Myriad Genetics Inc (MYGN) 2022 Q3 法說會逐字稿

Greetings, and welcome to the Myriad Genetics Third Quarter 2022 Financial Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded today, Tuesday, November 1, 2022.

I would now like to turn the conference over to Matt Scalo. Please go ahead.

Thanks, Grant, and good afternoon, and welcome to Myriad Genetics Third Quarter 2022 Earnings Call.

During the call, we will review the financial results we released today, and afterwards, we'll host a Q&A session. Our quarterly earnings release was issued this morning from -- in Form 8-K and can be found on our website at investor.myriad.com.

I'm Matt Scalo, Senior Vice President of Investor Relations. And on the call with me today is Paul Diaz, our President and Chief Executive Officer; Bryan Riggsbee, our Chief Financial Officer; and Nicole Lambert, our Chief Operating Officer.

This call will be heard via -- live via webcast at investor.myriad.com, and a recording will be archived in the Investors section of our website, along with this slide presentation.

Please note that some of the information presented today contains projections or other forward-looking statements regarding future events or the future financial performance of the company. These statements are based on management's current expectations, and the actual events or results may differ materially and adversely from the expectations for a variety of reasons.

We refer you to the documents the company files from time to time with the SEC, specifically the company's annual report on Form 10-K, its quarterly reports on Form 10-Q and the current reports on Form 8-K. These documents identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

With that, I'll turn the call over to Paul.

Thanks, Matt. Good afternoon, everyone, and thank you for joining us.

On today's call, we will discuss our Q3 results, along with highlights from the quarter and updates on our strategic transformation and growth plan. I want to start by thanking all of our teammates for their hard work and dedication this quarter to advancing our mission and our vision to make genetic testing and precision medicine more accessible to help people take more control of their health and enable providers to better detect, treat and prevent disease. I also want to thank our health care provider partners and their patients for their continued confidence in us.

2022 remains a year of strategic investment as we continue to build the foundation for accelerated growth and advance our mission of improving health and well-being for all. This was a challenging quarter for us as we faced external headwinds, including a stronger U.S. dollar and failed to advance our commercial strategy as quickly as we had hoped. However, we are pleased with our performance in many areas of the business, in what is typically our seasonally weakest quarter of the year.

After excluding divested businesses, quarterly testing volume grew 12% from the second quarter. Hereditary cancer testing volume returned to positive growth in the third quarter, up 4% year-over-year. And GeneSight had yet another strong performance, with volumes up 34% year-over-year in Q3. GeneSight continues to produce strong results with 2 years of consecutive quarterly volume growth, which we believe speaks to GeneSight's market durability. Finally, we saw double-digit quarterly volume growth year-over-year in Prolaris, myChoice CDx and BRACAnalysis CDx.

I'm also pleased to report that the MoIDX program has signed the myRisk Hereditary Cancer test, CPT code 81479, and provided favorable test-specific pricing for myRisk at $1,743 per test. This action supports longer-term pricing stability for myRisk that some have questioned, and when combined with improving volume growth this quarter, reinforces our positive outlook for our hereditary cancer testing franchise going into Q4 and 2023.

Despite significant cost pressures on wages, supply chain and freight charges, we continue to operate with strong gross margins, which, year-to-date, are approximately 70%, in line with our long-term guidance range that we laid out at our Investor Day back in 2021. Each of our products contributes to this figure, giving us confidence across all of our businesses that we have a solid foundation to accelerate growth for all of our current and new tests.

Finally, a separate press release was issued this morning announcing our acquisition of Gateway Genomics. An example of how Myriad Genetics is utilizing a disciplined capital deployment strategy, leveraging our strong balance sheet to support longer-term growth.

Let me spend a few minutes highlighting the transaction on the next slide. Gateway Genomics represents an exciting addition to Myriad Genetics. Its leading product, SneakPeek, has already helped 750,000 parents, learning their baby's fetal sex from home as early as 6 weeks into pregnancy. And the company's 2022 full year projected revenues are approximately $20 million.

The core gateway business is expected to grow at more than 20% compounded annually over the next 3 to 5 years, excluding synergies, and is expected to be neutral to Myriad's earnings and operating cash flows in 2023. Gateway's business is also expected to be accretive to Myriad's growth rate, earnings and operating cash flows in 2024.

