Myriad Genetics Inc (MYGN) 2016 Q2 法說會逐字稿

Welcome to the Myriad Genetics second quarter 2016 financial earnings conference call.

(Operator Instructions)

As a reminder this conference call is being recorded February 2, 2016. I will turn the conference over to Scott Gleason, Vice President of Investor Relations.

Good afternoon and welcome to the Myriad Genetics fiscal second quarter earnings call. My name is Scott Gleason and I am the VP of Investor Relations. During the call we will review the financial results we've released today. After which we will host a question and answer session.

If you have not had a chance to review the earnings release it can be found in the investor relations section of our website at myriad.com. Presenting for Myriad today will be Mark Capone, President and Chief Executive Officer, and Bryan Riggsbee, Chief Financial Officer. This call can be heard live via webcast@myriad.com. The call is being recorded and will be archived in the investor section of our website.

In addition, there is a slide presentation pertaining to today's earnings call on the investors section of our website which is also been filed after the market closed today on form 8K.

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 documents the company files from time to time with the Securities and Exchange Commission including specifically the company's annual report on form 10K, it's quarterly reports on form 10-Q, and it's current reports on form 8K. These documents identify important risk factors that could cause actual results to differ materially from those contained in our projections and forward-looking statements.

With that I'm now pleased to turn the call over to Mark.

Good afternoon and thank you for joining the call today. I am pleased to provide an overview of our fiscal second-quarter results and a progress update on our five year strategic plan.

In the second quarter we generated revenues of $193.3 million and adjusted earnings per share up $0.45. Representing year over year top line growth of 5% and bottom line growth of 13%. Based upon these solid quarterly results, we are maintaining our full year revenue guidance for fiscal 2016, but are raising our adjusted earnings per share guidance to $1.63 to $1.68.

Over the last quarter Myriad has made substantial progress on advancing our three strategic imperatives. To transition and expand the hereditary cancer market, diversify revenues by commercializing our four and six new product pipeline, and increasing our international contribution by investing in large countries with both reference and kit based tests. I would like to provide an update on that progress starting with hereditary cancer market.

During the second quarter our hereditary cancer business generated revenues of $167 million which represents a 1% year over year increase and a 6% sequential increase. We have successfully transitioned the vast majority of our targeted customers to ordering the myRisk hereditary cancer test instead of our legacy single syndrome test and continue to have our customer service and clinical teams transition infrequent ordering physicians from these legacy products to myRisk.

Therefore, we are increasingly focused on the second phase of our hereditary cancer strategy which involves expanding the indications for use and driving deeper penetration into other markets beyond hereditary breast cancer. At the San Antonio breast cancer symposium in December we presented in the interim analysis of the first 500 of 2000 patients in a clinical utility study evaluating the impact of the myRisk hereditary cancer panel on patient care.

The number of patients with a deleterious mutation who received clinically appropriate risk reduction measures increased by 61% relative to testing for BRCA 1 and 2 alone. In total, Myriad has presented data from 91 studies which evaluated over 100,000 patients and demonstrated the importance of using panel testing to improve patient care. We believe that the accumulation of data supporting panel based testing will continue to drive stronger recommendations and professional guidelines and broader payer coverage for our myRisk hereditary cancer test.

We also continue to make progress in converting our hereditary cancer business to longer term managed-care contracts. I am pleased to announce that we now have secured 61% of our revenue with three year contracts. And we expect this number to continue to increase in the second half of the year.

We believe that the willingness of payers to enter long term contractual arrangements with Myriad is a strong validation of the unique value proposition that only Myriad can offer in hereditary cancer testing. And the ability of our best in class test to lower health plan costs relative to lower quality competitors.

Our current expectation is that we will exit fiscal year 2016 having contracted with the bulk of payers that have expressed interest in evaluating their hereditary cancer testing coverage. Since the number of smaller regional payers have not yet prioritize resources, for the extensive scientific review that would be required.

We also continue to make progress on expanding indications for use with colon cancer, endometrial cancer, breast cancer and pancreatic cancer patients. I am pleased to announce that we now have 50% of our revenue covered by plans that have adopted the NCCN 2014 criteria for colon and endometrial cancer testing compared to 45% at the end of the first quarter.

As a reminder, under the new NCCN criteria, approximately 30% of newly diagnosed colon cancer patients and 100% of newly diagnosed endometrial cancer patients qualify for testing versus approximately 25% of both colon and endometrial cancer patients previously.

In the asymptomatic market, approximately 3% of the US population now qualifies for hereditary colon cancer testing versus 1% under the previous criteria. This represents an additional six million asymptomatic patients eligible for hereditary cancer testing or $18 billion of additional potential revenue.

Because we now have reached the critical mass of contracted payers for these new guidelines, in the third quarter we will implement a sales strategy to begin aggressively promoting these new criteria. In the oncology market, our penetration in the colon cancer market is less than 10% and our penetration in the endometrial cancer market is less than 5%. In the asymptomatic market, our current penetration in the hereditary colon cancer market is less than 1%.

Obviously, these indications have not achieved the same penetration as breast cancer and offer significant continued growth opportunities. We continue to make progress on expanding the hereditary cancer testing criteria for breast cancer patients to all of those diagnosed under the age of 60.

We recently received confirmation that the data presented at the San Antonio breast cancer symposium in conjunction with Dana Farber Cancer Institute on deleterious mutation rates in an unselected population has been accepted for publication in the Journal of Clinical Oncology. The study showed that the mutation rate in breast cancer patients remain the same until age 60.

