Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Myriad Genetics Inc. (NASDAQ:MYGN)

F2Q09 (Qtr End 12/31/08) Earnings Call

February 03, 2009; 10:00 am ET

Executives

Peter Meldrum - President & Chief Executive Officer

James Evans - Chief Financial Officer

Gregory Critchfield - President of Myriad Genetic Laboratories

Adrian Hobden - President of Myriad Pharmaceuticals

Analysts

Charles Duncan - JMP Securities

Ed Tenthoff - Piper Jaffrey

Michael Yee - RBC Capital Markets

Ian Sanderson - Cowen & Co.

Kevin Degeeter -Oppenheimer

Hahn Li - Stanford Group

Geff Meacham - JP Morgan

Alastair Mackay - Garp Research

Lucy Lu - Citi

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Myriad Genetics second quarter 2009 financial earnings results conference call. During the presentation all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. (Operator Instructions)

I would now like to turn the conference over to Mr. Peter Meldrum, President and CEO; please go ahead, sir.

Peter Meldrum

Thank you. Good morning and welcome to the Myriad Genetics earnings call for our second fiscal quarter ending December 31, 2008. My name is Peter Meldrum and I’m the President and Chief Executive Officer. I’m joined today by James Evans, our Chief Financial Officer; Gregory Critchfield, President of Myriad Genetic Laboratories and Adrian Hobden, President of Myriad Pharmaceuticals.

I will begin the discussion this morning with a brief review of the past quarter and will be followed by Mr. Evans who will discuss our financial results. Dr. Critchfield will review the company’s molecular diagnostic business and Dr. Hobden will discuss Myriad’s pharmaceutical drug development programs. At the end of the presentation, I will turn the conference call over to the operator for the question-and-answer period.

Please note that some of the information presented here 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 those 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 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 or forward-looking statements.

Myriad was formed with the goal of understanding the role that genes play in human disease and the vision to use this knowledge to change the practice of medicine by developing new molecular diagnostic products and best-in-class therapies.

Over the years, our two businesses have grown and flourished, but as these businesses have matured, it has become apparent that the needs of our profitable, rapidly growing diagnostic business differs significantly from those of our Research and Development stage pharmaceutical business.

As a result the Management and Board of directors have addressed this issue by announcing last October that we will spin-off the pharmaceutical business from the parent molecular diagnostic company, to create two highly focused, well capitalized independent publicly traded companies. I’m pleased to report that we are proceeding on schedule with the implementation of this spin-off and we believe that it will be completed during the second calendar quarter this year.

In order to effect the spin-off, the Board of Directors of Myriad Genetics will declare a dividend payable to our shareholders in the form of stock in Myriad Pharmaceuticals Inc. For each share of Myriad Genetics stock, our shareholders will receive an additional one half share in Myriad Pharmaceuticals. Myriad Genetics Inc. will not retain any ownership position in the new pharmaceutical company.

It is anticipated that this stock distribution will be tax-free to both our shareholders and the company. Importantly, shares in the new pharmaceutical company will be immediately and freely trade able by our shareholders on NASDAQ. We also believe that following the spin-off transaction, the parent diagnostic company will retain the majority of our consolidated R&D tax credits and net operating loss carry forwards, which approximate $400 million in offsets to our future taxable income.

Myriad is a team of compassionate, hard working, talented individuals dedicated to saving lives, improving patient healthcare and lowering the overall healthcare costs. Our employees are also committed to insuring that Myriad maintains its leadership position in this exciting new molecular diagnostic field.

So it gives me great pleasure to report that for our second quarter of fiscal 2009, we achieved a record net profit of $21.2 million or $0.43 per share, fully diluted earnings per share. These results compare favorably with a loss of $5 million and a loss per share of $0.11 in the same period a year ago. The severe economic recession that currently grips the country, appears to be affecting most companies but not Myriad.

For the three month period ending December 31, 2008, our product revenues rose to $84 million from $53.1 million in the same three month period of the prior year. This 58% product revenue growth resulted primarily from an increase in the company’s sales and marketing efforts, including the expansion of the company’s women’s health sales force to 100 sales representatives, our direct-to-consumer marketing campaign and other activities.

I’m also pleased to report that through the month of January, we have continued to see strong demand for our products and have yet to experience any negative impact as a result of the current severe recession. We remain confident that our molecular diagnostic business will exceed the consensus revenue projection of $325 million for fiscal 2009.

As Greg will discuss in more detail, Myriad successfully launched its sixth molecular diagnostic product, Prezeon in December. Prezeon is based on the P10 gene, a critically important anti-oncogenic gene that was discovered by Myriad and our collaborators at M. D Anderson Cancer Center. P10 has been associated with aggressive disease progression and poor survival in lung cancer, breast cancer and leukemia and has been shown to increase the immuno resistance of glioblastoma tumors.

In prostate cancer the gene is also linked with disease progression and the onset of androgen in dependant tumor growth. P10 is a key regulator of cell signaling pathways that are the target of several classes of pharmaceutical drugs, and as a result correlates with patient response to such drugs as Erbitux, Herceptin, Tarceva, Doxorubicin and Metaxines [Ph]. Obviously we are very excited about the future of Prezeon. Finally I’m pleased to report that we are on schedule to launch our seventh molecular diagnostic product this summer.

