies for publication and have also successfully completed two clinical utility studies. In addition, I am pleased to announce that we will have six presentations on myRisk data at ASCO, including two podium presentations.

As Pete mentioned, a major step in the conversion process occurred with the signing of our first major private payer contract for myRisk with United Healthcare. We believe this contract is a strong validation that private payers appreciate the importance of the increased sensitivity of myRisk with no additional costs.

I would like to provide some additional details on the format of the United contract as it is representative of terms for future contracts as well. First, the contract is for a period of three years and unlike our historical contracts, cannot be terminated by either party over that three year period. This provision gives both companies pricing stability for an extended period of time.

Second, the contract covers myRisk testing for all patients that meet United's current hereditary cancer testing criteria. Third, while we cannot discuss pricing with individual payers, the contract is consistent with our goal of providing the higher value myRisk test at no additional cost relative to our legacy single syndrome hereditary cancer test.

Additionally, this contract provides for update testing for legacy BRACAnalysis and Colaris patients who want to be tested for the additional myRisk genes. This opens up a new market for Myriad of more than one million previously tested patients who will now have access to the most advanced technology available. We are excited to continue our pioneering work with United Healthcare and look forward to signing additional similar agreements with other payers in the coming quarters.

We are also making significant progress in our myRisk laboratory operations. The vast majority of our myRisk reports now have a turnaround time less than the critical 14-day window for surgical decision making. Additional laboratory expansions are underway, and we are ramping our training regimen to ensure our sales force, customer service, and clinical support specialists are ready to support customers on a much broader basis. This is in support of our planned full commercial myRisk launch this fall. Overall, I am very pleased with the progress our team is making on the myRisk strategy, and we remain on track to achieve full myRisk adoption by the summer of 2015.

This is also a very exciting time for our urology division as we saw a 24% sequential growth in Prolaris samples during the third quarter. In addition, we are preparing for a more expansive launch of Prolaris in coordination with our expected receipt of Medicare reimbursement coverage.

During the third quarter, we submitted our finalized dossier to Medicare, including data from our recently published PROCEDE 500 clinical utilities study. We are pleased with the outcome of this pivotal study which analyzed 305 patients and showed a 65% change in physician behavior based upon the inclusion of the Prolaris score in clinical decision making.

We also recently completed a second clinical utility study called PROCEDE 1000 and expect to have clinical outcomes in the fourth quarter. These clinical utility studies have been incorporated in an extensive health economic model that demonstrates a significant savings to the healthcare system which will also be submitted to Medicare during pricing discussions.

In May, at the upcoming American Urology Association meeting, we will be presenting three Prolaris studies and an additional study pertaining to our renal cell carcinoma prognostic product that is under development. One of these studies includes a second pivotal prostate cancer biopsy validation study with over 750 patients correlated to the gold standard end point of disease specific mortality. This data is consistent with the 11 other completed clinical studies with more than 6,000 patients which have all demonstrated that Prolaris is the most significant predictor of tumor aggressiveness and disease specific deaths.

We also continue to see exceptional physician demand for myPath melanoma, and we received over 1,000 patient samples this quarter. We dramatically expanded the numbers of doctors ordering myPath melanoma this quarter from 35 ordering physicians in the second quarter to 90 in the third quarter. Since dermatal pathology is a small channel, this represents about 6% of the potential 1,500 dermatal pathologists in the country.

Additionally, we are working diligently to build a robust set of supporting clinical data around myPath melanoma. Our initial verification study was presented at the International Society of Dermatal Pathology meeting in March, showing the test had an 89% sensitivity and 91% specificity when differentiating melanoma from benign skin lesions.

I am pleased to announce that our first clinical validation study has been accepted for presentation at the upcoming ASCO meeting in June, and we expect the data to be similar to what we saw in our verification cohort. We have completed our initial clinical utility study and developed pharmacoeconomic data to support the economic value of the test to the healthcare system. This favorable health economic model will be presented at the Association of Value Based Cancer Care meeting this week.