While the BRCA 1 and 2 rates decreased the rates of mutations and other important genes increased leaving the total mutation rate unchanged. We believe that this data supports the testing of all breast cancer patients under the age of 60 based upon historical eligibility criteria utilized by NCCN. If accepted, this would expand the percentage of newly diagnosed patients eligible for hereditary cancer testing from 60% to 37%.

In summary, once these new indications have been accepted in guidelines and covered by insurance companies, the penetration in the oncology market will be less than 15% and the penetration in the preventive care market will be less than 4%. Consequently, we believe there is substantial opportunity for growth in both hereditary cancer markets.

As many of you are aware, United Healthcare recently aligned their hereditary cancer testing policies with a long-standing genetic counseling requirements contained in medical professional guidelines such as those for ASCO and ACOG. To be clear, while United Healthcare is requiring genetic counseling, this counseling can be provided by any accredited healthcare provider who attest to their qualifications.

Of interest, ASCO and ACOG have both taken public positions in which they stated that their collective membership, which is in excess of 50,000 healthcare providers, are all qualified to provide genetic counseling based upon their extensive medical training. To date, all of our ordering healthcare providers have attested to their qualifications to perform counseling.

Additionally, much of the information required by United Healthcare as part of the current pre-authorization process was previously required under their earlier pre-authorization process. Our customer service team is working with providers to expeditiously obtain and process the additional paperwork for the new requirements. And we believe that any delays in releasing samples will be transient in nature and have no lasting impact on our business.

Overall, I am very pleased with the performance of our hereditary cancer business which remains on the five year plan trajectory we discussed at investor day. With the myRisk transition behind us and increased pricing visibility from long-term contracts, we can now focus our energies on helping patients by deepening the penetration into markets that remain largely untapped.

I would now like to discuss our diversification efforts as part of our 4 and 6 pipeline strategy. As a reminder, our five year goal is to develop an additional six pipeline products beyond hereditary cancer, each with annual total revenues of more than $50 million. These pipeline products include Vectra DA, Prolaris, myPath melanoma, our companion diagnostics and myplan lung cancer.

Our first new product with significant potential is Vectra DA with a global total addressable market of $3 billion and a current reimbursed market of $600 million in the US. Vectra DA volume in the second quarter grew 13% year-over-year to 38,400 tests, while revenue was $11.3 million, representing a 5% year-over-year increase.

Our revenue in the quarter was detrimentally impacted by the implementation of the new ICD 10 coding system in the rheumatology community. The number of codes for rheumatologists increased from 53 to 450 and many rheumatologists had difficulty correctly coding for the test which resulted in increased cancellations. This increased cancellation rate was responsible for the disparity between volume and revenue growth rates in the second quarter.

Fortunately, by the end of the quarter we were able to reduce cancellations to normal levels as physician offices fully implemented the new procedure codes and we do not expect any impact in the third quarter.

I am also pleased to note that the favorable volume trends for Vectra DA have continued into the third quarter. We believe that these volume trends are driven by two strategic initiatives. The first to drive depth through practice integration and the second is to drive breath through our recently signed LabCorp contract.

In terms of practice integration. After successful pilots in the first and second quarter, we recently completed the training of our entire field sales force in January. As a reminder, rheumatologists who ordered Vectra DA only do so for 9% of appropriate patients. We believe that our practice integration strategy will be pivotable in expanding utilization among our current customers since our pilot practice integration programs increased volume by 30% to 40%.

Secondly, we continue to be optimistic about the recently initiated LabCorp collaboration. Since the agreement was signed in the first quarter, Vectra DA can now be ordered through any LabCorp account nationwide.

We have seen approximately 21% of our Vectra DA volumes submitted by our LabCorp patient service center, and we've expanded our ordering physicians by 6%. As a result, in the second quarter approximately 50% of the rheumatologists in clinical practice ordered Vectra DA. Similar to our practice integration strategy, we expect to see a more significant impact from this collaboration in the second half of the fiscal year.

The third key strategy for Vectra DA is to expand reimbursement from the $600 million level to the entire $1.5 billion market in the United States. The goal has been to develop additional clinical data along the entire spectrum from data mining to a prospective study.

Based on the outstanding data presented at the American College of Rheumatology meeting in November, that evaluated the optimal use of Biologics in rheumatoid arthritis patients, we have been having additional productive discussions with payers. They've been very receptive to the ability of Vectra DA in three applications.

To guide subsequent therapies selection for methotrexate incomplete responders, to aid in patient selection for non-biologic denard escalation, and lastly to identify patients who could be eligible for tapering of their therapy. We are discussing value based contracting approaches with these payors that are intended to demonstrate the clinical utility of Vectra DA in their patient populations.

I am also pleased to announce that we have finalized a protocol for our prospective clinical utility study and are beginning the enrollment process. This prospective study will evaluate biologic use and clinical endpoints in patients managed with Vectra DA versus patients managed with traditional clinical approaches.

We believe that this study will take approximately two years to complete based on our current enrollment estimates. And that it is an adequately powered to demonstrate equivalent clinical outcomes with improved health economics.

Finally, in terms of Medicare pricing, we were pleased with the CMS decision to use the gap-fill methodology in pricing the new Vectra DA CPT code 81490. As a result of this decision, we expect our Medicare pricing for calendar year 2016 to remain consistent with historical levels. Which is what we have experienced with claims submitted in January.

In addition, given that this code was originally gap-filed by the Multi-X program which is referenced by a number of local Medicare contractors, and nothing has changed in the terms of the gap-filled inputs, our expectation is that future pricing will be consistent with historical levels as well.

Next, I would like to provide an update on our urology business unit and Prolaris. Prolaris has a global total addressable market of $1.5 billion and a current reimbursed market of $200 million in the United States.