I believe that this quarter’s accomplishments underscore the strength of Myriad’s position in this exciting new field of molecular biology. We were an early pioneer in this field and our goal is to become the dominant player in predictive medicine, prognostic medicine, and personalized medicine.

Now it is my pleasure to turn the call over to our CFO, Jim Evans.

Jim Evans

Thank you, Pete. It is my pleasure to present a more detailed look at Myriad’s financial results for our second fiscal quarter, ended December 31, 2008. Myriad’s total revenues for the quarter were a record $84.4 million as compared to $56.7 million for the same period of the prior year. This significant growth can be traced directly to the 58% increase year-over-year of molecular diagnostic revenues.

As Pete mentioned, molecular diagnostic revenues for the quarter were $84 million, which is an increase of $30.9 million over the same quarter of our previous fiscal year and a 20% growth over the quarter ended September 30, 2008.

We can attribute this strong growth in the fourth calendar quarter to a number of factors, including the 50% increase in our OB-GYN sales force that took place in our first fiscal quarter, the initial returns from our direct-to-consumer campaign in the South, patients having met their insurance deductibles for the year, patients having money set aside in a 125C cafeteria plan that needed to be used on medical expenses by year-end and finally what we see as the biggest driver, an overall increase in the acceptance of the importance of Myriad’s tests in managing patient care decisions.

Actual product revenues of $84 million for the second fiscal quarter comfortably exceeded the average analyst projection of $75.1 million. We again experienced improvements to our gross profit margins that have now climbed to 87%. We continue to see efficiencies in our laboratory processes, together with the ongoing implementation of recent price increases. We believe that these current margin levels are sustainable.

Net operating margins for the molecular diagnostics segment increased to an impressive 51% for the quarter ended December 31, 2008. This result was possible even with a spend of $2.8 million during the second fiscal quarter on the Southern DTC campaign.

Research and Development expenses for the second fiscal quarter ended December 31, 2008, were $20 million compared to $17.1 million in the previous quarter ended September 30, 2008, and $27.3 million in the same quarter of the prior year ended December 31, 2007.

The year-over-year reduction in Research and Development expense was directly a result of Myriad’s discontinuation of our Alzheimer's drug development program; while the 16% increase over the first fiscal quarter reflects added expenses as we advance our lead drug candidates through clinical trials.

We continue to invest in developing new molecular diagnostic products and in the advancement of our drug pipeline. Since we expect to develop new molecular diagnostic products, move additional drug candidates into the clinic and advance our current clinical drug programs, we believe our Research and Development expenses will continue to increase over the next several quarters.

Selling, general and Administrative expenses for the quarter ended December 31, 2008 were $35.6 million compared to $30.5 million for the quarter ended December 31, 2007. The increase over the prior year quarter was primarily attributable to the increased number of sales reps in the field and the costs associated with Myriad’s explosive revenue growth.

SG&A line items that are directly tied to sales growth include sales commissions and bad debt expense. We expect our selling, general and administrative expenses will continue to fluctuate depending on a variety of factors, including the number and scope of new product launches, growth in molecular diagnostic revenue, expenses related to the spin-off of Myriad Pharmaceuticals, Inc., and future non-cash stock option expense.

The result of all this as Pete previously discussed is that our net income for the quarter ended December 31, 2008, improved to $21.2 million or $0.43 per share fully diluted. Net income of $21.2 million well exceeded the Thompson First Call consensus income of $16 million.

Taking a look at the balance sheet, cash, cash equivalents and marketable investment securities continue to be very robust. As of December 31, 2008, Myriad’s cash, cash equivalents and marketable investment securities were $497 million, as compared to $443 million as of September 30, 2008. Our accounts receivable are of a high quality and reimbursement continues to be strong with our average day sales outstanding dropping to just 45 days.

Before concluding, I am pleased to give a report on our analysis of the sustainability of the inroads we were able to achieve as a result of our DTC campaign in the Northeast. In performing our analysis, we first projected using past trends in the Northeast, as well as growth rates in the other regions of the country, our best estimate of what the revenues in the Northeast would have been without a DTC campaign. We then compared actual activity in the Northeast to this baseline number to determine incremental revenue for the target region.

The profit contribution stream from these incremental revenues was determined and a return on our $8 million investment for the DTC campaign was calculated. While we found that the Northeast region as a whole experienced significant incremental revenue, we noted that the New York/New Jersey areas comprising the majority of individuals in the campaign region, enjoy dramatic growth during the campaign with an ROI well in excess of our double digit hurdle rate and have seen very little degradation of incremental revenue since the conclusion of the campaign.

These results are consistent with the objective of the campaign to convert physicians into repeat prescribers of Myriad’s tests, even after the advertisements stop. From our analysis of the numbers it appears that the DTC campaign is an effective, cost efficient marketing tool for our molecular diagnostic products.

Now to conclude, it is my pleasure to State that Myriad has absolutely no debt and no convertible securities and that the weighted average number of shares outstanding at December 31, 2008 was a modest $46.6 million shares or $48.9 million fully diluted shares.

