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Myriad Genetics, Inc. (NASDAQ:MYGN)

F3Q09 (Qtr End 03/31/09) Earnings Call

May 5, 2009 10:00 am ET

Executives

Peter Meldrum - President and Chief Executive Officer

Jim Evans - Chief Financial Officer

Greg Critchfield - President, Myriad Genetic Laboratories

Adrian Hobden - President, Myriad Genetics Pharmaceuticals

Mark Capone - Chief Operating Officer

Analysts

Geoff Meacham - JPMorgan

Charles Duncan - JMP Securities

Derik de Bruin - UBS

Lucy Lu - Citigroup

Michael Yee - RBC Capital Markets

Kim Lee - Wedbush Morgan Securities

Bruce Cranna - Leerink Swann

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Myriad Genetics third quarter 2009 financial earnings results call. (Operator Instructions) As a reminder, this conference is being recorded Tuesday, May 5, 2009.

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

Peter Meldrum

Good morning, and welcome to the Myriad Genetics earnings call for our third fiscal quarter ended March 31, 2009. 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 Pharmaceuticals drug development activities. At the end of the presentation, I will turn the call over to the operator for a 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, its current report on Form 8-K, and Myriad Pharmaceuticals' Form 10 registration. 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.

I'm pleased to report that we have received initial comments from the Securities and Exchange Commission on Myriad Pharmaceuticals' Form 10. We are preparing our response to those comments and are on schedule with the implementation of the spin-off of our pharmaceutical and research businesses.

At our upcoming June 2nd Board of Directors' meeting, the Board will set the shareholder record date and dividend payment date for the distribution of Myriad Pharmaceuticals stock. For each share of Myriad Genetics stock, our shareholders will receive an additional one quarter share in Myriad Pharmaceuticals. We expect that the shares of Myriad Pharmaceuticals will be distributed to our shareholders as a pro rata tax-free dividend. Myriad Genetics, Inc. will not retain any ownership position in the new pharmaceutical company.

On February 13, we filed a private letter ruling request with the International Revenue Service regarding the tax free nature of this transaction. We anticipate a response from the IRS later this month and remain confident that following the spin-off transaction, the parent diagnostic company will retain the majority of our NOLs and tax credits, which approximate $400 million in offsets to our future taxable income.

Following the separation of our businesses, Myriad Pharmaceuticals will operate as an independent entity with publicly traded stock on NASDAQ under the new ticker symbol MYRX. Because Myriad Pharmaceuticals has elected not to adopt MYGN ticker symbol, we have decided to retain the MYGN ticker for the parent diagnostic company instead of switching to a new ticker symbol.

I'm proud of the Myriad Genetics employees and their accomplishments this quarter in achieving record revenues of $87.5 million and record net profits of $25.3 million or $0.25 per share on a fully diluted basis. This represents a 4% revenue increase and a 19% increase in profitability, as compared to our prior quarter ended December 31, 2008.

Our molecular diagnostic revenues in the 2009 third fiscal quarter grew 47% over the same period of the prior year. Even more impressive is the fact that these results were achieved in a very difficult economy with unemployment hitting a 26-year high of 8.5%. Although, we're not being impacted significantly by the current severe recession, we believe the economic downturn is having a modest effect on our revenue growth.

The company continues to post strong profits from our operations. Even before the spin-off of the pharmaceutical business, with its substantial R&D spend, the net profit as a percent of revenues was 29%. This profitability growth compares favorably with our prior two quarters net profit margins of 25% and 20% respectively. As a result of this performance, the company continues to generate positive cash flow and finished the quarter ending March 31, 2009 with a strong balance sheet and $535 million cash in the bank.

I believe that Myriad has been able to grow revenues and improve profitability during the severe recession, because our molecular diagnostic products save lives, improve the quality of life, guide treatment decisions, reduce psychological stress in patients and are cost-effective to the overall health care system.

These attributes of our products are not just Myriad's belief, but represent the independent assessment of leading researchers and clinicians as published in journals such as Nature, the New England Journal of Medicine, Lancet, the Journal of the American Medical Association, and Obstetrics and Gynecology.

The team of Myriad is working diligently to prepare the next generation of predictive and personalized medicine products. We were early pioneers in the field of molecular diagnostics, and we're striving to become the dominant player in this exciting new field.

We intend to achieve this goal by expanding the utility of our current products and launching new products, which will drive the future success of Myriad. Our product pipeline is robust, and I remain confident that we can meet our goal of launching at least one new product per year.

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 third fiscal quarter ended March 31, 2009. Myriad continued to see growth in total revenues for the quarter coming in at $87.5 million, compared with $61.8 million for the same period of the prior year.