In the second quarter, we saw exceptionally strong growth in Prolaris orders which were up 104% year-over-year and 26% on a sequential basis to more than 3500 tests ordered. This quarter we began recognizing Prolaris revenue for tests performed on low and very low risk Medicare patients. Which generated approximately $1.9 million in revenue.

As a reminder, Medicare began reimbursing the test on October 15, so this represented a little over two months of Medicare reimbursement. We have now received any retrospect of reimbursement from Medicare past claims today, but will continue the appeal process.

We believe that we have gained market share relative to competitor test and this growth has been fueled by two unique aspects of Prolaris. The first is the launch last quarter of our active surveillance threshold utilizing the Prolaris combined score and the second is the ability of Prolaris to provide insight across the entire spectrum of pathological risks.

The feedback from urologist has been excellent regarding the capability of Prolaris to predict the most important endpoints of 10 year survival. With a clear active surveillance threshold that provide a definitive cut point for patients and physicians to make an informed decision on how best to treat the cancer.

To this point, important updates in the 2016 NCCN guidelines published in November lists only prostate specific mortality, biochemical recurrence and the metastases as the endpoints under which prostate cancer prognostic should be validated. Prolaris is the only test that is been validated against all of these endpoints in multiple peer-reviewed studies.

Importantly, the NCCN guidelines were updated to reflect active surveillance as an appropriate option for some men with intermediate prostate cancer risk. We believe that these broader guidelines will provide important evidence for payers that are evaluating coverage guidelines.

At the recent ASCO GU symposium we presented key data on our active surveillance threshold. In a study that evaluated over 11,000 patients, 63% qualified for active surveillance utilizing the Prolaris combined score. Importantly the Prolaris combined score almost doubled the number of patients eligible for active surveillance when compared to those that would've qualified based on pathological features alone. In addition, urologist and patients follow the recommendation from this active surveillance threshold 85% of the time, demonstrating a significant level of confidence in the test results.

We also presented data from our first clinical validation study for myPlan renal cancer at the ASCO GU symposium meeting. In a study of 305 patients with renal cancer, who had a radical nephrectomy, these patients with a high myPlan renal cancer combined score had a threefold higher risk of recurrence when compared to patients with a low score.

The development of this test is evidence of our strategic goal to broaden our portfolio of tests in the urology market while leveraging our existing sales and marketing investments.

Transitioning to our dermatology business unit, our third new product with significant potential is myPath melanoma which has a global total addressable market of $600 million. We continue to see increased utilization of myPath melanoma test by dermatopathology community with 25% of US dermatopathologist now having ordered the test.

Our focus for this product is to obtain reimbursement, and we've now finalized and submitted the manuscript on our second clinical validation study and our clinical utility study. When these studies are published, which we anticipate will occur before the end of the fiscal year, we will be in a position to submit our dossier to both Medicare and commercial payers. We believe the dossier supporting myPlan melanoma is extremely robust with unmatched clinical validity data and we look forward to potential reimbursement decisions in fiscal 2017.

Our next group of products with significant potential is our suite of companion diagnostic tests to identify potential responders to D&A damaging agents which have a total global addressable market of $6 billion. Importantly, during the quarter we initiated the early access launch of myChoice HRD for platinum-based chemotherapy. The early access physician group has been fully enrolled with excellent academic thought leaders and we have started processing commercial samples through our laboratory.

At the San Antonio breast cancer symposium we presented several key studies supporting the launch of myChoice HRD. One of the studies evaluate our pooled analysis of 267 triple negative breast cancer patients from five previous clinical studies. Importantly, in the pooled analysis, patients who were myChoice HRD positive had a threefold higher rate of pathological complete response to platinum-based chemotherapy regimens compared to patients who were myChoice HRD negative.

Myriad also presented the first data demonstrating the applicability of myChoice HRD and estrogen receptor positive her2 negative breast cancer which comprises approximately 70% of all newly diagnosed breast cancer patients. In a trial of 48 patients who were estrogen receptor positive her2 negative, patients with a positive myChoice HRD score had a pathological complete response of 50% versus only 8% in myChoice HRD negative patients.

Transitioning to PARP inhibitors, has publicly communicated that they will be releasing the data from the pivotal nova study in the second calendar quarter of 2016. We believe that this will be a major milestone because it will be the first time in myChoice HRD was used in a prospective clinical trial with a PARP inhibitor. We believe that if this trial is successful, it will likely lead to additional collaborations with pharmaceutical partners and represent a major validation with clinical efficacy of our myChoice HRD past.

We're also pleased to announce that Myriad has now added a fourth and fifth companion diagnostic to our growing suite of products. The first new addition is a tumor sequencing test panel that evaluates approximately 80 genes that our pharmaceutical partners have identified as clinically actionable in oncology patients. This panel can be customized by our pharmaceutical partners to fit their clinical development strategies.

Our fifth new companion diagnostic is a proprietary immune pathway assay that can identify potential responders to immunotherapy. Much like myChoice HRD, Myriad's approach to solving this clinical question is unique, and we filed for intellectual property rights.

I am pleased to announce that we have already signed two undisclosed research collaborations with major pharmaceutical partners utilizing both of these new products in combination with myChoice HRD. We believe that these three tests can work in concert to identify the broadest set of potential responders to the range of oncology pharmaceuticals currently in clinical studies. As such, we believe that this broad portfolio of five companion diagnostics will play an important role in our long-term strategy.

