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Myriad Genetics, Inc. (NASDAQ:MYGN)

F4Q09 (Qtr End 06/30/09) Earnings Call

August 25, 2009 4:30 am ET

Executives

Peter Meldrum - President and CEO

Jim Evans - CFO

Greg Critchfield - President, Myriad Genetic Laboratories

Analysts

Geoff Meacham - JPMorgan

Charles Duncan - JMP Securities

Michael Yee - RBC Capital Markets

Bill Quirk - Piper and Jaffray

Ashim Anand - Natixis Bleichroeder

Ian Sanderson - Cowen and Company

Amanda Murphy - William Blair

Kelley Roche - Leerink Swann and Company

Junaid Husain - Soleil Securities

Operator

Welcome to the Myriad Genetics fiscal 2009 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded Tuesday, August 25, 2009.

I would now like to turn the conference over to Mr. Peter Meldrum, President and Chief executive officer of Myriad Genetics. Please go ahead, sir.

Peter Meldrum

Good afternoon, and welcome to the Myriad Genetics earnings call for our fiscal fourth quarter and year ended June 30, 2009. My name is Peter Meldrum, and I am the company's President and Chief Executive Officer. I'm joined today by Jim Evans, our Chief Financial Officer and Gregory Critchfield, President of Myriad Genetic Laboratories.

I will begin the discussion this afternoon with a brief review of the past year and will be followed by Mr. Evans who will discuss our financial results. Dr. Critchfield will review the company's molecular diagnostic business. At the end of the presentation, I will turn the conference call back 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 actual events or results may differ materially and adversely from these expectations for a variety of reasons.

We refer you to the documents the company files from time-to-time with the Securities and Exchange Commission. Specifically, the company's annual report on Form 10-K, its quarterly reports on Form 10-Q, and its current report 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.

As you know, at fiscal year end, we successfully completed the spinoff of our research and pharmaceutical business, Myriad Pharmaceuticals. All of the shares of Myriad Pharmaceuticals have been distributed to our shareholders and Myriad Genetics now has no ownership in Myriad Pharmaceuticals.

As part of the spinoff, we transferred $188 million to Myriad Pharmaceuticals. However, this has still left us with a very strong cash balance of nearly $400 million. According to a private letter ruling from the Internal Revenue Service, the distribution of common stock in Myriad Pharmaceuticals to our shareholders qualifies as a tax-free distribution.

Additionally, Myriad Genetics retained all of the consolidated R&D tax credits and net operating loss carry-forwards, which will be used by us to offset future income of approximately $400 million.

With the separation of the research and pharmaceutical business now complete, we are focused exclusively on building our molecular diagnostic opportunity, and are committed to the goal of expanding our global leadership position in this exciting industry.

While we are being affected by the current economic recession and have experienced weaker revenue growth over the past two quarters, we completed the fiscal year with molecular diagnostic revenues of $326.5 million, a 47% increase over revenues of $222.9 million in fiscal 2008.

Looking at the year more closely, the current economic recession began to impact our revenue growth during the second half of the year with first half growth of 55%, decelerating to 40% in the second half of the year.

As one would expect, the recession has had only a modest impact on our oncology sales largely from unemployment and the resulting loss of insurance, but a significantly greater impact on our OB/GYN sales in the primary care market, primarily as a result of fewer doctor office visits.

Here are few statistics that support what we've been seeing in the marketplace. According to the American Academy of Family Physicians' national survey, 58% of physicians have seen an increase in appointment cancellations, and 54% are seeing fewer patients since the recession began.

According to the Gallup survey performed by the American college of Obstetricians and Gynecologists, 14% of the women have postponed their annual checkups. Finally, a Kaiser Family Foundation survey noted that 19% of Americans are delaying going to the doctor for preventive care, and 23% are skipping a recommended medical test or treatment.

As we move into 2010, we expect the continued weak economy to restrain our revenue growth. However, we are comfortable with the current research analyst consensus guidance of $392 million in revenues and $1.44 per diluted share for fiscal 2010.

As the country begins to come out of the recession, we believe our revenue growth has the potential to accelerate. As Greg will discuss in more detail, we have implemented several programs recently to bolster revenue growth. First, we have completed the expansion of our OB/GYN sales force with the hiring of 50 new sales representatives. Our sales force is now 300 strong, 150 sales reps in oncology and 150 sales reps in women's health. These sales reps have already been trained and are in the field.

Second, we accelerated the Midwest DTC campaign, which began on August 17th, 2009, three weeks earlier than originally planned. The impact of this campaign should be seen in the second fiscal quarter. Third, because of the positive response in the South DTC campaign, we reinitiated that campaign on August 17, 2009 and plan to continue it through December 31, 2009.