Molecular diagnostic revenue for the March 2009 quarter increased 47% or $27.5 million year-over-year. We're continuing to see positive results related to our expanded sales force and our DTC campaigns, most recently in the South. As we look at quarter-to-quarter sequential revenue growth, our molecular diagnostic revenue increased from $83,952,000 in our second fiscal quarter ended December 31, 2008 to this quarter's $86,531,000.

It is important to consider that the double-digit growth in molecular diagnostic revenue that we experienced between our first and second fiscal quarters in 2009 was comparing a quarter with essentially no DTC benefits to a full quarter with DTC impact from the south campaign. Both our second and third fiscal 2009 quarters had the southern DTC activities fully engaged, so the sequential growth was more modest.

As recently reported in the Wall Street Journal, both UnitedHealthcare and WellPoint Health insurance companies experienced large declines in membership as a result of layoffs during the quarter ended March 31, 2009. With 47% revenue growth in that same March 31, 2009 quarter over the March quarter of the prior year, it does not appear that we're being impacted by the current severe recession by the same degree.

However, no company, including Myriad, is completely immune from what is happening around us, and we believe there was a dampening effect on our revenue growth this past quarter due to the economy. With that said, we remain confident that we will finish the 2009 fiscal year with molecular diagnostic revenue growth of more than 48% over fiscal 2008. A great accomplishment considering we are operating during the most severe economic slowdown since the "Great Depression."

Cost of goods sold of $11.2 million for the March 2009 quarter again resulted in gross profit margins of 87%. We reiterate that we believe that these gross profit levels are sustainable with potential upside.

Research and development expenses for the third fiscal quarter ended March 31, 2009, were $17.9 million compared to $20 million in the previous quarter ended December 31, 2008 and $31.2 million in the same quarter of the prior year ended March 31, 2008. The reduction in R&D expenses over the same quarter of the prior year continue to be driven by the discontinuation of the Flurizan program.

Selling, general and administrative expenses for the quarter ended March 31, 2009 were $36.1 million compared to $30.2 million for the same quarter last year. The 20% increase in SG&A was primarily attributable to the increased number of sales reps in the field and the costs associated with Myriad's 47% revenue growth.

We expect that 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 and future non-cash stock option expense. This non-cash stock option expense represented a significant 10% of our total SG&A expenses for the March 2009 quarter.

Myriad's net income for the third quarter of fiscal 2009 improved to $25.3 million, or $0.25 per share fully diluted, which comfortably exceeded the Thomson First Call consensus income of $22.8 million or $0.23 per share.

I'd now like to take a moment to address an issue that has received a significant amount of attention recently, namely the operating margins for Myriad's molecular diagnostic business as a standalone unit. When reporting diagnostic operating margins, Myriad has always referenced the margins for the molecular diagnostic segment as disclosed in our regulatory filings.

Myriad has followed the Securities and Exchange Commission's requirements regarding segment disclosure. The SEC's intent is to have company's breakout operations in Forms 10-Q and 10-K into the same segments that management evaluates in analyzing its businesses internally.

Historically, Myriad has broken down its segments to follow the way the company is organized, research, pharma and molecular diagnostic. Now that we're in the process of spinning off the pharma business, we will be losing the synergies of the research segment that served both the diagnostic and pharmaceutical businesses. The revenue producing portion of the research segment will go with Myriad Pharmaceuticals, but the internally focused portion will remain with Myriad Genetics.

Additionally, Myriad Pharmaceuticals has recently hired a new finance and administrative staff. Our existing finance and administrative group will now focus solely on the diagnostic business. Much of our existing research and admin activities, while previously servicing two segments, will now service just one, resulting in the loss of some cost synergies.

We've experienced tremendous growth in our net operating margins over the past eight quarters. We also do believe that we have tremendous leverage to our business and that will not be long, even with the loss of these synergies before the net operating margins for Myriad as a standalone molecular diagnostic company will return to the 50s.

The net operating margins for the molecular diagnostic subsidiary for the March 31, 2009 quarter, as we had historically reported, continue to improve to 53%, up from 51% in the prior quarter. In an attempt to quantify the effects of the pharma spinout and the resulting loss of synergies, many have subtracted the pharma expenses as reported in our recently filed Form 10 from our previously filed consolidated financial statements. Doing the same calculation for the March, 2009 quarter, net operating margins for Myriad Genetics, Inc., as if it had already spun out its pharmaceutical business, increased from 39% for the first six months of fiscal 2009 to 43%.