Our initial retrospective clinical utility study was presented at the USCAP annual meeting in March, demonstrating over a 33% change in medical management based upon the myPath melanoma test results. We continue to believe that we will have all the necessary data to submit a reimbursement dossier to payers by the end of fiscal year 2015, thereby opening access to this $1 billion global market.

In addition, we are making significant progress with our myPlan lung cancer launch. Commercial interest in the test grew during the quarter, and we are in the process of expanding the supporting clinical data to obtain reimbursement. Our first health economic study has been accepted for presentation at the upcoming International Society for Pharmacoeconomics and Outcomes Research meeting in early June.

Additionally, we have a second health economic study that has been accepted for publication at the upcoming ASCO meeting. Furthermore, as part of our early access launch, we are enrolling patients in our first clinical utility study. The completion of these studies will pave the way for a dossier submission for reimbursement.

We have also seen some promising developments in our companion diagnostic portfolio. We recently announced that we have submitted the first data module to the FDA in support of our premarket approval application in concert with AstraZeneca's new drug application for olaparib. As Pete mentioned, AstraZeneca has announced that olaparib has received priority review by the FDA and could be available by the end of this fiscal year. Only those ovarian cancer patients who carry a BRCA mutation will likely benefit from olaparib therapy, so it is important to know a patient's BRCA status in order to have access to and guide future therapy.

We have historically tested only 25% of ovarian cancer patients each year in the United States but would expect this number to increase dramatically if olaparib is approved later this year. In anticipation of these developments, the Society of Gynecological Oncologists in the third quarter reemphasized their professional guidelines recommending genetic testing for all ovarian cancer and endometrial cancer patients. To prepare for this launch, we have recently been expanding our outreach efforts to gynecological oncologists.

Transitioning to reimbursement, a significant positive industry event occurred with the passage of the protecting access to Medicare, or PAMA Act, that including provisions for pricing of all tests under the clinical laboratory fee schedule. This new legislation eliminated the ability of CMS to reprice codes under the clinical laboratory fee schedule based upon technology changes. Therefore, the Medicare pricing for integrated BRACAnalysis will remain the same until calendar year 2017.

In 2017, existing lab fee schedule codes will be priced based upon the weighted median reimbursement rate of all private payers submitted during 2016. Additionally, there are some provisions in the new law that are very favorable for the pricing and coding of new advanced diagnostic tests following a coverage determination by Medicare. Overall, we view this legislation as a major positive in reducing reimbursement uncertainty and incenting innovation.

Finally, I would like to provide an update on our legacy hereditary cancer business. In the third quarter, we saw only a small additional decrease in market share in the genetic segment that represents 15% of our business. As a reminder, 100% of our genetics revenues are recognized in oncology. So, this segment has disproportionately felt the impact of competition. We believe our increased selling efforts into this channel as well as the introduction of myRisk will stabilize our future market share.

Additionally, from a reimbursement perspective, we again saw no material change in our average selling price or network status with major providers. Our goal is to convert our payer contracts to myRisk with longer term durations as we have demonstrated with United Healthcare. This, coupled with the recent legislative changes for clinical laboratory fee schedule pricing, will provide long-term reimbursement stability for our entire portfolio of products.

In conclusion, we are making outstanding progress with our myRisk hereditary cancer conversion strategy as well as our other new product launches. As a Company, we have made a conscientious effort to dramatically expand our research efforts, and we are now seeing the dividends of that strategy in terms of our rapidly expanding product pipeline. Given the contribution we expect from these new products, coupled with the successful transition of our hereditary cancer market, we remain confident in our ability to continue to deliver strong growth in future years. With that, I will now turn the call over to Jim for a financial update.

Thanks, Mark. I'm pleased to provide an overview of our financial results in the third quarter, followed by a more detailed look at our 2014 financial guidance. Third quarter total revenues came in at $182.9 million, representing top line growth of 17%. Molecular diagnostic revenue in the quarter was $176.2 million, up 19% year-over-year. As we mentioned earlier in the call, our women's health revenues were $80.7 million, up 53% year-over-year.