With that I will now turn the call over to Dr. Gregory Critchfield.

Gregory Critchfield

Thank you, Jim. It’s a great pleasure to speak with you today about our molecular diagnostics business. As Pete and Jim mentioned, our fiscal ‘09 second quarter molecular diagnostic revenues were $84 million, a new record representing a 20% quarter-to-quarter increase and a 58% increase over the same quarter's revenues last year.

The operating margin of our molecular diagnostics segment for quarter two, fiscal year ‘09 was a record 51%. This growth is evidence of our strategy to increase the penetration in the oncology market, expand further into the women’s health market segment and develop new molecular diagnostic products. We continue to make good progress in all these areas.

One of the factors contributing to our growth is our ongoing DTC campaign. The campaign has the goal of convincing physicians of the need to routinely identify patients in their practices that benefit from molecular diagnostic testing. Jim mentioned the positive ROI in the analysis of the DTC campaign that Myriad launched in the Northeast more than a year ago.

We’ve built on information from the Northeast experience in designing the campaign in Texas and Florida, where the consumer DTC phase was launched in September 2008. In some campaign areas, physician practice groups and other healthcare delivery systems are conducting their own independent advertising, following Myriad’s ads, to let consumers know where they could have their hereditary cancer risk evaluated.

To date we are seeing a positive impact on revenues from both Florida and Texas. Because it will take several months to see the full impact of the campaign, we will conduct a formal ROI analysis for the South, as we have done for the Northeast.

Given the positive results of both DTC campaigns in the Northeast and the South, I am pleased to announce that Myriad plans on launching a third campaign of similar size in the mid-west region. The physician education phase of the campaign will take place this spring, with the DTC phase launching in September 2009.

We have discussed the large market potential for our current molecular diagnostic products, approximately $1.4 billion per year and the fact that our current products make a real difference in what physicians do for patients. We are excited about the further growth of our business from these current products.

During the previous conference call, we outlined some important statistics regarding insurance reimbursement for our products. 96% of our molecular diagnostic revenues were paid by third party payers, the average out of pocket patient co-pay was a modest $54.45.

This excellent reimbursement coupled with the value of our products provided to physicians and their patients, explains the very strong growth in our business in today’s challenging economy. To further grow our business, Myriad must also aggressively pursue new product development and commercialization.

In December 2008, we announced the launch of Myriad’s sixth molecular diagnostic test, Prezeon. Normal and tumor cells use activated protein pathways to send signals that control biochemical events that are involved in growth, differentiation, proliferation and survival of cells. In the Prezeon test we analyzed the expression of P10, an important gene discovered by Myriad in collaboration with researchers at M. D Anderson Cancer Center.

Myriad holds four U.S. patents on the P10 gene, protein and antibodies and methods for commercial clinical testing. The importance of P10 is indicated by several lines of evidence. First, P10 aberrations have been shown to cause rare inherited cancer syndromes resulting in breast, thyroid and endometrial cancer. Second, lots of P10 function from non-hereditary mutations occurring in tumor tissue, have been found in a large number of cancers, including colon, lung, breast, glioblastoma, ovary, prostate melanoma and endometrial, bladder and lymphatic cancers.

Third, a large number of reports in the literature have indicated important correlations of P10 status with disease progression and androgen independent response in prostate cancer, resistance to Herceptin in HER2 positive breast cancer, the response of tumors to Mtor inhibitors, prognosis independent of drug response in breast cancer, response to EGFR inhibitors in glioblastoma, Erbitux response in colorectal cancer and aggressive disease in lung cancer among a large number of others.

Clearly, the literature strongly illustrates that P10 is a key element in cancer progression and that assessment of P10 is a very promising area for guiding cancer treatments. Myriad’s Prezeon provides the means to assess P10’s status, a significant step forward in this exciting direction.

Clinical evidence continues to be published on the utility of hereditary cancer testing. Granader et al conducted an evidence-based approach on the value of MRI and mammography surveillance in BRCA mutation carriers and I quote, “The data support an essential role for screening MRI in women with increased risk for breast cancer.”

With regard to Colaris testing for hereditary colon and uterine cancer, a very recent publication by the CDC EGAPP working group as the evaluation of genomic applications in practice and prevention found strong evidence to recommend offering testing to all individuals with newly diagnosed colorectal cancer, to reduce morbidity and mortality in relatives. This implies that every colon cancer patient needs to be tested for hereditary cancer risks.

Recently, [Sals] et at conducted or concluded that hereditary colon cancer should be considered when evaluating patients with suspected hereditary ovarian cancer who have had negative BRCA mutation testing, given their high remaining risk of ovarian cancer, illustrating the importance of brother BRAC analysis and Colaris testing.

To summarize, both clinical and scientific data continue to strongly support the role of our products in managing a patient’s healthcare. Our molecular diagnostics products make a significant difference in helping to achieve better outcomes and lowering healthcare costs. We look forward to future growth of our current products and launching new innovative products that make a difference for patients. We are pleased to be helping more individuals as our business continues to grow. Thank you.

I would like now to pass the microphone to Dr. Adrian Hobden.

