Myriad Genetics Inc (MYGN) 2018 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Myriad Genetics Second Quarter 2018 Financial Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded, Tuesday, February 6, 2018. I will now turn the conference over to Scott Gleason, VP, Investor Relations. Please go ahead.

Thanks, George. Good afternoon, and welcome to the Myriad Genetics Fiscal Second Quarter 2018 Earnings Call. My name is Scott Gleason, and I'm the VP of Investor Relations. During the call, we will review the financial results we released today, after which we'll host a question-and-answer session. If you've not had a chance to review the earnings release, it can be found in the Investor Relations 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 via a live webcast at myriad.com. The call is being recorded and will be archived in the Investors section of our website. In addition, there's a slide presentation pertaining to today's earnings call in the Investors Section of our website and which we 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 its current reports on Form 8-K. These documents identify important risk factors that could cause the actual results to differ materially from those contained in our projections and forward-looking statements. With that, I'm pleased to turn the call over to Mark.

Thanks, Scott. I would like to start today's call by providing key business and financial highlights from the second quarter of fiscal 2018, after which Bryan will provide an overview of our financial results and guidance, and I will finish by providing additional details pertaining to the ongoing execution of our business strategy. In the second quarter, we once again exceeded expectations with revenues of $194 million and adjusted earnings per share of $0.31. This performance was a result of outstanding execution of our strategy, which calls for a solid foundation of hereditary cancer revenues and continued growth in our new products. In particular, GeneSight continued to outperform expectations this quarter, with revenue increasing 46% on a year-over-year basis. Based upon the strength in our operating results, we are raising our financial outlook for this fiscal year and are guiding to revenues of $760 million to $770 million, which is at the high end of our previous guidance range and adjusted earnings per share of $1.11 to $1.16 compared to our previous range of $1 to $1.05.

During the quarter, we continued to make significant progress on our 5 critical success factors: to build upon a solid hereditary cancer foundation; grow new product volume; expand reimbursement for our new products; increase international RNA kit revenue and improve profitability with Elevate 2020. From a hereditary cancer perspective, revenue was up slightly on a sequential basis, as volume growth was offset by the remaining price reductions in our long-term contracts. The second quarter fully reflected the pricing in our long-term contracts, and therefore, we anticipate stable pricing for the remaining duration of these 3-year contracts. Importantly, this was the fourth straight quarter with year-over-year volume growth. We believe the growth in sequential volume was partially attributed to the launch of riskScore, which was very well received by our customers. Given that the full validation data was presented at the San Antonio Breast Cancer Symposium in December, we would anticipate riskScore playing an even more important role in future quarters.

Related to our new product volume growth, year-over-year test volume again grew at a double-digit rate in the fiscal second quarter, with GeneSight leading the way. In total, new product sample volume represented 70% of overall volume and 35% of total revenue, a new record for the company. Additionally, we continue to see positive EndoPredict momentum with test volumes increasing over 70% sequentially in the U.S. market. Also, our companion diagnostic program made a significant advance, as we recently announced the BRACAnalysis CDx was approved by the FDA as a companion diagnostic for olaparib and HER2 negative metastatic breast cancer. This is a major milestone as it represents the first time, a PARP inhibitor has been approved outside of ovarian cancer. This quarter, we continued to make strides towards broader reimbursement coverage for our new products. First, the LCD from Noridian for EndoPredict was finalized and became effective on January 30, increasing total coverage to approximately 90% of the U.S. market.

Additionally, Prolaris is now covered by Medicare for favorable intermediate patients and is being evaluated for revised NCCN guidelines. For Vectra DA, we have identified a pathway for reimbursement and have been diligently addressing data gaps, raised by commercial payers in our reimbursement dossier. This includes 2 publications demonstrating the superiority of Vectra DA to conventional disease activity measures, a study that defines a medical management protocol, a large Medicare decision IMPACT study, retrospective and prospective studies with patient outcomes and the first study to show that Vectra DA can predict cardiovascular events. With GeneSight, we released top line data, demonstrating the ability of the test to improve the gold standard clinical outcomes of remission and response in the largest pharmacogenetics study ever conducted. This was unprecedented since GeneSight guided arm was compared to an active drug arm optimized by physicians rather than a placebo arm, as was used in all FDA antidepressant registration studies. We are on track to submit the manuscript for this pivotal study by the end of this month and plan to present the full data set in May.

I'm also pleased to announce that another major GeneSight study, the IMPACT study, will be submitted for publication by the end of the fiscal third quarter. This is a second large prospective study with more than 2,000 patients and demonstrated that with GeneSight, primary care physicians had even better outcomes compared to psychiatrists. Finally, we anticipate that an updated NCCN guidelines for myPath Melanoma could be issued in the second half of this fiscal year, providing yet another potential reimbursement catalyst. With Elevate 2020, we continue to make significant progress and saw total operating expense decline again sequentially, despite higher revenue and product volumes. This quarter, we made the decision to move the Vectra DA laboratory and customer service operations to Salt Lake City to take advantage of lower structural costs. Bryan will discuss this in greater detail in his prepared remarks, but in summary, we are well on track to achieving our $17 million target of incremental operating income in fiscal year 2018 and additional significant cost savings in fiscal year 2019.

Overall, we continued to exceed financial expectations, and more importantly, the transformation of the company is on track to deliver substantial future shareholder value. With a solid hereditary cancer foundation continued new product growth and increasing reimbursement, we remain confident in our ability to deliver on our long-term strategic financial goals. With that, I will now turn the call over to Bryan, to provide a more detailed assessment of our financial results in the fiscal second quarter and additional commentary on our updated fiscal year 2018 financial guidance.

