Myriad Genetics Inc (MYGN) 2015 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Myriad Genetics second-quarter 2015 financial 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 call is being recorded Tuesday, February 3, 2015. I would now like to turn the conference over to Scott Gleason, Vice President of Investor Relations. Please go ahead, sir.

Thanks, George. Good afternoon, everyone, and welcome to the Myriad Genetics second-quarter earnings call. My name is Scott Gleason. I am the Vice President of Investor Relations. 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 review the earnings release, it can be found in the investor relations sections of our website at www.myriad.com.

Presenting for Myriad today will be Pete Meldrum, President and Chief Executive Officer, Mark Capone, President, Myriad Genetic Laboratories, and Bryan Riggsbee, Chief Financial Officer. This call can be heard live via webcast at www.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 today may contain projections or other forward-looking statements regarding future events or the future financial performance of the Company. These statements are based on management's current expectations, and the actual events or results may differ materially and adversely from these expectations for a variety of reasons. We refer you to the documents the Company files from time to time with the Security and Exchange Commission, specifically the Company's annual report on Form 10-K and 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 would now like to turn the call over to Pete.

Thank you, Scott. As was announced earlier today after 24 wonderful years at Myriad, I have decided to retire at the end of the fiscal year. This was a very difficult decision for me since Myriad has been an important part of my life for nearly a quarter of a century. I have enjoyed being part of Myriad's pioneering work in personalized and predictive medicine. I feel extremely fortunate to have been a part of the team that played a central role in building this new industry of molecular diagnostics, which has such an enormous potential to save lives and improve the quality of life of patients.

However, I'm also looking forward to spend more time with my family and friends and focusing on the charitable work of the Meldrum Foundation. Myriad has always placed a high priority on management succession, and I am very fortunate to have been surrounded by an exceptionally talented and dedicated team of executive officers with whom I have had the privilege to work. Among my executive officers, one stands out as an ideal successor to me as Chief Executive Officer. Mark Capone has the experience, the skill set, industry knowledge, business acumen, and leadership style to guide Myriad into the future. Having worked alongside Mark for 13 years, I can think of no one I would trust more with the Company I co-founded 24 years ago.

I want to thank Myriad's Board of Directors for their wisdom and guidance over the years. And, in particular, I have enjoyed my partnership with our Chairman, John Henderson. On a more personal note, I will genuinely miss each one of the exceptional Myriad employees who make this Company such a unique and special place to work. I appreciate everything our employees do each and every day to help patients with cancer and other major diseases.

I am pleased to report that Myriad exceeded the consensus top and bottom line estimates in our second fiscal quarter. Second-quarter revenues of $184.4 million were up 9% on a sequential basis. Of particular note, we continue to be ahead of schedule in our transition from single cancer testing to our myRisk cancer panel with myRisk revenues up 60% sequentially to $85.1 million.

Second-quarter adjusted earnings per share were $0.40, an increase of 60% over the prior quarter and exceeded the consensus estimate by $0.05. While this was a strong quarter for the Company, we have experienced some recent delays that caused us to revise our guidance for the full year. We are now anticipating FY15 revenues of $730 million to $740 million and adjusted earnings per share of $1.50 to $1.55. The primary reasons for this guidance change are lag in obtaining private insurance coverage for Vectra DA, a delay in the timing of Medicare reimbursement for Prolaris, an increase in work in progress, and the timing of certain contracts in the pharmaceutical and clinical services segment. We believe most of these issues are transient in nature, are confident that they will be successfully resolved, and believe they will have minimal impact on our long-term financial outlook. Bryan will discuss our guidance in more detail later on in the call.

Importantly, we continue to make significant progress on our three strategic initiatives of growing the hereditary cancer market, diversifying our business through new product introductions, and expanding our international presence. During the second quarter, we saw strong sequential revenue growth in our hereditary cancer market segment. Additionally, as Mark will discuss later on in the call, we have laid the groundwork from the laboratory capacity standpoint to fully convert the remainder of our hereditary cancer business to our myRisk test over the next three quarters.

We are also making progress on our initiatives to expand the addressable market opportunity in the hereditary cancer segment. At ASCO this year, we plan to present data demonstrating the importance of hereditary cancer testing in the endometrial cancer patient population. Currently, we test less than 5% of the almost 50,000 newly diagnosed endometrial cancer patients in the United States. We also plan to initiate several new clinical studies in multiple cancers, which represent new market opportunities for the Company.

This quarter, Myriad achieved a major milestone with our BRACAnalysis CDx test receiving FDA approval, becoming the first FDA-approved, complex, laboratory-developed sequencing test. In the words of Alberto Gutierrez, Director of the Office of In Vitro Diagnostics and Radiological Health at the FDA, we are very excited that Myriad's BRACAnalysis CDx is the FDA's first approval of an LDT under pre-market approval application. And, it is the first approval of an LDT companion diagnostic. End quote. This undertaking was significant and required a substantial investment of both time and Company resources. FDA approval is the highest level of clinical validation in the United States and significantly differentiates the quality of our laboratory when compared to our competitors.