Lastly, I would like to discuss our progress with our international business. International revenue in the second quarter grew 29% sequentially from the first quarter, and increased to 4.5% of total revenue. We have made substantial progress in the quarter, especially with our kit based products as we work toward our goal of 10% of revenue being generated from international markets by fiscal year 2020.

First, there was significant new information presented on our licensed breast cancer prognostic test endopredict at the recent San Antonio breast cancer symposium. The study which evaluated 928 patients in the trans a-teck cohort compared the performance of endopredict to the widely used first generation breast cancer prognostic tests.

In the study, endopredict was highly accurate at predicting tenure distant metastases with only 5% of patient designated as low risk having metastases at 10 years in both node negative and node positive patients. This compares very favorably to patients classified by a first-generation prognostic test were metastases rates were five times as high in the low risk note positive patients.

In addition, endopredict did not classify any patients as intermediate risk compared to the first generation test which identified 26% percent as intermediate. This is important because an ambiguous classification is very frustrating to patients and physicians trying to make difficult treatment decisions.

In summary, the principal investigator in the study, Professor Mitch Dousset from the Institute of Cancer research at the Royal [Marsin] in London noted, our study showed that EndoPredict which analyzes a range of breast cancer genes alongside other tumor features is more accurate than the current standard test at detecting the risk of relapse for women with a common type of breast cancer. When we widened our analysis to include pathological features such as tumor size, the test became more accurate at predicting disease than other exclusively gene based tests. End quote.

As a reflection on the performance of the assay, I'm also pleased to announce that EndoPredict recently won a significant competitive tender in France that only selected second-generation prognostic test and is expected to result in additional international revenue in calendar year 2016. In the meantime, the French public health system is currently reviewing breast prognostic testing for broad coverage. Based on French statutory guidelines, the government should reach a reimbursement decision by mid 2017.

As with any healthcare product, favorable coverage should be a major catalyst for adoption in a market that represents approximately 35,000 patients per year who would be eligible for EndoPredict.

In Germany, the GBA has published the final recommended coverage criteria for breast cancer prognostic testing in December 2015. The new criteria was very inclusive and represent coverage for approximately 30,000 newly diagnosed breast cancer patients per year when treated at major centers in Germany. We believe that a final GBA reimbursement decision will be made sometime in calendar year 2016. Myriad currently has a significant installed base of instruments in Germany at large breast centers and favorable coverage which could materially increase revenue in the German market.

Transitioning to Prolaris of the international market, I am pleased to announce that the first major reimbursement decision in Europe occurred this quarter with Asana, the largest payer and Switzerland which announced the coverage decision for patients in all risk categories. Also, we continue to make significant progress on the development of a kit-based version of Prolaris with our strategic partner Thermo Fisher Scientific.

In combination with the Prolaris development, we're migrating the EndoPredict assay to the studio instrument as well so that we will have a broad portfolio of tests on a single platform with hundreds of placements throughout the European market.

In summary, we continue to make significant progress on executing our five year plan to transform Myriad into a diversified global leader in personalized medicine. In fact, 2016 marks an important milestone in the company's history, as Myriad will celebrate its 25 year anniversary in May. We are a pioneering personalized medicine company with a history of success in translating scientific discovery into highly differentiated molecular diagnostics that provide significant clinical and economic value to our customers.

While many of our new products are in the early stages of commercialization, we are confident they will emerge as major growth drivers for our business in the coming years. With a successful second quarter, we remain on track to deliver on our fiscal 2016 and a five year goals.

Now I would like to turn the call over to Bryan to provide a detailed overview of our financial results and an update on our fiscal year 2016 financial outlook.

Thanks Mark. I'm pleased to provide an overview of our financial results for the second quarter. Second quarter total revenues were $193.3 million compared to $184.4 million in the same period in the prior year. Importantly, we delivered our third sequential quarter with year-over-year growth with revenue increasing 5% compared to the same quarter in the previous year.

We remain confident in our ability to grow on a year-over-year basis every quarter this fiscal year. Hereditary cancer revenue was $166.6 million in the second quarter and grew 1% year-over-year and 6% sequentially.

The second quarter is typically our strongest quarter from a seasonal perspective because patients who have met their annual deductible or have additional funds and cafeteria plans are more likely to undergo elective testing.

Vectra DA revenue in the second quarter was $11.3 million and was up 5% year over year, however, volume was up 13% year-over-year. As Mark mentioned, revenue was negatively impacted by the ICD 10 coding transition and the difference in volume and revenue growth was largely attributable to the ICD 10 impact.

Prolaris revenue was $1.9 million in the second quarter and reflected Medicare reimbursement that began on October 15, 2015. As Mark mentioned, Prolaris volumes were over 3500 test, which was up 104% relative to the same period in the prior year.

Revenue associated with our pharmaceutical and clinical services business was $10.7 million and was up 106% year-over-year. Most of the growth on a year-over-year basis was attributable to the acquisition of the German clinic which occurred in last year's third fiscal quarter and was consequently not reflected in the fiscal second quarter 2015 financial results.

Gross margins were 79% in the second quarter compared to 79.5% during the second quarter of last year. Our hereditary cancer gross margins in the quarter were consistent with the first quarter this fiscal year and up on a year-over-year basis. Gross margins for our pharmaceutical and clinical services business and Vectra DA were down on a sequential basis. The decrease was driven by product and RBM, lower gross margins associated with the German clinic and more Vectra DA Medicare test not receiving reimbursement due to the twice per year limit on testing.

Additionally, we did see some negative impact on gross margins in the quarter based on the early access launch of myChoice HRD due to the fact that it is currently a non reimbursed test. Excluding the impact of the clinic this quarter, gross margins would have been 80.4% and would improved 90 basis points from last year's second quarter.