Thanks, Mark. I would like to start by providing a more in-depth overview of our fiscal second quarter financial results. Second quarter total revenues were $194 million compared to $196.5 million in the same period in the prior year, a decline of 1% year-over-year, with the year-over-year pricing decline in hereditary cancer being mostly offset by new product revenue growth and hereditary cancer volume growth. Hereditary cancer revenue in the quarter was $126.9 million, which was up slightly on a sequential basis and consistent with our expectations as volume increases were offset by the remainder of the price reductions in our long-term contracts.

On a year-over-year basis, volume growth, once again, exceeded our 3% growth target. As a consequence, the 12% year-over-year hereditary cancer revenue decline was driven by the price reductions in our long-term contracts. GeneSight revenue in the quarter, once again, set a record at $31.7 million and grew 46% year-over-year and 10% sequentially. Volume in the quarter achieved a new record and was driven entirely through increased sales representative productivity. This quarter, we once again set a record with an additional 2,000 new ordering physicians and a total of 12,500 ordering doctors. In the quarter, approximately 30% of psychiatrists ordered GeneSight.

So even with this record growth, we have significant upside opportunity in the psychiatry market as well as the even larger preventive care market, where we have yet to broadly commercialize the test. Vectra DA revenue in the second quarter was $11.1 million and grew 4% year-over-year. Given the recent increase in the Medicare rate for Vectra DA on the clinical laboratory fee schedule for calendar year 2018, along with our expectation for higher volumes in the second half of fiscal year 2018, we anticipate a meaningful increase in Vectra DA revenue, beginning in the fiscal third quarter. Prolaris revenue in the fiscal second quarter was $5 million and was up 61% relative to the fiscal second quarter of 2017. This reflected a double-digit increase in volume as well as an increase in average selling price that benefited from the Medicare favorable intermediate LCD, which became effective on September 25. This quarter's revenue number for Prolaris included $900,000 of retrospective revenue from Medicare favorable intermediate patients tested in the fiscal second quarter. EndoPredict revenues in the second quarter were $2 million and increased 25% year-over-year, led by U.S. testing volumes, which increased over 70% on a sequential basis.

International revenue is relatively flat due to reimbursement delays in finance. We are positioned for increased revenue in the U.S. market from EndoPredict, beginning in the fiscal third quarter, as our final LCD from Noridian became effective on January 30.

Lastly, revenue associated with our pharmaceutical and clinical services business was $14.8 million and grew 18% year-over-year. The higher-than-anticipated pharmaceutical and services revenue was tied to the timing of some large pharmaceutical contracts with our Myriad RBM business. I now would like to discuss our financial metrics for the quarter. Gross margins were 77.1% in the fiscal second quarter, which was relatively flat with the second quarter of last year. Once again this quarter, gross margin headwinds from lower hereditary cancer pricing were offset by increased efficiencies in our production process as a result of our Elevate 2020 initiatives as well as increased new product reimbursements.

Moving on to our operating expenses. GAAP research and development expenses were $16.8 million in the fiscal second quarter compared to $18.6 million in the fiscal second quarter of last year. On a non-GAAP basis, our adjusted research and development expense was $16.6 million compared to $18.5 million last year and declined 10% year-over-year. The decline in research and development spending was largely due to the completion of the GeneSight randomized clinical study and the consolidation of our research programs to focus on broader reimbursement coverage. GAAP SG&A expense this quarter was $115.4 million compared to $120.3 million in the second quarter of last year. Adjusted SG&A expense this quarter was $104.8 million compared to $110 million in the second quarter of fiscal year 2017. As a reminder, the fiscal second quarter of last year contained a full quarter of GeneSight, so the greater than $5 million reduction in SG&A is a result of our Elevate 2020 initiatives.

On a sequential basis, adjusted operating expenses were down slightly, demonstrating the continued progress with our Elevate 2020 programs. Adjusted earnings per share were $0.31 for the second quarter compared to $0.26 in the second quarter of last year, an increase of 19%. Our fully diluted share count increased sequentially to 71.9 million shares outstanding. We continue to prioritize debt repayment as a near-term use of cash. This quarter, we used cash to reduce the balance of our credit facility by $30 million, leading to an outstanding balance at the end of the second quarter of $43 million. We anticipate paying a $65 million revenue growth milestone associated with the Assurex acquisition during the third quarter and are on track to have completely paid off our credit facility by the end of calendar year 2018. This will increase our flexibility to deploy capital, including the potential for additionally internally developed or acquired new products. Our cash and cash equivalent balance at the end of the second quarter was $202 million, which was consistent with our cash balance at the end of the first quarter. We continue to generate meaningful free cash flow, with adjusted free cash flow in the quarter of approximately $32 million or $0.44 per share, which is significantly higher than our adjusted earnings per share. Historically, our adjusted EPS have significantly understated our free cash flow per share, and in fact, our free cash flow over the trailing 12 months was $1.90 per share.

Next, I would like to provide some commentary on the financial impact of the recent tax reform legislation. The legislation will positively benefit our fiscal 2018 full year adjusted earnings per share by approximately $0.06. Based upon accounting rules that benefit must be accrued across the entire fiscal year, so we recognized a $0.02 tax benefit in the fiscal second quarter and will recognize the remaining $0.04 benefit across the second half of fiscal year 2018. This quarter, we also recognized a $33 million onetime noncash gain associated with the adjustment of our deferred tax liabilities to the new statutory rates. Due to the legislation for fiscal year 2018, we now anticipate our non-GAAP tax rate will be reduced from our previous guidance of 23% to 21%. For fiscal year 2019, these rates will be lower, since we will have the benefit of a full year of the lower tax rate, and we anticipate a non-GAAP tax rate of approximately 17%.