Fourth, we are on track to launch a new oncology product in our third fiscal quarter, and we’ll be providing more information about that product in the future. Finally, we are expanding our OB/GYN speakers program, an effort to increase awareness among physicians about the new ACOG guidelines. So, they can incorporate them in their OB/GYN practice.

We believe that these initiatives will be beneficial to the company in combating this weak economy. We believe that the increased profits generated from these new initiatives will more than offset the costs associated with our investment. We are excited about the future and the future of the field of molecular diagnostics.

As Congress and the administration work on major healthcare reform, we believe we are poised to benefit from this far-reaching legislation. Myriad's products specifically address several of the major goals of the new healthcare legislation. A focus on disease prevention and wellness, a need to reduce costs within the overall healthcare system and a goal of improving healthcare and patient outcomes for all Americans. According to publications in Nature, the New England Journal of Medicine, Lancet, JAMA and the San Antonio Breast Cancer Symposium, our products address each of these goals of healthcare reform.

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

Jim Evans

Thank you, Pete and good afternoon, everyone. It is my pleasure to present a more detailed look at Myriad's financial results for our fourth fiscal quarter and our fiscal year ended June 30, 2009. To begin, I will point out some important differences in how we are reporting our statements of operations as a result of the spin off of our research and pharmaceuticals businesses, known as Myriad Pharmaceuticals, or MPI.

In the presentation of our results for the fourth quarter and fiscal year, revenues and expenses for MPI are netted for each reporting period and shown on one line as discontinued operations. Accordingly, revenues and expenses on the income statement reflect solely the activities of the molecular diagnostic company, and are totaled as net income from continuing operations. Earnings or loss per share are calculated for continuing operations, discontinued operations, and in total.

I would also like to note that the results from continuing operations that we reported today differ somewhat from those calculated by some analysts, based on the MPI FORM 10 data. The cause of the difference is in the allocation of overhead expenses. For the Form 10, the SEC required us to show what MPI would have looked like as a standalone company over the past number of years. We were therefore required to allocate various G&A expenses to MPI, based on reasonable proxies, such as square footage or headcount.

The results that are in today's release and in the 10-K that we will file shortly, move actual revenues and expenses directly incurred by MPI to discontinued operations. All overhead expenses, for example, human resources, legal and accounting, facilities maintenance, et cetera, have been retained by Myriad Genetics and are reflected in the continuing operations numbers.

Going forward with the separation of MPI and its employees, I believe these overhead expenses will decrease slightly, but I would not anticipate that there will be a noticeable change. With all that being said, my comments today will focus on the continuing operations of Myriad Genetics Inc.

As Pete previously highlighted, Myriad's total revenue for the 2009 fiscal year was $326.5 million, which is in line with our preannouncement at the end of June. This compares favorably to total revenue of $222.9 million for fiscal 2008. This 47% year-over-year increase during such a difficult economic environment is testament to the critical nature of the information Myriad's tests provide.

Revenue for the fourth fiscal quarter ended June 30, 2009, was $86.1 million, versus $64.7 million for the same period of the prior year, or a 33% increase. While the year-over-year revenue numbers continue to show strong growth, we recognize that quarter-to-quarter sequential revenue growth over the past two quarters has not increased at the pace to which we have become accustomed.

We have analyzed the revenue numbers in detail to ensure that we understand the cause of this slowing and to assure that we implement appropriate actions to strengthen revenue growth. I would like to share with you a number of facts that we determined as a result of this analysis.

First, approximately 30% of molecular diagnostic revenues are now derived from the asymptomatic or OB/GYN market segment. I will remind you that we only began addressing this market just over three years ago. The remaining 70% of our current revenues are derived from the oncology segment. We estimate that the annual oncology market for BRACAnalysis alone is approximately $450 million, leaving Myriad with substantial in-roads yet to be made in this market.

Looking back over the past three years, our compound annual growth rate for oncology sales is 31.4% and we do not see any noticeable decline in this growth rate. The compound annual growth rate for OB/GYN sales over that same period is a 118.7%. This growth in the OB/GYN segment has slowed as a result of the current economic downturn.

We also looked at how much additional efforts, if any, is required by a Myriad salesperson to access an OB/GYN practice versus an oncology practice. Many believe that the very busy OB/GYN is less likely to adopt new technologies such as genetic testing. We found that an OB/GYN sales rep on average needs six visits to move a doctor to be what we classify internally as a physician customer. On average, five visits are required for an oncology rep to move an oncologist to the same status. As such we believe the continuing addition of OB/GYN sales reps will have a positive impact on our revenues.

Finally, I will note that we saw slowing in the revenue growth from all of our more established tests during the fourth fiscal quarter. Additionally, we did not notice any geographic outliers except to say that New York and the southern region continue to be among our most productive, we believe as a result of the DTC campaigns in those areas.