The company's mission, strong reputation and overall approach to the market, which is to explore new ways to provide genetic insights to women who are pregnant or planning a family, are well aligned with our vision for our Women's Health business. And with over 4 million unique visits to Gateway's website year-to-date, we see significant potential synergies across our existing customer bases.

As we look to the future, Myriad Genetics is positioning itself to drive 9% to 12% organic revenue growth, with a number of catalysts on horizon beyond that as we continue to execute on our transformation efforts. We continue to enhance our core commercial organization with prudent investments in technologies and innovations. We are excited about FirstGene Myriad Genetics' next-generation prenatal offering, from broader coverage and faster turnaround time to fewer inconclusive results in certain areas. We expect FirstGene will make a significant impact on the prenatal care of our patients.

FirstGene is complementary to our current prenatal portfolio and targets a market of over 1 million patients in the U.S. We are preparing for a second half 2023 commercial launch. We plan to launch our liquid biopsy technology for tumor profiling in the second half of 2023 as well. With this new test offering as part of our suite of precised oncology solutions. Our provider partners will benefit from an overall ease of use and a better understanding of results.

We continue to invest in new and emerging technologies to ensure that Myriad Genetics remains on the frontier of innovation. Lastly, our proprietary MRD product is on track, with a research use-only introduction in the second half of 2023 with our pharma and oncology partners. This will be followed by a commercial launch, and we expect to happen in the second half of 2024. We are excited about a number of differentiating features of our liquid and MRD technologies and how we can uniquely position them in this fast-growing market to win significant market share.

With that, I'd like to turn it over to Nicole Lambert, our Chief Operating Officer, to discuss our Q3 operating results and new innovations in more detail. Nicole?

Thank you, Paul. I'd like to start with our core business unit performances, starting first with our Mental Health business unit. Mental health -- mental illness continues to have a lasting effect on patients and their families in the U.S. as those suffering failed to receive proper medical treatment. Our GeneSight psychotropic test helps physicians better understand how antidepressants and other drugs will affect their patients.

Importantly, for this patient group, the test can be performed with just a single cheek swab that can be taken in the privacy of their own home. In this quarter, GeneSight hit yet another all-time quarterly high volume with approximately 97,000 test reformed. Myriad Genetics is proud to be part of the solution to this ongoing mental health crisis by providing physicians with the information that they need to treat their patients.

In the third quarter, the Mental Health business surpassed 2 million patients tested worldwide with the GeneSight test. Quarterly volumes increased 34% year-over-year, and we are celebrating over 2 years of consecutive quarterly volume growth from GeneSight. We believe that the performance of GeneSight this quarter demonstrates the effectiveness of our new commercial capabilities, digital marketing strategies and patient-centric engagement initiatives implemented over this last year. We look forward to bringing these learnings over to our Women's Health and Oncology business units and continuing to accelerate their growth as well.

Also in the third quarter, the Center for Medicare and Medicaid Services preliminarily agreed to crosswalk GeneSight to PLA code 0175U. Myriad Genetics' Women's Health business units serves women of all ancestries by assessing their risk of cancer and offers prenatal testing solutions for those who are pregnant or planning a family.

In the third quarter, the Women's Health business reported $54.3 million of revenue, with reported quarterly test volumes of roughly $109,000. In the quarter, the Women's Health team celebrates a return to positive quarterly volume growth for our hereditary cancer test, up 4% year-over-year in what is typically our seasonally weakest quarter.

As Paul mentioned, the MoIDX program recently assigned the myRisk Hereditary Cancer test CPT code 81479 and provided favorable test-specific pricing at $1,743 per test. Prenatal testing volumes were stable in the third quarter despite it being a seasonally weak period. Prenatal volume growth in the third quarter was also negatively impacted due to the state of California's recent rollout of its revised prenatal screening program. State of California held a public hearing on October 26, where more than 200 stakeholders and 22 clinicians spoke out to preserve provider and patient choice for prenatal screening.