I'll point out that even with the loss of synergies, the net operating margins for the post-spin company, calculated using this methodology already, are comparable to those previously reported for the molecular diagnostic segment just three quarters ago. I'll also point out that doing the math using this methodology in determining, say, SG&A and then projecting that forward is dangerous as it does not take into consideration items such as the non-recurring costs associated with the spin transaction, which for the first nine months of this fiscal year were approximately $1 million.

Cash, cash equivalents and marketable investment securities continue to be very strong. As of March 31, 2009, Myriad's cash, cash equivalents and marketable investment securities were $535 million, as compared to $310 million as of March 31, 2008. We believe that our accounts receivable are of a high quality, and reimbursement continues to be strong with modest bad debt expense.

Now to conclude, it is my pleasure to state that Myriad has absolutely no debt and no convertible securities.

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

Greg Critchfield

Thank you, Jim. It is a great pleasure to speak with you today about our molecular diagnostics business. As Jim and Pete mentioned, we achieved record fiscal '09 third quarter molecular diagnostics revenues. We're continuing our focus on increasing penetration in the oncology market and expanding further into the women's health market segment and have already had several successes. In particular, two important recent events should help us continue growing our business in these market segments.

First, we recently announced the commercial launch of our seventh molecular diagnostic product, OnDose. OnDose employs a unique proprietary nanoparticle immunoassay to measure a patient's exposure to the chemotherapy drug, 5-fluorouracil or 5-FU. This critical piece of data assists oncologists in adjusting and optimizing patient dosing to improve efficacy and reduce toxicity.

5-FU is the backbone of a number of important chemotherapy regimens used to treat colorectal, head and neck and breast cancers. Patients receiving 5-FU have up to a 30-fold difference in their ability to clear the drug from their system. This variability in drug clearance makes it difficult to achieve an optimal balance between having too much drug on board with attendant serious side effects and too little drug on board resulting in continued tumor growth and lower efficacy in treatment. We believe OnDose provides critical information that may allow for more optimal treatment of patients' cancers.

Prior to OnDose, there was no readily available method to help the physician know how much drug a patient was exposed to or how best to modify the subsequent doses of drug. As a result, physicians used body surface area dosing or BSA dosing. BSA considers only the patient's height and weight.

A prospective randomized controlled Phase III study recently published in the Journal of Clinical Oncology by [Erik Gamlin] et al., found that using the traditional BSA dosing of 5-FU resulted in 68% of the patients being in the underdosed range and 17% in the overdosed range. Only 15% of patients were receiving an appropriate dose.

The authors reported a statistically significant increase in objective tumor response, 33.7% versus 18.3%, and a statistically significant reduction in serious toxicity. Grade 3-4 diarrhea occurred in 18% versus 4% using OnDose compared with the older traditional BSA dosing protocols. The P values associated with each of these two measures were highly statistically significant.

In this study, personalizing the amount of drug a patient is exposed to during a course of chemotherapy resulted in improved efficacy and reduced toxicity. The market segment for OnDose is large. Approximately 175,000 patients receive 5-FU infusion therapy for colorectal cancer each year in the US. We estimate that an average of at least eight OnDose measurements will take place during the course of a patient's 5-FU treatment. With a [test list] price of $300, we estimate that the total potential market for this exciting new personalized medicine test is approximately $420 million per year.

The second event that occurred was the recent publication of clinical practice guidelines by the American College of Obstetrics and Gynecology or ACOG, the professional organization of the 52,000 practicing OB-GYN specialists in the United States. ACOG guidelines are important to all practicing obstetricians and gynecologists, as the guidelines from their professional society represent an informed synthesis of expert opinions based on scientific data to guide physician behavior.

The newly published ACOG Practice Bulletin 103 states very clearly, and I quote, "Evaluating a patient's risk for hereditary breast and ovarian cancer syndrome should be a routine part of obstetric and gynecological practice." The Practice Bulletin was based on a thorough review of the clinical and scientific literature, including the role of BRCA1 and BRCA2 genes in the breast ovarian cancer syndrome, the prevalence of harmful mutations in individuals with various levels of personal and/or family history risk and the effect of clinical interventions in individuals found to carry these kinds of mutations.

The new ACOG guidelines highlight the importance of BRACAnalysis testing in patients affected with cancer, as well as in individuals not yet diagnosed with cancer who have a family history of breast or ovarian cancer. The guidelines further provides specific selection criteria for testing individuals at high risk for breast and ovarian cancer. The guidelines also discuss rationale for treating a protesting individuals who do not meet the criteria because of family history, maybe influenced by adoptions in the family, small numbers of individuals in the family tree or small numbers of females in the family.

In summary, the guidelines give OB-GYN's firm direction to routinely identify and test individuals in their practices who are at high risk for breast and ovarian cancer. The timing of the new ACOG guidelines couldn't be better, as we are how now in the process of further expanding our OB-GYN sales force.