Moving on to our operating expenses. Research and development expenses were $16.7 million in the second quarter and decreased 4% relative to the second quarter of last year. GAAP SG&A expense this quarter was $90.8 million and declined 2% relative to last year. Last year's GAAP SG&A included $4.3 million of one time severance expense, however, this year's SG&A included approximately $2 million of expense attributable to the German clinic.

Excluding these expenses, SG&A grew less than 1% relative to the same period last year. We believe the fact that on an adjusted basis operating expenses increased less than 1% year over year, is reflective of the potential leverage in our business model as our pipeline products begin to garner greater market traction. Non-GAAP SG&A was $87.7 million and excluded approximately $3 million of non-cash amortization expense tied to the acquisition of crescendo bioscience and Myriad RBN.

Adjusted operating income was $48.4 million in the second quarter, and increased 11% relative the second quarter of last year. The increase in operating income was driven by higher revenue and operating expense leverage.

Our GAAP tax rate in the quarter of approximately 33% was meaningfully lower than the we have seen in previous quarters for several reasons. First, were able to recognize the benefit of the recently passed R&D tax credit. In addition, we benefited from some tax restructuring internationally that will likely have an ongoing positive impact on our future tax rate although to a lesser magnitude than was seen in the second quarter of this year.

Adjusted net income was $33.5 million and adjusted earnings per share were $0.45 for the second quarter, compared to $29.9 million and $0.40 respectively in the second quarter of last year.

Our fully diluted share count increased sequentially from 72.1 million shares to 73.8 million shares based primarily upon employee stock option exercises. During the quarter, we utilized approximately $25 million to repurchase 600,000 shares of Myriad common stock in an average price of $42.17 per share. As of the end of the second quarter, we had approximately $92 million remaining on our approved share repurchase authorization.

For fiscal year 2016 to date, our free cash flow has equaled $64 million and our share repurchases totaled $63 million which is consistent with our stated goal to match these two metrics. Our cash and cash equivalent balance at the end of the second quarter was $286 million compared to $199 million at the end of the first quarter. The increase in our cash balance was driven by the impact of strong operating cash flow generation in the quarter as well as the benefit of employee stock option exercises.

I would now like to provide an update on our fiscal year 2016 financial guidance. As Mark mentioned, we are maintaining our full year revenue guidance for a total revenues of $750 million to $770 million. But we are increasing our adjusted earnings per share guidance from $1.60 to $1.65 to $1.63 to $1.68. I would like to provide some additional color on ours assumptions for this guidance starting first with revenue.

We have maintained a broad guidance range for revenue and would like and I would like to provide commentary and the business drivers that could dictate performance within this range. There are three business drivers that could reduce revenue growth in the second half of the year.

First, we have seen a lower proportion of Prolaris patients who are eligible for Medicare reimbursement than we initially anticipated with approximately one quarter of our incoming volume meeting these criteria. Since the advent of the active surveillance threshold, physicians have become increasingly comfortable with utilizing the test in intermediate and high-risk patients which is responsible for the change in mix. Additionally, it is now clear that full reimbursement for Medicare advantage patients will require contracts with private payers to ensure codes and prices have been adequately loaded into their systems which we expect to happen over the next six months.

Lastly, with Vectra DA there is the potential that the recent coding changed to a unique vectra code could negatively impact private payer reimbursement in the second half of this fiscal year, including Medicare advantage plans. Private payers need to update their systems with the new code and need to attach the appropriate pricing to this code. Which has historically created challenges for payers.

We have just started billing using this new code and are not in a position to currently determine the impact. While we expect to see meaningful revenue volume growth in the second half of the year, under the scenario where private payers do not reimburse for this new code, we could see revenue remain at our second quarter run rate until we perform the appropriate appeals and revised payer systems.

There are a couple of business drivers that could also deliver revenue at the higher end of our guidance range. First, if the hereditary cancer market were to accelerate based upon promotion of the broader indications in colon and endometrial cancer patients we could see a positive impact to revenue.

Additionally, if we were to receive retrospective reimbursement for Prolaris, this could generate additional revenue in the second half of the fiscal year. We are still in the appeal process with Medicare and don't know whether these claims will ultimately be paid.

Additionally, we saw significant acceleration in growth for Prolaris in the fiscal second quarter and stronger growth transfer Vectra DA throughout January. To the extent that this growth acceleration continues, it could generate additional revenue.

Lastly, the recent EndoPredict and Prolaris reimbursement decisions for the international market can provide revenue momentum in the second half of the year. Looking at how we are tracking on the bottom line, our adjusted operating margins in the first half of the fiscal year 2016 were 25.2% which is on track to meet our objective of 200 to 300 basis points of operating margin expansion for the full year or adjusted operating margins of 25% to 26%.

Additionally as stated on the call we would now likely see an effective GAAP tax rate of lower than 40% for the full fiscal year given our tax restructuring internationally. This is the main reason for the increase in our bottom line guidance range for the full year.

As we look to the fiscal third quarter we typically see seasonal weakness based upon the reset of patient copay and deductible limits and would expect our hereditary cancer revenue to be down in the seasonally weak third quarter. Consequently, we are guiding toward 3rd quarter revenue of $183 million to $185 million and adjusted earnings per share of $0.37-$0.39.

The magnitude of this seasonal decline in revenue is consistent with what we saw in the fiscal third quarter last year. Importantly, as we indicated at the beginning of the year, we continue to expect to grow on a year over year basis in the third quarter and throughout every quarter this year.