Adrian Hobden

Thank you, Greg and good morning. Recently, we announced the acquisition of Bevirimat from Pannacos Pharmaceuticals. Bevirimat, which is the non-proprietary name for this molecule and not a trade name, is scheduled to enter Phase 2b testing for the treatment of HIV infection later this year.

Following the experimental medicine naming conventions of Myriad Pharmaceuticals, we have recently given the compound the code MPC4326. In exchange for the payment of $7 million, Myriad received all the IP covering Bevirimat, all of the pre-clinical and clinical data, the regulatory filings, all of the active pharmaceutical ingredients for its tablet formulation and finally, the 100mg tablets and placebo tablets that had been manufactured for the Phase 2b study. Myriad has no further obligations to Pannacos, including no milestones, no royalties, no success fees and no payments should we partner the program in the future.

The clinical data on this maturation inhibitor is outstanding and bodes well for the potential success of this experimental medicine. However, as many people are aware, Bevirimat has presented several challenges in development. I’m excited to announce that we believe those challenges have been overcome and the future of this molecule looks very promising.

Two major challenges with this molecule have been identified. The first dealt with the physical properties and formulation of Bevirimat. The molecule has a tendency to aggregate, unless formulated with an excipient which prevents this aggregation. It took a long time to identify the correct mixture of excipients and as a result early studies were complicated by variable patient-to-patient bioavailability and loss of oral bioavailability with time.

Identification of an acceptable tablet formulation was particularly challenging for this reason. Recently however a 100mg tablet has been designed which has excellent dissolution characteristics and very good bioavailability with little patient-to-patient variability. We believe that these tablets appear suitable for commercial use.

The second challenge was that whilst the majority of patients showed excellent viral load reduction following treatment with Bevirimat, a minority of patients did not have their viral load reduced by Bevirimat. The reason for this lack of response has now been elucidated.

About 30% to 35% of HIV positive patients are infected with genetic variance of HIV, which have specific polymorphisms which make them naturally resistant to Bevirimat. These variants have now been identified and we anticipate that a simple and inexpensive companion diagnostic will be used in order to identify these patients.

Thus, we expect to be able to reduce the size of our clinical trials by concentrating the studies on these 65% to 70% of patients, without the polymorphisms, who would likely be responders. It is current standard of practice in treatment of HIV patients to do viral genotyping for drug sensitivity prior to prescribing an HIV drug regime. So we do not expect this type of test to be an issue with physicians or patients.

We believe that the two major concerns with Bevirimat have been solved and we see great potential with this experimental medicine. Bevirimat has been tested in approximately 650 patients and appears to be very well tolerated since there were few adverse events. The adverse events were primarily GI and were mild and transitory in nature.

Several Phase II studies have explored daily dosing with Bevirimat for two weeks. These studies have revealed significant reductions in viral load, regardless of whether the patients were treatment naive or treatment experienced. Indeed, Bevirimat appears to work effectively against reverse transcriptase and protease resistant strains of HIV.

In a follow-on to one of the Phase II studies, four patients have continued in an open label extension for between three and six months. All four patients have undetectable viral loads. There are a number of other advantages to Bevirimat. It has a low probability for causing drug-drug interactions, since it is not a substrate for P450 metabolizing enzymes. This is of particular importance given the polypharmacy that is currently associated with the treatment of HIV infections.

All the long term toxicity and genetic toxicity studies have been performed without any findings of note, and finally, Myriad Pharmaceuticals has a proprietary process for the manufacture of Bevirimat, which enables the production of large quantities API inexpensively.

In final commercial production, we believe that the margins on this product will be in accordance with industry standards for small molecule drugs. We will utilize Myriad manufactured API for the Phase III studies, but are using existing supplies for the Phase 2b.

In future earnings calls, I will brief you on our progress with other clinical programs in Myriad Pharmaceuticals. However, I can confirm that the trials with Azixa are proceeding well. We do not yet have sufficient data to be able to talk about survival of patients in the studies; however I am pleased to say that we have been able to see some tumor shrinkage in patients which has been accompanied by improvements in the patient’s symptoms.

For example, one patient who has had several rounds of treatment with Azixa has seen his tumor shrink. He is not only able to walk again, but has gone back to his job as a general contractor. We expect to submit an IND this spring for our exciting anti-cancer molecule MPC3100 and I will provide a complete update on this molecule at the next earnings conference call. Thank you for your attention.

I’ll now hand the call back to Pete.

Peter Meldrum

Thank you, Adrian and I’ll turn it back to the operator for the question-and-answer portion of the call.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Charles Duncan of JMP Securities. Please proceed with your question.

Charles Duncan - JMP Securities

Hi, guys. Good morning and congratulations on a very good quarter. My question is regarding perhaps the breadth of potential use of BRAC analysis. If you look at some of the recent literature, suggest that BRAC mutations may convey therapeutic benefit or prognostic information beyond breast cancer, including perhaps prostate cancer. Do you have a sense of the timing of some of the clinical data that could come out including that from the PARP inhibitor studies that could help us better understand the breadth of utility for BRAC analysis, Pete?