The Direct-to-Consumer campaign has now concluded in Texas and Florida, and the Direct-to-Physician campaign has begun in the Midwest. This Direct-to-Physician campaign consists of a physician education phase that will incorporate the new ACOG guidelines. The DTC advertising phase will follow the DTP phase in September of 2009.

Our molecular diagnostics products make a significant difference in the lives of individuals at high risk for hereditary cancer and in treating cancers. We are excited about the future potential of these products and their role in helping to better treat patients and lower health care costs.

Thank you. I'd like now to pass the microphone to Dr. Adrian Hobden. Adrian?

Adrian Hobden

Thank you, Greg and good morning. On our last earnings conference call, we announced our intent to submit an IND for MPC-3100 this spring. MPC-3100 is our orally-bioavailable, second generation, and fully synthetic Hsp90 inhibitor for the treatment of cancers. I'm delighted to tell you that the IND was submitted on schedule and accepted by the FDA well within the 30 days statutory period for review. This was Myriad Pharmaceuticals' sixth IND submission to the FDA and the fifth for a compound discovered at Myriad. All of the INDs have been accepted by the FDA within the 30-day limit.

We are very excited by the commercial potential of MPC-3100 and expect that the clinical development program will progress rapidly. Hsp90 inhibitors have great clinical potential because their molecular target is involved in promoting the growth and replication of most, if not all, cancers.

First generation inhibitors have advanced to clinical development and demonstrated anti-cancer activity in patients. Unfortunately, this activity has been accompanied by significant toxicity. It is widely believed that this toxicity is primarily as a result of the molecular structure of these first generation compounds and not toxicity intrinsic to the target.

Hsp90 is a so-called molecular chaperone, which stabilizes intracellular proteins. A mutated protein, such as an oncogene, would normally be rapidly degraded in a cell, but for the presence of active Hsp90. When the function of Hsp90 is inhibited, the oncogene is rapidly degraded and the growth stimulus on the tumor is lost. Hsp90 is known to regulate the activity of a large number of proteins and oncogenes, which control cell division, apoptosis, angiogenesis, metastases and resistance to other cancer drugs.

Each metastatic cancer expresses a large number of mutated or over-expressed oncogenes, which are subject to regulation by Hsp90. And thus, further mutation of a single oncogene should not lead to resistance to Hsp90 inhibitors.

MPC-3100 was discovered by Myriad Pharmaceuticals, and a composition of matter patent covering MPC-3100 has been allowed by the US Patent and Trademark Office. This drug candidate has some very attractive attributes, which we believe sets it apart from other Hsp90 inhibitors in development.

Firstly, MPC-3100 is a potent and selective Hsp90 inhibitor. It has good oral bioavailability and has shown its best activity in mouth cancer models, when given on a daily basis.

In pre-clinical testing, MPC-3100 has demonstrated potent anti-cancer activity in xenograft models of HER2 breast cancer, myeloid leukemia, lung cancer, prostate cancer, colon cancer, melanoma, and gastric cancer.

In head-to-head comparisons with competitors Hsp90 inhibitors, it has shown better anti-tumor activity, for example, decreasing tumor size, not just slowing growth, and without the accompanying toxicity. Indeed, we were very pleased with the relatively low toxicity burden of MPC-3100 in the DLP animal studies required for the IND package.

In contrast to competitors' compounds, for example, we did not see evidence of hepatic toxicity.

We've now initiated a Phase I study with MPC-3100 to investigate the safety and pharmacokinetic profile of the molecule in humans. The study will enroll all comers who have failed currently available treatments for their cancers. There are a number of novel features to our trial, which speak to the good properties and in vivo safety profile of MPC-3100.

Firstly, we have already developed a tablet formulation of the drug. Normally, Phase I studies are conducted with liquid formulations.

Secondly, we are able to dose escalate after treating only one patient, provided no dose-limiting toxicity is seen. A normal cancer Phase I protocol requires three or more patients before dose escalation.

Thirdly, the patients take only their first dose of MPC-3100 in the physician's office, and then take their tablets home with them. The patients will take the tablets once a day for 21 days as part of each cycle.

In addition to monitoring safety, we will obviously be looking for any evidence of anti-cancer activity. We expect to initiate Phase II trials around the end of the calendar year.

Moving on to Azixa, I'm pleased to tell you that we are collaborating with the Brain Tumor Investigators Consortium or BTIC. BTIC is a group of neuro-oncologists within the United States who have committed to only studying Azixa as an experimental medicine for their glioblastoma and anaplastic glioma patients.