Overall, we are very pleased in the first half of our fiscal year and we believe we're on track to deliver on our financial targets for the full fiscal year. From a longer-term perspective, we are committed to and focused on delivering our five year goals of greater than 10% revenue growth, having seven products with greater than $50 million in revenue, achieving greater than 30% operating margins, and having international revenue contribute greater than 10% of revenue. We believe the achievement of these goals will drive substantial shareholder value for our investors and we've garner leverage from the investments we've made in a product pipeline and international expansion over the last several years. With that I am now pleased to turn the call back over to Scott.

Thanks Bryan. As a reminder during today's call we use certain Non-GAAP financial measures. A reconciliation of GAAP financial results to non-GAAP financial results 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 begin our Q&A session. In order to ensure broad participation in today's Q&A session we're asking participants to please ask only one question and one follow up.

Operator, we're now ready for the Q&A portion of the call.

(Operator Instructions)

Jack Meehan, Barclays.

Hi, thanks. Good afternoon, guys. I wanted to start and ask another question on the guidance that you've laid out through the rest of the year. I think I understand some of the moving parts from 2Q to 3Q. Wanted to ask, one, with some of the new longer term contracts on the hereditary side, was there any incremental change in the pricing? And also, bridging from 3Q to 4Q, what are some of the things that step up to the 760 at the midpoint?

Yes, thanks, Jack. This is Mark. I will take the first one, and then, Bryan, you can take the second. I think from a hereditary cancer perspective, obviously we are pleased we were able to sign significant additional contracts this quarter, so we're now up to 61% from the 50% level.

We don't talk about the details of the prices that are in those contracts. We are not actually allowed to do that without discussion. But what I would say is, if you note that our guidance around operating margins has remained the same. We haven't seen any change in operating margins.

Our operating margins we expect to be up 200 to 300 basis points this year over where we are last year. And all of that contemplates the pricing that's contained in those long-term contracts. So I think from that you can understand where those contracts are from a pricing perspective. Bryan?

Jack, I guess just in terms of the guidance. You know, upsides that we would see would be, as we outlined, the expanded indications in intermediate endometrial and colon cancer, as well as retrospective Prolaris back pay, and then just the continued acceleration in Prolaris and Vectra DA volumes. Those would be things that we would point to that would sort of shift us towards the upside.

Got it. And maybe just a follow up on that. To still get to the 760 at the midpoint, if I assume 184 for the third quarter, I think it would need to be closer to $200 million in the fourth quarter. To get to the midpoint, do you need any other retrospective Prolaris or the additional indications in hereditary cancer to kick in to get to there?

No.

Okay. And then just one more. On Prolaris, just plans around the sales force with the volume numbers coming in clearly I think better than we were expecting. Do you feel like now is the time to push ahead, expand the sales force, and then what do those volumes look like, just the trajectory through the end of the fiscal year? Thanks.

Yes, we obviously, we would agree we are very pleased with the volume trends that we have seen in Prolaris. I think the team has done an excellent job differentiating the product and taking advantage of the two unique aspects of Prolaris, with an active surveillance threshold and the ability to be used across the entire spectrum of risk for patients. So we think that's been successful.

We have been very pleased, and we will continue to evaluate whether or not it's appropriate to add additional sales people now that we have attained Medicare reimbursement. So those are our decisions that we'll continue to evaluate. We know there is room to expand the sales team, because, right now, we can only access probably half of the urologists in the country, so I think that opportunity certainly presents itself.

We haven't provided any guidance on ongoing run rates for Prolaris through the rest of the year. But obviously, our revenue guidance contemplates our projections on where we might continue to see Prolaris grow sequentially over the next couple of quarters.

Shawn Bevec, Deutsche Bank.

Thanks, guys. Just a question, sticking with the guidance, real quick. The hereditary cancer test guidance I believe you gave for the full year was roughly 1%. I was curious if there's any change to that? Because, based on where you've come in so far in the first half of the year, it looks like you would have to go down year over year terms of the growth. Is there any update there?

Thanks, Shawn. No, no real update. We obviously saw 4% year-over-year growth in the first quarter. It's important to note that there were some comparables in the first quarter the previous year that, because of the myRisk transition that caused that 4% number to be a little higher on a year-over-year basis. 1% is what we saw in this quarter year over year, consistent with our guidance, so we haven't really changed our thoughts around the guidance specifically for hereditary cancer for the year.

Okay and then my follow up. With regards to the incoming requisitions for myRisk, how many requests are currently being made for BRCA versus all of the other cancers that the panel covers, and how broad are the reimbursement guidelines at this point for physicians to request the myRisk test for indications outside of breast and ovarian cancers?

Yes, so on the last call we had talked about the fact that essentially 100% of our targeted physicians are ordering myRisk instead of our single syndrome testing. And so that targeted market really at this point is fully converted.

The only physicians that hadn't converted were those that we call non-targeted physicians. These are infrequently ordered ordering physicians. And for those physicians, they literally may only order once a quarter, once every other quarter, and so in those cases, it will take longer for us all ultimately to convert all of those physicians.

For example, many of the non-targeted physicians that ordered this quarter were not necessarily physicians that ordered last quarter. So this was the first time we had an opportunity to reach out to them. So we've said the remainder of that is going to be a slow trajectory to ultimately transition the rest of those non-targeted physicians, but we continue to be pleased to see that all of our targeted physicians have essentially fully converted.

We are still in the process of gaining coverage decision specifically for myRisk. And that we know will be based on broadening NCCN criteria, 19 of the 25 genes are already in NCCN guidelines, and we're continuing to work to produce additional data that will broaden those coverage guidelines. As that occurs, that will allow us to reach out to payers and modify their coverage decisions as well.