On October 28, the court granted a preliminary injunction to stay the exclusivity portion of the California prenatal screening program, and we expect to reclaim a portion of our disruptive business in the fourth quarter of this year. Lastly, we continue to progress towards the launch of FirstGene, our combined noninvasive prenatal screen and carrier screening test, which is expected to be available in the second half of next year.

Our Oncology business delivered $69.2 million in revenue in the third quarter. Reported test volumes were roughly 45,000. Precised tumor volumes continue to grow and are leading to additional orders of other Myriad oncology products, like myChoice CDx and BRACAnalysis CDx, as our oncology customers seek to use one laboratory that can interpret all of these test results in the context of each other.

In the quarter, myChoice CDx reported its highest quarterly volume level in the U.S. ever. Myriad's Prolaris prostate cancer prognostic test grew in the mid-teens compared with the third quarter of 2021. The Prolaris test is designed to assess prostate cancer aggressiveness, helping patients and urologists make more personalized treatment plans.

We're also excited about our expanded partnership with Intermountain Precision Genomics to offer precised liquid, a liquid biotherapy selection tool in 2023. With these new solutions, Myriad Genetics is advancing precision oncology by merging the power of FDA-approved companion diagnostics, a broad next-gen tumor sequencing panel and best-in-class germline testing services.

I would now like to turn the call over to Bryan to discuss our Q3 financial results in more detail.

Thanks, Nicole. I'd like to start by reviewing our year-to-date revenue growth.

For the 9 months of 2022, total revenue of approximately $500 million grew 5% after excluding revenues from divested businesses. We estimate an approximate 2% headwind to year-to-date revenue growth, driven by a $7 million currency translation impact this year and a $4 million nonrecurring milestone payment from last year.

Year-to-date performance is important as it minimizes the impact of changes in estimates associated with billing collection experience, which can fluctuate from quarter-to-quarter. Total change in estimates year-to-date represent a positive impact to revenue of $20 million.

Revenue growth in 2022 has been driven by a variety of factors. We continue to enjoy strong demand for GeneSight, generating 40% volume growth year-to-date. Hereditary cancer testing volumes have improved and returned to growth this quarter, increasing 4% year-over-year. In addition, our oncology products are experiencing continued volume growth, with myChoice CDx testing volumes up 40% year-to-date.

On this slide, we represent -- we present a waterfall showing the drivers of revenue during the second half of 2022. As shown here, revenue is expected to perform consistent with historical seasonal trends with a soft third quarter, followed by a sequential increase in the fourth quarter. The chart shows the normalization of the change in estimate, highlights the impact of foreign currency, which is a negative headwind to the back half of the year of approximately $7 million.

Next, I would like to talk about pricing trends and volume growth in the quarter. As Paul stated earlier, overall volume growth was strong in Q3, up 12% year-over-year, excluding divested businesses, driven by ongoing demand for GeneSight, where quarterly volumes grew 34% and renewed growth in our hereditary cancer testing businesses where quarterly volumes grew 4%. Continued growth was also experienced for Prolaris, MyChoice CBX and BRAC CDx.

Underlying pricing of our genetic test products was stable in the quarter, excluding items like currency translation, change of estimates and a nonrecurring milestone payment in the year ago period. Overall, our blended ASP is consistent with our expectations, and we are encouraged by increased visibility and pricing for our products with recent announcements such as the positive news regarding MoIDX and a favorable test specific price for myRisk.

This next slide details our 2022 adjusted operating expense trend to demonstrate our prudent management of company expenses, while investing in core growth initiatives. Consistent with others, we are dealing with an incredibly difficult operating environment that continues to have a significant effect on wage cost, supply cost, freight, et cetera.

We continue to look for opportunities to reduce cost and redeploy operating investments to our growth initiatives. We have raised our adjusted operating expense guidance by $10 million for the remainder of the year to reflect the impact of the inflationary environment as well as incremental investments in research and development, technology and commercial tools, pipeline development and sales and marketing programs in an effort to access market share and support various growth initiatives.

We are updating our fiscal year 2022 financial guidance to account for third quarter business updates. We are now guiding to revenue of $668 million to $672 million and gross margins of 70%. We are increasing our adjusted operating expense guidance by approximately $10 million to reflect inflation in previously mentioned internal investments.