We are very pleased with the continued strength of our women's health business. Oncology revenue declined $3.4 million year-over-year to $92.4 million. Contributing factors to the year-over-year decline in oncology revenue included a $6 million reduction in Medicare reimbursement associated with the CMS price cut, which was subsequently increased by 37% beginning April 1, 2014 and a typical seasonality of our business during the winter quarter.

Companion diagnostic revenue in the third quarter was $6.7 million, and Crescendo added an incremental $3.1 million which represents a single month of sales as the acquisition closed at the beginning of March. We believe going forward, the best way to gauge the performance of our hereditary cancer testing franchise is to look at the aggregate growth of our hereditary cancer tests including BRACAnalysis, BART, Colaris, Colaris AP and myRisk since the individual product growth rates are no longer comparable on an apples-to-apples basis

Looking at our revenues this way, this quarter our overall hereditary cancer franchise grew approximately 16% year-over-year. Hereditary cancer revenues consisted of BRACAnalysis and BART revenue of $140.7 million, Colaris and Colaris AP revenue of $14.4 million and myRisk hereditary cancer revenues of $14.5 million. Other revenues were $3.5 million and grew 25% relative to the third quarter of last year.

Before moving further into the income statement, I want to discuss some one time noncash charges Myriad incurred during the third quarter as a result of the acquisition of Crescendo Bioscience. First, we incurred approximately $12.6 million in one time noncash charges associated with acceleration of Crescendo employee stock options and change of control bonuses tied to the closing of the transaction on February 28. These remain out of the $270 million purchase proceeds, so it did not cost Myriad anything. However, GAAP accounting requires us to record this on our books as opposed to acquisition expense.

Additionally, as with most acquisitions, we will have a noncash amortization charge going forward associated with the purchase of intangible assets in the transaction. This noncash charge was approximately $900,000 in the third quarter and will be approximately $2.7 million per quarter on an ongoing basis. This, combined with the amortization of intangible assets acquired in the rules-based medicine combination will result in total amortization of intangible assets from acquisitions of approximately $3 million quarterly.

Following the lead of most public companies that complete sizeable acquisitions and in order to provide investors with additional information that may be useful in analyzing the Company's past and future operating performance, we will begin breaking out these noncash amortization charges separately and reporting adjusted EPS. We believe this will give a better reflection of the true earnings power of the Company and provide the better comparison with historical periods. Therefore, our earnings guidance going forward will also be adjusted to exclude these noncash charges.

Now, moving down the income statement. Our adjusted gross margins declined 130 basis points year-over-year to 85.7% as expected, principally due to the inclusion of revenue from Crescendo which at current volumes has lower margins. We anticipate some further decline in our gross margins as Crescendo becomes a larger part of our product mix. As we enter into additional long-term contracts such as the United contract, we expect gross margins similar to our single cancer tests at volume; however, at our current economies of scale, the margins are lower for our myRisk test.

Adjusted research and development expense was $9.5 million, which excluded approximately $3.9 million in noncash charges. Our R&D expense will continue to fluctuate based on the timing of clinical trials and receipt of research samples with a goal to spend approximately 9% of sales. Adjusted SG&A was $78.1 million, which excludes approximately $9.5 million in noncash charges. Our adjusted SG&A was relatively flat quarter over quarter.

Our adjusted operating margin was 37.8% in the quarter, an increase of 40 basis points on a year-over-year basis, primarily due to the lower R&D expense in the third quarter. Total adjusted operating income was $69.1 million, an increase of 19% year-over-year. Our tax rate this quarter was 36%, which was lower than our prior quarter due to the exercise of employee stock options during the quarter and a lower blended state tax rate. Adjusted net income for the quarter was $46.2 million, an increase of 21% year-over-year.

Our fully diluted share count decreased to 76.4 million shares based primarily on our share repurchase activity during the quarter. The benefit of our share repurchases was offset some this quarter as a result of the higher stock price which has a dilutive effect as more employee stock options moved into the money. Our adjusted EPS was $0.60 for the quarter, which was up 30% compared to the $0.46 adjusted EPS we posted in the third quarter of last year.