Myriad has developed the capability to gain FDA approval of highly complex tasks as one of our core competencies. This ability will be increasingly important as the regulatory environment evolves in the laboratory industry. This core competency is also extremely important to our pharmaceutical partners who want to reduce their risk as they bring new drugs to the market. Our global sales and marketing infrastructure further position Myriad as a preferred partner in the companion diagnostic arena. Mark will provide more detail on our launch plans for the BRACAnalysis CDx test later in the call.

We are also pleased to be granted European CE marketing approval for our tumor BRACAnalysis CDx test which is a companion diagnostic for AstraZeneca's new PARP inhibitor, Lynparza. Tumor BRACAnalysis CDx is the first and only tumor-based companion diagnostic for a PARP inhibitor to receive a CE Mark. This positions Myriad well in the European market because germline BRAC tests would miss more than one-third of the ovarian cancer patients who could benefit from this new life-saving drug.

Also on the companion diagnostic front, we recently presented new data at the San Antonio Breast Cancer Symposium on the ability of our myChoice HRD test to predict which triple-negative breast cancer patients are likely to respond to platinum-based therapies. In a study conducted at the Dana-Farber Cancer Institute, 52% of patients with a high myChoice HRD score responded to platinum drugs compared to only 10% with a low HRD score. We believe this study, along with other supporting data, provides strong evidence in support of the use of myChoice HRD to guide therapy decisions concerning the use of platinum drugs. Based on the strength of these studies, we are planning an early access launch of the myChoice HRD test later this summer.

We are also making good progress with our myPath melanoma test, and I'm pleased to announce that our first clinical validation study has been accepted for publication. Along with the second validation study and our clinical utility study, we will have the necessary data to support the submission of a reimbursement dossier to Medicare and the private insurance companies by the end of this fiscal year. While it is difficult to predict the ultimate timing of reimbursement coverage, we are very excited about the potential for this product and have seen robust demand already from dermatopathologists. To date, approximately 10% of all US dermatopathologists are customers for myPath melanoma.

While this quarter's revenues for Vectra DA was flat, we continue to be excited about the prospects for this test and the autoimmune disease market as a whole. Our primary focus at the beginning of this year was to obtain private insurance reimbursement, and our progress to date has been slower than we originally anticipated. However, Myriad's managed care team is now fully engaged and charting a strategy for Vectra DA reimbursement.

Additionally, we recently hired Bernard Tobin, a seasoned healthcare executive with proven operational track experience to lead Crescendo in its transition from a startup to an operational Company. Bernie had extensive management and sales experience at Amgen and Eli Lilly. Additionally, Bernie has significant managed care experience and was the executive director of national accounts for Amgen. Under Bernie's leadership, we have developed a plan to refocus our sales efforts on broadened payer coverage for Vectra DA.

This plan includes sales initiatives such as streamlining the Vectra DA ordering process for rheumatologists, implementing sales strategies similar to our successful protocol integration program first developed in the preventive care market, and employing practice management software tools. These changes will take some time to be effective so we are not anticipating a significant inflection in Vectra DA revenues in the short term. However, we remain confident in the growth prospects for Crescendo. As a reminder, Vectra DA already has Medicare reimbursement which represents a $600 million market in the United States, and we continue to envision this business as a major component of our revenue growth in FY16 and beyond.

Finally, I'd like to touch on our international progress. As I mentioned earlier, we achieved a major milestone this quarter with the EMA approval of Lynparza and the CME -- CE marketing approval of our tumor BRACAnalysis CDx test. We believe the European approval of Lynparza will be a major driver for our international business. There is now a significant need to receive test results in a timely fashion, and more importantly, receive results that identify as many ovarian cancer patients as possible who may benefit from this life-saving drug. We believe that our laboratory in Munich is uniquely suited to this challenge given our significant advantages in tumor tissue analysis, turnaround time, accuracy, and variant classification.

Additionally, we have experienced strong revenue growth from our EndoPredict test which was up 80% sequentially. And, our international myRisk revenues enjoyed a record quarter increasing 50% quarter over quarter. Our total international revenues were up 118% compared to the same quarter of the prior year. We are confident that our international business will become a meaningful contributor to our long-term growth.

In conclusion, we believe Myriad is in an excellent position for strong revenue growth going forward. The investments we have made this year will ensure the durability of our hereditary cancer franchise, will allow us to expand and drive leverage in new, multi-billion-dollar market opportunities, and will lay the foundation for a global footprint. Before I turn the call over to Mark for an operational update, I would like to thank all of you for your support of Myriad and me throughout the years. Mark?

Thanks, Pete. I am pleased to provide a more in-depth look at our operational performance in the second quarter. First, I would like to provide you with an overview of our segment performance followed by an update on our myRisk conversion progress and finally provide some additional detail around our newer product launches. Overall, the hereditary cancer business generated $165 million in revenue which represented a significant sequential increase of 9.5%. The oncology revenues were $83.7 million in the second quarter, and preventive care revenues were $84.6 million.