This group of physicians originally approached Myriad because of the extraordinary brain accumulation of Azixa and because it caused no obvious CNS side effects. However, they have been very encouraged by our ongoing study of Azixa with carboplatin in which about 50% of the patients were judged to have stable disease.

In addition, we presented a poster at the recent AACR meeting in which we showed complete inhibition of brain tumor growth in a mouse model, where human glioblastoma was implanted into the brains of mice.

Azixa has also been demonstrating very encouraging data in a melanoma trial in which it is administered with temezolamide. Over 50% of patients have either stable disease or partial responses. This trial is continuing.

Finally, we are making good progress with our HIV drug, MPC-4326. In preparation for a large Phase IIB study, we are just completing a number of drug interaction studies with other HIV drugs. Because MPC-4326 is not metabolized by P450 enzymes, we do not anticipate a problem with drug interactions, but need to complete these studies so that the patients in our Phase IIB can continue to take their existing medications.

I look forward to discussing the Phase IIB protocol in the near future. I will now hand the call back to Pete.

Peter Meldrum

Thank you, Adrian, and I will hand the call over 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 Geoff Meacham with JPMorgan. Please proceed with your question.

Geoff Meacham - JPMorgan

I wondered if you can talk about either volume or revenue trends exiting the fiscal third quarter, and then anything you can give us that you're seeing in April or even so far this month on just trends? Thanks.

Peter Meldrum

Thank you, Geoff. As we indicated on the call, the revenue growth and the sample volume growth has remained strong compared to last year, up 47%. During the past quarter, we saw a very strong January followed by a weak February, and we think this was to a large extent explained because of the job loss, insurance loss, and economic downturn. Then we did see a nice rebound in March.

So we remain confident as a company, as Jim said, that for this fiscal year we'll exceed 48% revenue growth compared to last year. But as Jim also said, I don't think any company is immune to the recession, and I think we are currently seeing a dampening effect on our revenues, and that was reflected by the 4% total revenue growth quarter-over-quarter, compared to the double-digit quarter-over-quarter growth we saw in the December quarter.

Geoff Meacham - JPMorgan

Just a quick follow-up, Pete, is there any extrapolation from the trends in March going forward, either the sample flow or the revenue side?

Peter Meldrum

Again, the sample flow remains strong in April, and that precipitated our indicating that we'll feel very confidently that we'll achieve the 48% revenue growth for this fiscal year.

Operator

Our next question comes from the line of Charles Duncan with JMP Securities. Please proceed with your question.

Charles Duncan - JMP Securities

Pete, my question is related to a comparison of the Midwest Direct-to-Consumer campaign versus then in the south and northeast. Can you provide a little bit more color on the types of reimbursement patterns that you might see there? And the types of docs, et cetera, to really give us a sense as to how that Midwest DTC could perform relative to that in the northeast and south?

Peter Meldrum

I will talk a little bit about the Midwest campaign, but then I will ask Greg to provide a little more color in terms of reimbursement. The northeast campaign, which is the first campaign we did, represents about 12% of our revenue base, and the expense associated with that campaign was about $8.5 million. The south campaign was larger. It represents about 18% of our revenue base and costs about the same amount.

The Midwest is kind of in between the two. It represents 15% of our total revenue base, but because of the economic downturn, we're projecting the cost to be about $2 million less than either the northeast or the south campaign. We feel that the demographics are very strong in the Midwest and very appropriate for Myriad's products and that was one of the reasons that we selected the Midwest as the third region for our Direct-to-Consumer campaign.

I will let Greg comment further.

Greg Critchfield

As far as the physician target, it is the same as in the previous campaigns. The professional target is the practicing OB-GYN. We believe that the new ACOG guidelines will actually put wind in the sails as we talk to the OB-GYNs. In fact, even now we're seeing a lot of interest in BRACAnalysis testing as a result of the recent guidelines.

As Pete mentioned, when we did the analysis to select the regions that the campaign would run in the Midwest, we look carefully at insurance reimbursement to make sure that we were performing the campaign in an area where the reimbursement would be good. That went into the selection of the regions that we chose.

Operator

Our next question comes from the line of Derik de Bruin with UBS. Please proceed with your question.

Derik de Bruin - UBS

So I guess could you talk a little bit about the bad debt expense, just trying to get more color? Was there a significance sequential increase this quarter?

Jim Evans

No, I don't believe so. I think it has been able to stay in the same range where it has been over the last number of quarters in that 4.7% to 5% of revenue. We monitor that closely. We watch those accounts that are difficult to collect and try to make sure that we aggressively work with those people to give them the terms that they need to be able to make payment. The majority of our revenues do come from insurance companies.