In my mind, this is indicative of a broader economic impact affecting our molecular diagnostic business, rather than one product to one territory becoming over-saturated. Based on our analysis, we continue to conclude that the market for our test still has large upside once we get past the economic headwinds that we have been experiencing. Pete mentioned some of the actions we are taking to drive revenue growth and Dr. Critchfield will address these initiatives in more detail.

Cost of goods sold of $43.3 million for fiscal 2009 resulted in gross profit margins of 87%. This is a 200 basis point improvement over the 85% gross profit margins for fiscal 2008. We again reiterate that we believe that these gross profit levels are sustainable with modest potential upside.

Research and Development expenses for the fiscal year ended June 30, 2009 were $17.9 million, compared to $18.5 million for fiscal 2008. R&D for the fourth fiscal quarter was $4.4 million, which is consistent with all four quarters of the 2009 fiscal year. As a result of the spin of MPI, R&D no longer includes either pharmaceutical research or the R&D that was performed as part of externally funded collaboration.

Selling, general and administrative expenses for fiscal 2009 increased 26% to $138.9 million, compared to $110.4 million for fiscal 2008. Reflecting the increased number of sales reps in the field, costs associated with the launch of two new products Prezeon, and OnDose and expenses that support Myriad's 47% revenue growth.

For the 2009 fiscal fourth quarter, SG&A was $36 million, relatively flat from $35.5 million in the third quarter ended March 31, 2009 and a 14% increase over the same quarter of the prior year. I will highlight that Myriad incurred additional spin-related legal and accounting costs in the 2009 fourth fiscal quarter.

Going forward, 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 and future non-cash stock option expense.

Income from continuing operations increased 83% to $136 million for fiscal 2009 from $74 million in fiscal 2008. Net income from all operations was $84.6 million for the 2009 fiscal year, equal to $0.86 per diluted share compared with net income of $47.8 million in the prior fiscal year, equal to $0.51 per diluted share.

Net income and fully diluted earnings per share each exceeded the Thomson Reuters consensus income of $84.1 million and $0.85 per share, respectively. Cash, cash equivalents and marketable investment securities continued to be very strong. As of June 30, 2009, Myriad's cash, cash equivalents and marketable investment securities were $392 million, net of the $188 million of cash, cash equivalents and marketable investment securities transferred to MPI as a result of the separation of our research and pharmaceutical businesses.

We believe that our accounts receivable are of a high quality and reimbursement continues to be strong with a modest bad debt expense of approximately 5% of revenue. Now to conclude it is my pleasure to state that Myriad has absolutely no debt and no convertible securities. With that financial review, I will now turn the call over to Dr. Greg Critchfield.

Gregory Critchfield

Thank you, Jim. It is a pleasure to speak with you today about our molecular diagnostics business. As Jim and Pete mentioned, we achieved fiscal 2009 revenues of $326.5 million, a 47% year-over-year increase. We are continuing our focus on increasing penetration in the oncology market, and expanding further into the women's health market segment.

As Pete mentioned, studies have shown that because of the recession, women are cancelling their annual physicals, delaying going to the doctor for preventive care and skipping medical tests. We believe that this is the primary reason for the slowdown that we experienced during the second half of the 2009 fiscal year.

Additionally, during the current difficult economic environment, United Healthcare recently institute a prior notification requirement for BRACAnalysis. We have been working very closely with United Healthcare to assist physicians was UHC's prior notification policy. United Healthcare has agreed that Myriad can act on behalf of the patient and ordering physician to initiate the insurance notification directly with UHC.

United Healthcare has agreed that physicians do not need to complete any special forms or extra genealogy charts, but that the current Myriad test request form is adequate for their purposes. The reimbursement criteria they are used by United Healthcare are consistent with the 2009 National Comprehensive Cancer Network or NCCN guidelines for affected patients, and an expanded version of the U.S. Preventive Services Task Force guidelines for unaffected patients.

It is important to note that United Healthcare did not tighten their reimbursement criteria for BRACAnalysis. Therefore, we currently do not believe that United Healthcare's prior notification requirement will have a significant impact on our revenues. In fact, we are seeing an overall improvement in the patient reimbursement criteria from insurers.

Recently, professional medical society criteria for our tests have been expanded and insurers generally follow these professional society guidelines. For example, the NCCN guidelines, which United Healthcare uses have recently increased the age limit by five years for testing newly diagnosed breast cancer patients, irrespective of family history.

We are also seeing excellent coverage for BRACAnalysis testing among OB/GYNs, where insurance coverage is starting to approach the rates seen in the oncology segment of the business. Clearly, the headwinds from the economic downturn are stronger in the OB/GYN segment of our business than in our oncology segment.

This makes sense as patients not yet affected by cancer which is the great majority of those in the OB/GYN segment do not have as much urgency to be tested as those who are affected by cancer and who need the information to know what to do next for immediate treatment decisions.