Peter Meldrum

Thank you, Charles. You’re absolutely correct. In addition to being the major causes of hereditary breast and ovarian cancer, the BRAC1 and BRAC2 genes have been linked to a number of other cancers, including pancreatic cancer and prostate cancer and colon cancer. We’re very excited about these findings and the company is certainly going to pursue those in the future.

You also pointed out that we do have a collaboration with AstraZeneca to stratify their patient population for their clinical trials for PARP inhibitors. Being DNA repair genes, the BRAC1 and BRAC2 function when it’s lost makes the tumors particularly susceptible to DNA damaging agents like the PARP inhibitors and we’re very excited about the potential of BRAC analysis becoming a companion diagnostic.

So while we continue to exploit our existing markets in breast and ovarian cancer, I think the future looks very good for BRAC analysis to expand to other applications of both personalized medicine and predictive medicine in other types of cancers.

Charles Duncan - JMP Securities

Thanks, Pete.

Operator

Our next question comes from the line of Ed Tenthoff of Piper Jaffrey. Please proceed with the question.

Ed Tenthoff - Piper Jaffrey

Great, thank you very much and congratulations on really a phenomenal quarter. Digging in maybe a little bit on to the performance in this quarter, can you give us a sense of how much of this was benefit from the DTC campaign? How much of this was still continued strength through the Northeast, that analysis on the last direct-to-consumer ad campaign was very helpful? How much of this was growth from some of the other tests beyond BRAC? Give us a little bit more color on what lead to this really record growth?

Peter Meldrum

Thank you, Ted. All of the items you mentioned of course contributed to the 58% revenue growth this past quarter. The largest contributor was related to growth in all regions across the country. So while the direct-to-consumer campaign definitely benefited, it’s important to remember that the Northeast campaign which last year saw a 78% growth in new physician customers.

As Jim has mentioned, we’ve been able to sustain that customer base substantially through this past year since the campaign ended, represents only about 12% of our total revenue base. So the majority of the growth really has occurred throughout the country and represents growth across all five of our current product lines, leaving out of course Prezeon which was just launched in December.

So we’ve seen a very positive response from all of our products and very strong growth through all of the products that the company offers. We’ve also seen particularly strong growth in the South region which represents about 18% of our revenue base as a result of the current direct-to-consumer marketing campaign there.

I think as Greg pointed out, the better than anticipated growth in the South, in part is probably due to the companion ads being run by the major breast cancer centers and OB-GYN clinics in combination with Myriad’s ad. So really, we’re seeing a very strong contribution from all of the factors that you mentioned.

Ed Tenthoff - Piper Jaffrey

Great. That’s very helpful and maybe just as a quick follow-up, do you get a sense if there might have been any pull through or pull forward from the March quarter where physicians wanted to take advantage of something before year end or do you get any sense on sort of whether or not there may have been any pull forward from March?

Peter Meldrum

As we mentioned in January, we’ve seen very strong sample growth, so we haven’t yet identified any negative impact of the current recession on the company. Now, it is important to note that our second fiscal quarter which ends December 31 is historically one of our strongest quarters and that is because it’s the end of the year and people have met their deductibles. They tend to have medical procedures at that time and for any employees who have a cafeteria plan, again at the end of the year they use the money they’ve set aside in that plan.

So we certainly see a lot of year end positive impact on our revenues, but we don’t see any acceleration of revenues that would typically occur in the March 31 quarter being pushed into the December 31 quarter. We’re seeing right now very strong third fiscal quarter as well.

Ed Tenthoff - Piper Jaffrey

That’s fantastic. Keep up the great work. Thanks.

Peter Meldrum

Thank you, Ted.

Operator

Our next question comes from the line of Michael Yee of RBC Capital Markets. Please proceed with your question.

Michael Yee - RBC Capital Markets

Great, thanks. Congratulations on a good quarter as well; a couple of questions on the DTC. Can you kind of characterize the growth rates that you’re seeing with the order flow in the Northeast and how does that compare with what you’re seeing in the south and how does the launch in the South compare with what you saw in the Northeast when the Northeast launched?

Peter Meldrum

Thank you, Michael. The launch in the South, particularly in the states of Texas and Florida compare very favorably to what we saw in the Northeast. As Greg mentioned, New Jersey and New York in particular were extremely strong in the Northeast and Texas and Florida are much more New York, New Jersey-like.

So we’re very pleased with the initial launch in the South and the initial returns and are going to watch it very closely to see if we have the same sustainability that we’ve been able to achieve in the Northeast, and of course as we mentioned, that is the key to a successful direct-to-consumer marketing campaign, because we want to have continued benefit even after the ads stop running.

Michael Yee - RBC Capital Markets

When you think about the other regions, are you seeing sales from the OB-GYN’s lands and other regions outside of where you’ve done DTC and if so how much? Then when you’re going to the Midwest, what percent of revenues does that region represent?

Peter Meldrum

We’re definitely seeing strong sales from the OB-GYN group outside of the DTC campaign regions. As we mentioned, we now have 100 sales reps on the ground calling specifically on women’s health physicians, primarily OB-GYN’s. This has been a very strong sales force. We’ve mentioned in the past that a new sales rep in the OB-GYN area comes up to speed every bit as fast as a sales rep in the oncology area. So it’s been a very strong positive impact.