We achieved a major milestone this quarter where for the first time our preventive care business exceeded the size of our oncology segment. The promise of hereditary cancer always has been to prevent cancers from occurring in generations of family members. This milestone is a significant accomplishment in that it shows that physicians are increasingly identify patients with red flags early so they can take affirmative steps to prevent those cancers. As a reminder, we are less than 5% penetrated in the preventive care market and continue to expect this to be the fastest-growing segment of our hereditary cancer business.

We continue to make excellent progress on the conversion of the hereditary cancer business from single syndrome testing to the myRisk hereditary cancer test. We ended the quarter with 53% of hereditary cancer revenue attributable to myRisk. As a reminder, we decided not to add any additional physicians to the myRisk conversion program in the second quarter while we were increasing the laboratory capacity to meet current demand. I am pleased to say that we have exceeded that goal and now have sufficient equipment, personnel, and informatics hardware to support the complete transition of the market.

In the third quarter, we will be installing additional proprietary software applications that will be the final pieces necessary to expand laboratory capacity for full transition. As a result, we plan to only modestly increase access to myRisk in the third quarter followed by a more meaningful increases in the fourth quarter of FY15 with complete conversion by the end of the summer as originally planned. We saw no impact from changes in work in progress on revenue this quarter, and so our hereditary cancer revenues were a true reflection of the underlying business.

We continue to have productive discussions with payers regarding myRisk coverage. Payers see the benefit of identifying more patients with a hereditary cancer syndrome to reduce cancer and downstream costs among their members. In addition, they are experiencing an increase in a la carte gene testing as more data is published on the prevalence of other hereditary cancer genes. As a result, we were able to sign additional long-term payer contracts in the second quarter. If we are successful at obtaining contracts from the remaining Blue Cross/Blue Shield affiliates, we will have long-term, fixed-price contracts for approximately 75% of our hereditary cancer commercial payer business.

At the San Antonio breast cancer symposium this year, we presented data showing that myRisk increases mutation detection by 105% relative to our legacy single syndrome tests. This study was performed on a broad, community-based patient population of over 17,000 patients and was therefore more representative of what we would expect to see in the overall testing population. We believe this study further demonstrates the importance of myRisk and the value of the panel-based approach in guiding patient care. Overall, I remain very pleased with the physician and patient acceptance of myRisk and our increased capacity to deliver the most accurate and comprehensive hereditary cancer test in a timeframe required for real-time decision-making.

Transitioning to our urology business unit, this quarter we presented several key data sets at the Society of Urological Oncology meeting. First, we presented our health economic model showing that Prolaris can save the healthcare system over $2,800 per patient tested. Over a 10-year period, this could save the healthcare system $6 billion. Additionally, we presented interim data from a Proceed 1000 clinical utility study.

The interim data analysis of 816 patients demonstrated that physicians change their treatment decisions in 44% of cases based on the results from the Prolaris test. In 32% of patients, the Prolaris test score led to a reduction in treatment while 12% of patients received more aggressive treatment based on their test results. Additionally, a draft local coverage decision from Meridian which mirrors the final Palmetto [MoBX] LCD was posted on January 15.

Meridian is the local Medicare contractor that processes all of Medicare claims for Myriad and has decided to seek additional public comments prior to the coverage advisory committee meeting. Meridian's open comment period is scheduled to end on March 30, 2015 and given the timeline required for Meridian to issue a final LCD along with the 45 days for it to become effective, we now believe we will not be able to begin submitting claims to Medicare for reimbursement until late in the fourth quarter of FY15.

Despite this delay in timing of reimbursement coverage, we have seen strong growth in Prolaris sample volumes with total samples increasing 32% sequentially in the second quarter. As we enter the second half of the fiscal year, the increase in clinical data, physician acceptance, and our recent new sales team hires should continue this strong growth. We do not anticipate the delay in Medicare coverage to have any impact on our Prolaris revenue expectations in FY16.

Finally, I would like to provide an update on BRACAnalysis CDx. As Pete mentioned, we believe the receipt of FDA approval for BRACAnalysis CDx in conjunction with Lynparza is a key milestone for several reasons. First, it shows the capability of Myriad to obtain FDA approval for complex, full-sequencing tests which will continue to be important for future companion diagnostic tests and other advanced diagnostic tests.

Secondly, it provides validated evidence to patients and physicians that BRACAnalysis CDx is of the highest quality. Lastly, it signifies our first commercial companion diagnostic test in an area that we believe will become an increasingly important growth driver for our business going forward. We are actively working with AstraZeneca to market the test at gynecological oncologists. Historically in the United States, we have tested approximately 25% of the 22,000 newly diagnosed ovarian cancer patients.

Additionally, we estimate that there are over 40,000 ovarian cancer survivors who may also be good candidates for this test. We are currently working with AstraZeneca to sponsor several continuing medical educational events at major conferences such as the upcoming Society of Gynecological Oncology meeting in March. We are engaging with the opinion leaders to ensure they understand the importance of BRCA testing. We have expanded our institutional sales team which targets customers that have historically ordered tests for ovarian cancer patients.