In order to stimulate revenue growth in this challenging economic environment, Myriad has launched several initiatives. This includes accelerating the hiring of 50 new sales representatives, expanding the direct to consumer marketing campaign, focusing on creating more frequent ordering customers, expanding peer-to-peer physician activities, offering OB/GYN physician education on new ACOG guidelines and offering genetic counseling education for office physician staffs.

We have now completed the hiring of all 50 new OB/GYN sales representatives, well ahead of schedule. As I speak, this expanded and trained sales force is out in the field, generating revenue. It usually takes four to six months for a sales rep to achieve break even status. So this sales force expansion should benefit our revenue growth during the second half of the year.

Turning to our DTC initiatives, our analysis shows that we have traditionally experienced an excellent return on investment from our DTC activities in the Northeast and South and thus have consequently expanded and accelerated these activities. We initiated the Midwest DTC campaign early, commencing on August 17th, 2009, and running through March 31st, 2010. We have also re launched the South DTC campaign in Texas and Florida. This campaign began on August 17th, 2009, and is scheduled to run through December 31st, 2009.

Both campaigns will include full television, print and direct mail activities. Finally, we are launching a direct mail program in the Northeast campaign region on September 8th, 2009 and this will run through the end of the year. Moving more casual ordering physicians to frequent orderers is a significant goal and opportunity for Myriad. To this end, we are launching a sales force directive initiative in conjunction with a direct mail effort to physician customers who are currently infrequent orderers to convince them to use our products throughout their practices.

We are instituting an opportunity for customers to experience BRACAnalysis and COLARIS testing through a clinical experience program. We are providing tools and training to streamline office implementation for new physician customers, and finally, we have put in place a special incentive program to motivate the sales reps to increase the number of high ordering customers.

As mentioned, we are expanding the number and scope of peer-to-peer physician activities and are identifying and educating an additional 130 physician speakers for our Speaker's Program and for conducting grand rounds. Individuals are selected for the Speaker's Program based on their having a great deal of experience and knowledge of BRACAnalysis testing and because they are regional key thought leaders. These individuals receive two days of education from a nationally respected key opinion leader, whereupon these speakers then work with our sales representatives who schedule peer-to-peer events with physicians in their respective local territories.

As thought leaders share personal experiences with Myriad testing with their peers, we see greater adoption of our testing from physicians attending these events. Infrequent ordering physicians have the opportunity to ask questions in non-training environments and seek to be educated by someone who routinely identifies and tests appropriate patients with BRACAnalysis. Should an uninitiated doctor have additional questions that arise during implementation of testing in his or her practice, there's a personal connection with someone who has gone through it and whose opinions and advice are valued. Through this program we anticipate contacting 50% of physicians that our sales force targets on a monthly basis.

We are increasing the number of informal peer-to-peer breakfast and luncheon meetings. We are working with national and local professional society leadership, larger hospital network and academic centers to conduct more formal education programs. All of these peer-to-peer activities are designed to help physicians understand the importance, the value and the practicality of offering testing to their patients.

We are also designing and offering a nationwide OB/GYN guidelines webinar to educate OB/GYNs concerning the recent ACOG Practice Bulletin. The program will feature involvement of a key thought leader, educating physicians on the guidelines and their impact on clinical management of patients. We will also design and deploy a genetic counseling webinar for OB/GYN practices.

This will help educate OB/GYN office staff on practical applications our research cancer testing. Tools and education will presented to them to help them in identifying patients according to ACOG guidelines, insurance support, patient education materials, results interpretation and follow-up.

We believe that Myriad's products are vital to the healthcare management of patients with cancer or a family history of cancer. Our products have the potential to save lives and save healthcare costs. Even in a severe recession, we believe that these actions will help us to further grow our business. There is still large potential for growth, both in the oncology and OB/GYN segments. We look forward to expanding our business as we make a real difference in healthcare.

Thank you for your kind attention. At this point I'd like to turn the call back over to Pete.

Peter Meldrum

Thank you, Greg and I'll turn the call over to the operator for the question and answer portion.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Geoff Meacham with JPMorgan.

Geoff Meacham - JPMorgan

Thanks for taking the question. I know that July, August are seasonally light months, given the summer holidays, but is there anything you can tell us about the current quarter, just in sort of broad brush strokes, how it compares to probably the past two?

Peter Meldrum

Really not prepared to talk too much about this quarter. Historically, the summer quarter has been a weaker quarter for the company, because of the vacation periods. Women go on vacation, physicians go on vacation, genetic counselors go on vacation.

Typically, we see a smaller revenue flow in July and August primarily because of the vacation, and a much stronger revenue growth in September, so it is very difficult to comment on this particular quarter given that we have no insight yet really into September, which is a key driver of the quarter.