Moving on to our financial guidance. We are raising guidance for the fiscal year to reflect the strong business trends we saw in the first half of fiscal year 2018 and the new tax law. Our new revenue guidance cost for fiscal year 2018 revenue of $760 million to $770 million, which is at the high end of our previous range. From an earnings perspective, we are increasing our guidance for adjusted earnings per share to $1.11 to $1.16 from our previous guidance of $1 to $1.05. As I've previously stated, approximately $0.06 of this increase is -- in our adjusted earnings per share guidance is tied to the impact of tax reform and the other $0.05 is tied to improved business fundamentals compared to our original expectations.

In addition, we are guiding the fiscal third quarter revenue of $186 million to $188 million and adjusted earnings per share of $0.26 to $0.28. I would now like to discuss the relevant drivers of our financial guidance. First, from a hereditary cancer perspective. In the fiscal third quarter, we typically see a negative impact from co-pay and deductible resets, and we did see a slight impact from severe weather, winter weather across the country in January. In the third quarter, we are only assuming a modest contribution to hereditary cancer revenue from the BRACAnalysis CDx metastatic breast cancer indication launch, consistent with the ovarian cancer companion diagnostic launch. Admittedly, the breast cancer market in untested patient population is substantially larger than the ovarian cancer market, but it is too early to see a trend with only a few weeks of data. Consequently, consistent with previous years, we are assuming that hereditary cancer revenue will be down sequentially in the third quarter, with a return to sequential growth in the fourth quarter. GeneSight, like all of our diagnostic tests, faces adverse seasonality in the fiscal third quarter, and therefore, we expect sequential revenue to be relatively flat in the fiscal third quarter, followed by sequential growth in the fiscal fourth quarter. For Prolaris, we expect sequential flat -- sequentially flat revenues in the third quarter. As a reminder, the second quarter had some backpay for testing that will not occur in the third quarter. But we expect increased volume and increased clinical fee schedule pricing to offset the sequential decline associated with backpay. For Vectra DA, we expect sequential revenue growth in the third and fourth quarters due to increased volumes and increased Medicare pricing associated with the implementation of PAMA. For EndoPredict, the guidance anticipates revenues to increase in the third and fourth quarter due to continued volume growth in the United States and an increase in average selling price due to the Medicare LCD in the implementation of private payer contracts. We -- also, we have not assumed any reimbursement from my myPath Melanoma, any positive coverage decisions this fiscal year will represent upside to guidance. Finally, we are expecting a significant reduction in pharmaceutical and clinical services segment revenue in the second half of fiscal year 2018, given the bonus we saw in the first half of the fiscal year for some large pharmaceutical contracts. In the third quarter alone, we expect pharmaceutical and clinical services revenue to decline approximately $4 million sequentially. Turning to our progress on expense reduction, we remain on track in terms of achieving our targeted $17 million in increased operating profit under our Elevate 2020 program for this fiscal year.

In terms of new initiatives under the program, in January, we made the operational decision to move the Vectra DA laboratory operations and customer service groups to Salt Lake City. This project will result in significant long-term cost savings due to lower structural operating costs at our Salt Lake City facility. As part of this transition, we will have some onetime expenses, and we do not anticipate cost savings from this move to manifest until fiscal year 2019, as the full transition could take up to 18 months. Overall, we remain very pleased with the pace and magnitude of savings generated by the Elevate 2020 program. In conclusion, I am very pleased with the strong first half of fiscal year 2018, which allowed us to increase our guidance for the full year. We continue to see additional upside potential, with key catalysts such as the metastatic breast cancer launch of BRAC CDx. Perhaps, more importantly, we remain well positioned to deliver on our long-term financial goals, given the significant progress we have made on our strategic initiatives. With that, I would like to turn the call over to Mark.

Thanks, Bryan. I would now like to provide some additional details on important clinical data and our performance for the second quarter, beginning with hereditary cancer. The second quarter represented our first full quarter commercializing riskScore, and we are exceptionally pleased with the customer feedback. We saw preventive care year-over-year volume trends accelerate during the fiscal second quarter and believe the impact could be greater in the future, given that the full validation data was only presented in December at the San Antonio Breast Cancer Symposium. The validation data underscored how critical the information from riskScore can be to shaping patient care. Specifically, the data showed that the lifetime risks associated with riskScore range widely from 1% to 66%. This dramatic difference in lifetime risk places patients along a continuum from below the general population risk to risks similar to that of high penetrance genes such as BRCA1 or BRCA2. Additionally, in the validation, 38% of patients had lifetime risks greater than 20%, which is the level of risk where guidelines recommend using more sensitive MRI screening instead of mammography. Moreover, 7% of patients had a lifetime risk greater than 3x the general population risk. Putting this in context, riskScore identifies more patients with significantly elevated breast cancer risk than BRCA1 and BRCA2 combined. This is why healthcare providers truly believe we are entering the fourth major epic in hereditary cancer testing. Peter Kraft, an epidemiologist at Harvard, recently stated in the MIT Technology Review, and I quote "it's like we've discovered another BRCA, but it's not one gene." Overall, customers are very pleased with Myriad's pioneering riskScore launch, and we believe it will continue to be a competitive differentiator and catalyst for growth in our hereditary cancer franchise. We are also seeing a significant increase in hereditary cancer testing among prostate cancer patients. Consistent with our 4 in 6 strategy, hereditary cancer testing for prostate cancer patients is being commercialized by both our oncology and our urology business units. Over the last year, we have seen a tenfold increase in volume, and there have been recent catalysts, which could further accelerate testing. In October, NCCN updated its guidelines to recommend hereditary cancer testing for all patients with metastatic prostate cancer. Additionally, an expert panel of physicians recently released a consensus statement in the Journal of Clinical Oncology, recommending the need for routine assessment of family history and hereditary cancer counseling for men with prostate cancer, seen by either a urologist or oncologist.

