Myriad Genetics Inc (MYGN) 2017 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Myriad Genetics first-quarter 2017 financial earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded, Tuesday, November 1, 2017 (sic - 2016). I would now like to turn the conference over to Scott Gleason, Vice President of Investor Relations. Please go ahead.

Thank you, Mike. Good afternoon and welcome to the Myriad Genetics first-quarter 2017 earnings call. My name is Scott Gleason. I am the Vice President of Investor Relations. During the call 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 sections of our website at myriad.com. Presenting today for Myriad will Mark Capone, President and Chief Executive Officer, and Bryan Riggsbee, Chief Financial Officer. This call can be heard live via webcast at Myriad.com. The call is being recorded and will be archived in the investor section of our website.

In addition, there is a slide presentation pertaining to today's earnings call on the investor section of out website, and which will be filed following the call on form 8-K 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 Securities and Exchange Commission, specifically the Company's annual report on its form 10-K, its quarterly reports on form 10-Q and it's current reports on form 8-K. These documents identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

With that I will now turn the call over to Mark.

Thank you, Scott. I would like to start today's call by providing a summary for the quarter, after which, Bryan will provide detailed overview of our financial results and guidance, and I will finish by providing key highlights pertaining to the execution of our business strategy.

Overall, we were pleased with first quarter as we met our financial expectations and saw the Hereditary Cancer business return to more normal volume trends by the end of the quarter, while making significant strides towards our portfolio diversification and international expansion goals. Given that the Hereditary Cancer volume weakness in the fourth quarter was evident in the Oncology segment, it is important to note that we signed agreements with physician networks that represents 70% of community oncologists in the country and which gave an important endorsement by selecting Myriad as their preferred hereditary cancer testing provider.

Our diversification efforts continued to advance this quarter with GeneSight, Prolaris and EndoPredict, each experiencing year-over-year growth rates in excess of 50%. GeneSight is now our second-largest product, and the revenue and volume for this test exceeded our expectations. In total, we have eight commercial products that will fuel our growth and diversification over the next few years.

With a full quarter of GeneSight revenue, our Non-Hereditary Cancer revenue would represent 27% of total revenue, compared to 7% three years ago. The most significant challenge in this industry is securing reimbursement, and we have made some important strategic adjustments this past quarter that I will detail later in the call. As a way of quantifying the impact of broader reimbursement with the test volumes generated from our commercial tests last year, full reimbursement would have generated over $1 billion in revenue, and $3.50 per share in earnings.

Another important highlight in the quarter was the pivotal, prospective validation for myChoice HRD with niraparib and for BRACAnalysis CDx with olaparib. Given the strength of the data on myChoice HRD, we were pleased to see the increased interest in our companion diagnostic tests and are in discussion of multiple new collaborations as a result. I also will provide details in the NOVA study and regulatory submissions in my concluding section.

Finally, from an International perspective, we are seeing promising trends as a result of our shift to a kit-based a strategy, with EndoPredict forming the foundation of that strategy. International revenue for the quarter was 5% of total revenue, which is important progress from three years ago when the International revenue was less than 1% of total revenue. As a Company, we are still in the process of transforming our business from a 20-year strategy focused on a single exclusive product in a single geography.

It is a transformation that has already made significant progress, but also will take time given that we are pioneers in the nascent personalized medicine industry. We continue to believe that substantial unmet clinical needs of patients, and the billions of dollars in waste in our healthcare system, can be addressed by our strategy, and that capturing a small percentage of that savings will provide tremendous growth opportunities for the Company.

With that, I will turn the call back over to Bryan to discuss our first fiscal quarter 2017 financials and updated financial guidance for FY17.

Thanks, Mark. I'm pleased to provide an overview of our financial results for the fiscal first quarter of 2017 followed by additional detail on our updated FY17 financial guidance. First-quarter total revenues were $177.5 million, compared to $183.5 million in the same period in the prior year, a decline of 3% year-over-year. Hereditary Cancer revenue in the quarter was $139.3 million, and in line with our expectations when we provided our financial guidance.

Looking at the components of our Hereditary Cancer revenue, we saw a larger impact from volume decline than from price reduction in the quarter. Year-over-year volume declines were primarily attributable to declines in the oncology segment, which reflected the weakness we also saw in the fourth quarter. But these trends did return to more normal patterns by the end of the first quarter.

Reductions in pricing year-over-year were primarily attributable to the full implementation of our long-term contracts that we signed over the last year. GeneSight revenue in the quarter was $7.2 million, and reflected revenue associated with the month of September as we closed the Assurex acquisition one month earlier than we expected on August 31. GeneSight volume for the month of September was over 18,000 tests, which was up 70% year-over-year.