Geoff Meacham - JPMorgan

Okay, then a follow-up to that. Have you guys seen any economic impact on oncology revenues for BRCA, specifically? Obviously that's pretty clear with the OB/GYN segment?

Peter Meldrum

Greg can expand on this a little bit, but yes, we have seen an impact on our oncology revenues, particularly for BRAC analysis.

Do we believe to the recession? As I mentioned, it's not nearly as significant as what we've seen in the OB/GYN sector, but we've definitely seen a slowdown across both sectors.

Gregory Critchfield

Yeah, again, Geoff, I'll reiterate what I said earlier. The reason that we believe there is less impact on the Oncology segment is that the decisions are more critical for immediate decision making that the doctor and patient need in order to treat the disease, because the oncologist is seeing people that have cancer, there's a need to get that information in order to know what to do next.

It's less urgent in the OB/GYN segment of the market, and we believe that's one of the key reasons that is more susceptible to the recessionary effect.

Geoff Meacham - JPMorgan

Just one final question for Jim. Can you talk about how much of the SG&A spend during the fiscal fourth quarter was non-recurring from the spinoff, et cetera, and then maybe anything about SG&A run rate for the year, if you guys can talk about that.

Jim Evans

Well, in the fourth quarter, we had just shy of $1 million of spin costs. I think it's somewhere between $700,000 and $1 million of cost associated with the spin, and so taking that out, the fourth quarter obviously does not have the full impact of the increase of the sales force, nor does it have the additional spend that we are going to have for the programs that Greg has listed out.

Now, the one fortunate thing is the DTC campaign in the Midwest, we knew was going to be less expensive than what we have historically encountered in the southern area and the Northeast, just because of the current economic environment and air time and those types of things being less expensive. There will be an impact obviously to our SG&A for those additional programs that we will be initiating in order to spur revenue growth.

Operator

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

Charles Duncan - JMP Securities

My question was related to the direct-to-consumer campaign in the Midwest. Can you characterize that region relative to the Southeast as well as the Northeast, in terms of key metrics that you look at such as population density or the types of physicians that you're dealing with, et cetera and give us some sense as to what the potential is for the Midwest relative to the Southeast and Northeast, and then also let us know what other regions you're targeting that you think may be interesting growth potential going forward.

Gregory Critchfield

As far as size goes, it's approximately the same size as the Northeast region that we conducted back in 2007. So that's 12%, 13%, roughly. What we do is look at the major Metro areas. We target areas where we have good medical infrastructure, where we have knowledge of insurance reimbursement, and where we have salespeople that are concentrated.

One of the key elements of success that we have is making sure that experienced sales reps are the ones that are present while we're conducting the campaign and as you know we hired a head last year in our expansion to make sure that we had people in the Midwest region ahead of time.

So, those are some of the elements we look for. There are other areas that could be future campaign areas. We have not done a campaign in the West Coast yet. That's one area that we are looking at. There are few other segments in the U.S. that we have also been looking at. All of the factors I mentioned are part of our analysis for deciding where to go next.

Charles Duncan - JMP Securities

Thanks, Greg and a follow-up for Pete. You mentioned global leadership, that's intriguing. Can you give me some sense as to any specific initiatives to become more of a global company?

Peter Meldrum

The Company is very interested in expanding its products outside the U.S. As you're aware, about 95% of our revenues to-date comes from U.S. and we have only a U.S. sales force. We see significant market opportunity in Europe and other parts of the world and are looking right now at the potential of developing facilities and sales forces in territories outside the U.S.

Charles Duncan - JMP Securities

Is there any timelines on that initiative, Pete? Is that in the year or over the course of time?

Peter Meldrum

The European market is probably the largest near term opportunity for the company. It's a very exciting one, but it's a challenging one because there really is no Pan-European reference laboratory like iQuest or LabCorp here in the U.S. In fact, some European countries, for example, France, don't allow the shipment of DNA across their company borders.

So we would have to establish laboratory facilities in each of the major market countries and of course and of course each of those countries will have different requirements in terms of language and cultural issues with those sales forces and marketing materials. So I would say that this is an initiative that the company is very committed to and over the next two to three years, hopefully we'll make progress toward achieving that goal.

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

A couple of questions. Thinking about the September quarter, I know as was previously stated, somewhat of a slower quarter, typically you guys grow high single digits. Should we think about the September quarter as something that can reflect previous trends or would you suggest that the ongoing economic headwinds would make September a weaker relative quarter than what we've seen? I'm just trying to understand how much the economy is still impacting things.

Peter Meldrum

Unfortunately, Michael, we don't give guidance on a quarter-by-quarter basis. We have indicated that we are comfortable with the annual consensus numbers that the research analysts have put out there. As I mentioned with Jeff's call, once we're past the September, the vacation period is a key driver to determining the success of the September first fiscal quarter for the company and obviously since it's not September, we don't have any insight into that.