In total, there are approximately 46,000 newly diagnosed prostate cancer patients every year that meet professional guidelines, and these patients are motivated not only because their test results could prevent cancers in their children, but because it could actually shape their therapy with targeted pharmaceuticals. On the companion diagnostic front, we were excited to launch BRACAnalysis CDx for HER2 negative metastatic breast cancer patients as a companion diagnostic for olaparib. As a reminder, there are approximately 155,000 metastatic breast cancer survivors in the United States today, of which we estimate 125,000 do not know their BRCA status. And every year, there are 60,000 new patients diagnosed with metastatic breast cancer. Given the FDA approval of BRACAnalysis CDx, we believe there will now be significant motivation for these patients to be tested to determine if they are eligible for olaparib. Our oncology commercial team is aggressively working to ensure patients and physicians understand this new treatment option. From a sales perspective, we are collaborating with AstraZeneca and Merck in the United States, which doubles our commercial impact. We are also initiating one of our largest ever direct-to-patient and direct-to-provider digital marketing campaigns in support of this important launch, which have historically generated significant returns. Furthermore, we have fine-tuned our sales efforts to ensure higher and more frequent call volumes on the 3,300 oncologists that treat over 75% of metastatic breast cancer patients in the United States. Also of note, Pfizer presented positive metastatic breast cancer data associated with their drug, talazoparib, in early December. Only patients testing positive with BRACAnalysis CDx were enrolled in this study. The results were highly statistically significant and demonstrated that talazoparib had median progression-free survival of 8.6 months compared to only 5.6 months for trace -- patients treated with physician's choice of therapy. Myriad plans to submit a supplementary premarket approval application to the U.S. Food and Drug Administration under its existing PMA for BRACAnalysis CDx include talazoparib. Looking into the future, we continue to see opportunities for market expansion with companion diagnostics. As early as fiscal year 2019, we expect data readouts in first-line ovarian cancer and pancreatic cancer. Of note, we recently signed an expanded research collaboration with AstraZeneca using myChoice HRD Plus and first-line ovarian cancer. As early as fiscal year 2020, we expect data readouts in adjuvant breast cancer and in prostate cancer. In combination, we believe these indications would represent over $700 million of annual addressable market opportunity.

Moving on to GeneSight. We remain excited about the presentation and publication of the full data set from our 1,200-patient randomized controlled trial by the end of this fiscal year. Early feedback and the top line data from physicians has been exceptional, with doctors clearly impressed at the statistically significant improvements in the gold standard clinical outcomes of remission and response, given the unprecedented comparison to an actively managed optimized drug control arm. Psychiatrists appreciate how difficult psychotropic drug studies are and understand that in registration studies for FDA-approved medications compared to placebo, statistically significant improvements in remission and response were only seen 13 and 33% of the time respectively. We have also had very productive dialogue with large payers under nondisclosure agreements. As one national payer noted, and I quote, "The study designed was exceptionally strong, with an impressive list of key opinion leaders and the results you've demonstrated are real.'' After review with another technical assessment committee, they noted, "This is high quality evidence in a very large study, which addresses the gaps identified in our last review of GeneSight, and we encourage you to resubmit as soon as practical." Consistent with historical precedents, we have assumed that coverage decisions from payers will occur after publication of the results in a peer-reviewed journal. But we believe our early educational efforts will help accelerate the timeline from publications to coverage. Also, we have reached another important milestone with GeneSight related to the Canadian IMPACT study. IMPACT is a major ongoing prospective open-label study conducted in conjunction with the Center for Addiction and Mental Health, that to date, has enrolled over 8,000 patients with a range of mental health conditions. If you recall last quarter, we discussed the positive outcome from the IMPACT study for general anxiety disorder. One of the primary goals for this study was to compare the performance of GeneSight-guided arms in depressed patients between primary care physicians and psychiatrists. The analysis from this subset of the IMPACT study includes outcomes from over 2,000 moderate to severely depressed patients. I am pleased to announce that the top line results from this study showed that primary care physicians had even better outcomes than psychiatrists in all 3 study end points: Remission, response and symptom improvement. And the results were highly statistically significant, with p-values less than 0.0005. We anticipate presenting the full data set in an upcoming conference and submitting it for publication by the end of this fiscal year. We believe this data will be pivotal in broadening Medicare coverage to include primary care physicians, and we will be presenting this data to the MolDX program before the end of this fiscal year.

Finally, on GeneSight, we have launched another study in conjunction with the Department of Veterans Affairs. The study titled PRIME Care, will be a randomized controlled trial, which will enroll over 2,000 patients with major depressive disorder and include 250 healthcare providers at 21 VA medical centers. The Department of Veterans Affairs has committed over $12 million to fund the study, which will evaluate how the GeneSight test impacts the key end points of remission, response and symptom improvement relative to a control group. We are honored to work with the Department of Veteran Affairs on this important initiative. Given that over 20% of the 2.6 million veterans who are deployed to Iraq and Afghanistan returned with major depressive disorder or a related mental health condition. This study is anticipated to complete by 2021 and is currently enrolling ahead of schedule. If successful, this study could lead to broad utilization guidelines for Department of Defense personnel.