For the full quarter, GeneSight volume was over 51,000 tests, and also was up 70% year-over-year. Vectra DA revenue in the first quarter was $11.6 million, which was up 2% year-over-year. Total volume in the quarter was approximately 39,000 tests, which represented a 4% increase year-over-year. Sequential patterns reflected the typical summer seasonality we see with our Vectra DA business.

Prolaris revenue in the quarter was $2.9 million. Prolaris test volumes were up 56% year-over-year with total tests ordered coming in at 4,400. Similar to Vectra DA and all of our diagnostics, we experienced a seasonality impact in the summer months.

However, September was our second highest volume month on record and we entered the fiscal second quarter with appreciable momentum. EndoPredict revenues in the quarter were $1.7 million and grew 113% year-over-year. We have seen signs of significant increased traction with EndoPredict in Europe, based upon recent reimbursement coverage in France and also are seeing increased traction in the German market in anticipation of broader reimbursement later this fiscal year.

Lastly, revenue associated with our pharmaceutical and clinical services business was $12.4 million and was up 7% year-over-year. I now would like to discuss our financial metrics for the quarter. Gross margins were 77.5% in the first quarter, compared to 80.1% during the first quarter of last year.

The year-over-year decline was primarily attributable to product mix with more revenue from lower margin segments such as Pharmaceutical and Clinical Services, lower fixed cost absorption from lower Hereditary Cancer revenues, and lastly there was an impact from the full implementation of our long-term contracts in hereditary cancer. Moving on to our operating expenses, GAAP research and development expenses were $19.4 million in the first quarter and grew 13% relative to the first quarter of last year. GAAP SG&A expense this are was $111 million, and increased 29% relative to last year.

This quarter GAAP operating expenses included $10 million in closing costs and acquisition-related expenses, as well as $2.1 million in incremental amortization associated with the Assurex acquisition. GAAP operating income in the first quarter was $6.2 million. On a non-GAAP basis, our adjusted research and development expense was $19.2 million, compared to $17.2 last year and grew 12% year-over-year.

The increase in research and development spend was anticipated as we continue enrollment in our prospective reimbursement studies and based on incremental spending tied to Assurex. Adjusted SG&A expense this quarter was $96.7 million, compared to $83.4 million in the first quarter of FY16. Excluding the impact from the Assurex acquisition, total non-GAAP operating expense grew 7% on a year-over-year basis.

The increase in expenses was tied to increases in sales commissions, increases in sales headcount in our Urology International divisions, higher bad debt and higher benefit cost. Adjusted operating income was $21.6 million in the first quarter, and declined 54% relative to the first quarter of last year. The decline in the adjusted operating income is based primarily on lower Hereditary Cancer revenue, the mix of our revenue towards lower margin products and incremental dilution associated with it Assurex acquisition.

While we are committed to growing the business, we are also focused on improving profitability over time and have initiating cost-containment programs across all of our divisions, in addition to our efforts to generate synergies from our two recent acquisitions. As in the fourth quarter, we recognized a tax expense associated with a reevaluation of our stock-based compensation expense due to the adoption of the new accounting standard ASU 2016-09. From an accounting standpoint, we were required to apply these expenses in the quarters when it was generated.

The expense for the first quarter was $2.4 million. As a reminder, this new rule will result in variability in our tax rate due to the excess tax benefits and expense we will record associated with equity compensation. Given the potential variability and unpredictability of this change, we have decided to exclude these adjustments from her non-GAAP earnings.

Adjusted earnings per share were $0.23 for the first quarter, compared to $0.41 respectively in the first quarter of last year. Adjusted earnings per share included approximately $0.02 of dilution this quarter related to the Assurex acquisition, which we did not contemplate when we gave our financial guidance. Our fully diluted share count decreased sequentially by approximately 2.8 million shares to 69.5 million shares outstanding.

This reduction was driven by our share repurchase program and a smaller dilutive share count based upon employee stock options, which are now out of the money. During the quarter we used approximately $21 million to repurchase 1 million shares of Myriad common stock at an average price of $21.30 per share. While we have stated our priority from a capital deployment standpoint and the short-term with debt repayment, we took advantage of dislocation in our share price to acquire shares, because we believe overtime this will lead to a substantial return on invested capital.

Our cash and cash equivalent balance at the end of the fourth quarter was approximately $201 million, which declined from $239 million at the end of the fourth quarter. The primary reason for the decline was the use of approximately $30 million of cash in excess of the debt we raised to fund the Assurex acquisition and closing costs, as well as the cash we utilized for share repurchase activity.