Michael Yee - RBC Capital Markets

It's so, so that brings me to my derivative question which is, it's not to press you on this but if we haven't gotten into September, we haven't seen September and you're acknowledging that there's low visibility and we don't really know, how do we have confidence on $392 million or what you're projecting as consensus? How do we know that, if we're not really sure, as we haven't got out of the summer yet?

Peter Meldrum

Not quite sure how to answer that, other than to say that management is comfortable with the $392 million revenue figure for fiscal year 2010.

Michael Yee - RBC Capital Markets

Okay, last question. Remind me if I didn't catch it. What was the molecular diagnostic operating margin this quarter and where do you think you can get it, given the types of investments you guys are going to put into further promotion this year?

Jim Evans

Well, the operating margin is right around 40% for the quarter, and that's looking at just the continuing operations or the operating for the molecular diagnostic company as it's currently broken out in the financials. As we've said previously, I'll just quickly go back through, from information that's in the 10-K going back over a number of years, you'll see that operating margins increased from 14% in 2006, to 22% in 2007 to 28% in 2008 to almost 40% in 2009.

So we see that we've been able to make significant improvements in those operating margins over time and as I've said in the past, we do think that we will be able to continue to see improvements in those margins with the leverage that we have, both on our R&D and our selling, general and administrative cost. That will allow us to move up toward the 50% mark.

Operator

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

Bill Quirk - Piper and Jaffray

Thanks good afternoon. First off Greg, glad to see you guys are incentivizing the sales force to shift towards harvesting more tests from existing accounts rather than the I guess the mix of both looking at new and existing accounts. How long should we be thinking about this approach? Is this a fiscal 2010 approach? Is this a, we're going to have it in place as long as the economy continues to sputter? How should we thing about that?

Gregory Critchfield

Well certainly, we put it in place right now at this point in time, we believe that there's a tremendous opportunity as I mentioned to allow physicians to become better educated so that they incorporate more testing into their practice. I think that as a focus, this is going to be something that's going to be an ongoing focus for Myriad even beyond this.

We always see a physician may try out a few test initially and becomes comfortable with it. Then understands and then looks for more patients in his or her practice to whom these tests would apply. So it's a general trend that you see. The number of people that are ordering at a high frequency today is far greater than it was last year and it's greater than it was the year before.

So this is something that we're always striving for. The goal is that patients be, who are appropriate for testing, be identified and be given access to these potentially life saving technologies. So we're always driving toward that.

Bill Quirk - Piper and Jaffray

Okay, understood. Then Peter, not to pick on guidance but one quick question. Your commentary around the bottom line, the $1.44. There is a bit of a disagreement, shall we say, in terms of the sell side community, about half of us have fully taxed numbers in there from a GAAP standpoint, the other half don't.

The $1.44, I guess, is you're thinking about your numbers, are you assuming that now we are 12 months past profitability in the operating basis that we'll continue to not have to recognize GAAP taxes? How should we think about that?

Peter Meldrum

Let me take a stab at that, then I'll ask Jim to chime in as well. Based on discussions we've had with our auditors, Ernst & Young, we believe that the company will not recognize for either book or income tax purposes income taxes in fiscal 2010.

The $1.44 fully diluted earnings per share number would be an after-tax number, reflecting the fact that the company will pay a very small tax, based primarily upon AMT, alternative minimum tax.

Jim Evans

Yes, as we had these discussions with them, it's something that we'll look at on a quarterly basis, but they don't think that we would have a serious review of our ability to disregard income tax from a GAAP basis until fourth quarter of next year, when the audit goes on again, we'll take another very hard look at that and see if it would then be the time to remove the allowance against the tax asset and book that onto our books and then have an income tax expense going forward. So yes, I believe we have a number of quarters before that will impact us.

Operator

Our next question comes from the line of Ashim Anand with Natixis Bleichroeder. Please proceed with your question.

Ashim Anand - Natixis Bleichroeder

Thanks, guys and congrats on a good quarter. I was wondering if you can comment on your products which have direct applications in personalized medicine that is Prezeon, OnDose, in terms of OnDose, how is the penetration going and in terms of Prezeon, if you can comment on, if you guys have worked on it's indication expansion in personalized medicine?

Peter Meldrum

Let me address that and I'll ask Greg to chime in as well. Prezeon of course is a very exciting personalized medicine product. It's one of the most important anti-oncogenes ever discovered, involved in major pathways that are the target of a number of cancer therapies. I have cautioned investors however that Prezeon needs more clinical data to support the product and as a result, the company is in the process, both internally within Myriad, and in collaboration with our academic collaborators, doing clinical studies to support the clinical utility of P10 as a progression and survival predictor, as well as identifying individuals who would respond or not respond to drugs in both the colon and breast cancer areas.