We have seen a noticeable uptick in ovarian cancer sample volume in January and are optimistic these trends will continue. While we envision BRACAnalysis CDx for ovarian cancer as a significant growth driver in the near term, we believe that PARP inhibitors will likely play a much broader role in solid tumor cancer indications. As a reminder, we have a suite of three companion diagnostics tests, BRACAnalysis CDx, tumor BRACAnalysis CDx, and myChoice HRD.

Currently, we are using these companion diagnostics in support of Phase 3 studies covering all ovarian cancer patients and up to 90% of invasive breast cancer patients. These two indications alone represent a total testing population of approximately 210,000 patients annually. In the second quarter, we announced an expanded collaboration with Tesaro covering myChoice HRD. Given the level of interest we are seeing in myChoice HRD as a PARP inhibitor companion diagnostic, we are starting the construction of a laboratory that will support an eventual submission of myChoice HRD to the FDA for approval as a companion diagnostic.

We expect our pharmaceutical partners to announce clinical trials in multiple new indications throughout calendar-year 2015. While these new indications will likely take several years to manifest into commercial products, the suite of tests that [comprise] our companion diagnostic portfolio have the potential to become one of our largest revenue segments over time.

We continue to make progress on achieving our goal of building a larger and more diversified molecular diagnostic Company. We have multiple products that are close to reaching inflection points in terms of revenue growth, and these products will drive significant financial leverage in the coming years. I am very proud of the efforts of the entire Myriad team to enrich the lives of our patients.

Before I turn the call over to Bryan, I would like to provide some personal comments on the upcoming transition. 24 years ago, Pete Meldrum had a vision that the remarkable advances and our understanding of human genetics could transform the practice of medicine. With a vision long before the term precision medicine became popular, there was no precedent, no defined business model, and the science was still in the very early stages. In fact, the first human genome was published 10 years after the founding of the Myriad.

There were no research-based diagnostic companies. Unlike the pharmaceutical or biotechnology industries, the diagnostic industry had historically focused on commercializing routine or licensed tests. The risks were great with no clear path or endpoint. Pete was truly a pioneer in translating the promise of genetics to enriching the lives of patients.

During Pete's tenure as CEO, Myriad has provided hope to over 1.5 million patients. His steady leadership during the inevitable twists and turns faced by a pioneering company over two decades has been extraordinary. For the past few years, Pete has been an insightful mentor to help prepare me for this transition. I feel honored and privileged to have his support and that of the Board of Directors to become the second CEO of Myriad Genetics. And, I promise that the 1,800 current members of the Myriad team will remain passionately committed to Pete's pioneering vision. Our work is far from done, and I strongly believe our finest hours will be discovered in the days ahead. I would now like to turn the call over to Bryan for a more detailed financial overview.

Thanks, Mark. I am pleased to provide an overview of our financial results for the second quarter followed by a detailed look at our updated FY15 financial guidance. Second quarter total revenue was $184.4 million compared to $204.1 million in the same period of the prior year. The 9.6% decline in revenue this quarter was primarily a result of the significant benefit we received from celebrity publicity in last year's fiscal second quarter, the timing of certain pharmaceutical and clinical services contracts, the reduction in Medicare reimbursement for our hereditary cancer test partially offset by the Crescendo acquisition.

Moving on to our operating expenses, our consolidated gross profit margin this quarter was 79.5%. We saw some improvement in the gross margin associated with our hereditary cancer franchise this quarter as we work to make the testing process more efficient, and we expect to make further progress throughout the remainder of the fiscal year as we continue to enhance the efficiency of our testing process. Some of these efficiency gains were offset as we saw significant increases in both Prolaris and myPath melanoma sample volumes during the second quarter. Since these tests have not yet received reimbursement, we bear the full cost of performing the test without the offsetting revenue. As we begin to garner revenue for these products, we will experience a significant improvement in our overall gross margin.

Additionally, Vectra DA has not yet received significant private insurance reimbursement, and its margins remained in the mid-40% this quarter and continue to negatively impact our overall gross margin. We continue to work on expanded payer coverage that will improve the Vectra DA gross margin and believe that as we obtain broad-scale reimbursement, we can achieve a Vectra DA margin in the 75% range.

Research and development expenses were $17.5 million in the second fiscal quarter, an increase of 2% relative to the second fiscal quarter of last year. This increase was primarily the result of the Crescendo acquisition, partially offset by a reduction in product development expenses. SG&A expense this quarter was $92.7 million, an increase of 19% relative to last year. The increase in SG&A this quarter are attributable primarily to increased operating expenses resulting from the Crescendo acquisition.

Adjusted net income was $29.9 million, and adjusted earnings per share were $0.40 for the second quarter. Both were down year-over-year but up sequentially. The decline in adjusted net income was driven primarily by the positive impact of celebrity publicity on profitability in the second fiscal quarter of last year, dilution from the recent Crescendo acquisition, lower margins associated with the process of converting our hereditary cancer franchise over to myRisk, and increased sample volume expenses associated with our newer products which have not yet obtained full insurance reimbursement.