Moving to the balance sheet, we ended the quarter with $277.7 million in cash and cash equivalents, which translates into $3.64 in cash per fully diluted share. We utilized approximately $245 million for the purchase of Crescendo Bioscience, an additional $42 million in cash to repurchase approximately 1.6 million shares during the third quarter.

We continue to believe our stock price is not reflective of the long-term value of the Company, and we will consequently continue our stock repurchase program as current valuation thresholds. As of the end of the March quarter, we had approximately $231 million remaining on our current share repurchase authorization, and we'll have more than sufficient cash on hand to complete the authorization.

Now, I would like to provide a more detailed look at our 2014 financial guidance. We are once again revising our 2014 revenue guidance upward and now are calling for revenues of $770 million to $775 million, reflecting 26% revenue growth. This guidance includes an assumption of approximately $13 million in revenue from Crescendo this year and reflects the recent increase in Medicare pricing for BRACAnalysis and assumes no material declines in private pay pricing.

On the bottom line, we are also raising our annual financial guidance and are now calling for adjusted EPS of $2.37 to $2.40, representing earnings growth of 34% to 35%. As a reminder, our adjusted EPS excludes noncash charges associated with acquisitions.

Finally, we have received a great deal of investor inquiries surrounding Crescendo, so we would like to provide you with some additional visibility to aid you in your modeling for fiscal year 2015. We anticipate revenues from Crescendo will be approximately $60 million in fiscal 2015, and we believe the acquisition will be approximately $0.20 dilutive next fiscal year. We expect the dilution to moderate throughout the year and that Crescendo will be accretive in fiscal year 2016 and beyond. And with that, I will now turn the call back over to Scott for Q&A.

Thanks, Jim. As a reminder, during today's call, we use certain non-GAAP financial measures. A reconciliation of the GAAP financial measures to non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial guidance can be found under the Investor Relations section of our website. Now, we are ready to being the Q&A session. In order to ensure broad participation in today's Q&A session, we are asking participants to please ask only one question and one follow-up. Operator, we are now ready for the Q&A portion of the call.

(Operator Instructions)

Bill Quirk, Piper Jaffray.

Hi, great, thanks, good afternoon, everybody. First question for me is regarding the UNH contract. Talking about the 1 million patients that have already gone through the BRACAnalysis product and the fact that they may be eligible for myRisk. Help us think a little bit about the terms here for Myriad there. Is this something where you are charging a discounted price for the balance of myRisk? Is this essentially like performing a brand new test for someone? Help us think about the logistics there, thank you.

Thanks, Bill. As I mentioned, we have 1 million patients, obviously, a percent of those are United Healthcare patients, and that percent is roughly consistent with their share of the overall managed care market in the US. We don't talk about any of the pricing details as it relates either to myRisk or what we call the myRisk update, so we can't necessarily get into any of those details.

But as you mentioned, those patients do represent an additional market that historically we've not been able to tap into. I think with a 50% to 60% increase in sensitivity that we've seen with the myRisk task, we have certainly seen an increasing level of interest from healthcare providers to contact those patients that have been historically tested, and particularly those that had initially been identified as higher risk. And so we think over the coming months that we will see physicians reach out to some of those legacy patients and provide them the opportunity for updated testing.

Derek DeBruin, Bank of America.

Hello, good afternoon. I'm a little bit curious on the Prolaris volumes. Can you give us a little bit more color on that and how we should think about the increase in Prolaris once you get CMS approval -- reimbursement approval, reimbursement for this? I'm just curious how you're thinking about that and the growth projectory in that product.

Thanks, Derek. As I mentioned in my comments, we've continued to see very nice growth in Prolaris. We saw a 24% sequential growth in samples for Prolaris this quarter. As you're probably aware, Medicare is really the most important segment for Prolaris. That represents probably about 65% of patients, which is why we've put significant emphasis in obtaining Medicare approval.