With regards to OnDose, that is different than P10 in that we think the uptake for OnDose will be more rapid than our historical products. The clinical utility we think is very compelling. In a clinical trial published in the Journal of Clinical Oncology, we saw in the control arm, which was dosed using the standard body surface area dosing procedures, a substantial increase in adverse effects, compared to the OnDose treated patients.

We saw that the life expectancy was six months longer for OnDose treated patients than the Body Surface Area treated patients. Again this is not a clinical study comparing a new drug or comparing a Avastin to the current therapy. This is giving the same drug to both patients, you're just using OnDose, an optimal dose and your improving the life expectancy and reducing the side effects.

Because of that, we're very excited about OnDose and have seen throughout the summer a very positive response from oncologists in the ordering of OnDose. So, its uptake is matching our lofty expectations for the product. I will caution investors, however, that OnDose is still a brand-new product and so even though we're seeing exceptional uptake, the numbers are still very small. The product only having been launched about four months ago.

Gregory Critchfield

I concur with all of Pete's comments and I would again remind everyone that it takes time for a physician to become educated and to understand what these products do. Our belief is there is an enormous opportunity with personalized medicine. Everyone knows someone that has taken a drug and it hasn't worked or a drug has caused an adverse reaction in someone taking it. We all know cases like this and we've all experienced them. So, there's a huge benefit in getting patients on the right drugs and getting patients so they can take drugs more safely and optimizing therapy and it will take time to develop those but we're very excited about these products.

Operator

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

Ian Sanderson - Cowen and Company

Based on your comfort with the consensus revenue number for fiscal 2010, versus the current run rate, we're looking at adding somewhere around $50 million of incremental revenues. What are you assuming in terms of where the majority of those revenues come from? Whether is it the oncology setting or the OB/GYN setting?

Peter Meldrum

The OB/GYN setting is still our fastest growing market segment but as Greg mentioned we're seeing continued growth in the oncology as well. As Jim pointed out, we moved into the primary care, women's healthcare market opportunity only about three years ago. At that time, of course we were 100% oncology and we have seen over the years that go from 100% of our revenues being oncology to now about 70% of our revenues being oncology and we think throughout fiscal 2010 that number will continue to drop as we bring on more and more revenues from the OB/GYN sector. So despite the recession, because of the rapid growth in the OB/GYN, we do think that that will still be a faster growing segment for this year.

Ian Sanderson - Cowen and Company

Within the OB/GYN segment, are you seeing greater use in the academic setting versus the community setting?

Gregory Critchfield

We see use increasing in both. Remember that the great majority of OB/GYN practices are not in academic centers. Most communities have OB/GYNs that are taking care of women's primary healthcare needs. So that is where our sales force is. I would expect that that's the greatest segment of the segment, if you will, where we expect to see growth.

Operator

Our next question comes from the line of Amanda Murphy with William Blair. Please proceed with your question.

Amanda Murphy - William Blair

Hi, just a few questions. I'm curious, as you are out there with your sales reps and talking with OB/GYNs, have you seen any indication that doctors are becoming more comfortable doing the test in office, versus referring it out at this point?

Gregory Critchfield

Yes, a very good question. In fact, we've been through this kind of thing before. When we moved from the academic genetic centers into the oncology practices, the same question was posed in those days. In fact, what we saw is that as physicians became educated about these products, they became comfortable with ordering the test within their own practice and we see the same trends are being established now in OB/GYN physicians. Many of them are very, very comfortable just ordering based on what they know and we're educating them and their staff. That's the reason that we have the educational initiatives in place, to allow them to make that choice.

By the way, it's better for the patient, in that the patient doesn't have to make an extra appointment, they don't have to go see somebody, there's much less attrition and there's better follow-through with the ongoing care of the patient because it is ultimately the physician that will take care of the patient after the results come in. So we see that as a trend that's going to continue and more and more people will be ordering within their offices.

Amanda Murphy - William Blair

I believe the United also expanded their access for patients to genetic counseling. Is that accurate and is that something that you think could accelerate that trend at all, if other insurers kind of adopt the same policy?

Gregory Critchfield

Well, I think that there are many insurance companies that make that one of the avenues. What's really important for a patient, however, is that depending on where the patient lives, depending on who their physician is; as they may not have access to all of those things.

So what we as a company are doing is making sure that there are multiple channels through which a patient can receive genetic education. They can get it from their primary care doctor. They can get it from an advanced practice nurse in the doctor's office. They can get it sometimes from a genetic counselor. All by building capacity in all these areas we are able to better serve the needs of patients and make sure they get the access to testing.

Operator

Our next question comes from the line of Bruce Cranna with Leerink Swann and Company.