Our fully diluted share count decreased sequentially to 75.4 million shares from 76.1 million shares in the prior quarter driven by our share repurchase program. During the quarter, we used approximately $58 million to repurchase 1.7 million shares of Myriad common stock. We have approximately $62 million remaining on our current share repurchase authorization, and we plan to repurchase stock at valuations that we do not believe are reflective of our longer-term fundamental value.

I would now like to provide a more detailed look at our updated FY15 financial guidance. As Pete mentioned, we are revising our FY15 revenue and EPS guidance and are now calling for $730 million to $740 million in revenue and adjusted Earnings Per Share of $1.50 to $1.55. To assist you in your modeling and understanding of our new guidance, I would like to provide some additional information.

First, we are changing our assumptions associated with Vectra DA and are now forecasting minimal growth in the second half of the year. As Pete mentioned earlier in the call, we believe it will take a few quarters for the new initiative to take effect. On the bottom line, Crescendo was approximately $0.15 dilutive to our adjusted earnings per share in the first half of the year, relative to our previous guidance of $0.20 for the full year. Consequently, our revised guidance reflects a higher dilution impact from Crescendo.

We also are forecasting lower pharmaceutical and clinical services revenue for the full year compared to our previous guidance. This is based upon the timing of a large contract in the segment. Additionally, as Mark stated, we are not expecting to submit Prolaris claims to Medicare until late in the fourth quarter. Consequently, our expectations in terms of the impact of Prolaris on both our revenues and profitability in FY15 have decreased despite strong sample volume trends. Since this is merely a matter of timing, we will be well positioned to benefit from significantly increased Prolaris revenues in FY16. Importantly, we believe hereditary cancer revenue will grow when comparing the second half of FY15 to the first half, and while we have seen some delays in terms of the timing of reimbursement for our newer products, we remain confident that these new products will drive leverage for the Company going forward.

From an expense standpoint, we are now targeting full-year gross margin between 80% and 81% compared to our previous guidance of 82%. This change is primarily attributable to lower gross margin assumptions for Crescendo and a smaller positive impact from Prolaris revenues on our gross margin in the second half of the fiscal year.

We also expect to see some significant reductions in operating expenses associated with the recent settlement of our patent litigation against several laboratories. Our guidance also assumed approximately a 38% tax rate for the full fiscal year and does not include the impact from additional share repurchases in the second half of the fiscal year.

The third quarter has a historical headwind associated with the resetting of patient deductibles, and so we are forecasting revenues of approximately $180 million to $185 million. As we previously stated, we will not yet have Medicare reimbursement for Prolaris and are assuming only a small incremental contribution from BRACAnalysis CDx and tumor BRACAnalysis CDx which should ramp as we progress through the year.

On the bottom line, we are forecasting adjusted fiscal third-quarter earnings per share of $0.38 to $0.40 per share. As Pete stated, the revision of our guidance is primarily a reflection of timing and not the long-term potential for our new products. Importantly, despite the revision, we are still positioned to end the year with a revenue run rate of approximately $800 million and an earnings-per-share run rate of approximately $2 per share.

Looking into FY16, we see several significant growth drivers and expect to generate significant leverage as our core gross margins improve as we gain broader reimbursement for our product pipeline. Consequently, we remain very optimistic surrounding our future growth prospects. I would now like to turn the call back over to Scott.

Thanks, Bryan. As a reminder, during today's conference call, we used certain non-GAAP financial measures. A reconciliation of the GAAP financial results to the non-GAAP financial results and a reconciliation of GAAP to non-GAAP financial guidance can be found on the investor relations section of our website.

Now, we are ready to begin our 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)

Amanda Murphy, William Blair.

Just a question on the guidance, obviously that's going to be a key topic here given the magnitude of the production. And, if you do the math on what you've highlighted in the commentary, it is hard to get there without assuming some deterioration in the hereditary cancer business both sequentially and then going forward. Maybe you can help us get more comfortable, obviously people are concerned about market share loss, [versant] pressure, et cetera. Get us more comfortable with what is going on in the hereditary cancer business, even considering the changes in Crescendo guidance, Prolaris, et cetera.

Thank you, Amanda. Let me address the question initially, and I will ask Mark to add any color as well. We lowered the guidance by about $70 million, and a large part of that was due to slower reimbursement on the private insurance sector for Crescendo. If you'll remember, Amanda, the original guidance for Crescendo was about $65 million. If you can look and just do the math from the first half of the year, that is about $20 million of the $70 million lower guidance.

The second as Bryan indicated, we had a delay in the large contract on the pharmaceutical services and clinical services sector. Originally, our guidance was about $35 million in that sector. Again, if you do the math on the first half of the year, that would contribute about $15 million. Those two combined are 50% of the guidance change.

The other changes, as we mentioned, were Prolaris with the delay which was really outside of our control of Medicare reimbursement into late fourth quarter. We are also experiencing some delay in revenues for tumor BRAC CDx. AstraZeneca had originally applied to the cancer drugs fund for earlier reimbursement for its test. They have recently withdrawn that waiting for a nice recommendation to NIH. That certainly had an impact on both our international revenues and our guidance. And then, we did see some additional width impact, but beyond that, we feel the hereditary cancer market is growing. We feel that we retained the vast majority of that market and have not seen material additional market share loss in that segment.