Next, I would like to discuss Vectra DA, starting first with our efforts to broaden commercial coverage. Based upon feedback from commercial payers in the past year, we identified 4 questions to be addressed that would enhance the chain of evidence supporting coverage for Vectra DA: First, pairs are interested in any guidelines that include Vectra DA. Currently, Vectra DA is in the United Rheumatology guidelines, which represent approximately 10% of rheumatologists and is under consideration for ACR guidelines; second, to answer the question of how Vectra DA compares to other measures of disease activity, we presented 2 major studies showing that Vectra DA is the best predictor of radiographic progression, with performance more than 3x better than conventional disease activity measures; third, to answer the question on how to use Vectra DA to modify treatment, we recently submitted a manuscript for publication, which determined the magnitude of change in Vectra DA scores that justify a change in therapy. This clinical utility data will be used as the basis to add a medical management protocol, with every Vectra DA test report similar to what we have with our hereditary cancer tests; the final request by payers is for data demonstrating the improved outcomes when physicians follow our medical management protocol. We are currently generating both retrospective and prospective data to answer this request and expect the retrospective data to be available for a completed dossier by the end of this fiscal year. I'm also pleased to announce another advance in the clinical utility of Vectra DA, with recent publication in the annuls of rheumatic diseases that demonstrated a strong link between Vectra DA scores and cardiovascular disease. The study evaluated Medicare claims data from over 70,000 patients and found that for every 10-point change in Vectra DA score, the hazard ratio for a major coronary event was 1.32 and was statistically significant. Patients with rheumatoid arthritis are at double the risk of heart disease already, and according to the study, a patient with a Vectra DA score of 60 would have a 3x greater risk of a major coronary event compared to a patient with a Vectra DA score of 20. Physicians' previous data is adding substantial additional clinical utility for Vectra DA. Dr. Jonathan Graf, a professor of medicine at University of California, San Francisco stated, and I quote, "This is some of the best data available to suggest the link between RA and heart disease. I think these results proved the hypothesis that inflammation drives cardiac disease." We anticipate future versions of the test report will provide an individualized cardiovascular risk determination. Moving on to EndoPredict. We presented our first chemo predictive data at the San Antonio Breast Cancer Symposium in December, demonstrating the ability of EndoPredict to predict therapy response in the neoadjuvant setting. Approximately, 15% of breast cancer patients receive neoadjuvant chemotherapy. The study, which evaluated 217 women with HR-positive breast cancer, demonstrated that patients with a low EndoPredict score responded substantially better to endocrine therapy where patients with a high EndoPredict score responded significantly better to adjuvant chemotherapy. These results of both these outcomes were highly statistically significant. Lastly, I wanted to provide an update on myPath Melanoma, which increasingly looks like it will add to revenue growth in fiscal 2019. Every year in the United States, there are approximately 2 million skin biopsies, of which approximately, 15% or 300,000 have an uncertain diagnosis. This represents a $500 million total addressable market based upon our $1500 targeted average selling price. Even with efforts limited to select opinion leaders, our small sales team was still able to generate over 300 samples per territory per quarter. When we obtain broader reimbursement, we will expand our sales team and increase our marketing spend to access the entire market of 1,000 dermatopathologists. Overall, I am exceptionally pleased with our business performance in the second fiscal quarter and our ability to raise financial guidance for this fiscal year. We have a solid hereditary cancer foundation with growing volumes and stable pricing in a hereditary cancer market that still remains less than 10% penetrated. In addition, we continue to grow new product volume at a robust double-digit pace in highly underpenetrated markets, and we have a number of near-term catalysts that can expand reimbursement. Also, we are beginning to see a significant impact from Elevate 2020 initiatives as we build a leaner, more efficient organization. And most importantly, we have an extraordinarily talented team that is passionately focused on improving patient's lives, while achieving our long-term financial goals. With that, I'm pleased to turn the call back over to Scott for Q&A.

Thanks, Mark. As a reminder, during today's call, we use certain non-GAAP financial measures. A reconciliation of the 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 the Q&A session. (Operator Instructions) George, we're now ready for the Q&A portion of the call.

(Operator Instructions) Our first question is coming from the line of Sung Ji Nam with BTIG.

Mark, sorry, if I missed it, but what's the expected contribution for BRACA CDx for the second half of the year? I know -- I believe, Ryan mentioned it for third quarter, is there a meaningful contribution for the second half?

Thanks, Sung Ji. We don't provide product-specific guidance, so we didn't give anything specifically for BRACAnalysis CDx. I think our commentary was that for guidance assumptions for Q3, we're really only assuming a modest impact. And I think that's true for the entire second half that would include fourth quarter as well. So obviously, if we were to see the performance of BRAC CDx with breast significantly in excess of what we saw with ovarian cancer, I think that would be upside to what we provided to our guidance.

And then just as a follow-up. How should we think about, maybe, the first year of sales? Do you expect BRAC -- I'm sorry, Lynparza for the metastatic breast cancer product to ramp kind of in a similar fashion to how the ovarian product ramped for AstraZeneca?