Kelley Roche - Leerink Swann and Company

This is actually Kelley in for Bruce this afternoon. Thanks very much for taking the call. So just a question back on the guidance, it looks like the guidance implies about a 20% growth for fiscal '10. What really gives you the confidence there? I know you've talked about the DTC campaigns, the ACOG, the economy. What makes you guys think that you can really get that way and do you think maybe it's stronger in the back half of the year or just what gives you the confidence that number is attainable?

Peter Meldrum

Very good question, thank you. As we mentioned at the beginning of the call, the company has spent a lot of time and effort understanding to the best we can the cause of the weakness that we've seen in the June and March quarters. We do feel that it is primarily as a result of the recession and primarily as a result of impacting our OB/GYN sector with women postponing annual physicals or delaying diagnostic preventative testing procedures.

We do anticipate that until this economy improves, we're going to continue to face this recessionary headwind. What I guess gives us confidence in achieving the consensus guidance that research analysts have put out there, is the fact that when we look at the growth within the oncology sector and the OB/GYN sector, and look at the new initiatives that we put forth in terms of accelerating the hiring of our sales force, reinitiating the campaign in the south and accelerating the Midwest DTC campaign. All of those factors, we think, hit at many of the causes of the slowdown as a result of recession and should provide benefit to the company.

Kelley Roche - Leerink Swann and Company

Okay, and then the pacing question. Do you think it will be a gradual ramp, so bigger in back half of the year as the DTC campaigns either payoff, or the ACOG guidelines really start to show through on the top line?

Peter Meldrum

Well, it's hard for me to comment on that, other than to say some of the initiatives that we've instituted will take some time to bear fruit. For example, the sales force as Greg mentioned usually takes around six months before they're at breakeven and fully up to speed, and so that benefit certainly would be greater in the second half of fiscal 2010 than it would be in the first half of the year.

We have accelerated the DTC campaign, so I think you will see a bigger impact, particularly in the second quarter, but again the biggest impact I think we are facing is the recession and I'm not going to try to predict when the country is going to come out of the recession. Some feel that the recession has already bottomed out, and we certainly hope that's the case.

Kelley Roche - Leerink Swann and Company

Okay, and then one final question. The 20% growth rate that we are kind of looking at in fiscal '10 off of the consensus number here, do you think we'll see greater strength or greater contribution to revenue growth from the BRCA test or from COLARIS or MELARIS or something like that, can you give us a little bit of either clarity or guidance looking forward?

Peter Meldrum

Our, BRCA is certainly our largest selling product and it's still growing well, so it will, being our largest product have the biggest impact on revenues for fiscal 2010. Most of the other tests are growing faster than BRAC. They're of course growing of a smaller revenue base so that's easier to do, and will contribute as well. So I think we'll see growth in fiscal 2010 from all of our products that Myriad has launched.

Operator

Our next question comes from the line of Junaid Husain with Soleil Securities. Please proceed with your question.

Junaid Husain - Soleil Securities

Peter, Jim, a few questions for you on the sales and market front. Are you still looking to hire more sales reps. Are you basically done on the sales hiring front for 2010?

Peter Meldrum

No, we are completed for the entire year. We were able to accelerate the hiring of the 50 sales reps that we had planned to hire this year and we will not be hiring any additional sales reps this fiscal year.

Junaid Husain - Soleil Securities

Then Jim, in broad strokes could you give us a sense for expenses associated with the DTC campaign say on a per geography basis?

Jim Evans

Well, we have said that we were expecting the DTC campaign in the Midwest to run around $6 million. That compares to the $8 million that we had seen in the previous campaign areas that we had done. As far as the cost impact of the expansion of the Southern DTC campaign, as you recall, that was like I said about an $8 million campaign for the full seven months. We are reinitiating that campaign, running from basically September through the end of the year.

So, you can kind of look at the type of run rate. Again, taking into consideration the current economic situation and the cheaper air time that will have an impact on driving that same sort of run rate down to what we're going to be experiencing we think more in the Midwest, those types of levels but for that shorter period.

Peter Meldrum

Yeah we are seeing the same benefit in the South in its reinitiation that we saw in the Midwest in terms of being able to get advertising time cheaper than we had previously because of the current economy. So, I agree with Jim's assessment. Both campaigns, if they ran a full seven months, should be in the $6 million ballpark. Of course, the South will be three months shorter than that.

So, I think you can do the math. Please do remember, though the point that I made in my remarks earlier that we feel that the increase in revenues from these initiatives will generate profitability for the company that should cover the cost. So, we're not seeing an impact of this investment in boosting our revenue growth. We're not anticipating an impact on the bottom line.

Operator

Sir, we've come to the end of our allotted time. I now turn the call back over to you.

Peter Meldrum

Thank you and I want to thank everyone for listening in and participating on the earnings call for Myriad Genetics. This does conclude our remarks and 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 line.

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Source: Myriad Genetics, Inc F4Q09 (Qtr End 06/30/09) Earnings Call Transcript
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