Just maybe to talk specifically about hereditary cancer, Amanda. The guidance does assume that we are going to see growth in the second half of the year relative to the first half of the year. Obviously, we saw some nice sequential growth going from Q1 to Q2. As Bryan mentioned, we have historically seen the third quarter as a headwind from the reset of deductibles, and as the percentage of patients in high deductible plans has increased year-over-year, we have seen the impact of that. Yet, despite that, we are -- our guidance does assume that there will be hereditary cancer growth second half versus the first half of the year. Those patterns are actually pretty consistent with the historical patterns that we have seen in the hereditary cancer business.

As Pete mentioned, we didn't see any additional -- or, as I mentioned, we didn't see any additional WIP in the second quarter, and so what we saw was truly reflective of the underlying business. The guidance does assume there will be some additional WIP build through the second half of the year, unlike previous guidance. That is only because we're not anticipating that the reductions in turnaround time will now fully offset the additional WIP associated with additional conversion through the back half of the year. I think that was the last piece to that.

The last comment I will make -- in the second quarter, your question about shares. We did -- we really weren't able to identify any discernible changes in market share in the second quarter. As you can appreciate, as other laboratories do not actually provide any details on their BRCA testing volumes, it is becoming increasingly difficult to determine precise market shares. But, the analytics that we do, looking at all of our physicians, all of their behaviors, all of our segment performance, we were unable to discern any material changes in market share in the second quarter.

Just a follow-up on the WIP commentary. I think there is some level of confusion around exactly how this impacts your financial statement both from a P&L perspective and a balance sheet. Maybe you could just review that. Obviously, there is still quite a lot of -- you still have about $30 of guidance reduction to make [it] up there between all of the things you quantified. Maybe you can help us figure out what that -- what the WIP effect in the back half might be from a dollar perspective?

We haven't -- we aren't really planning to provide any more granularity other than what Pete already has. Obviously, the rest of that $30 between Prolaris, tumor BRACAnalysis CDx, some additional WIP build. Those in total get you the rest of that change in guidance. I think that is where that comes from.

As to how the WIP appears on the balance sheet, it doesn't. That is not a balance sheet transaction at all. The impact of WIP is just demand that comes in that ultimately does not translate into revenue because that is all revenue, if you will, that is left as work in process. It impacts the outcome statement, but it does not impact the balance sheet. What is essentially happening is that reductions in turnaround time can reduce that WIP, but as we convert to myRisk, which has a 14-day longer turnaround time -- so, as more of the business goes from single syndrome testing to myRisk, you are going to see an increase in WIP associated with that longer turnaround time.

Those two factors offset each other to some extent. What we are guiding to now is that we don't expect turnaround time reductions in the back half of the year to fully offset any of the additional WIP associated with higher conversion. Previously, we were expecting those two to offset.

Thanks very much.

Jack Meehan, Barclays.

Congrats, Mark, and congrats to Pete as well. I just want to start with the BRACAnalysis for CDx. Can you just talk maybe anecdotally to start the year? What you're seeing in terms of sample volumes? And then, what is it -- what are the marks that you need to hit in order to get the reimbursement there?

I will start with the reimbursement first. I think the good news with BRACAnalysis CDx is we actually have reimbursement already. With the current codes that are available, we are able to obtain reimbursement. And so, that's -- in this particular case, unlike some of our other newer tests where we actually have to establish codes and reimbursement, that is not necessarily the case with BRACAnalysis CDx. We will discuss with payers the fact that this is an FDA-approved version, and therefore should have some of premium associated with that. Those are discussions we will have with payers as time goes forward, but at least currently, we can pursue billing as we have with BRACAnalysis.

As I mentioned in my commentary, we have seen a noticeable uptick in the number of ovarian cancer patients that are coming into the laboratory. Those all look to be incremental with the BRACAnalysis CDx test. This is a significant change in what we have seen as the historical pattern of ovarian cancer. As a reminder, that market will start with the 40,000 patients that are survivors that have been diagnosed with ovarian cancer and those previously. Only 25% of those patients have been previously tested. 75% of that 40,000 patient group would be appropriate for testing so that we can discern whether or not they might be eligible for Lynparza.

In addition to that prevalent pool, there is also the incident pool of newly diagnosed ovarian cancer patients where physicians will want to know their BRCA status so that when they eventually become eligible for Lynparza, they can immediately receive that drug. That is the opportunity for BRACAnalysis CDx.

And, on the international front, I would like to add that we are also fortunate in that we have reimbursement for tumor BRACAnalysis CDx as well. That won't delay revenues from that standpoint. As I mentioned in the call, while our original guidance did assume in many of the major market countries in Europe, we do not -- AstraZeneca does not have reimbursement yet for Lynparza. That is usually a six-month to maybe nine-month process.

We did anticipate under the ability in the UK to get new breakthrough drugs reimbursed before formal reimbursement under NHS through the cancer drugs fund. AstraZeneca initially submitted an application and has decided to withdraw that application and go directly for NHS guidance. It is the Lynparza reimbursement that is impacting the delay in tumor BRACAnalysis revenues, not the reimbursement of tumor BRACAnalysis itself.