Going forward, we plan to prioritize debt repayment, but will continue to be opportunistic with share repurchase. We currently have $200 million in debt outstanding, as we have not yet made any debt payments on our credit facility.

I've one additional important note as we think about our cash acquisition. We've now completed our initial accounting assessment of Assurex tax assets and identified approximately $100 million in net operating loss carry forwards that we believe may be utilized to offset combined Company taxes going forward. While this will not have any impact on our income statements going forward, it will result in additional cash generation that effectively reduces the purchase price of Assurex. I would now like to discuss our FY17 financial guidance.

I would now like to discuss our FY17 financial guidance. We are maintaining our guidance for the full fiscal year, which calls for revenues of $740 million to $760 million and adjusted earnings per share of $1.00 to $1.10 per share. Let me discuss some of the underlying trends supporting our guidance beginning with Hereditary Cancer.

We did see some improvements in the trajectory of our Hereditary Cancer volumes throughout the first quarter. Importantly, our sales force in the Oncology segment of the business has now stabilized and we have assumed nine months for these territories to be fully productive, which has been factored into our guidance. As is typical, we expect to see Hereditary Cancer volumes increase sequentially in the second quarter and are expecting normal sequential volume trends for the remainder of the year.

From a pricing perspective we have clear visibility for the 65% of revenue that remains under long-term contract. Of the remaining 35% of the business, most is with regional payers that are not evaluating their Hereditary Cancer contracts, but there is a portion of this business that is subject current negotiations.

Despite the fact that we continue discussions, we have been notified of some out-of-network decisions by payers. If these decisions were to remain, our full-year guidance is consistent with this scenario since we have seen strength in other parts of the business.

Moving on to GeneSight with Assurex Health, we had a strong first month in September with revenues and volumes both exceeding our expectations. Additionally, our integration efforts are going well with a number of projects completed and underway that have already identified significant revenue and cost synergies. Our progress continues to make us comfortable with our goal to achieve breakeven in the first half of FY18.

Given the strong start to the acquisition and integration, Assurex Health is currently exceeding our expectations. Our other products, including both Vectra DA and Prolaris, have trended in line with our expectations year-to-date. For the fiscal second quarter, we are guiding to revenues of $188 million to $190 million and adjusted earnings per share of $0.23 to $0.25.

As I mentioned before, the guidance assumes sequential growth in Hereditary Cancer revenue and a full quarter of GeneSight. Overall, we are pleased with the start to the year and we continue to believe that our investments and our product pipeline will manifest into increasing profitability as these investments drive increased revenue growth and financial leverage for the Company. I'm now pleased to turn the call back over to Mark to discuss our efforts to drive upside to our financial projections and deliver on our five-year goal.

Thanks, Bryan. I'm pleased to provide a more detailed review of key initiatives in the Company. As those following this industry recognize, reimbursement remains the critical opportunity to accelerate future growth.

It is a hurdle that has only gotten higher as payers struggle to absorb unexpected cost from new markets. As we stated last earnings call, based on our volumes last year we would've generated an additional $300 million of revenue and $2 per share in incremental earnings per share if we received full reimbursement for test volumes run in FY16. We recognize that we need to employ new strategies if we are going to change the current reimbursement paradigm and made a number of important shifts this past quarter.

First, I added an executive to my team, Chip Parkinson, our Executive Vice President of Reimbursement Strategy. Chip has an exceptional level of experience with managed care in the pharmaceutical industry and diagnostic industry. Most recently, he worked for Cambia Health Solutions as President of Omeda Rx and MedSavvy, and was the Chief Pharmacy Officer for Regence Blue Cross Blue Shield Health Plans with responsibility for over $1 billion in pharmacy spend.

Chip brings to Myriad a depth and breadth of knowledge with an insider's perspective on managed care organizations. He is providing important insights on the best way to communicate the value proposition for Myriad's broad portfolio to the appropriate level of decision-maker at insurance providers. Every product Myriad develops has a strong health economic argument and our suite of products in totality offer unprecedented savings to payers that typically operate with low single-digit margins.

One of the realities of personalized medicine is that the costs and savings for our products reside in very different parts of a managed care organization and internal incentive systems can hinder coverage. Executives at the highest levels of a payer organization are better positioned to understand our broad value proposition, can adjust incentive systems and can modify resource allocations appropriately.