The Midwest region represents about 12% to 13% of our total revenue base. So we will launch that direct-to-consumer campaign next September 2009 and once that campaign is under way, we will have launched campaigns in approximately 45% of the total revenue base of the company.

Michael Yee - RBC Capital Markets

And just a quick financial question; have you had any sort of update on feedback from the IRS and discussions there regarding stay NOLs. Is it a majority of the NOLs or do you think you can take all of the NOLs to diagnostics?

James Evans

Mike, we haven’t had an update yet from the IRS. We have made an initial request for their impressions. We’re actually going back with a formal letter to ask for their thoughts on the way we’re structuring the spin-off and to confirm that it will be a tax free transaction as well as being able to retain those NOLs. In consultation with our Advisors, they currently are very optimistic that we will be able to retain the NOLs and the R&D tax credits, but obviously it will be up to the final determination of the IRS as to which way that will go.

Michael Yee - RBC Capital Markets

Okay, great. Thanks. Thanks guys.

Operator

Our next question comes from the line of Ian Sanderson of Cowen & Co. Please proceed with your question.

Ian Sanderson - Cowen & Co.

Good morning. Thanks for taking the question and congratulations on a terrific quarter and I may have missed this, you may have provided it, but have you provided some guidance on how much of the cash will be spun off to Myriad Pharmaceuticals.

Secondly, in a follow-up to the previous question, do you have an idea of what percent of the BRAC prescriptions are being written by OB-GYNs at this point on a national basis. Then third, you referenced $2.8 million of spending on the Southern DTC campaign in the December quarter and should we assume that that campaign is also going to run around $8 million by the time it’s complete in March?

Peter Meldrum

Thank you, Ian. Yes, even though the South campaign represents an 18% of our revenue base compared to the Northeast of 12%, it will cost roughly the same as the Northeast campaign which is $8 million. Given the current recession and the fact that the airtime in Florida and Texas is less expensive than the New York/Boston area; that campaign should come in just slightly under the Northeast campaign.

With regards to break down between our OB-GYN and oncology sales forces, there’s no question that the largest market potential and the greatest utility of our products are for women and men who have a hereditary predisposition to cancer, a family history of cancer, but don’t yet have the disease.

So our focus on the women’s healthcare sales force really represents a huge opportunity for the company; however oncologists tend to be earlier adopters. So at the present time, about 20% of our total revenues come from the OB-GYN sector and about 80% of our total revenues come from the oncology sector, but again with the greatest potential and the most rapid uptake currently occurring in the OB-GYN area.

Finally, with regards to the spin-off of Myriad Pharmaceuticals, it is anticipated and our goal is to give enough cash to Myriad Pharmaceuticals to allow them to complete the clinical and regulatory development of their two lead compounds, Azixa and Vivecon without having to go back to the market and raise more money.

The Board right now is in the process of analyzing the data and projections for the spin-off of Myriad Pharmaceuticals, but we have stated in the past that we anticipate that the amount of cash that would be given to Myriad Pharmaceuticals is between $150 million and $200 million. We currently have approximately $500 million in cash, so that would leave between $300 million and $50 million back with the diagnostic company.

Ian Sanderson - Cowen & Co.

Thank you very much.

Operator

Our next question comes from the line of Kevin Degeeter of Oppenheimer. Please proceed with your question.

Kevin Degeeter -Oppenheimer

Yes good morning. I want to add my congratulations on a very strong quarter here. Most of my questions have been answered, but perhaps a bit more granularity. Can you just give us a sense as to what the strategy is for example in the Northeast and what the P&L impact, if there is any, will be in terms of follow-on to a DTC campaign and should we think about the cost functions, largely rolling from sort of region-to-region or will there be built in kind of incremental impact to that sales and marketing due to follow-on activities?

Peter Meldrum

I think it’s appropriate to view this as rolling from region-to-region. The whole strategy around our direct-to-consumer marketing campaign is to not necessarily drive women to the physician as long as the ads are running, but to really focus on building our customer base and our customer is the physician, not the patient. We do not do any tests at Myriad without a physician prescription.

So we used the direct-to-consumer campaign to get into the OB-GYN in the direct to physician portion of the campaign, convince them of the benefit and utility of the test, and then the campaign itself creates demand with women asking for the test with their OB-GYN and hopefully reinforces the value and utility of the test.

If we’ve been successful with that strategy, once a physician is won over as a customer, that physician should continue to use the test in his or her practice for the rest of the life of the practice. Any time a woman comes in for an annual physical, the physician should think to ask about her family history for cancers.

So if the campaign is successful as I mentioned in the Northeast, we saw over 70% increase in new physician customers. If the campaign is successful, we should retain those and we should not have to go back to the Northeast with additional advertising and direct-to-consumer campaigns.

So I really think you’ll see this roll from region-to-region once we build the region. Of course we will continue to grow the sales force and put additional salespeople onboard, but we wouldn’t go back, for example with BRAC analysis and do another DTC campaign in the Northeast region.

We certainly may see Colaris or some of the other products have their own DTC campaigns in the future, but we wouldn’t go back with the same BRAC ads, but instead we go to a new region.