Inclusive of this increase to adjusted operating expense, our updated guidance reflects an approximate 8% year-over-year increase from fiscal year 2021 total operating expenses, excluding divested businesses. This increase remains in line with current inflationary trends and demonstrates prudent cost management even as the company invest in growth and innovation.

We ended the quarter with approximately $258 million in cash, cash equivalents and investments as compared to $284 million at the beginning of the quarter. This decrease of approximately $36 million was driven primarily by capital expenditures tied to our investments in labs of the future and other technology investments. Operating cash flow was only a negative $2 million in the quarter.

Moving forward, we continue to focus on cost management, while working to return to positive free cash flow generation. Our cash balance, along with having no debt and access to capital markets, provides us with a strong capital position. As we continue to execute our strategic transformation and growth plan, we believe that we are well positioned to be a high-growth, profitable free cash flow generating leader in precision medicine, delivering important medical information to health care providers to improve patient care.

I'll now turn it back over to Paul for closing remarks.

Thanks, Bryan. Before we move to the Q&A portion of the call, I want to summarize 5 key takeaways in context with our strength and strategic advantages. First, we are growing volumes consistently every quarter, and we know how to get paid for our tests. Second, pricing for our products is stable, and we have increased visibility into pricing moving forward. Third, we continue to have a disciplined approach to cost management and we expect to maintain our strong 70% gross margins and managed our OpEx with specific targeted opportunic investments that we've laid out to capture market share.

Fourth, we are committed to effective capital deployment in key areas that will improve the customer experience, including new tech-enabled tools and capabilities, innovation, commercial capabilities and our labs for the future. Fifth and finally, our growing catalysts are clear as we continue to elevate our products to their full potential, roll out our new solutions like FirstGene, MRD and Liquid, and opportunity -- opportunistically, look for strategic and accretive tuck-in acquisitions like Gateway Genomics.

All of this reinforces our position as a trusted differentiated lab specialized expertise, best-in-class quality, a strong scalable commercial engine underpinned by data, research and technology with industry-leading margins and business management.

Now I'll turn it back over to Matt for Q&A.

Thanks, Paul. And as a reminder, during today's call, we use certain non-GAAP financial measures. A reconciliation of the GAAP 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're ready to begin the Q&A session. (Operator Instructions). So Grant, we are now ready for the Q&A portion of the call.

(Operator Instructions) And the first question comes from the line of Dan Brennan.

Maybe just starting off with the new myRisk code. Can you just give us a sense, how we should interpret that in terms of what impact it will have on pricing going forward for your hereditary cancer business?

Well, I think it's further evidence. I'll let Bryan dig in deeper, Dan, of the commitment we've had to stability in -- for investors and for the company in terms of pricing and our strategy around engaging both, with Medicare government payers and commercial payers, to bring more transparency and more stability in the pricing. So we see it as a pretty significant step forward.

We know that there have been a fair number of questions about this, and some expected a much bigger drop. So we were pleased with the outcome. And our team worked really hard with MolDx to recognize the unique characteristics of myRisk, and that's part of why we think we're enjoying this price.

That bodes well for our continued discussions with commercial payers, and I think, supports our long-term guidance of 3% to 5% pricing pressure in this portfolio going forward. And so that's kind of how we see it. We see, it's a really great step forward in terms of stability and transparency.

Got it. So in terms of the 3% to 5% down is still this kind of get you into that ZIP code to feel comfortable with the ZIP code as opposed to giving you any kind of upward -- kind of upside to that number?

Yes. I don't think this is the quarter to get ahead on anything. So I would say, it maintains our confidence in that 3% to 5%, Dan, for sure.

Yes. And Dan, just to add, I mean the pricing for the myRisk code is slightly below where we've -- where it was priced historically, so in the 5% down range. So it's more of avoiding a more significant price decrease than sort of additive to where we were before, if that makes sense.

Got it. No, that makes sense. And then maybe just as a follow-up just on GeneSight. Just give us a sense of the coding update there, kind of what -- how that filters through into the business and the numbers as we look out? And then as you kind of look forward, maybe just give us an update on kind of what you're seeing in the field now that we've had some time with the VA study? Just give us any kind of update on kind of impact of that study in terms of adoption rates and things of that nature.