What we've historically seen in molecular diagnostics is that when Medicare approval is obtained, that you see an inflexion point in utilization of testing, and we would anticipate the same thing with Prolaris when we ultimately get reimbursement. As a result of that, we've already begun looking at expansion of our field sales force in anticipation of that, and we're looking to double that field sales force which then should allow us to significantly increase our penetration into the urologists that prescribe Prolaris. So, we do anticipate an inflection point. We haven't provided specific guidance around that, but you can see we've already seen very nice sequential growth, even without Medicare reimbursement.

Eric Criscuolo, Mizuho.

Good afternoon. Thank you for taking my question. Just filling in for Peter Lawson tonight. On the R&D, it was substantially lower than what we had estimated and substantially below run rate. And I know you've said that obviously, R&D timing comes into play. Were there any programs in particular that got pushed out into later time periods that are going to hit the P&L in the coming quarters?

Thank you for the question. No, there's nothing unique or unusual about this quarter. As Jim mentioned on the conference call, R&D is dependent upon our receipt of samples, upon the timing of clinical studies and our work with both our pharmaceutical partners and our internal product development. So, it does fluctuate from quarter to quarter.

We still feel fairly confident that it will not exceed 9%, which has certainly been our goal, as a percent of revenues, and are very excited about the industry leading product pipeline that the Company has. We do have about a dozen programs, new products under development in the pipeline. And again, there's quite a bit of fluctuation in terms of getting samples to do the clinical valuation studies around those new products. But no, nothing unusual that would anticipate an increase, an abnormally unusual increase in future quarters.

Thank you.

(Operator Instructions)

Amanda Murphy, William Blair.

Hello, thanks. I have some questions on the growth rates of the two sides of the business, the OB/GYN and the oncology. I believe that you said that the celebrity publicity factor was out of the numbers now. So, I'm curious, first, should we look at the run rate as sustainable as that market expansion? Maybe just provide a little more color there. And on oncology you mentioned obviously, the Medicare cuts, but also some market share losses. Just looking for a little more color on, if you could quantify it in incremental amounts. Thanks.

Thanks, Amanda. As you mentioned, we have in fact seen any of the effect from publicity really dissipated at the end of last quarter. I think we feel very confident about that. As you know, we've done a number of public awareness campaigns over the lifetime of the Company, and we carefully monitor certain indicators of those awareness campaigns. The patterns we saw during this celebrity publicity period were identical to what we've seen historically, although the magnitude was certainly greater than what we've seen. But it was very clear from accessing those patterns that the effects dissipated by the end of last quarter.

So, you are right, this quarter is more reflective of true year-over-year without the impact from celebrity publicity. The OB/GYN segment grew 53%, we're obviously quite pleased with that. Prior to the impact from celebrity publicity, we had been seeing growth rates in the year-over-year 30% to 40%. So, while this is slightly higher than what we had seen, it's still within the realm of what we've historically seen in the OB/GYN segment. As mentioned, we are still very underpenetrated in that segment. There's still substantial opportunities for growth. And with the current changes in the colon cancer and endometrial guidance, guidelines from NCCN that actually expand the potential market size for OB/GYN. We still continue to believe there's significant opportunity for growth there.

As you mentioned, in oncology we did see year-over-year revenue decline, but in the absence of the Medicare changes, would have seen a slight increase of about 2% year-over-year. This segment does bear the full brunt of the competitive pressures that we have seen, although we continue to see that market share loss really reside in that 15% of our business that is the genetic segment. We also continue to think there are opportunities for growth in the oncology segment.

As I mentioned, we are doing a couple of initiatives to try to shore up market share in that genetic segment through additional call points or additional expansions into the genetics segment -- the sales team that calls on the genetic segment. So, we will continue to focus on that. The other thing that we have seen is that segment is particularly interested in panel testing. And so making myRisk available to that segment is very important, because it now allows them to use one laboratory for single syndrome or for panel testing. And lastly in the oncology segment, we still continue to believe that there are opportunities to expand the indications with myRisk, potentially doubling the size of the patient population that would be eligible for hereditary cancer testing.