I don't think AstraZeneca has provided any public commentary on their expectations around Lynparza, what that might look like. So I'd hesitate to comment on that. I think that's commentary that really, probably needs to come from AstraZeneca. I could say from our end, from a diagnostic standpoint, obviously, this is a much bigger market that we are addressing than the ovarian cancer market. The prevalence pool is 125,000 patients, which is substantially larger than the prevalence pool of ovarian cancer patients of 20,000 or so that were eligible when BRACAnalysis CDx was approved for that particular indication. So this is certainly a much larger market, a very motivated group of patients. And that's why we've always pointed to this as a potential catalyst. And so that's what we are focused on. Our teams are very keen on making sure that we can get those patients into the office as quickly as possible to at least get them tested and facilitate their ability to take olaparib. So it's a significant opportunity but I don't think either one of us is necessarily opined on exactly what that trajectory may look like.

Our next question is from the line of Amanda Murphy with William Blair.

This is actually Matt on behalf of Amanda. Just wanted to follow up around the impact that you're estimating as a result of the proposed Medicare coding changes, and how you'd expect that to impact the business in terms of your Vectra test?

Thanks, Matt. So I think from a Vectra perspective, we've obviously, seen a significant increase in price from Medicare, effective January 1, so that price is now $860, which -- that's increased from the $560, that it was previously. So obviously, that's going to have a significant impact on Vectra. We don't provide product-specific guidance, so we didn't necessarily call out that Vectra revenue. But I think Bryan pointed out our expectation that are of course you're going to see a nice year-over-year volume growth in Vectra, given the fact that we're -- we've got volumes increasing plus a higher ASP.

I think the other thing, just to note in that is that typically, the Medicare volume is about 40% of Vectra volume. So it is a very significant component of Vectra testing.

Perfect. Yes, that was actually my follow-up question. I wanted to get a better sense of, exactly the percentage of testing that related to. So I appreciate the context there and then, I know this has kind of been discussed already obviously, but just wanted to get -- just more commentary around readout opportunities for GeneSight, and do you have just any updated thoughts around timing for potentially getting coverage.

Yes, I think, at this point, as we said from a guidance perspective, our assumption is that coverage decisions would occur after a publication of peer-reviewed journal articles. That's at least historically, what we've seen. And so as always, as Bryan and I provide guidance, it's really based on historical precedent. And so that's the assumption that we've used. The data still is expected to be presented fully in May, and our goal still remains to have a publication available by the end of this fiscal year, which would then allow us to be considered for coverage decisions as we enter into the next fiscal year, starting with July. The timing is to when those additional coverage decisions might happen is something that we wouldn't necessarily try to predict because there's no statutory requirement for time line on those coverage decisions. But obviously, our discussions have gone well so far with payers, and we're laying the educational foundation such that when those peer reviews happen, we've at least positioned all the appropriate people within the payer organizations to have already digested the information. And in fact, we can get back to them and answer any other questions they may have on the data even before the data gets published. So that's our strategy here over the next 6 months.

Our next question is from the line of Tycho Peterson with JPMorgan.

Mark, I just want to understand the guidance. You guys posted pretty strong feeds in the first half of the year. You obviously had the companion diagnostics approval and better reimbursement for PAMA, for Prolaris and Vectra. You're only raising guidance here marginally. Other offsets here we should be factoring in, in terms of why you're not increasing to guide more?

Yes, Tycho, this is Bryan. I'll take the question. I think -- As we look at the front half versus the back half, I think there are couple of things that are important at a high level. One is, we had the Vectra positive from the accrual transition to accrual accounting that was in Q1, we had the Prolaris backpay. We've had RBM, our clinical -- pharma, clinical services business, as I mentioned, we expect that business to be down $4 million sequentially from the second quarter. So I think there are some things there that you can't necessarily extrapolate. I think in terms of the guide, what we've said is that we are very happy with the first half of the year, especially, from a hereditary perspective. We've seen nice volume there and expect to have stable pricing and expect that business to move to more seasonal trends in the back half. Of note, typically, we see in Q3, for that business historically, we've seen up to a 5% sequential decline from the December quarter to the March quarter for reasons that we mentioned on the call. So I think we -- as Mark said, we look at our business. We didn't -- we thought about BRAC CDx and the impact that it could have but again, we don't have a lot of data to look at to know, how much we should build in there ovarian cancer with a small market. So I think we put out guidance, again, that we feel is achievable and represents our best guess at where the business is headed. So I don't know if that answered your question, but there is -- it is difficult to look at the front half and necessarily extrapolate that to the back.

Okay. And Bryan, can you comment on the accounts receivable? DSO is, I think, went up again sequentially. Any color you can provide there?

Yes, we look at that every month, obviously. I think there were some things that were unique to the end of the year, especially, as I mentioned, the large RBM deliveries, right? During December and obviously -- and normally, December is a month where you have very little time to collect. You have the holidays, and there we typically see lower collections during that period, so I think as we look at it relative to historical, it looks in line when you see the growth in GeneSight, that's another area where we have higher DSO in that business but we -- there's nothing of concern for us there relative to the change in the December quarter.

Our next question is from the line of Brandon Couillard with Jefferies.

Mark, be curious if you could elaborate a little bit on the riskScore and perhaps, the halo effect that, that's having on the hereditary cancer business and if you're actually able to measure in any way the impact of that on volumes?