While our total addressable market for our eight commercial-stage products is over $25 billion, our reimbursed addressable market is currently about $5 billion. Chip will lead our efforts to get the right message to the right person in a managed care organization across the entire Myriad portfolio of products and close the gap between the reimbursed market and the total addressable market.

In addition, until we obtain broader reimbursement, we have made a strategic decision to shift most of our research and development efforts to our eight commercial products. These efforts will be designed to ensure that we have more than enough clinical data to drive payer coverage and professional guidelines. I would like to elaborate on some of the studies that are associated with this strategy.

For GeneSight, we are nearing completion of a landmark clinical utility study in collaboration with numerous leading academic institutions, many of whom are members of the National Network of Depression Centers, including Johns Hopkins, University of Pennsylvania and University of Michigan. The study will evaluate approximately 1,200 patients, comparing GeneSight versus treatment as usual with a primary endpoint measuring the change in depressive symptoms or HAMD 17 scores, as well as several other important secondary endpoints.

This study includes both preventive care physicians, as well as psychiatrists and will therefore provide data supporting the entire addressable market for the treatment-resistant depression indication, worth more than $5 billion per year. In addition, this study will provide critical data to advance the anxiety indication, which would represent an additional $2 billion per year in incremental market potential.

This represents one of the largest prospective studies for molecular diagnostics and we are excited about the impact this could have on the GeneSight business. Currently, we have enrolled over 90% of patients and expect a complete enrollment in the spring of 2017 with data reported by the end of calendar year 2017. While the data dossier for GeneSight is already strong with five published clinical studies this additional level of evidence in two indications across both preventive care and psychiatry markets will ensure the broadest level of payer coverage decisions.

Also, to provide additional GeneSight health economic data, beyond the already completed 13,000 patient Medco study, we are collaborating with several large insurance providers to evaluate claims data within their plans to demonstrate the impact GeneSight has on health care utilization and prescription drug costs. Shifting to Vectra DA. We are currently enrolling our prospective outcomes study and expect to have data available in calendar year 2018.

In addition, we are in advanced discussions with several large payers and benefit managers to demonstrate the ability of Vectra DA to identify which patients will respond to enhanced DMARD therapy in lieu of a biologic. Biologics for rheumatoid arthritis currently account for 10% of all pharmacy spend and payers are highly interested in approaches that can ensure appropriate utilization. We expect these demonstration projects to be completed prior to our clinical utility study.

If successful, they could provide an impetus for coverage within the participating plans, as well as be utilized as case studies to share with other managed care organizations. And we will continue to amass additional evidence for our dossier with data recently presented at the American College of Rheumatology meeting. The first study of evaluated patients who were considering tapering therapy from a biologic.

Patients with a vector score below 25 had a 15% risk of flare over a 52-week period compared to 60% for patients with a high Vectra DA score. Alternatively, patients with a Vectra DA score below 25 had a 64% rate of sustained remission compared to 0% in patients with a high Vectra DA score. A second study presented at ACR evaluated the ability of Vectra DA to predict radiographic progression in 180 early-stage rheumatoid arthritis patients.

In the study, patients with a Vectra DA score less than 44 only had a 3% rate of radiographic progression compared to 31% in patients with a Vectra DA scored greater than 44. Importantly, Vectra DA added significant predictive power to DAS28 CRP where DAS28 CRP added no incremental predictive power to Vectra DA.

Finally, it has long been known that inflammation associated with RA can lead to serious side effects. A third study evaluating over 16,000 patients showed the ability of Vectra DA to predict myocardial infarction and serious infections. Patients with a high Vectra DA score had almost twice the risk of myocardial infarction and five times the rate of serious infections when compared to patients with a low Vectra DA score.

We are also aware that Vectra DA is being considered by multiple professional societies for guideline revisions in the next 12 months. In fact, the first of these organizations, United Rheumatology, which represents 7% of rheumatologists, has added Vectra DA to its professional practice guidelines.

Moving to Prolaris, to add to our current 11 publications, we have completed an additional clinical validity study with approximately 1,000 patients. This study will provide important additional data on the ability of Prolaris to predict response to single modality treatments such as radiation therapy and surgery, as well as providing further validation of Prolaris against all three critical end points recommended by NCCN.

Finally, switching to EndoPredict, while we have already seen significant payer and physician interest in this test, we want to ensure that data will be available to address any potential questions. Therefore, I am pleased to announce that we have completed enrollment in a predictive study for EndoPredict, which will evaluate patient benefit from neoadjuvant therapy.

We expect to present this data at a major conference in calendar 2017. We also recently completed enrollment in a decision impact study in Germany and completed a health economics study that demonstrated the ability of EndoPredict to lower health care costs by EUR1,384 per patient tested.