Kevin Degeeter -Oppenheimer

Terrific, thank you and one follow-up question if I may. You provided the average or the median co-pay on BRAC analysis at a little North of $54. This seems to be an interesting point with our clients; can you just give us a sense of what portion of folks have a co-pay of say more than $100 if we cut the threshold a bit differently? I’m trying to understand the range in the outliers there.

Peter Meldrum

Well as Greg mentioned, 96% of our revenues in the September 30 quarter were paid by insurance, so well over 96% of our folks have insurance coverage. Of the 4% that was paid by private individuals, the majority of that was the co-pay, but some individuals do order the test. There are individuals who do not have a strong family history that would not qualify for insurance reimbursement and there are some individuals who do not have insurance and pay for the tests out of pocket, but that is a tiny minority of the vast majorities over 96% are paid by insurance.

I think that it’s also important to note that Myriad has a medical reimbursement assistance program, where if an individual lacks insurance and can’t afford the tests, we do offer BRAC analysis testing at no cost to the patient, for those individuals that need that assistance, but there’s no question that 98% I would guess or even greater of the individuals who have the test are paid by insurance.

Kevin Degeeter -Oppenheimer

Terrific. Thank you so much.

Operator

Our next question comes from the line of Hahn Li of Stanford Group. Please proceed with your question.

Hahn Li - Stanford Group

Yes, good morning. A couple of quick questions; one on the DTC. What’s your decision process in determining which territory you go to, like say in the next one you’ll be at Midwest, why not California West Coast?

Peter Meldrum

Thank you, Hahn. Obviously, we’re looking at a number of regions when we look at a direct-to-consumer campaign and there are a number of factors that go into looking at which region we move into next. One is the strength of the insurance coverage and the types of physician groups that occur in the region.

A second factor we look at is how many OB-GYN sales reps do we have onboard in the region and how long have they been in the region; obviously the greater number of sales reps who have been on a longer period of time. Again as we saw in New York and New Jersey, we saw much better results than for those areas that maybe aren’t newer. So there is a variety of things that we look at when we investigate regions for direct-to-consumer marketing.

The West Coast California region is an important region for us. I think that will definitely be one that we’ll look at in the future, but given the factors that we study, we felt that the timing was right for the Midwest as our next DTC campaign region.

Hahn Li - Stanford Group

I see and also quickly on the price of BRAC, any price increase or price adjustments?

Peter Meldrum

The BRAC analysis test sells for $3120 and there have not been any recent price adjustments to that number.

Hahn Li - Stanford Group

Okay and you plan to stay that way?

Peter Meldrum

The company does have price increases about every 18 months or so and so our last price increase was September 2008. So we wouldn’t anticipate another price increase probably until spring of 2010.

Hahn Li - Stanford Group

Quickly on the spin-off, in the form of stock dividend, can you remind us of what’s the ratio of the dividend?

Peter Meldrum

Yes. It is a stock dividend. It will be declared by the Board of Directors at an appropriate time and a record date for the shareholders that own the stock will be determined. The ratio is one half share of Myriad Pharmaceuticals will be given to each shareholder of record on the record date, for each one share of Myriad Genetics. So if you had 10,000 shares of Myriad Genetics, you’d receive 5,000 shares of Myriad Pharmaceuticals and we do anticipate that that would be a tax-free spin-off and the dividend would not be taxable to the shareholder.

Hahn Li - Stanford Group

Okay, so another way, the shares outstanding for the new entity of the pharmaceutical part will be half of the current share outstanding?

Peter Meldrum

Yes. That’s exactly correct. We do anticipate that the total number of shares outstanding for Myriad Pharmaceuticals will be about 23 million and Myriad Genetics currently has approximately 46 million.

Hahn Li - Stanford Group

Okay, and we expect that transaction to complete in the next quarter?

Peter Meldrum

Yes. We anticipate it to be completed before June 30 of our current fiscal year.

Hahn Li - Stanford Group

Got it. Thank you very much.

Peter Meldrum

Thank you, Hahn.

Operator

Our next question comes from the line of Geff Meacham of JP Morgan. Please proceed with your question.

Geff Meacham - JP Morgan

Hi guys, congrats on a great quarter. Jim I’m not sure if you covered this, but can you give us the percent of R&D and SG&A spend attributable to the pharma business during the quarter?

James Evans

No, we didn’t break that out specifically. I can tell you as we have talked about historically that on the R&D side we anticipate that the molecular diagnostics side of the business is going to spend about $20 million in the year and they are on target to do that. So I guess the excess above the $5 million that would have been for the molecular diagnostics side would have been associated with the drug development, research and development for the quarter.

For the SG&A, the bulk of that is going to be associated with molecular diagnostics. Obviously all of the selling and marketing efforts are there. There’s a little bit of the G&A that’s associated with the pharmaceutical side of the business, but that is a small percentage. The bulk of it is the parent company and the diagnostics.

Geff Meacham - JP Morgan

And just to follow-up on the predictive medicine business. What’s your sense about any formal guidelines from say ACOG or other groups that could come potentially in the near term? I know we’ve been talking about ACOG for maybe a year or two.