Yes, thanks, Brandon. As I mentioned, in general, certainly from a qualitative standpoint, our customers have been very excited about this data. They've known about the potential impact for SNPs and family history for quite some time. But to be able to have such a highly validated test that definitively quantifies that for them so they can have a very straightforward conversations with patients, it's really something they have been looking for, for quite a while. And obviously, they trust Myriad to do that validation in a way that others cannot. Plus, frankly, just the level of statistical significance, when you start talking about p-values, 10 to the minus 30, it's pretty impactful to people. As I noted, we did see an acceleration of the hereditary cancer volumes in the preventive care segment. The segment where of course, you would expect riskScore to have an impact because it's delivered to patients that obviously haven't had cancer. And so that's one indication. We do have other metrics we measure, Brandon. We look at frequency of testing by doctors, we can correlate that to the number of riskScore results they've got. So there is actually quite a few analytics we can do. I think everything is positive from that regard as we would have expected. As I also mentioned, because the full data wasn't available until December, there certainly were customers that were anxiously awaiting that presentation in order to get the full understanding of the validation. And so that happened right at the very end of the quarter. So our expectation is that the interest will just continue to build now that the data is out there. And also, we've got a number of other things in the pipeline, as we evolve riskScore for other applications that will continue to interest customers. So I think, so far, everything's gone exactly as we would hope.

Our next question is from the line of Dan Leonard with Deutsche Bank.

So I had a couple of follow-up questions on GeneSight. First off, on your assumption that revenues would be down sequentially in the March quarter. Why would that be, given the low penetration rates for the product? And I do believe that is not consistent with historical seasonality in GeneSight. So I could hope to understand that better.

Yes, to be clear. I think as Bryan mentioned, Dan, our assumption for guidance was that it would be flat Q2 to Q3, just because of some of that seasonality. So obviously, the product has grown dramatically since a year ago. So it's really difficult to compare data from previous years just because we're at a much higher base. So the assumption we made is that we would expect that to be flat again. The same weather conditions that affected hereditary has affected all of our products, and frankly, the whole industry. And so we have at least visibility into that as we look at the third quarter as January is behind us. And that's certainly going to have an impact on what we would see for volumes. What I can say overall, the volume trends for GeneSight continue to be ones that we are very pleased with. The reception that we've gotten from doctors to the top line results has been very positive. I think doctors have recognized this as something they need to be doing a lot more of and not less. And so I think the overall trends of the business are ones that we feel very good about. We've just provided guidance based on the assumption that we've got a weather impact and seasonality for a business that's now bigger and does face the same concerns from patients about the resets of deductibles and co-pays that we see in our other businesses.

Okay. That's helpful color. And then my follow-up on -- for Bryan on GeneSight, is a follow-up to Tycho's question. So Bryan, why would GeneSight have higher DSOs? My understanding is, historically, these emerging growth diagnostic companies recognize most of the revenue based on cash versus accrual. And I wouldn't think that the Medicare portion of GeneSight would lag from a DSO standpoint.

Yes, I think that we may have talked about just a little bit on the Q1 call as we talked about Vectra and the transition to an accrual basis of accounting that's really consistent with ASC 606, and that's the case, it's really consistent with what the way we account for GeneSight revenue. So you -- we actually do see some level of DSO impact there because it is a longer collection cycle related to that business as compared to, say, a business like our hereditary cancer business.

Our next question is from the line of Bill Quirk with Piper Jaffray.

Couple of questions, Mark. Just a couple of clarifications, really, on reimbursement. So first off, on Vectra. You mentioned that a number of studies you've been undertaken were based on feedback from payers. Does that include feedback from CMS as well?

Well, we've been in discussion with CMS. I think, obviously, from a CMS perspective, we already have coverage. So it's -- I think that commentary is a little different. We do provide them updates on all the plethora of futility data that we generated over the last year. So every time there's new data, this is something that we feed into the process. So they continue to get updates on any of that material. But from their perspective, these questions were not gaps that were identified by CMS, these were things identified by commercial payers.

Okay, got it. Appreciate the clarification. And then, just on GeneSight. I appreciate the comment about the publication timing and then the expectation that we could start to see some private payer momentum thereafter. Just given the timing, safe to assume that, that should be probably more of a 20 -- or fiscal 2019 phenomena? I'm assuming, you're not -- you're still continuing not assume any incremental GeneSight reimbursement in the current fiscal year, correct?

Yes, that's correct, Bill. So our guidance assumes no additional reimbursement for GeneSight that -- based on our assumption that the publication will not be out before the end of the fiscal year. And assuming historical practice that coverage would wait for that, it will be a fiscal '19 event. That's at least what our assumptions are based on. Where payers in a position where they wanted to act prior to that, just based on the data we are providing, that would be upside to guidance.

And then just, I guess, a quick follow-up to that. Recognizing that, obviously, picking the timing of reimbursement, is one of the more difficult things to do in this business. That's said, it sounds that you're getting some pretty good feedback from some of your conversations with payers. So how quickly do you think they could move, following publication of that study?

Yes, it's a great question, Bill. I can't answer that specifically, I can say the feedback has been very positive and very consistent with what we heard when the study was designed 4 or 5 years ago. We asked payers exactly how the study should be designed, what are the things they most want to see. We designed it according to that, so it's encouraging that we go back with that data and it's answered the exact question they wanted us to answer. Their focus really has been on remission and response. They've really wanted to understand that data because they understand that the cost savings that are going to accrue to them are based on improvements and remission and response. And so that's really where their focus has been on understanding some of that additional data. So I think that the conversations have been very positive. How quickly they'll want to move on that? Again, we're going to show them and have shown them health economic data that it is in their financial interest to move quickly because the savings for this will pay for itself within the first year. And so that's what we're trying to set up as a scenario where the data is strong. The health economics are in their advantage to act quickly, projecting exactly when that will happen is really difficult as you've mentioned, and we would agree, Bill. But we're trying to do things differently so that we can speed that up.

Our next question is from the line of Doug Schenkel with Cowen.