In addition, we are currently enrolling patients in another health economics study in the United Kingdom, evaluating the ability of EndoPredict to reduce the use of adjuvant chemotherapy in appropriate patients. In summary, we recognize the importance of increased reimbursement to the growth trajectory of the Company and have taken significant steps to change the paradigm around payer coverage from Myriad's broad personalized medicine portfolio. With new resources, new approaches and new studies, we are confident that we are laying the groundwork to close the gap between our reimbursed addressable market and our total addressable market.

This past quarter we also had significant news impacting our companion diagnostic portfolio with the first prospective date on myChoice HRD with niraparib and an additional validation of BRACAnalysis CDx with olaparib. First, we want to congratulate Tesaro and the principal investigators for the truly landmark NOVA study that will provide meaningful options for ovarian cancer patients in the future.

We also were pleased with myChoice HRD results in the study, which showed the ability to clearly differentiate the levels of benefit between myChoice HRD positive and negative patients. Patients with a positive myChoice HRD score had 9.1 months of progression-free survival benefit versus placebo, where patients with a negative myChoice HRD score had 3.1 months of progression-free survival benefit.

This six-month difference in PFS benefit is notable in a difficult to treat disease like ovarian cancer. Importantly, myChoice HRD was able to delineate this benefit even on a highly selected ovarian cancer patient population. In fact, in this particular study, approximately 70% of ovarian cancer patients had a positive myChoice HRD result, which makes differentiation from the overall group significantly more difficult.

As PARP inhibitors move into early-stage therapy for ovarian cancer and into other cancers, such as breast, lung, and prostate cancer, we anticipate myChoice HRD positive rates to be much lower, between 25% to 40%. In these indications, we believe that myChoice HRD test will be critical to identifying the subset of patients that will likely respond, since the overall response will be much lower.

As a result of the NOVA study, we have submitted the first module of our rolling PMA for myChoice HRD to the FDA. The FDA has provided us written feedback on questions relating to our submission and I quote, the decision regarding complementary versus companion is made by the therapeutic review center.

Although based on the clinical data available at this time, the BRACAnalysis CDx and myChoice HRD tests may be complementary diagnostics for use with niraparib. There is a possibility that niraparib will be approved for only the HRD-positive and/or BRCA mutation-positive subgroups. If this occurs, the devices will be indicated as companion diagnostics, and it would be expected that the drug and devices are approved contemporaneously.

Additionally, a number of other pharmaceutical partners were motivated by the myChoice HRD data. I'm pleased to announce that we have signed an agreement with AstraZeneca to use our newest companion diagnostic, myChoice HRD Plus to help prospectively identify patients for enrollment in an upcoming exploratory study involving olaparib. We also are in late-stage discussions with three other pharmaceutical companies who are interested in utilizing the myChoice HRD assay as a companion diagnostic for their PARP or other drug programs. Another important announcement was made last week when AstraZeneca announced that it had met its primary endpoint in the SOLO-2 clinical study, which evaluated Lynparza in recurrent ovarian cancer patients that were identified with BRACAnalysis CDx.

Beyond the SOLO-2 data, we expect pivotal data from 10 additional studies to be announced over the next 18 months. The first major result we anticipate is AstraZeneca's data from the OlympiAD trial in HER-2 negative metastatic breast cancer. Every year in the United States, EU5 and Canada, there are approximately 160,000 patients that are either diagnosed with or progress to HER-2 negative metastatic breast cancer.

PARPs will provide an important new treatment tool for these patients, where treatment options are currently limited. We also expect three additional PARP study results for HER2 negative metastatic breast cancer with other pharmaceutical partners over the next 18 months.

In addition, we expect pivotal study results in triple negative breast cancer, ovarian cancer, and pancreatic cancer by the end of FY18. In total, if these studies were successful, they would add an addressable testing population of more than 380,000 patients per year on a global basis.

One stark reminder from the ovarian cancer PARP studies, is that many of the patients identified with germline BRCA mutations should have never developed ovarian cancer in the first place. The only effective way to treat cancer is to prevent it from happening in the first place because decades of progression-free survival is far better than an additional year.

Once again, this underscores the importance of using the most accurate hereditary cancer test to prevent cancers, which brings me to our Hereditary Cancer business. This quarter we introduced our customizable myRisk panel. This introduction was well received and is creating opportunities to renew discussions with genetics customers who prefer to choose from a subset of the genes on the myRisk panel.