And let me just add, Amanda, to that. I think the new guideline changes at the NNCN around colon cancer and endometrial cancer testing could have a potential significant positive impact on the growth in both businesses. But certainly in oncology as those guidelines are incorporated in private pay reimbursement.

Sung Ji Nam, Cantor.

Hi, thanks for taking my question. Just had a question on your guidance for Crescendo for the remainder of the year. You did roughly $3 million this quarter, and it seems like you're expecting kind of a flattish quarter sequentially for fourth quarter. You've seen a lot of significant sequential growth, at least in volume, over the last several quarters. I was wondering if there's more, if I'm reading too much into that or if there might be something else going on as you're trying to integrate that business into your core business.

Yes, I think you probably are trying to read maybe a little bit too much into that. We're forecasting about $13 million in revenue, which is an increase over the March quarter. But as Jim pointed out, for our fiscal guidance in 2015, we're showing about $60 million in revenue growth. Crescendo finished their calendar year in 2013 with total revenues of $27 million. Both what we're forecasting in the fourth fiscal quarter and for fiscal 2016 is a significant increase over Crescendo's current run rate and historical revenues.

We're very excited about Crescendo, we think it represents a significant opportunity for Myriad as we not only move and diversify into a new disease indication, but look at a product that truly will dramatically improve the quality of life of patients with a chronic disease like rheumatoid arthritis. We remain very excited and anticipate very good revenue contribution and growth from Crescendo going forward in the future.

Dan Leonard, Leerink Swann.

Great, thank you. I know you don't want to talk specifics around the UNH pricing, but can you at least talk about pricing in context of some of your prior commentary that private payers were more receptive to your economic arguments and lower VUS and that sort of thing? And then for my follow-up, could you comment on whether or not the companion diagnostic branded BRAC, if that would be part of this agreement as well, or if that would be a separate negotiation. Thank you.

Thanks, Dan. Yes, you're correct. We can't necessarily talk about details in pricing, but we can maybe provide some commentary on that. First, when we initially laid out the myRisk strategy, I think we mentioned at that point our goal was that we would provide substantial increase in information for no additional costs, and you can see this contract is consistent with that. Payers are very receptive to the economic models, first of all, around our legacy testing, BRACAnalysis specifically. And so when you layer on a 50% to 60% increase in sensitivity at no additional cost, I think the health economics for they payer, even become that much more pronounced. They have been very receptive. I think this is a true validation of that with United Healthcare, which would be viewed a pioneer in hereditary cancer testing for quite some time.

I think we're very pleased that we're able to demonstrate that and provide that as a model for future contracts with other payers. Specifically to BRACAnalysis CDX, which will be the branded name for the new companion diagnostic that will cave pre-market authorization from the FDA because that product has not yet been approved, we have not specifically engaged with payers on contracting for that new product. But we will certainly do so as we approach the approval and launch of BRACAnalysis CDX. It is a different product, and we can explore different coding and pricing and reimbursement that are consistent with the value that that new product brings to the marketplace.

Drew Jones, Stephens.

Thanks, guys. On the colorectal side, can you give us some color on historical cancellation rates there, given the [IC] pre-exquisite test and how the baited guidelines might change that?

Yes, thanks, Drew. We haven't talked specifically about cancellation. I think actually what you saw with this test was not so much an impact of cancellation, but more the fact that when a healthcare provider, specifically in oncology segment, would identify a patient with colon cancer that had a family history.

Guidelines were such that they were rarely required to do tumor-based testing before they could ever order genetic testing. And so we would actually never see those tests in our laboratory because if the tumor test was done and the tumor tests came out negative, then there was never genetic testing ultimately pursued with that test. This new guideline recognizes the fact that first of all, those tumor tests are not as sensitive.

Secondly, now that the recommendation is that you should test all the mismatched repair genes, which are all four of those, that tumor testing actually no longer become viable as a pretest and that you should move directly to a genetic test. These are test that we would have never historically seen, but will now be ordered directly from Myriad without a prescreen. That's why we believe this offers the opportunity, as Pete mentioned, for expansion in the oncology segment for colorectal cancer testing.