So I think it will be an ongoing process to get coverage updated for myRisk. And in the interim, payers are satisfied with us billing the genes that are covered under our current contracts, and so that's how we continue to run the tests that are being ordered and then build for whatever has been contracted at this stage for each of the payers.

Thanks, guys.

Bill Quirk, Piper Jaffray.

Great, good afternoon, everyone. This is actually Alex Nowak filling in for Bill today. First one from me, so for the 39% of hereditary revenue not under a long-term contract, I guess just why haven't these payers signed on and signed a three-year contract, I guess what you're hearing from them?

Yes, thanks, Alex. I think what you see and increasingly we're getting to some of those smaller regional payers. In order for a payer to do an evaluation of their hereditary coverage decision, it really requires an extraordinary amount of scientific evaluation. These tests are not equivalent in order to assess the differences to fully appreciate the accuracy levels of Myriad's testing, the ability to classify variants, the quality systems we have in place to assure that only appropriate patients are tested, and the impact that this highly accurate test will have on reducing healthcare costs, all of that requires an extraordinary commitment from payers.

And so, as I said in my comments, we think by the end of the year we will have contracted with all of those payers that have decided to dedicate resource to evaluate their hereditary cancer portfolio. We continue to believe that there will be a number of payers, particularly smaller regional players, that have just decided they are comfortable with their current coverage and are not going to do any sort of policy assessment. And so, we don't necessarily expect that number to get to 100% as those smaller payers.

The other thing you have to remember, that is been pointed out by other analysts is that, on a priority list for payers, hereditary cancer still is a relatively low spend. I've commented before that as a country, we spend five times as much on disposable gloves as we do on hereditary cancer testing. And so, you can imagine as they are trying to prioritize resources this may not necessarily float to the top of that priority.

Sure, okay. That make sense. This is somewhat actually of a follow up to that point. So on the long-term contracts, do you have any provisions in there to ensure the payers don't switch test volume from Myriad to another lab?

So said another way, you might have the payment from them locked down, but how do you ensure the payer doesn't persuade the physician to actually switch volume from Myriad to, let's say, just another hereditary cancer test provider?

Yes, so our contracts are non-exclusive contracts. We actually have not tried to pursue exclusive contracts. We are very comfortable competing against others that may be a network based on all this quality advantages that I referenced previously and physicians' comfort in knowing that they are going to get the best test from Myriad. So we haven't put any exclusivity provisions in those.

Depending on the contract will depend on whether or not there may be a language around adverse actions towards switching or things like that. But those are things in general that we're really not concerned about because we just have not seen physicians willing to engage in switching because of their confidence in using the Myriad tests and the results for their patients. So it's really not been a strong consideration of ours.

Okay, great. Thanks, guys.

Derik de Bruin, Bank of America.

Good afternoon. So could you give us some idea on what the potential catch-up payments or back payments could be for Prolaris? Is there any rhyme or reason in terms of how that's negotiated or calculated? It looks like from other companies it could be all over the place. Is there any guidance you can give us on that?

Thanks, Derik. I wish we could provide more clarity, but all over the place is probably a fair characterization of this. There is no statutory requirements. And so, you can look back at the Prolaris decisions and certain time points. Final recommendations by MolDx were made, final LCD in January. It became effective in March. And then there were subsequent time periods all the way until October 15.

And so, Medicare could choose any of those dates or none of those dates as a potential go-forward point for retrospective reimbursement. So it's hard to say because there is no statutory requirement, and we just continue discussion with Medicare about what we might think is appropriate for some of that legacy reimbursement.

Great, and just one follow-up question. On the hereditary cancer market, when you look at all the expanded indications and what's going on and the work you're doing to expand the market, how do we think about an overall growth rate for the hereditary cancer market on a go-forward basis? Thank you.

Yes, thanks, Derik. You know, historically, we've seen this market grow at around 10% per year, and as you saw on Analyst Day, when we put together a Monte Carlo for the go-forward years, we had a growth rate anywhere between 7% to 15% as the growth range. We continue to think 10% is a reasonable expectation for growth in this market.

And when we put together that five-year plan, we had already contemplated that, in fact, these expanded indications would be available. So I think all of this is consistent with that plan. I would underscore that, again, when you look at an oncology market that's only 15% penetrated based on these new indications, a preventive care market is only 4% penetrated based on these indications, with very large total addressable markets, we think there is ample opportunity to support those types of historical growth rates.

Jonathan Groberg, UBS.

Operator, let's go ahead and take the next question please.

Isaac Ro, Goldman Sachs.

Hi, guys, thanks. It's Joel in for Isaac. Just a question on capital allocation. Can you just help us think about how you guys are thinking about M&A versus buyback, and is there any reason guys would be more opportunistic on the M&A given the valuations we're seeing on the market today?

Yes, sure, thanks for the question. Just in terms of our prioritization, you know, we obviously would prioritize and have stated that we would prioritize M&A above share repurchase and we have an active program for looking for opportunities. The landscape in molecular diagnostics is rather sparse, especially for the types of targets that would meet our filter.

So while we remain active, in the absence of things that would meet our criteria, we look to our share repurchase program, and that's why you have seen us continue to buy back our shares. 600,000 shares in the quarter, at $42 a share, so we are still committed to the buyback program.

Great. And then just one on the UNH policy document, can you maybe just dive in a little bit deeper and clarify how you're interpreting the guidelines? I think there is a comment in there about specialized ongoing training. Just understand why the majority the claims wouldn't be denied if the docs haven't actually had that specialized ongoing training?