These customers represent a significant portion of those that we lost to competition so we are hopeful that combining this flexibility with the most accurate hereditary cancer test will allow opportunities to increase market share in this segment. I'm also pleased to announce that we have now signed preferred provider agreements with the physician networks that comprise 70% of community oncologists throughout the country, or around 4,000 physicians.

These organizations chose Myriad based upon our unparalleled accuracy and quality after ongoing detailed technical assessments of the hereditary cancer panels on the market. We believe these partnerships will lead to increased utilization among members of these organizations and that these extremely influential physicians will lend their voice to ensure continued access to Myriad tests from payer organizations.

Additionally, we continue our effort efforts on guideline expansion. We are nearing completion on a landmark study with a women's health initiative, evaluating approximately 4,400 patients to determine the rate of hereditary breast, and ovarian cancer mutations in an unselected population.

This study will be completed by the end of calendar year 2017. We believe that this study, along with the Dana-Farber study that showed the rate of mutations remain consistent in women until the age of 60, will provide convincing evidence to expand indications for hereditary cancer testing in breast cancer patients and potentially double the market.

Additionally, last summer a study published in the New England Journal of Medicine showed that the rate of hereditary cancer mutations in men with advanced prostate cancer was 11.8%, or roughly equivalent to that seen in breast cancer patients who meet criteria for hereditary breast and ovarian cancer screening. This data has received significant attention and could be the impetus behind broader testing for men with prostate cancer who meet risk criteria.

This would represent an additional 15,000 men per year eligible for hereditary cancer testing. Finally, payers continue to recognize the differential value Myriad's hereditary cancer tests provide. We currently have 65% of revenue under long-term contract and are in network with 95% of payer plans across the country.

Of note, even in the limited areas where Myriad is an out of network provider, we have been able to sustain at least 80% of our previous testing volume. This once again underscores that accuracy is paramount in this application and patients and providers simply will not risk their health with less accurate tests.

Transitioning to EndoPredict, I would like to discuss some of the progress we made in International market development. This quarter, International revenue grew 43% year-over-year and comprised 5% of our total revenue compared to 4% at the start of the fiscal year and much of the growth was attributed to EndoPredict. EndoPredict generated $1.7 million in revenue this quarter and grew 113% year-over-year, which exceeded expectations and is well on the way to achieving our FY17 goal.

Much of the growth in EndoPredict is attributed to a recent reimbursement decision from the French government. Importantly, in Germany and France we believe EndoPredict has the largest market share for reimbursed tests because we have seen a strong press preference from hospitals towards a kit-based solution. Additionally, there's been significant interested after the TransATAC cohort, which demonstrated that EndoPredict significantly outperformed the market-leading breast prognostic with over four times the prognostic power and more often correctly classified tumors when compared to Oncotype DX

We are currently working to further expand international reimbursement for EndoPredict and have submitted our reimbursement dossier to NICE in the UK and plan to submit to Health Canada by the end of this fiscal year. Also this quarter, the German National Reimbursement Authority, or GBA issued new ambulatory specialty care, or ASV, reimbursement coverage for gene expression testing for breast cancer when conducted in authorized major centers throughout Germany.

This is especially favorable for EndoPredict, given that it is a kit-based test and can meet the criteria to be performed by a German certified pathologist within Germany. While centers must apply for this reimbursement, which will take some time, we ultimately expect this decision to lead to an inflection in revenue, since we have large revenue of installed systems within Germany.

Beyond Europe, we have finalized our launch strategy for EndoPredict in the US for our launch in the second half of 2017. The remaining significant interest from physicians for better a prognostic and from payers that are interested in a better value, particularly given the lack of a costly intermediate category.

Lastly, I would like to provide an update on one of our products entering the reimbursement phase, myPath Melanoma. Our last clinical validation study for myPath Melanoma was presented at the American Society of German Pathology meeting this month. We expect this data to be published in the near-term.

This landmark study evaluated 182 monocytic lesions with known outcomes after more than five years of follow-up testing. It is the single largest outcomes study ever performed with a melanoma diagnostic test and the results were impressive with 94% sensitivity and 96% specificity in differentiating melanoma from benign lesions. Importantly, this unprecedented diagnostic accuracy for a molecular diagnostic test was achieved based upon outcomes data after more than five years of follow-up, rather than relying on the consensus views of multiple experts dermatopathologists.

We recently had our second validation study accepted for publication in cancer and our clinical utility study accepted for publication in medicine. Upon publication of this last clinical validation study, we will submit our dossier to Medicare and private insurers this fiscal year.