Got it. That makes sense. That is helpful. Mark, I just want to get your thoughts on the balance sheet now that you are in the seat. I know Bryan touched on it a little bit -- just the run rate for 2016 revenues. Obviously, the new pipeline is ramping in the next year. So, I guess, what is your opinion on capital deployment? And then, maybe also on leverage as a way to improve your cost of capital?

Thanks for the question. I think we are actually all of the same mind on this -- on the use of cash, on the balance sheet. I think our same priorities hold. First, is internal research and development, which I think you can see from our work over the last five years, that team has been extraordinarily productive and is now potentially fueling our long-term growth. That will continue to be our first use of cash.

The second is to look at M&A activities that fit into our strategy of the six different business units that we have identified. You have seen examples of that with Rules-Based Medicine and Crescendo Biosciences. We will continue to look at those tuck-in opportunities that fit within that strategy.

We have consistently believed that those will not use all of the cash. Our third priority has been a robust share repurchase that is something that we continue to believe. There are opportunities for share repurchase, and we will continue to do so. As a reminder, we have over $60 million left on our previous authorization, and in this past quarter, we were -- we also had -- repurchased over $50 million of shares in the second quarter. We will continue to look at share repurchase as a vehicle to return cash.

As it relates to leverage, these are things that we are not opposed to. I think we will look at those opportunities as they prevent themselves. Where there are opportunities to take on leverage either for M&A opportunities or if we wanted to be more aggressive on share repurchase, those are things that we're not opposed to and recognize there are opportunities to take on leverage given the type of cash flow that we generate.

Got it. That's great. Thanks again.

Bill Quirk, Piper Jaffray.

Good afternoon, everybody. First question is a follow-up to Amanda's. I wanted to clarify here that 100% of the guidance reduction has nothing to do with the myRisk/BRACAnalysis transition? And then, just specifically on myRisk, where are we on lab automation right now? And then, the turnaround time? Mark, you signaled that there is an extra 14 days. I'm curious where we are today? Thank you.

Let me take those one at a time. From a lab turnaround time standpoint, we have been successful in maintaining the turnaround time. We have always promised our customers that they would have under a 21-day turnaround time with myRisk, and we have been able to maintain that even in first quarter but in the second quarter as well. As I mentioned, there was no change in WIP in the second quarter so that 9.5% sequential increase, none of that was impacted by any change in WIP. At least, as it relates to lab turnaround time.

From a transition standpoint, I think we continue to be on track with what we have said historically. We decided to make sure in the second quarter that we scaled up the lab process sufficient to do the full transition as opposed to just meeting current demand. In that way we were actually ahead of the schedule in the second quarter. We have installed all the equipment we need. We have hired the people that are going to be necessary for full transition, and we installed all of the hardware -- informatics hardware that was necessary. The last remaining piece for full transition is being installed this quarter which are all of the proprietary pieces of software that we need in order to make all those -- that hardware work together and achieve under 21-day turnaround times. Those -- that software is going in this quarter. As a result, we are planning on only modest increases in the conversion this quarter. But then, that should position us for full conversion beginning in the fourth quarter and then moving over into the first quarter of next year.

The last part is in our guidance what we are now contemplating is some increase in WIP associated with the myRisk conversion in the second half of the year that is not due to increased turnaround times. We will maintain turnaround times under our stated promise of 21 days. That is associated with the fact that we now no longer expect turnaround time reductions to fully offset the conversion that will happen in the third and fourth quarter.

Got it. And then, as a follow-up, another multi-part question here. One is obviously glad to hear that the OUS business is doing well. Can you remind us specifically how large that is today?

And then, secondly, Mark, help us think a little bit about the ordering patterns within myRisk. You mentioned that you didn't open it up to any additional physicians. But obviously, it was up nicely sequentially in terms of the overall hereditary cancer. Should we read this that the physicians are getting more comfortable expanding it to all of their patients within colon, breast, and ovarian? Or, are you starting to see some tests coming in for some of the other solid tumors as well? Thank you.

Let me start off, as I mentioned in the call today, we are very excited about the opportunity outside the US. We saw 118% year-over-year revenue growth this particular quarter. And, we see a real bright spot as Lynparza gets reimbursement with our tumor BRACAnalysis CDx. Our new EndoPredict product, again, which was up sequentially, dramatically, and even myRisk has seen over a 50% increase sequentially in Europe.

We are very excited about Europe. We still think we are on track to meet our original guidance of $50 million in revenue by FY16. And, we will, at some point in the future, be breaking out revenues as they rise to a more meaningful level. You will be able to track the international ex-US revenues as well.

And then, to your second question, Bill, if you remember at the end of first quarter, we had talked about the fact that we were exiting the quarter with about 50% of incoming samples being ordered as myRisk. In the second quarter, you saw 53% of revenue that was recorded as myRisk. What we essentially saw is that those physicians that were ordering at the end of the first quarter continued to order all of their business as myRisk in the second quarter which is why you see that 53% number in the quarter. That is essentially what our exit rate was coming out of first quarter.