And let me add to what Mark has said, and I'm in complete agreement with Mark. I don't think it will have any impact on our cancellation rates. I think those have historically remained consistent and should going forward in the future. These are just patients we never got to see because of the micro satellite instability testing requirement. And going through that procedure, you see a drop-off in compliance, both at the physician level and at the patient level, in terms of advancing on to genetic testing.

This new guideline change I view as extremely important and extremely beneficial in terms of patient healthcare in treating colon and endometrial cancer. I think we're going to see much better patient access and utilization of the testing in the future. But it really is a situation of, we never got to see these patients in the first place as opposed to any impact on our cancellation rate.

Isaac Ro, Goldman Sachs.

Good afternoon, guys. Thanks for taking the question. Just wanted to start off, hoping that you can comment on what visibility you have regarding the number of payers or the percentage of payers that you deal with who are now providing reimbursement for more than one BRAC test? And just taking that in context of the comments you had earlier regarding the fact that you really haven't seen a ton of share loss here, and you've obviously been able to negotiate with United for a variety of things. Just trying to get a sense of if we look now versus a few months ago or a year ago, the percentage of payers who are now paying effectively for multiple versions of BRAC.

Thanks, Isaac. That's really a visibility we wouldn't have. What I can say is that from our perspective, as I mentioned, that we've seen no change in network status, no change in average selling prices. Whether or not they've contracted or paid for other laboratory tests, there's no insight I could probably have on exactly what they might be doing there. I think what we've continued to see is because they value the accuracy of the Myriad test and because we've been able to show it to payers, that that additional accuracy can save a payer $2,600 per patient. We continue to see broad access in all payers with no change in network status, and we would expect that to continue.

Jon Groberg, Macquarie.

Just one question and a quick follow-up. On the oncology side, you mentioned how OB/GYN, how you think you're still very underpenetrated. Could you maybe give an update of where you think you are on the penetration side on oncology, just given that it was a bit of a slower grower there, even if you adjust for the price decline and whatever you think the competitive impact is? And the second question is on use of cash. I know you bought back a lot of stock, but seems like the Crescendo acquisition is something that could be a real positive. And I'm just curious, your appetite for looking at other types of deals and using your cash more for M&A than buybacks. Thanks.

Thanks, Jon. I'll talk about the oncology side and then Pete will talk about use of cash. From an oncology perspective, we view that as the entire hereditary cancer portfolio, which includes breast cancer, colon cancer, endometrial cancer, all of those cancers that currently have indications. So, across the entire hereditary cancer portfolio, we're about 33% member penetrated. As Pete mentioned, part of the reason that we're at 33% is because the colon cancer side we've been relatively underpenetrated versus the breast cancer side of the business. And so that offers some significant opportunity, particularly as we transition to myRisk. About 33% penetrated across all of hereditary cancer.

With regard to our capital deployment strategy, you're correct in pointing out that even after we have repurchased about $750 million worth of Company stock and have completed the Crescendo transaction, so there's no addtional funds that would be needed toward that. The Company still has $277 million cash in the bank, and that's plenty of cash to continue our current share repurchase program. But also, we will continue to look at opportunities to grow the Company through the acquisitions and mergers. Our first priority, certainly is to grow the business, both by investing in R&D and again, we've committed about 9% of revenues to the internal product development as well as M&A. But we will have plenty of cash left over to continue the share buyback because we still do believe the stock is undervalued.

I'd also throw in that we do have a very clean balance sheet. No debt on the balance sheet at the current time. That leaves us completely wide open to be able to take advantage of opportunities that come along through the cash balance we have on hand or the ability to lever if we need to.

That does conclude the question and answer portion of the conference. Mr. Gleason, I'll turn the conference back to you to continue all your closing remarks.

Thank you, Jamie. This concludes our earnings call. A replay will be available via webcast on our 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 please ask that you disconnect your lines.