I guess, I just want to start with a guidance question. Did you reduce your expectations for the year for HCT revenue? I guess, I ask because it seems like you're expecting second half revenue, at least for that category, to be a bit less than what I was looking for, based on previous guidance. I might be doing something wrong but I mean, we now have Q1 HCT revenue, which actually beat expectations. You are about in line in the second quarter. So when I take your full year guidance and then factor in what you said about GeneSight, now you said that's going to be flat sequentially and up in Q4. You told us Prolaris is essentially going to move sideways and then up a little bit in Q4. EndoPredict, you indicated, would improve a bit based on coverage in ASPs. And you reiterated that full year pharma and clinical service revenues is going to be about flat year-over-year. So I think we have enough data points to back into at least in the right neighborhood. What are your expecting for HCT revenue in the second half and for the year, I'm coming up with something like above 10% declines year-over-year? I may just be making a mistake recognizing there's a lot of moving parts here, so I guess back to the simple question, did you change your HCT guidance?

Yes, thanks, Doug, and you're right, those are definitely a lot of moving parts. I think what I can do, we -- as we said, we're not providing additional guidance on products for the rest of the year. We've obviously raised to $760 million to $770 million, which is top end of the guidance that we provided before. So I think it's a signal overall that we feel like the business is performing quite well. And for hereditary cancer, we actually feel very good about how that business is performing overall. We've got 4 quarters in a row of year-over-year growth and stable pricing. And so when you put those 2 components together, that's a business that's certainly a solid foundation and opportunity for significant continued improvement in that business. So overall, I think we're very pleased with how the year has shaped up. We did raise the guidance to the higher end of the range from a revenue perspective. And so I think that's probably the commentary I can provide since we are not going to provide necessarily product-specific guidance.

Okay, understood. And thank you for that. Just a quick cleanup on Vectra and I apologize if I missed this in your prepared remarks. I think you were about $1 million light of your target on the quarter. Was that pricing or volume-driven? It sounds like you're pretty enthused about the outlook for the second half. I'm just wondering what happened in the quarter just so we can think about that, right, as we're contemplating our model updates tonight?

Yes, thanks, Doug. We didn't provide Vectra-specific guidance for the quarter as we don't for any products. I think, overall, Vectra performance was in line with our expectations for the second quarter. We saw year-over-year volume -- or revenue growth of 4%. So that's -- that was pretty much in line with what we had expected. You're right. The back half is going to be a different story for a Vectra since 40% of the business is Medicare, and we saw significant price increase in that portion of the business. So we do expect significant revenue growth for Vectra in second half of the year. But I would characterize the performance in Q2 as pretty much in line with our expectations for Vectra.

And our last question for today will be from Drew Jones with Stephens Inc.

This is James Rutherford on Drew. A couple of questions for me. In terms of your opportunity for the BRAC companion diagnostic for Lynparza, can you give some insight into the split between patients who're treated in the community, oncology setting versus an academic hospital, and how your go-to-market strategy might change for each of those groups?

Yes. Thanks, James. So breast cancer is a little different, and I'm sure that's what you're reflecting on in your question compared to ovarian cancer and that the majority of those patients, over 70% of those patients, are really treated out in the community medical oncology segment, whereas ovarian cancer, generally more of that is treated in academic centers. Obviously, we have presence in both of those settings. Our market shares are higher in the community oncology setting than they necessarily are in the academic settings. And so that positions us very well for those conversations out there in the medical oncologists' office in the community. I think it's interesting to note that, that 3,300, it's a relatively concentrated set of physicians that handle 75% of that. So even when we say, out in the -- they're mostly treated in the community setting, it's actually mostly in a subset of physicians that do the largest volume in those community settings, located in places where you would expect the higher density areas. And so we've made sure from a sales execution standpoint, that we're going to change the way they target and call on those physicians to ensure that we get much higher frequencies with those physicians that are treating a higher number of those metastatic breast cancer patients. So I think that gives us an opportunity to penetrate this market in a way that we may not necessarily have seen with the original -- with the ovarian cancer launch of BRACAnalysis CDx.

Okay. Very helpful. And then on ACR guidelines for Vectra, can you just give an update on the timing for that and the potential for inclusion of Vectra in those guidelines, and how that might impact adoption of Vectra?

The expectation is that the ACR guideline revisions would be out before the end of the fiscal year, certainly. And so that's something that could come any month. We know that Vectra was being considered for inclusion in those as one of the disease activity measures. We know there's a lot of community support for that. As we've mentioned, 75% of rheumatologists in the country order Vectra. So -- and over 300,000 patients have been tested. So there's been quite a groundswell of utilization of Vectra. So there's a lot of physicians that certainly, are very supportive of that, and they had opportunities to provide comments to the guidelines setting committee that was considering its inclusion, Vectra's inclusion in those. So we'll have to see how that plays out here over the next few months. To your point, those are very important, because typically, for commercial payers, they follow those medical society guidelines because it's important as it enters the guideline, it's now considered standard of care. And obviously, payers need to and want to follow anything that's deemed as standard of care. And -- so historically, inclusion in guidelines has really been a catalyst for us to be able to broaden commercial payer coverage. And so those are the things you certainly should look for is Vectra and is that included. And just as a reminder, there are other potential guidelines coming on things like Prolaris and myPath Melanoma and NCCN guidelines, any of those type of guidelines should be viewed as a significant step forward as its part of the reimbursement catalyst as well. So those are all events here that can happen over the next few months.

That's all the time that we had for today. I will now turn the call back to the presenters for their closing remarks.

Thanks, George. This concludes our earnings call. A replay will be available via webcast on our website for 1 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 lines.