As a reminder, there are over 5 million suspicious lesions excised every year in the US and Europe alone, so there is a substantial and under-appreciated opportunity for this product, particularly given that this test will also be offered in a kit format.

In conclusion, the entire Myriad team is earnestly working to transform their Company and achieve our strategic goals. We have the best pipeline in the diagnostic industry, with a global market potential of $25 billion and we believe Myriad is the best-positioned company to bring the promise of personalized medicine to patients around the world.

With that, I'm pleased to turn the call back over to Scott to begin the question-and-answer portion of our call.

As a reminder during, today's call we used certain non-GAAP financial measures. A reconciliation of the GAAP financial results to non-GAAP financial results and reconciliation of GAAP to non-GAAP financial guidance can be find under the investor relations section of our website. Now we are ready to begin the Q&A session.

(Conference Instructions)

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

(Operator Instructions)

One moment please for the first question, which comes from the line of Bill Quirk with Piper Jaffray

Good afternoon, everyone. This is Alex Nowak filling in for Bill today. First question for me is on Polaris and Vectra DA. Both of those tests declined sequentially when looking at number of tests delivered and on the revenue.

And you attributed this to seasonality. But when we look at the tests, I mean specifically Prolaris, we would think that it would be flat to slightly up since the penetration is so low and the test is new. Just curious if you're seeing anything else new within these tests that would explain the sequential decline?

Thanks, Alex. No, this really was attributed -- and we actually see this across the board in the summer. This was really, totally attributable to what we see in summer impacted by physicians, patients, and so we have not been able to discern really anything.

I think, for us, because of the seasonality in the business, it is year-over-year comparisons that we find the most useful. I think obviously in case of Prolaris we saw very strong volume growth, in excess of 50%. So I think it is really maintained that.

I think also importantly for us is, we generally look to see if momentum returns in September, which is also consistent with the fact that people start to return to normal routines. That is exactly what we saw with Prolaris. September was our second largest month ever, and so we saw that same sort of return that we see, for example, we saw with Hereditary Cancer as well, a return to more normal patterns that we've typically seen in September.

Next question comes from the line of Jack Meehan with Barclays. Please go ahead.

I wanted to ask about the Hereditary trends in the quarter, just whether you would be willing to share -- 11% decline in revenue, was there a bigger contribution needed from volume or rate? And just a little bit more commentary around the salesforce and how you expect them to ramp up over the next nine months?

Jack, this is Bryan. In terms of what we saw during the quarter, consistent with the last quarter we noticed the same trend as we entered the quarter in our Oncology business, as we trended toward the end of the quarter we saw the business, the Hereditary Cancer business return to more normal trends. Therefore that is consistent with our guidance. We would expect to see sequential growth as we enter the second quarter, which is seasonally stronger.

The other question, Jack, from a volume and price perspective, we obviously [pried] a little color in this, when you look at that -- the year-over-year decline, we said the majority of that was associated with volume as opposed to price. So that gives you some sense of what we saw, which to Bryan's point was consistent with what we saw actually in the fourth quarter.

From the salesforce perspective, we're fully -- we've got the salesforce now filled, all the territories filled, so I think we have been able to address the turnover that we saw. As Brian mentioned, we typically expect those people to take nine months to get to be fully productive and that is the trend that we are on right now. And that's what we've assumed from the standpoint of our guidance is that our typical ramp up for new salespeople will apply in this particular case.

The next question comes from the line of Amanda Murphy with William Blair, please go ahead.

Hello this is [Art Coe] in for Amanda. Just a question regarding your competitor's entrance into United. I was just wondering, what kind of impact have you seen come through from changes in prior authorization requirements, given the lower prices of your competitor everyday?

Thanks. From a prior authorization standpoint I will see if I answer your question. Really for United that is something that actually went into effect in January. As a recap of that, what they wanted to ensure is that there was genetic counseling occurring before the tests that were ordered.

And so that was a change that actually has been made now quite a while ago from United. As we've reminded everyone, the genetic counseling requirements have always been in place, have always been in policy, but United was putting in place a procedure to enforce that. For somebody like Myriad, this was it really a significant change for us. Our processes were robust enough for us to be able to provide that documentation in an appropriate way.

I know that probably wasn't the case for other laboratories that weren't necessarily used to providing that information. But for Myriad it was something that we had traditionally done. So we haven't really seen any changes from United in that regard since that policy came out.

We haven't seen any others that have pursued any other further documentation requirements from a pre-authorization standpoint. Again, most payers already have some level of pre-authorization and have had that for many years.