So we are able to work directly with the insurance companies in getting payment. We do have, what turns out to be relatively minor part of the payment that we receive from individuals, and we've started some programs to allow individuals to make payments over longer periods of time. We don't want the relatively small co-pay there come into play as a deterrent for taking one of our tests.

So we have put some programs out there to allow patients to pay over 12 months or some type of extended payment period to make sure that that's not an issue. But so far, we have not seen any type of spike in bad debt.

Peter Meldrum

I think, Derik, you make a good point in that Myriad has a very modest bad debt expense of about 5%, and that's remained very steady over the past four or five quarters. Even in this severe economic downturn where you might anticipate an increase in bad debt expense, we certainly haven't seen it.

And again as Jim mentioned, that's largely due to the fact that most of our revenues come from large insurance companies and are collectible.

Derik de Bruin - UBS

Great. That's exactly the point I was going for. I guess when you look at some of the market trends other than just the continuation of the orders and the revenue run rate going into April, are there any other indicators that you look at to note that the so-called dampening is behind you?

Peter Meldrum

No. I don't think the dampening is behind us. We're seeing strong revenue growth, and that's reflected in 48% year-over-year. But clearly the recession is having some impact on the company, and I think going forward you are going to see a more modest growth rate. I don't think you will be seeing the double-digit, 20% growth rate that we saw in the December quarter.

Derik de Bruin - UBS

Great. And just one final one. I know the FDA is starting to take a more active role in regulating laboratory derived tests. How do you think FDA will kind of look at the way to the new tests that you are launching going forward?

Peter Meldrum

At the present time, we are regulated of course by CLIA. The FDA has indicated in the past that they're comfortable with CLIA regulation. However, the FDA has issued guidance on a class of tests called IVDMIAs. Myriad has none of those tests. All seven of our products, including OnDose, are laboratory developed tests, but not subject to the FDA guidance.

The FDA could certainly look more closely at regulating the reference laboratory industry, in general, or molecular diagnostics, in particular. And I think Myriad would actually embrace that. Myriad has the financial resources, and since we have been moving drugs through the FDA, certainly the intellectual capacity to get approval on the diagnostic front.

What this would do is actually create a barrier to market entry, and smaller companies that lack that intellectual power or financial resource would actually have to turn to Myriad to license products to have us move them through the regulatory environment. So I would actually view FDA regulation of laboratory developed tests as a positive to Myriad and any of the larger, more well-financed companies, as it would create barrier to market entry.

Operator

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

Lucy Lu - Citigroup

In the March quarter, is there any change in the revenue mix in terms of the tests? Is COLARIS still your fastest growing test?

Peter Meldrum

Yes, COLARIS is still our fastest growing test, but all of the tests have performed extremely well during the quarter. There was no real shift in the revenue mix. The revenue mix during this quarter was very consistent from our prior quarters.

Lucy Lu - Citigroup

I'm also wondering because in the past most of your tests are paid for by third-party insurance companies. Wondering if you are seeing a change in terms of percentage of patients that are paying out of their pockets? If you can also comment on percentage of patients paid for by the COBRA payments?

Peter Meldrum

No. We have not seen a shift in payment. Still approximately 90% of all of our revenues are paid by insurance companies. Only about 4% are out-of-pocket paid by the patient, and the majority of that, of course, is the modest co-pay.

I don't think we have a good number in terms of being able to track COBRA payments. Obviously, as Jim pointed out, there has been a substantial loss of members from UnitedHealthcare and WellPoint, and I'm sure other large insurers that have resulted from the unemployment rate reaching 8.5%, and the loss of jobs which then translates to loss of insurance.

As I mentioned, that certainly is having an impact on our revenue growth. It's not significant because of our 47% year-over-year growth. Certainly, this quarter saw the impact of the recession more than any other quarter that the company has obtained.

Obviously, if an employee loses his or her insurance, they are eligible for COBRA. Frequently, they can't afford the COBRA payments. President Obama, in his stimulus package, has allowed now that the federal government will pick up 65% of those COBRA costs.

If an employee lost their job after August 1st of last year, they are eligible to come back on COBRA and the government will pick up that roughly two-thirds portion of the COBRA payment. There is no real way we can track COBRA, so we can't really give you a good estimate of the percent of our revenues that are COBRA pay.

Jim Evans

COBRA payment takes place between the employee or former employee and their former employer, just to keep them on the insurance that they had prior to leaving the company. So, from Myriad's side, we'll just see that we are still working with that insurance company. We don't have any way of seeing how that's being paid for on the employee side.

Operator

Our next question comes from the line of Charles Duncan. Please proceed with your question. Mr. Duncan, your line is now open. Please proceed with your question.