Yes, thanks, Joel. So the way the United Healthcare policy is written is it's entirely consistent with decades-old policies from ASCO, ACOG and a number of other breast cancer, ASBS and others. What the policy requires is for the physician to do a self attestation that, in fact, they have had sufficient training to be competent in doing hereditary cancer testing. So it's up to the physician to make that determination and to declare that determination to the United Healthcare.

Now recognize, we've, through the years, have had over 90,000 physicians order tests from Myriad. Tens of thousands do so on a routine basis. And so what we have seen is that all of those physicians have in fact attested to the fact that they are capable of providing genetic counseling.

It's important to note that the reason ASCO and ACOG have both taken public positions about the capabilities of their members is that they have received training in counseling, as you might imagine, an oncologist is often faced with communicating very challenging and difficult information to patients, as is an OB/GYN. And so, throughout their medical profession, they have received a lot of training on how to provide counseling. Many have taken short courses that have been offered by these medical professional societies, et cetera.

And so that's why these societies have all said they believe all of their members are capable of providing this service and we have seen all of these members attest to the fact that they are. So it's really just a self attestation on the parts of the physician as to whether they can do this. And like I said, to date we've seen all of our physicians that have stated their competency in providing this.

Thanks.

Amanda Murphy, William Blair.

This is [Arco], in for Amanda. I know you guys spoke to the competitive dynamics a bit, and I was wondering if you could elaborate on that on Prolaris, especially given another products in the market, and I was wondering if you have any ideas as to what the market share you have is out of the gate? Thanks.

Yes, thanks, Arco. We were very pleased with Prolaris performance. Obviously at 104% year over year and very high sequential growth rates as well. We are pleased that Prolaris has continued to perform well. It's difficult to know where other competitor volumes may be. I think we will probably hear that on future calls and can probably provide then a more adequate assessment about what market shares may be.

But we think with 3,500 tests, we are certainly the market leader at this point. And we have seen physicians that have really gravitated towards Prolaris because its endpoints are the endpoints they are most interested in, which is prostate cancer specific mortality, with a very clear report that shows which patients can safely pursue active surveillance versus those that aren't. And the other thing is, they know they can use this test across all risk profiles, which is the only test that can do that. So I think that's contributed to our ability to very successfully compete for market share, and we're excited to see how that continues into the future.

Just one follow-up question on that, regarding the all risk profiles. What you guys see as a timeline, maybe, of reimbursement on that? Sorry if I missed that. And then, you'll still expect private payer coverage in 2016 perhaps?

Yes, so I think we just got NCCN guidelines for the fact that patients with, quote, favorable intermediate risk, could be appropriate for active surveillance. So that just came out in November. Based on that and all of the data that we have on intermediate patients, we're putting the dossier together now that we can ultimately submit to the MolDx program to at least evaluate whether or not favorable intermediate patients could be tested with Prolaris to identify which of those could pursue active surveillance safely versus those that aren't.

The NCCN guidelines in that regard basically told physicians that they should consider them but consider all the information to decide which intermediate are appropriate, and we think Prolaris is a piece of that information that they could consider. So we will submit that relatively soon. There is, of course, no timeline that we can necessarily predict for that, but we will obviously pursue that as quickly as we can.

And on the private side, we are doing the same thing. Obviously the active surveillance threshold data is all relatively new. So we are now in communication with private payers work to expose them to that additional data, to expose them to these new NCCN criteria. Again, we have chosen not to try to speculate on coverage for private payers since it's so difficult to predict, but it's a very high priority for the Company.

Thank you.

Tim Evans, Wells Fargo Securities.

Thanks. Mark, I think, in the past, you've said it's a little hard to tease out the companion diagnostics piece of the hereditary franchise. But I was wondering if you could give us any directional color on what you feel like the companion diagnostics growth is versus the non-companion hereditary business?

Yes, thanks, Tim. You are right. It is, at least with the companion diagnostic indications that we have today, it's really difficult to isolate that from hereditary cancer. The reason is, the patients that are indicated for use for the current companion diagnostics are all ovarian cancer patients. That's the same indication that's eligible for a hereditary cancer test.

And so in many cases, physicians that used to order the BRACAnalysis test are now ordering BRACAnalysis CDx. And in that case, it's really just cannibalizing what would've been hereditary cancer sales. So it's really difficult to tease those out, which is why we've chosen just to keep those all as a singular hereditary cancer revenue line item, because otherwise, I think it would just be too confusing.

I think the opportunity for companion diagnostics to really grow the market will be for things like when we get myChoice HRD approved as a companion diagnostic for some of these newer indications, for platinum use, or for PARP, I think that's where you'll really see the opportunity for expansion of the companion diagnostic market.

The other part is the tumor BRACAnalysis product, which we've launched in Europe. Because AstraZeneca is still seeking broad-scale reimbursement for olaparib in Europe, that's really meant that the tumor BRACAnalysis CDx companion product is not going to get broad utilization until we see more significant reimbursement for the drug. And that process is ongoing. So, I think as a result of that, we have just lumped all that into hereditary cancer, and I think that cannibalization, then, is something that we don't have to try to tease out.

Fair enough. Quick follow up for Bryan. Are you able to put a little finer point on the long-term tax rate given the restructuring here?

Yes, I think, Tim, what I would say is, just lower than 40% for the year and that the second quarter was artificially low, just given the fact that the R&D tax credit is a full calendar year catch up and the international restructuring was more than one quarter, so it was a couple quarter's worth. So I would say that the second quarter was artificially low.

Okay. Thank you.

You're welcome.

There are no further questions at this time. Mr. Gleason, I will turn the call back over to you for your closing remarks.

Thank you. 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 ask that you please disconnect your line.