I think the only other thing that I will note is, there was a study that was published recently that actually looked at a genetic counselor requirement. So again to differentiate that from genetic counseling, that is a requirement that testing must be done by genetic counselor and there was a study done by authors from the American Society for -- ASBS. What those authors showed is, in fact, that requiring access through a genetic counselor actually significantly reduced access to the testing from patients without increasing the positive rates associated with that, which means it did not increase appropriate utilizations.

So these were people who met NCTN criteria that just didn't follow through with testing. And particularly hard-hit were those in minority populations. So I think that is why you have not seen others tried to implement a genetic counselor requirement beyond a few payers that did that quite a few years ago.

The next question comes from a line of Tycho Peterson with JPMorgan. Please go ahead.

Hello, guys. This is Steve on for Tycho. Thanks for taking my question. Can you give us a sense of what percentage of your myRisk test-volume is now being sold in this customizable format? How the pricing compares to the full panel?

And is this customizable option available to everyone? Or just to certain customer segments? Thank you.

Thanks, Steve. There's no difference from a pricing perspective. This is similar to the full panel. Initially, we have done as a limited-access launch to this primarily to genetics customers.

Those are the ones that really are most interested in particularly picking genes. We haven't really seen that same level of interest from other community providers that really would prefer just to get the entire panel because those providers recognize this is really a once-in-a-lifetime test and they want to get as much information as they can on the first one. So we have really segmented this to only genetic providers.

We haven't split up volumes on what percent is in customizable form versus the full panel, and probably not something we will necessarily do to provide that level of detail. But I think our expectation is that it would probably still be limited to genetics professionals that are in a much better position to select a subset of genes.

Next question comes from line of Sung Ji Nam with Avondale Partners. Go ahead please.

Hello, thanks for taking my question. Mark, could you remind us? AstraZeneca continues to talk about a significant increase in BRCA testing from their perspective, due to Lynparza. Is that still too small to move the needle for Myriad? And then, what is the potential implication for Myriad if Lynparza gets maintenance treatment indication? Would that move the needle a bit more?

So we continue to have our testing for BRACAnalysis CDx is lumped in with our Hereditary Cancer revenue numbers. So we have not broken that out. The reason is that, because the indications for ovarian cancer patients are either in Hereditary Cancer testing or the BRACAnalysis CDx and we see customers that don't necessarily differentiate when they may use those tests.

We just don't think it is very insightful to break BRACAnalysis CDx out separately because it is really just cannibalizing the ovarian cancer patients that we have always been able to test. So we don't think that it would make sense to do that. Probably wouldn't provide any clarity and something that we're not necessarily plan on doing.

I think with the additional Lynparza data on SOLO-2, obviously, they haven't released the actual data. But their commentary suggested that they saw results that were very favorable and, in fact, better than what they had seen in Study 19. And so obviously that is a good result for patients. I think using BRACAnalysis CDx, once again as the companion diagnostic for that test.

We think that is favorable for the test. I think it just reinforces for customers that there is one FDA approved tests and that is Myriad's test.

So we think that is favorable. But again it is still drawing from the ovarian cancer group that would be eligible for hereditary cancer testing.

The next question comes from the line of Isaac Ro with Goldman Sachs.

It's actually Joel in for Isaac. Just following up on the comments you guys have made regarding the initiative in the oncologist population. What incremental investments do think you need to make to retain your strong market position and mind share within the GP population?

Thanks Joel. I think in the Preventive Care, I think one of the most important assets we continue to have is our sales and marketing expertise and the customer service that goes with that. I think those are the three pillars.

There are three pillars that are most important to that customer segment. First is the most accurate test and between Myriad's sequencing accuracy, and interpretation accuracy that continues to be number one with a group that wants to be able to trust those results when they are sitting down with patients. Which again, most of these patients are unaffected. So they are going to be making decisions about potentially doing prophylactic surgeries. They have to be absolutely certain in the accuracy. That's first.

The second is the presence of our sales team, our genetic counselors that are in the field, is very important to that customer group because they need to know who is appropriate for testing, how to interpret results, how to incorporate this into their practice. And so that white glove service, if you will, that we provide in the field is very important. And the third thing is, our customer service team has to work through the pre-authorizations that we've discussed and ensure that patients understand any of their financial obligations and all of those customer service elements.

Those investments already exist and obviously that is something that we continue to leverage as we look at maintaining that share in the market where, as you mentioned or inferred here, is we just haven't seen significant share erosion in that particular segment. I think it is because of the strength of all three of those pillars.

There are no further questions at this time. I will now turn the call back over to you. Please continue with presentation and/or 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.