Charles Duncan - JMP Securities

I had a question regarding the recent data on the BRACAnalysis predictive value in people of ethnic background that have not been traditionally thought of as candidates. What do you intend to do with this information? Do you intend to provide that to folks here in the states or is there an international effort that you might pursue?

Greg Critchfield

What you are referring to, of course, is the recent paper published that showed that, irrespective of a person's ethnicity, if they have a strong personal or family history for breast or ovarian cancer risk that they are candidates for testing. In fact, those individuals harbor the mutations that cause the risk to occur. This is an important thing for all physicians to understand.

Conventional wisdom has been that this was a condition that was primarily focused in European populations, and specifically, Western European populations. Our data show conclusively that that is not the case. So, there is an importance to make sure that individuals of all ethnicities, if they have a strong family or personal history, that they be evaluated and be given the opportunity to be tested.

This has implications both in the U.S. and abroad. As we look at populations that are currently not served, certainly, those individuals should be considered for testing.

Operator

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

Michael Yee - RBC Capital Markets

Can you characterize whether the weakness in the quarter was either geography-related or was it broad-spread? Then, can you help us understand whether April and May, is it accelerating? How does it compare to March as you see it right at this point?

Peter Meldrum

We don't see really a geographical impact. We think revenues remain fairly consistent throughout the country. As we mentioned, we saw a very strong January. That was followed by a very weak February, and that was followed by a rebound and stronger March. Again, we don't think the recession will have a significant impact on our revenues, but it is having a dampening impact on our revenues.

April was also very strong, similar to the January and March months. Not at all like the weakness we saw in February. So again, we are projecting 48% revenue growth for this fiscal year over the prior year. We think that's an outstanding revenue growth in this severe economic recession.

We, clearly, are not immune to the recession. We are clearly being impacted across the country, irrespective of geography, by job loss, insurance loss, and the economic downturn. Fortunately at Myriad, the impact is modest. It's not anywhere near as significant as many companies are experiencing.

Michael Yee - RBC Capital Markets

A quick nuance question on the guidance. Is that molecular diagnostic revenue year-over-year? Or is that total revenue year-over-year?

Peter Meldrum

No, that's molecular diagnostic revenue year-over-year.

Michael Yee - RBC Capital Markets

Why, if it was an economic issue, do you think in February that why would March and April rebound so strongly if unemployment hasn't really changed? Certainly, I don't think the economy has materially changed in two months? Why would it be just an economic issue? Do you think, in February?

Peter Meldrum

It's our best estimate that it's the economy that is doing it, and it's difficult for us to pinpoint a specific cause-effect. The best guess we have is, it is the recession and the economy that has weakened this quarter.

Keep in mind, that the quarter experienced 4% revenue quarter-over-quarter growth, which is historically less than Myriad has enjoyed. We think that is an impact of the recession. I won't blame it entirely on February, but February clearly was a weak spot in our revenue sample received.

Michael Yee - RBC Capital Markets

Just lastly on nuance again, is it more than 48% or is it, 48%? Just on nuance there.

Peter Meldrum

I think I'll ask Jim to repeat what he said in his earnings call for you, so that you get the percentage exactly right. Jim?

Jim Evans

Well, we did say that the growth would be more than 48% over fiscal 2008. That gives you a pretty good feel for where our best estimate would be.

Peter Meldrum

In other words, we have confidence in that 48% number.

Operator

Our next question comes from the line of Kim Lee with Wedbush Morgan Securities. Please proceed with your questions.

Kim Lee - Wedbush Morgan Securities

What have you seen is the impact of the new sales reps that were added in the fall of last year?

Greg Critchfield

The new sales reps that you are talking about were in the OB-GYN segment of the market. We added 50 individuals to our group. We see those individuals, between six and nine months, reaching profitability. They are contributing to revenue and we are glad that we hired them at the beginning of the year for that very reason.

Peter Meldrum

If I can add, it takes about six to nine months for a sales rep to come up to speed and breakeven. So we're seeing those sales reps at that point in time. Then within about a two-year timeframe, the sales reps usually generate at least $1 million per year per rep.

Operator

Our next question comes from the line of Bruce Cranna from Leerink Swann. Please proceed with your question.

Bruce Cranna - Leerink Swann

Just a couple of clean-up questions from me, Peter. So I'm clear on this, the sluggishness you guys saw in the quarter sequentially was uniform across your portfolio. In other words, it wasn't price sensitivity on the BRACA side versus something like MELARIS?