I'll speak first to the GeneSight code. So the process is still wrapping up with respect to final Medicare pricing, but the rate is now, I believe it's $13.36, and it's consistent with what we've -- what's been in the market and talked about. So I think there's really no update there. We would expect it to be finalized and effective Jan 1, and it will be reflected when we give an update after the first of the year.

Yes, Dan, so kind of consistent with our strategy around all our coatings. We think code-specific eliminates the confusion around miscellaneous codes or things like code stacking that I think the industry is sometimes challenged with and gives us a much better conversation with commercial payers.

We're having really good discussions, leveraging not only the VA study, but others. And we have some other clinical and health economic studies underway. And I would again point to the underlying trends and demand for GeneSight as strong market evidence of the demand for this product. And that is leading to good discussions with various commercial payers.

And we've continued to reduce our no pay and improve our execution under the contracts that we have to reduce no pay. And again, just a shout out to our rev cycle team for all the great work they've done there.

And the next question comes from the line of Matt Sykes with Goldman Sachs.

Maybe my first question is just kind of talking a little more broadly about hereditary cancer. You guys have shown continued improvement throughout this year. I'm just curious about the competitive landscape and how you see it now.

I mean, a lot of your peers in that sector, there are some differences in sort of financial and operating situations there. And so as part of some of the recovery that you're seeing or the improvement you're seeing, the result of share gains, and any way you can kind of characterize competitive landscape today versus, say, 1.5 years ago?

Yes, I think, I'm disappointed that we haven't seen more gains, quite frankly, Matt. But what we're finding, and Nicole can add, we're having kind of conversations the last few months that we haven't had in at least the 2 years I've been here with big customers, big academic medical centers and a whole wide range of participants in the hereditary cancer market.

And I think those will take the next few quarters to run forward and to convert from good conversations to contracts and then from contracts that do system conversions to our EMR and portal, but we're really encouraged by the field-based activity.

And certainly, the distress in the marketplace that others are facing has enabled us to have new and fresh conversations. But it's also what we've done with myRisk in terms of expanding the gene panel, expanding the financial access and improving ease of use, which continues to be a big focal point.

So we're encouraged by the 4%, but at the same time, I would have hoped to have seen more progress. But really seeing a lot of activity accelerating here going into Q4, and I think bodes well for next year.

So Nicole, I don't know if you want to add any color to that.

Yes, I would agree completely. And I think what we're seeing in our market research is a significant improvement in customer perceptions of our reputation and the engagement that they have with us, and that's leading some large customers to really take another look at Myriad and giving us opportunity to gain access in places we haven't had for a while to have higher-level conversations. And we're just seeing across the market that people are taking another look at us, and they're having a positive experience.

Got it. And then maybe a second one for my follow-up. Just, Bryan, you talked about the increase in the OpEx and obviously understandable given some of the inflation in freight logistics, et cetera, but you're also continuing to invest in the business.

As you're making those decisions and balancing the two, how are you thinking about sort of the inevitable path to profitability and balancing that OpEx versus making sure you're investing in growth at the same time of taking care of some of the constraints that are in the supply chain and other things? I'm just curious about the thought process there with a view towards profitability.

Yes. I think 2 comments there, and then Paul can chime in as well. But first and foremost, to your point around ultimately getting to profitability, we want to position the business and the cost structure in a way that is long-term sustainable and really supports the business and generates free cash flow sort of on a stand-alone basis, as you would look at it separate and apart, sort of from the capital and the investments that we're making to really drive our growth acceleration.

And then secondly, at the same time that we're doing that, we're also every day going through -- because it is a difficult operating environment, as you've noted, and looking for ways that even in this current circumstance, that we can save money in certain places and utilize that money to reallocate more towards things that are going to help to drive growth.

So things that as you would see with a company that's 25 or 30 years, a lot of times you can build up some cost in the organization that you really need to take a look at to see if it's really driving the type of benefit that the company needs.

And so I just want to highlight the fact that I'm really proud of the team and the work that they've done in order to be able to, one, handle the current environment; and two, be able to focus on the types of long-term innovation that Dale talked about at our Investor Day with MRD and Liquid, et cetera. I think, it just really puts us in a great position, not only in terms of innovation, but also in terms of cash flow generation at some point in the future.