The pattern is really unchanged from what we have seen historically. When a physician is offered the myRisk test, virtually every physician wants to order the test, and in fact, they convert their business fully over to myRisk. As I mentioned, there's even more impressive data that was released at San Antonio whereby 105% increase in the number of patients identified with mutations with myRisk. When a physician is presented that type of data that says you can more than double the number of mutation carriers you identify by using myRisk as opposed to single syndrome tests, those physicians want to convert their business completely to that more sensitive test. That is a pattern that we have seen continue.

Drew Jones, Stephens, Inc.

Thanks. On Crescendo, understanding commercial reimbursement has been a little slow to come on. But, it seems like there is still a pretty significant opportunity with CMS patients, and penetration looks like it seems to have stalled a little bit. Can you walk us through what is happening there? And, maybe give us some physician penetration and reordering metrics as far as Vectra is concerned?

Thank you, Drew. You are correct. The Medicare markets where we already have reimbursement for Vectra DA is large. It represents a $600 million opportunity. We -- with the transition from Bill Hagstrom to Bernard Tobin have refocused our strategy on not only continuing to strive to obtain private insurance reimbursement, but really focus on existing customers that are in the test and making sure that they ordered for all of their Medicare patients where it is fully reimbursed.

We have also focused part of our strategy on Medicare advantage plans which will have to cover Vectra DA because Medicare covers Vectra DA. I think you will see with the addition of Bernie to our team and his experience in managed care and attending reimbursement while he was at Amgen, a very strong strategy both on the Medicare and private pay front that will return Vectra DA to its stronger growth trajectory.

Okay. And then, as far as Prolaris is concerned, do you have visibility into what percentage of the volumes would fall into the low-risk reimbursable group?

So, the 50% of the incoming samples would be -- would qualify for that low or very low-risk category. What we see for sample ordering is pretty consistent with what you would expect based on the prevalence out there in the general population. If you were to translate the coverage -- the draft LCD coverage decision to the entire population of prostate cancer patients, you are looking at about a $300 million market.

We think that is a good opportunity to start with. We believe we continue to have very strong data that would suggest it is appropriate for all risk categories. In fact, the NCCN was convinced of that as well. We will continue to pursue broader indication, but at least that initial indication were that adopted by every payer, it is still a $300 million market that provides a good opportunity to start with.

Thanks. Congrats, Pete and Mark.

Thank you.

Derik de Bruin, Bank of America.

Good afternoon. You mentioned that 75% of your hereditary testing now is under long-term contracts. I am curious, could you elaborate that on a little more detail on the ASP and the duration? I am asking this question as we gear up next year for the PAMA legislation and the implementation of that as CMS goes to market-based pricing? And, I'm just wondering is the current -- where you are currently getting reimbursed by commercials above or below where you're at with CMS right now?

Just to clarify my comment so that we have continued to make progress and sign additional long-term contracts in the second quarter. As you will remember, our strategy was to sign three-year contracts with fixed prices so that it would provide visibility to both Myriad and the payers on the hereditary cancer business. We don't have 75% of commercial lives under contract. We will, if we are successful in getting all of the Blue Cross/Blue Shield affiliates to sign on to the association contract that we have already put in place. That is what our managed care team is working on is signing up the remainder so that we can get to that 75% number. Obviously, we are continuing to approach other payers as well.

Those contracts prevent us from talking about any of the pricing that is included in those. That is commentary that we won't provide in the future. Other than what we had said previously is that our goal with myRisk after we have been through full conversion and put some of the efficiencies in place is that we anticipate 87% gross margins on myRisk once all of those contracts are in place, and once we have got conversion fully under our belt. That's, I think, the commentary we can make on that.

As to the PAMA regulations, I think what is important about those are that those are dependent -- those are a weighted average of the pricing that is available. And so, it is highly dependent on what the market shares are of each of the various laboratories because it is a weighted median price. I think, obviously, our market share will factor heavily into the final pricing that will come from that PAMA regulation.

Great. Mark, a philosophical question. What are you -- is there anything significantly you're going to do under the management of the Company that is going to be a departure from what has been done in the past? What are you doing to bring new to the role?

I think in this case, obviously, Pete and I have worked very closely for a number of years as has the entire management team. I think we made a very critical strategic shift five years ago when we converted -- when we spun off the pharmaceutical business and became a pure-play diagnostic business and launched our four and six strategy. I think what we're seeing now is on the cost of the realization of those efforts with 10 product launches over the last few years with market potentials in excess of $15 billion.

I think a lot of our focus is going to be continuing to execute on the strategy that we laid out five years ago because we really haven't seen all of the benefits from that strategy and the expansion to a global footprint. I think you are going to continue to see us execute on that. I think as we laid out we are going to exit into FY16 with revenue run rates approaching $800 million. Earnings per share approaching $2 per share. I think those are great launching points. As we move into FY16, we see all of these investments come to fruition [and] some significant leverage on the income statement. I think you're going to see us continuing to execute on that strategy as we move forward.

Thank you.

Mr. Gleason, I will turn the call back over to 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 to please disconnect your lines.