Peter Meldrum

No, it was very uniform. In fact, it would be hard to differentiate this quarter from any other quarter in terms of the individual product line revenue growth. So we're not seeing any reluctance to the pricing or sensitivity on the pricing. We aren't seeing any reluctance from our major insurers or payers. We're not seeing any softening in terms of the physician enthusiasm about all of Myriad's products.

I think what we are seeing is a severe economic recession that's resulted in significant job loss. When people lose their job, they frequently lose their insurance if they are not able to stay on COBRA. Again as Jim pointed out, in the recent Wall Street Journal article, both WellPoint and United Health have seen significant membership lost. Again, it's difficult to pinpoint exactly the softening we're seeing, but our best guess is it is due to the economy and the recession.

Now, again, having said that, and I do want to emphasize that we are seeing a dampening effect on our growth. We are still maintaining a 48% growth. So the recession, obviously, is not impacting us significantly, but we're not completely immune to it either.

Bruce Cranna - Leerink Swann

I know you mentioned that there was no geographic skewing to the economic weakness, if you will. Can you draw any correlation between the areas you've gone DTC in and in weakness or relative weakness or less weakness than areas perhaps that you haven't?

Peter Meldrum

The revenues in our DTC campaign are stronger than the rest of the country, because they have benefited from that increased physician base.

Bruce Cranna - Leerink Swann

Sure.

Peter Meldrum

I think the fact that the DTC campaign maybe masks any impact the recession might be having on those areas, because clearly those areas are stronger. That's one of the reasons we are going forward, even in this recessionary environment, with the Midwest campaign because we are getting such great returns on the DTC campaign.

Bruce Cranna - Leerink Swann

Just quickly, any early color on OnDose, if you have any? Just so I'm clear on it, I know you probably don't want to comment too much on modeling, but is there any reason why I should not assume that a physician or oncologist using TheraGuide wouldn't, in fact, be using OnDose? Any reason to suspect that the payers who are paying for TheraGuide would, in fact, not pay for OnDose?

Peter Meldrum

Let me ask Greg to answer the question of the synergy and the compatibility between TheraGuide 5-FU and OnDose. Then, we actually happen to have in the room with us Mark Capone, who is our Chief Operating Officer, and oversees all of the sales group. I'll let him talk a little bit about some of the initial physician feedback that we have heard from clinicians that we've talked to and from our sales force.

Greg Critchfield

There is very strong complimentarity between the two products. TheraGuide is used in the initial assessment of a patient's risk of developing serious toxicity. OnDose is a way of following up and measuring the amounts of drug that a patient receives. One can make an adjustment early in the course of treatment that can help a patient avoid Grade 3 or 4 toxicity, which in many cases requires hospitalization and in some cases, actually causes death.

So the two products really are complimentary. As we talk to insurers, and we are having a number of discussions with insurers, they are very interested in how these fit together, and it does give us an opportunity to increase the number of insurance companies that are carrying the product. On the physician side that Mark will talk about, we are able to discuss both of these with physicians.

Mark Capone

I'd say the early reception from physicians has been extremely positive. As one physician stated, they all recognize that traditional means of dosing, using BSA. One equated that to using the same dose for everybody with the same shirts size. They recognize that's an inappropriate way to dose something, particularly with a narrow therapeutic window such as 5-FU.

The receptivity has been extremely positive. We have had conversations now with over 1,000 oncologists on this particular product. I'm pleased and surprised even, at the level of receptivity that the physicians have had. So we're excited with this initial launch.

Bruce Cranna - Leerink Swann

Lastly, Peter and/or Jim, can you comment perhaps on margins on the ELISA-based tests, relative to your others?

Peter Meldrum

All our tests are priced based on clinical utility, not on cost of the test. So all of our tests have very attractive gross profit margins and at full economies of scale in that high 80% range. So the ELISA-based tests are really no different than the full DNA sequence-based tests.

Now, I would caution listeners to keep in mind that when we launch a test and volumes are small, the margins of those tests are not going to be at the same level. As they achieve full economies and achieve full capacity in the lab, they will have all the similar high 80% gross profit margins.

Jim Evans

I guess I'd just add to that as they are small and don't have the type of margins, they are not going to be significant enough to really impact our current margins I would not imagine. So, as they grow and become more significant, and they get to the level that they have the better margins, that's when they will start being impactive to our current margins.

Operator

Unfortunately, that's all the time we have for questions and answers today. Mr. Meldrum, I will now turn the call back to you. Please continue with your presentation or closing remarks.

Peter Meldrum

I want to thank everyone for participating on the Myriad third quarter earnings call. This will conclude the call. Thank you.

Operator

Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation and ask that you please disconnect your lines.

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Source: Myriad Genetics F3Q09 (Qtr End 03/31/09) Earnings Call Transcript
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