Peter Meldrum

Yes, great question. ACOG is a professional organization that does tend to move cautiously and a little slowly. We are working with the folks at ACOG to establish stronger guidelines for genetic predisposition testing.

We were pleased to note though that SGO, the Society of Gynecological Oncologists adopted very strong guidelines, not only supporting the BRAC analysis test for breast and ovarian cancer pre-disposition testing, but also very strong guidelines for Colaris, in colon cancer, uterine cancer predisposition testing. Typically ACOG does follow the SGO lead and so we are optimistic that down the road we will see better guidelines from our friends at ACOG.

Geff Meacham - JP Morgan

Okay, thanks a lot.

Peter Meldrum

Thanks.

Operator

Our next question comes from the line of Alastair Mackay of Garp Research. Please proceed with your question.

Alastair Mackay - Garp Research

Yes, a question about Prezeon. I wonder if you could mention the price that it’s being sold at and if you could talk a little bit about how the test is run? In other words is it a test where normal tissue is sampled or where tumor tissue is sampled and is it a test where the sequence is run and looked and if it is a sequencing test, about how many kilo bases of sequence go into the analysis?

Peter Meldrum

Thank you, Alastair. The test does sell for $500. Unlike our other tests which are full sequenced analysis of the gene, this is actually an immuno-histo chemistry test based upon the antibody that binds to the P10 gene. So it is a quicker, less expensive test than the other products that we offer that are full sequence based tests. So even at the $500, it has very attractive gross profit margin potential and generally we work with the tumor tissue from the patients.

Alastair Mackay - Garp Research

Okay, thanks and then a question about Bevirimat. You mentioned that about 30%, 35% of patients have a geno type that is non-responsive to Bevirimat. Is there a concern with the remaining 60%, 65% or 70%, where because of the genomic instability of HIV that often times patients will develop that sort of resistance and response to Bevirimat therapy?

Peter Meldrum

As you allude, the virus is very prone to mutations and if you look at the sequences of HIV in the genetic databases and there’s a lot of sequences in the genetic databases now, you’ll see polymorphisms throughout the entire HIV virus.

The intriguing thing is that the mutations that lead to resistance to Bevirimat, seem to be naturally occurring polymorphisms that possibly have more to do with immunological response than with the drug and the actual region that the drug binds to on the virus and which leads to where the resistance occurs is actually fairly genetically stable suggesting that there are immunological reasons why the virus cannot have many genetic variance in that region.

To date we have not been able to see any mutations arising in the virus which can be directly attributed to the treatment with the drug. That doesn’t mean to say that we won’t see those in the future, but we certainly don’t have any reason to think that viral resistance is going to be rapidly evolving to this drug, unlike for example, in most of the non nucleoside transcriptase where it happens within a couple weeks of treatment.

So we’re actually relatively optimistic that we’ll be staying in the 65% to 70% of patients responsive to this drug and that the drug will have a long term effect on the patients without the resistance arising.

Alastair Mackay - Garp Research

Great, and just to clarify, when you say we there, you’re referring to Myriad and Pannacos’s experience?

Peter Meldrum

Clearly we’re using their data, but analyzing it internally in Myriad and have analyzed it in great detail, yes.

Alastair Mackay - Garp Research

Okay, great. Thanks.

Operator

Our next question comes from the line of Lucy Lu of Citi. Please proceed with your question.

Lucy Lu – Citi

Great, thank you. Congratulations as well. I guess on the diagnostic side, it sounds like the physicians are the drivers of BRAC sales after DTC campaign. I’m just wondering, can you comment on the reimbursement side? Do third party payers require pre-approval and only provide reimbursement if a patient needs the guidelines or do reimbursement for BRAC like other lab tests which mean patients only have to pay a co-pay. Thanks.

Greg Critchfield

This is Greg. The majority of patients meet the guidelines and insurance companies reimburse the guidelines. There are very few insurers that have pre-authorization required. Most of them understand that physicians are following professional society guidelines of which there are many and those selection criteria are what are used to determine who is an appropriate candidate for genetic testing and the insurance companies follow suit and do reimburse to those.

Lucy Lu – Citi

How about for your other tests, for Colaris and the other tests?

Greg Critchfield

It’s a very similar situation. Again, professional societies have issued guidelines. Pete mentioned the SGO guidelines that were issued covering both BRAC analysis and Colaris. These kinds of guidelines are read by practicing physicians. They serve as guidance for them to know how to identify patients and the criteria that are articulated in the guidelines are the ones that insurance companies reimburse to.

Again very few insurance companies require pre-authorization. Many of them are moving away from it, because of the expense and as they do reviews, their conclusion is that physicians are appropriately identifying patients and therefore they oftentimes will drop the pre-authorization requirements.

Lucy Lu – Citi

Great. Thank you.

Operator

We have reached the end of the time allotted. Mr. Meldrum, I will now turn the call back over to you.

Peter Meldrum

Thank you and I would like to thank everybody on the call for participating on Myriad’s second fiscal quarter, ending December 31 earnings conference call. This does conclude our conference call. Again, thank you.

Operator

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.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Myriad Genetics Inc. F2Q09 (Qtr End 12/31/08) Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts