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Myriad Genetics Inc. (NASDAQ:MYGN)

F2Q10 Earnings Call

February 2, 2010 4:30 p.m. ET

Executives

Peter Meldrum - President and Chief Executive Officer

Jim Evans - Chief Financial Officer

Greg Critchfield - President, Myriad Genetic Laboratories

Mark Capone - Chief Operating Officer

Analysts

Ian Sanderson - Cowen

Geoff Meacham - J.P. Morgan

Amanda Murphy - William Blair

Charles Duncan - JMP Securities

Bill Quirk - Piper Jaffray

Ashim Anand - Natixis Bleichroeder

Lucy Lu - Citigroup

Operator

Ladies and gentlemen thank you for standing by. Welcome to the Myriad Genetics Second Fiscal Quarter Earnings Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator instructions)

As a reminder this conference is being recorded, February 3, 2010. I would now like to turn the conference over to Peter Meldrum, President and Chief Executive Officer. Please go ahead, sir.

Peter Meldrum

Thank you. Good afternoon. And welcome to the Myriad Genetics earnings call for our second fiscal quarter ended December 31, 2009. My name is Peter Meldrum and I’m Myriad’s President and CEO.

I am joined today by Jim Evans, our Chief Financial Officer; Gregory Critchfield, President of Myriad Genetic Laboratories; and Mark Capone, Chief Operating Officer of Myriad Genetic Laboratories; and our future President of Myriad Genetic Laboratories.

I’ll begin discussion this afternoon with a brief review of the past quarter and will be followed by Mr. Evans who will discuss our financial results. Dr. Critchfield and Mr. Capone will review the company’s molecular diagnostic business and sales and marketing initiatives. At the end of the presentation, I will turn the conference call back to the Operator for the question-and-answer period.

Please note that some of the information presented here today may contain projections or other forward-looking statements regarding future events or the future financial performance of the company. These statements are based on management’s current expectations and the actual events or results may differ materially and/or adversely from those expectations for a variety of reasons. We refer you to the documents the company files from time-to-time with the Securities and Exchange Commission, specifically the company’s annual report on Form 10-K, its quarterly reports on Form 10-Q and its current reports on Form 8-K. The documents identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

Before we get into the financial results of the quarter, I’d like to spend a few minutes discussing a management change that was announced today. As mentioned in our news release, Dr. Gregory Critchfield will retire on March 1, 2010 to spend more time with his grandchildren and focus his energies on his many philanthropic pursuits.

I’ve had the pleasure of knowing and working with Greg for more than a decade and through the years I have developed great admiration for his keen intellect, medical expertise and genuine concern for the well being of patients with cancer.

Together we have worked towards the goal of commercializing products that assist physicians in improving the healthcare of their patients. Greg will be missed by all of us here at Myriad but I’m comforted by the fact that Mark Capone is eager to step into Greg’s shoes and carry on Myriad’s tradition of developing products that save lives and improve the quality of life for patients with cancer.

Mark has been with the company for more than seven years and has been responsible for the management of the company’s sales force and laboratory operations. Mark is eminently qualified for his expanded responsibilities having received an MS degree in management and an MS degree in chemical engineering from MIT.

He held management positions overseeing sales, production and development operations at Eli Lilly for 17 years prior to joining Myriad. We are all very excited to welcome Mark to his new role at Myriad.

Now, let me return to our results for the second fiscal quarter ending December 31, 2009. As I discussed on our last earnings conference call, we experienced a noticeable increase in weekly testing volumes during the latter part of September and throughout the month of October.

I’m pleased to report that this improved sample flow continued through November and December. As a result, revenues for our second fiscal quarter grew 11% to a record $92.8 million from the $84 million for the same period of the prior year.

We attribute this revenue growth to improve economic conditions and the increased sales and marketing initiatives that were implemented last August, particularly the company’s two direct-to-consumer marketing campaigns and the expansion of our OB/GYN speakers bureau.

These marketing programs are expected to continue to drive revenue growth during this third fiscal quarter. We also added 50 new sales reps to our OB/GYN sales force at the end of last summer. However, we are not anticipating significant productivity from these new hires until our fourth fiscal quarter.

In addition to these marketing programs, the company recently entered into a collaboration with Mammography Reporting System, which has enable us to expand our BRACAnalysis market into the women’s healthcare sector.

Given the early success of these sales and marketing programs, the increase in our testing volumes over the past quarter and our 9% sequential revenue growth, I remain confident that the company will meet or exceed the current first call consensus revenue of 381 million and earnings per share of $1.47 for fiscal 2010.

Our decision to invest in Myriad’s future by expanding our sales force and initiating the DTC marketing campaigns is paying off. Not only have we seen positive topline results from these initiatives but we were able to achieve this growth without hurting our bottom line.

I’m pleased to report that the company achieved a record net profit of $35.4 million, a 67% increase from the same quarter of the prior year and a 16% increase over last quarter. This increase in profitability was accomplished as a result of our improving gross profit margin, which is currently 88% and achieving efficiencies throughout the company’s operations.

As a result of this profitability, the company generated approximately $40 million of free cash flow during the second fiscal quarter, growing our cash position to $458 million. With no debt and an improving revenue and profit picture, we now have the flexibility to explore various uses of our cash including returning some of it back to our shareholders through payment of the cash dividend and/or a stock repurchase program.

Myriad remains on track with the planned introduction of our eighth molecular diagnostic product later this quarter and the launch of our ninth new product during the second half of this calendar year.

Additionally, we recently announced the results of the clinical study of our seventh product OnDose that were presented at ASCO, Seventh Annual Gastrointestinal Cancers Symposium in Orlando. Greg will discuss these data in more detail later on in the call.

In summary, Myriad’s products are well positioned for future growth, as they provide critical information that will improve patient healthcare, will save money in the overall healthcare system and address the current need to focus on prevention of disease rather than waiting one for to get sick and then attempting to treat the illness.

Before I turn the call over to our Chief Financial Officer, Jim Evans, I’d like to mention that Myriad will be hosting an Investor Day in New York on March 3rd. We intend to have the company management there, as well as, several outside experts. If you are interested in attending, please do not hesitate to contact us.

Now it is my pleasure to turn the call over to Jim.

Jim Evans

Thank you, Pete. It is my pleasure to present a more detailed look at Myriad’s financial results for our second fiscal quarter ended December 31, 2009. Myriad’s revenues for the quarter of $92.8 million grew by $7.6 million or 9% over our first fiscal quarter of 2010. This improvement was driven by growth in each of the market segments that Myriad addresses.

More specifically, on a sequential quarterly basis Myriad experience greater than a 4% increase in revenues derived from our oncology or affected patient population. And more than a 20% increase in revenues from our OB/GYN or asymptomatic population in the second fiscal quarter, as compared to the first fiscal quarter of 2010.

Historically Myriad’s December quarter is seasonally the strongest quarter of the year. While we are unable to definitively distinguish how much of the revenue growth this quarter is a seasonal phenomena and how much is attributable to a revival of consumer confidence.

During the second fiscal quarter we did see over 2500 new physician customers utilize Myriad’s products for the first time, which we believe is indicative of an expanding customer base.

We are also excited by the impact that we have seen to revenues in the DTC territories that have grown above and beyond that which we experienced in other territories. You will hear more from Mark regarding the DTC efforts later in this call.

The $92.8 million of revenues for the December quarter comfortably exceeded the Thompson First Call census revenue estimate of $92.2 million. I’m also pleased to report that sample flow continued to be strong through January.

Gross margins improved once again to a new all time best of 88%, an increase from 87% in Q1 of this year. We attribute this uptick to improvements in our laboratory processes and to volume discounts that we have been able to negotiate with our suppliers. We continue to believe that gross margins at this level are sustainable with room for additional improvements over the next few years.

Research and development expenses for the quarter ended December 31, 2009 were $5.1 million, compared to $4.6 million of continuing operations, R&D expense in the same quarter of the prior year.

Year to date, Myriad has spent just under $11 million on R&D and we continue our efforts to bring new products to the market and to expand the indications and knowledge base surrounding our existing products. As Pete mentioned, we are still on track to launch a new test later in this third fiscal quarter and a second new test later in this calendar year.

In addition to the recent presentation of our OnDose trial results at the ASCO GI meeting, Myriad is directly performing or sponsoring over 25 clinical programs both perspective and retrospective that we believe will provide critical information that will aid medical practitioners to fully appreciate the necessity of using molecular medicine and more specifically Myriad’s products to more effectively treat their patients.

Selling, general and administrative expenses for the quarter ended December 31, 2009 were $42.1 million, compared with $35 million in the second quarter of 2009. As we have discussed in previous calls, the increase was primarily attributable to the hiring of additional sales representatives to address the OB/GYN market. The expanded DTC campaign that encompasses both the Midwest and the south and the additional 120 new positions that have been added to the speakers bureau.

We spend approximately $5.5 million on the DTC campaigns in our second fiscal quarter for a total expenditure of $8 million so far in this fiscal year. We expected this marketing investment will benefit future revenue growth for years to come.

Operating margins improved for the quarter ended December 31, 2009, as compared to the September 2009 quarter. Operating margins for the December quarter increased 200 basis points to 37% from 35% in the September quarter. This improvement, even in the face of the increased investments in our aggressive marketing initiatives was driven by our record gross margins, as well as, leverage on our research and development expenses.

Myriad continues to maintain strong cash balances. Cash, cash equivalence and marketable investment securities increased $40.6 million over the prior quarter ended September 30, 2009 to $458 million. Unfortunately, interest rates have dropped significantly over the past year. During the last 12 months higher returning investments have matured and the available funds have been reinvested at the lower current rates.

As a result, Myriad’s interest income for the second fiscal quarter dropped by half or approximately $1.9 million from the same quarter of the previous year, as always, the number one goal of Myriad’s investment policy is preservation of capital, so you will not see us stretch into more risky investments in search of better returns. I believe that we can anticipate similar returns to those we experienced in this most recent quarter for the foreseeable future. Fortunately, as our cash balance continues to grow, our interest income should also grow.

Myriad continues to enjoy extremely good reimbursements, extremely good reimbursement for our tests from practically all insurance companies and HMOs.

During the quarter ended December 31, 2009, 96% of revenues were paid by third party payers and only 40% were paid by patients primarily as a result of co-pays or deductibles. This split has remained constant even during these difficult economic times.

Income taxes for the December 2009 quarter were -- $980,000. This is comprised of both alternative minimum tax that cannot be fully offset by our accumulated net operating losses as well as state taxes.

The AMT has estimated as 2% of net income before tax. Myriad also has NOLs at the state level for certain states but has exhausted accumulated NOLs per other states resulting in taxes due to those states.

Net income for the quarter ended December 31, 2009 improved 67% to 35.4 million, equal to $0.36 per diluted share, compared with net income of $21.2 million or $0.22 per diluted share in the second fiscal quarter of 2009. $15.5 million of this improvement during the period is a result of the company’s decision to spin off the pharmaceutical subsidiary whose expenses impacted the second quarter of fiscal 2009 but had no impact in the second quarter of fiscal 2010.

I will point out that the results of $0.36 EPS exceeded the Thompson First Call consensus EPS for the quarter of $0.34. Finally 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 provide an update for you today on our molecular diagnostics business. The recently completed quarter marks a record in revenues for our molecular diagnostics business. This growth was achieved in part, by the marketing initiatives that we instituted last August.

As Mark will be speaking in greater detail about these activities a little later on, I would like to focus on some of the intermediate and longer term opportunities in the exciting field of molecular diagnostics, an important part of our strategy is to generate clinical data that support our products.

I am going to discuss some of our recent clinical research efforts for two of our products OnDose and BRACAnalysis. I will conclude with some remarks on Myriad’s products pipeline.

Myriad has been supporting clinical studies for its newest personalized medicine product OnDose. OnDose launched last spring provides the oncologist with a measurement of chemotherapy exposure to the important drug 5-Fluorouracil or 5-FU.

OnDose gives the oncologist a measurement of how much 5-FU’s a patient is exposed during a 5-FU infusion, providing a target to help optimize the amount of drug that each patient receives.

On January 24, 2010, Myriad presented a poster at the American Society of Clinical Oncology Seventh Annual Gastrointestinal Cancer Symposium held in Orlando. We presented data on 150 U.S. patients receiving FOLFOX-6 with or without Avastin to treat colorectal cancer.

FOLFOX-6 is the most common protocol for treating colorectal cancer in the U.S., consisting of folinic acid, 5-fluorouracil as the backbone drug and oxaliplatin. We demonstrated that 81% of U.S. patients had suboptimal drug exposure when dosed according to traditional body surface area or BSA protocols. 28.7% of these U.S. patients had elevated exposure to the drug and 52.6% had low exposure to the drug. Because too much drug leads to increased toxicity, hospitalization and treatment interruption, and too little drug allows the tumor to continue to grow both situations result in suboptimal outcomes for the patient and increased costs to society.

Furthermore, for the subset of patients where OnDose measurement was conducted over four cycles administration a 12 fold improvement occurred in patients falling within the therapeutic range of drug exposure, compared to the traditional BSA dosing.

These ASCO GI data are important for several reasons. First, they are based on measurements of drug exposure in actual community practice settings. They are neither theoretical nor are they derived from a narrow tightly controlled study that may not apply generally.

Second, this is the largest data set of its kind since routine measurement of 5-FU exposure in clinical practice has been heretofore unavailable. Third the poster documented there is a great deal of variability in 5-FU exposure among cancer patients in U.S. practice and that the traditional BSA dosing protocols fail to ensure that patients receive optimal drug exposure.

Fourth, these data for measurements of 5-FU exposure in patients on combination therapy used in the U.S. are entirely consistent with what was reported in the Gamelin 2008 Journal of Clinical Oncology paper. Gamelin showed that 85% of patients were suboptimally dosed with 5-FU, compared to 81% in the recent U.S. study.

Fifth and perhaps most importantly OnDose demonstrated that community physicians were able to achieve improved drug exposure in their patients through individualized dosing. We believe that these data will help convince oncologists of the failure of BSA dosing to deliver optimal amounts of drug to patients and that OnDose provides a better way to optimize drug dosing.

In addition to this recent -- to this ASCO GI study report, Myriad is working with other researchers to show the importance of OnDose monitoring in 5-FU chemotherapy regimens.

One such study expected to begin this month is an investigator initiated phase 2 controlled trial from the university of North Carolina to establish the proportion of patients that achieve optimal dose -- an optimal dose range using OnDose to help adjust the amount of drug given to patients.

This study will involve approximately 50 colorectal cancer patients treated with FOLFOX Avastin in three community based clinical practices. The goal is to demonstrate that OnDose guided chemotherapy improves the ability to achieve a targeted exposure to 5-FU within four cycles of chemotherapy as compared to historical BSA dose therapy, by determining the proportion of patients that achieve an optimal AUC range in each arm.

In addition the study will also examine the incidence of toxicity in patients with OnDose monitoring versus traditional BSA guided therapy. Additional OnDose, excuse me, additional OnDose studies are in the planning process and we will keep you apprised of their progress.

On the BRACAnalysis side, Myriad recently launched a study to determine the frequency of BRCA mutations in breast cancer patients that are negative for HER2, estrogen receptor ER and progesterone receptor PR.

Note that HER2, ER and PR are routinely analyzed on newly diagnosed breast cancer cases. Approximately 15% of patients diagnosed with breast cancer have tumors that have negative for these three markers. Small studies have reported higher mutation carrier prevalence in Ashkenazi Jewish and African-American breast cancer patients. But it is not currently known what the prevalence is of mutations in HER2, ER and PR negative patients that will be found in routine clinical practice.

We are working with investigators at U.S. oncology, one of the nation’s premiere oncology services companies to determine as a primary end point of prevalence of mutations in such patients.

A secondary objective is to determine the mutation prevalence in individuals who lack a strong family history for breast or ovarian cancer. This study will involve approximately 200 patients. We anticipate that if the study shows that a significant percentage of these patients have (inaudible) mutation it could result in expanded professional organizational guidelines for identifying who should undergo BRACAnalysis testing because of their elevated risk for hereditary breast and ovarian cancer.

Finally, I have a few comments on our product pipeline. We continue to work to build our pipeline of new products through both internal research and external opportunities that we end license. As Pete and Jim mentioned, we have plans to launch a molecular diagnostic product during this quarter followed by a second one in the second half of this calendar year.

In addition, we continue to develop other break-through products with you’re talented internal research group while evaluating strategic external product acquisitions. Given Myriad’s strong cash position, our preeminent sales force addressing both oncology and OB/GYN markets and our demonstrated ability to take markets from the research bench to bedside, we are an attractive partner for a number of companies looking to commercialize their products.

Our new product pipeline contains about a dozen predictive, personalized and prognostic medicine opportunities, as we focus on products that address large unmet clinical needs and therefore have large potential markets. We maintain our commitment to launch at least one new molecular diagnostic product per year.

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. There’s a large potential for growth, both in current products and in future opportunities we are examining. We look forward to further growing our business as we make a real difference in healthcare.

On a more personal note, my decision to retire is a bitter sweet one. I’m excited to be able to spend more time with my family to perform non-profit philanthropic work and to devote time to my writing.

On the other hand, I will miss the excitement at Myriad and especially all of my friends here. I express my profound gratitude to all of the dedicated and talented individuals I’ve had the pleasure of working with at Myriad during the past 11 and half years. This spans across all divisions of the company, all the officers and directors.

The world is a better place as a result of their hard work. I give special thanks to Pete for his confidence, support, mentorship, leadership and friendship. Myriad is strong and growing.

Having hired and worked very closely with Mark Capone for seven years, I have seen firsthand his keen insight, skill and intellect. He and other members of the MGL leadership team have worked together to help build the company into what it is today.

I could not be more pleased that Myriad Genetic Laboratories is in Mark’s talented hands and I’m supremely confident that under Pete’s capable leadership Myriad will continue to grow and flourish. I wish all of my friends and associates at Myriad the very best.

Thank you for your kind attention. I would like to turn the microphone over to Mark Capone. Mark?

Mark Capone

Thank you, Greg. Before I begin, I want to thank you for your leadership and coaching over the past seven years. Your vision, passion, integrity and wisdom have been instrumental in the success of Myriad and in my personal career. You are leaving behind a legacy that has positioned Myriad as a leader in the revolution that is taking place in medicine. On behalf of everyone at Myriad Genetic Laboratories we wish you much continued success.

Now it is my pleasure to provide some additional detail on the progress we have made on the enhanced sales and marketing initiatives that we launched during the first quarter of this year.

I’m pleased to say that each of these activities is starting to contribute to our revenue growth in both the oncology and women’s health segments. First, we accelerated the hiring of our new women’s health account executives completing the addition of 50 new representatives by the end of August.

This is the third consecutive year that we have expanded our women’s health team, each year implementing new strategies to increase the adoption curves in these territories. In addition, this is the first year where we split existing territories to further increase penetration.

I’m pleased to say that the adoption rates in both these new and split territories are 30% higher than previous years. The split territories are showing adoption rates similar to new territories, which valid dates the opportunity to even further penetrate the women’s health market.

As a result, during the second quarter, we increased our OB/GYN customer base by 25% over the first quarter. Historically, new territories have achieved breakeven revenue in six to nine months and we believe we are on track to meet or exceed those time lines.

The second initiative is our direct-to-consumer campaign. In mid-August we initiated a new campaign in the Midwest and we renewed our campaign in the south. Having previously conducted two other campaigns, we are benchmarking the Midwest against this historical performance.

Through the end of December, the Midwest campaign performance is similar to that of the two previous campaigns that exceeded our double-digit return on investment hurdle rate.

In the south, we are conducting our first pulse campaign as a follow-up to the fiscal year ‘09 campaign. Although the incremental sample flow from this pulse campaign is not as large as we typically see in a new campaign, we are definitely seeing positive signs and have decided to extend the advertising program past the original December 31st deadline and continue it through the end of March. While primarily benefiting the women’s health segment, we are seeing spillover contributions in the oncology segment as well.

The third initiative is to accelerate our peer-to-peer efforts. Peer-to-peer programs typically involve an experienced physician discussing case studies and common objections with three to five less experienced physicians. These programs have proven to be highly effective. During the second quarter we exceeded our goals and successfully implemented 717 peer-to-peer programs with approximately 2500 physicians.

In addition, we increased our capacity to conduct these programs by training an additional 120 speakers expanding our speaker’s bureau to more than 500 healthcare providers. We anticipate continuing at this heightened peer-to-peer level of 700 events per quarter throughout the rest of this year.

The fourth initiative was new this past quarter and focused on creating loyal customers ordering with increased frequency. We estimate that over 85% of our ordering OB/GYN physicians test at a rate lower than professional society guidelines dictate.

Historically, revenue growth has been driven by a significant increase in new ordering physicians. While this is still important for new territories, retention of loyal customers becomes increasingly important for more mature territories. We have demonstrated that once a physician has the experience of ordering at least five tests, they are three times more likely to continue as a loyal customer.

To facilitate the complete integration of genetic testing into physician practices, we have highlighted a clinical experience program in the women’s health market. Although the program is in the early stages, it is already exceeded our expectations and has generated greater than the 300% return on investment.

In addition, we have created a special incentive program to reward our sales team for both customer retention and new customer development to reinforce these joint goals. Since all of these initiatives were implemented during the fiscal second quarter, we believe we will see increasing revenue contributions in the second half of this fiscal year.

To date we believe less than 5% of mutation carriers have been identified in United States and we continue to develop innovative ways to realize the tremendous market potential still remaining in the hereditary cancer market.

And now I will turn the call back to Pete.

Peter Meldrum

Thank you, Mark. And I will turn the call back to the Operator for the question-and-answer period.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from the line of Ian Sanderson with Cowen. Please go ahead.

Ian Sanderson - Cowen

Good afternoon. Thanks for taking the question. First, if I could ask Pete to repeat what you had said about returning, plans to return cash to shareholders. Are there specific plans in place to start paying a dividend or implement a share repurchase program?

And secondly, can you provide any color about around sample demand seen in the first weeks of this year?

Peter Meldrum

Thank you, Ian. Myriad has been investigating the most appropriate use of the cash we generate. The company is very fortunate in that, it has a very strong cash generating capability, as I mentioned, $40 million this past quarter.

Our first priority for the use of cash is to reinvest it in the company in terms of infrastructure and our product pipeline, research and development activities as well. We also have a very strong focus on end licensing products and to take a very aggressive look at moving the company to Europe within the next three years. And that will certainly consume cash whether it’s an acquisition in Europe or building facilities in Europe from scratch.

But as I alluded to on the call, we’re probably generating more cash than the company can wisely spend on internal programs. So the company has been in discussions internally with our investment bankers and we will be discussing at the board level whether or not it would be appropriate to explore other ways of giving cash back to the shareholders and the two main ways I mentioned on the call would be payment of a cash dividend or a stock repurchase program.

I would not anticipate any of those being implemented in this fiscal year but we definitely will be seriously considering both of those options in the next fiscal year beginning July 1, 2010. And let me ask Jim to comment briefly on sample flow.

Jim Evans

Yeah. So as I mentioned earlier, sample flows remain strong through January and I’m optimistic about this quarter. It’s still too early to the comment on the strength of the entire quarter. As historically we have encountered a couple of challenges in our third fiscal quarter.

First, we’ve had the impact of the Christmas New Year holidays. Samples that would have been received during the holiday period, given our seven to 10-day turnaround time would typically be reported out in early January. So the lower number of samples received during the holidays ends up impacting the March quarter revenues.

We also see a resetting of insurance deductibles at the beginning of the calendar year that could cause patients to push off testing until those deductibles have been met. But even with these challenges, I believe that Myriad has taken the necessary steps through our marketing and sales initiatives to assure that the company has once again embarked on a period of sustained revenue growth, so we are optimistic about this quarter but it’s still way early to be able to say much definitively on it.

Ian Sanderson - Cowen

Thank you very much.

Operator

Our next question comes from the line of Geoff Meacham from J.P. Morgan. Please go ahead.

Geoff Meacham - J.P. Morgan

Hey, guys. Thanks for taking the question. Greg, congrats on the retirement. Hope you find some time to race cars alongside, yeah.

Greg Critchfield

Thanks, Geoff.

Geoff Meacham - J.P. Morgan

And question for you just on the sequential trends. I’m wondering if you can go in a little bit more detail about the, you know, the trends for the quarter. Is there any way to tease out demand from healthcare spending accounts at year-end versus DTC and then what can you tell us about the geographic differences in volume between DTC regions and all others, with as much specificity as you can?

Peter Meldrum

Either Greg or Mark, if you’d like to take that question.

Mark Capone

Sure. I’m happy to. This is Mark. Let me take the first or the second question first, Geoff. As far as geographic differences, we track very closely the samples coming in, as well as, revenue reported from DTC areas relative to the rest of the nation, which we use as an ongoing control.

We have seen significant increases in samples from those DTC areas relative to that national control and the increases consistent with the double-digit hurdle rate that we would expect to see and consistent with what we have seen historically in the previous two years.

So that sequential difference or so that difference, I think has caused us to be very positive towards this campaign because it appears as the other ones have as well. I think your first question had to do with sequential trends. Is that right, Geoff?

Geoff Meacham - J.P. Morgan

Yeah. More or less, I think, last fiscal -- this time last year you guys had a big benefit from demand from healthcare spending accounts at the end of the year, I’m wondering if there’s any way that you can kind of talk to how that impacted the quarter versus how you think DTC impacted the quarter because the healthcare spending trends are…

Greg Critchfield

Yes. Yeah. This is Greg. Let me jump in on that, Geoff. The health savings accounts are helpful but they are not, they are clearly not the full force that’s play at the end of a quarter and part of that is that people put in a certain amount at the beginning of the year and they can draw from it through the year to offset expenditures that may not be covered fully by their health plans.

One other things that I think happened during this quarter and we don’t have any way of substantiating that, but it is -- but in fact people put less money in seeing the economy souring, seeing the prospects of unemployment, they weren’t willing to take money and put it in as much and I think that’s clearly a -- is a clear trend that we believe is there.

We don’t have visibility in what people are using to offset things. What Jim said, though, is that the relative proportion of spend by an insurance company versus individuals has stayed relatively the same even through the worsening recession.

So the out-of-pocket expense that people are paying appears to be the same fraction of payment that we saw before the recession really turned south.

Geoff Meacham - J.P. Morgan

Okay. Thanks a lot. That’s helpful.

Operator

Our next question comes from the line of Amanda Murphy with William Blair. Please go ahead.

Amanda Murphy - William Blair

Hi. Thanks. Just a question. It seems that most physicians are aware of the test, so I’m just curious as you’re out in the field talking to docs, what is it specifically that converts physician to a new ordering doctor?

Peter Meldrum

Thank you, Amanda. And I’ll ask Mark Capone to handle that one.

Mark Capone

Sure. Thank you, Amanda. I think for most physicians the key piece of information that they need is to understand how this test is going to change the medical management for their specific patient, while they are aware of the tests, they may not be aware of the details of changes in medical management and once they do become aware of those differences, normally that’s enough for them to recognize that managing the patient is it’s crucial to have this information to manage that patient.

I think those are -- that’s probably the first and foremost. Once they understand that, then they may have questions about logistics, they may have questions about healthcare insurance, they may have questions about discrimination, all of which are readily handled with some of the latest information that we have. So it’s typically that medical management question that gets them over that first hurdle.

Amanda Murphy - William Blair

Okay. Thanks a lot.

Operator

Our next question comes from the line of Charles Duncan with JMP Securities. Please go ahead.

Charles Duncan - JMP Securities

Hi, guys. Thanks for taking the question and congratulations on a nice turnaround in the quarter. My question was on the DTC traction that you’re seeing, do you believe it’s sustainable, perhaps you could give us some color on the number of docs that are using the tests more very broadly across your practice or do you think there’s upside in that and where do you think the next DTC will be done and when?

Peter Meldrum

Thank you, Charles. And I’ll talk a little bit about answering your question then I’ll ask Mark Capone to provide greater detail. The campaigns thus far, particularly the one in the Midwest have been tracking very close to what we’ve seen in the northeast campaign and the prior south campaign.

So we do think that the benefits we are seeing are sustainable since they certainly were sustainable from the campaigns that we had done in the previous two years. Mark?

Mark Capone

Yes. I would agree. In fact, historically in the previous two campaigns the benefit we saw in the third quarter equaled what we had seen in the second quarter and we don’t see any reason to expect anything different from this campaign. All the signals look to be the same.

To your other point, the -- what we did see is 25% increase in the number of OB/GYN customers in Q2 relative to Q1. Again, we saw much of this to occur in those areas where the DTC campaign was occurring and we would anticipate that to continue through Q3 as well.

Peter Meldrum

And Charles, to finally wrap up your question. The three regions that have not yet benefited from a direct-to-consumer marketing campaign would be the California region, the mid-Atlantic region and the northwest region, and so it’s likely to be one of those three regions that we move in next fiscal year.

Charles Duncan - JMP Securities

Thanks for the added color.

Operator

Our next question comes from the line of Bill Quirk with Piper Jaffray. Please go ahead.

Bill Quirk - Piper Jaffray

Yeah. Thanks, guys. And congrats on the quarter. First off, appreciate the color around BRACAnalysis, I was hoping, could you give us a little color to the performance of some of the other tests and I guess, I’m thinking about the products that have been on the menu for sometime, as well as, some of the new ones, such as Prezeon and OnDose?

Peter Meldrum

Thank you, Bill. We have seen good sample flow from essentially all of the company products so it hasn’t been restricted to BRACAnalysis. This past quarter, again, COLARIS was our fastest growing product and has been our fastest growing product for the past several years.

The company is very excited about Prezeon. Prezeon represents the largest market potential of any of our products including BRACAnalysis. But I have cautioned investors that we need to do additional clinical validation before Prezeon can be used to its full potential. So Prezeon revenues are small and until we have additional clinical data, we don’t anticipate large revenue contributions from Prezeon.

OnDose is probably the product that I’m most excited about. I think the clinical data showing patients who used OnDose versus the body surface area standard of care lived in the Gamelin study six months longer. That’s better than the drug Avastin, for example, just giving the patient the right optimal dose, and the toxicity was half that of patients using traditional body surface area dosing.

So we are very excited about OnDose and we are actually going to have Dr. Edward Chu, who is probably the leading expert in terms of treatment of colorectal cancer patients with 5-FU speak at Myriad’s Investor Conference on March 3rd, and he’ll talk in greater detail about the clinical benefit of OnDose but that certainly is a product that I think will be making great contributions to Myriad’s revenue growth in the near-term.

Bill Quirk - Piper Jaffray

Appreciate the color, Pete. Quick follow-up on Prezeon, if I may. Do you see yourselves altering the tests at all to chase after more of a pathway approach for your EGFR, do you think that PTEN by itself can really achieve some of these opportunities that you’ve thrown out there?

Peter Meldrum

It’s an excellent question, Bill. I do think there’s going to be more of a pathway component with one exception. There are a number of pharmaceutical companies today that are developing drugs in the PTEN pathway for which PTEN would be a companion diagnostic, very similar to BRACAnalysis being a companion diagnostic for the new PARP inhibitors that are being developed. In that case it would be PTEN by itself

In other areas, particularly with existing drugs such as Herceptin, PTEN likely would be combined with HER2 new and for the EGFR inhibitors like Vectibix and Erbitux it likely would be combined by KRAS. Both HER2 and KRAS are publicly available, so that would be easy to incorporate in a Myriad Prezeon test.

Bill Quirk - Piper Jaffray

Very good. Thank you.

Operator

Our next question comes from the line Ashim Anand with Natixis Bleichroeder. Please go ahead.

Ashim Anand - Natixis Bleichroeder

Congrats on a good quarter guys. The question is regarding the ACLU patent lawsuit, not the lawsuit per se but the thought process was some of the patients and some of the clinicians are also part of that lawsuit.

So I was wondering if you can comment on the fact that some of the patients and some of the clinicians are part of this lawsuit. Do you guys think that that negatively affects your position in terms of getting more adoption or getting new customers?

Peter Meldrum

One never knows what the publicity around the ACLU lawsuit will do in terms of negative or positive benefit. We have certainly from the feedback we get from our sales force not have any negative comments or reluctance to use the test based on the ACLU lawsuit. And if anything, I think the added publicity has had a positive benefit to the company.

And when the ACLU put forth their suit in an attempt to ban all gene patenting, it was very important for them to have some patients and so, there are some patients as plaintiffs. One of the patients complained that even though she was tested at Myriad and tested positive, she wasn’t able to get a second opinion. That, unfortunately, is an inaccuracy on the part of the ACLU.

Myriad when we first launched the test licensed 13 different laboratories at major universities throughout the United States to do second opinion confirmatory testing of specific mutations in the BRCA1 and BRCA2 genes and you can still get confirmatory second opinion testing at a number of those institutions. So it’s too bad that those statements were put out there incorrectly.

With regards to some of the physicians that are part of the suits, some of those were competitors of Myriad running a laboratory themselves that were unfortunately not able to continue once the patents had been granted to Myriad.

So, again, it’s not a general physician that someone who was a competitor and if the patents go away, they would like to become a competitor in the future, so I think there’s clearly a best interest there.

We have just completed a few hours ago the oral argument in front of judge sweet in the southern district in the court of New York and both Myriad and the ACLU presented those oral arguments and will now await his decision with regards to our motion for summary judgment.

Ashim Anand - Natixis Bleichroeder

Thanks a lot.

Operator

Our next question comes from the line of Lucy Lu with Citigroup. Please go ahead.

Lucy Lu - Citigroup

Great. Thank you. Can you please talk a little bit more about the fourth initiative that Mark talked about, the clinical experience program for the OB/GYN, because I think there’s a worry in the marketplace that once the physician [needs into their] entire practice it’s hard to really find new patients within that practice. Can you just describe what that program is?

Peter Meldrum

Yes, Lucy. And I’m going to make a comment on the statement you made and then I’m going to turn the call over to Mark Capone to comment specifically on that fourth initiative, because this is a newer initiative that was initiated in this past second fiscal quarter, most of our other marketing initiatives were discussed in our September quarter call and were initiated actually in August.

When we think of the oncology market, it is a incidence market. There are 194,000 women diagnosed with breast cancer every year. According to the American Cancer Society and an additional 22,000 diagnosed with ovarian cancer.

So year over year, year in and year out, there are over 200,000 women diagnosed with cancers that can benefit from BRACAnalysis testing. So I think that’s fairly easy for investors to get their mind around.

You have correctly pointed out that the OB/GYN market, because these are women who do not have cancer yet, we test them before they get cancer, so that they can take action to actually prevent the disease or at least delay the onset of the disease and catch it earlier when it’s more treatable.

This is a prevalence pool and as Mark pointed out, we have identified only 5% of the women in the United States who are likely carriers, mutation carriers in the BRCA1 and BRCA2 genes, so we have a long way to go to get through this patient pool.

A number of studies have shown that about 6% of the U.S. population are candidates for BRACAnalysis testing and would need the professional society guidelines. There’s 156 million women in the United States, so that represents about 9 million women who were candidates for testing and a $3000 a test, that’s $27 billion annually.

Now, if you look at the whole market, when we have exhausted all of the women that we are -- that are candidates for testing, then that prevalence market can only grow by the birth rate and so you’re right, that will exhaust the entire market. But again, it’s such a huge market, we anticipate it takes about 30 years to get through that prevalence population and that’s how we arrive at some of our market projections.

If you look on the micro scale, it is true that once a physician looks at all of the patients in his or her practice and those -- and that particular physician has identified and tested all of those women, then that market for that particular physician is only the new patients that come into the practice.

But again, that sounds, maybe worrisome on a micro level but on the macro level, again, you have to get through the entire population and if we can get to it more quickly in several years, then obviously the revenues will be substantially higher. So it is a huge market opportunity and again, I’ll point out we are only 5% penetrate or have identified only 5% of the individuals who are mutation carriers. Mark, would you like to comment then on the fourth initiative?

Mark Capone

Yes. I’m happy to you and thanks for the question, Lucy. Just to add maybe a slightly more color to Pete’s comments, then I can talk about the initiative, I recently have looked at those OB/GYNs that have ordered tests from Myriad less than 50 of the 35,000 OB/GYNs have really tested what appeared to be all the appropriate patients in their practice, so that’s less than 50. There is -- there is ample opportunity in almost every OB/GYN’s practice to find additional appropriate patients, which underscores Pete’s point that we have got a long way to go.

This particular initiative was designed to assist those OB/GYNs that were interested in putting in place programs that would allow them to identify and test all of those patients that are appropriate based professional cited guidelines, essentially they were -- they are many clinical studies done in a physician’s office, we work very closely with them during and after that clinical study period to make sure that we understand anything in that experience that we may have been able to provide to be more helpful as they integrate this into their practices.

And as we mentioned, that has been very well received by physicians and we’ve already seen a very significant return on our investment as we institute these clinical experience programs in each of these physician’s offices.

Lucy Lu - Citigroup

All right. Thank you. And congratulations on a good quarter. Thanks.

Peter Meldrum

Thanks, Lucy.

Operator

Thank you. We’ve come to the end of our allotted time for questions. I will now turn the call back over to Peter Meldrum. Please continue with your presentation or closing remarks.

Peter Meldrum

I would like to thank everybody for attending the Myriad genetics second fiscal quarter earnings conference call and this does conclude our call. So thank you very much.

Operator

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

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Source: Myriad Genetics Inc. F2Q10 Earnings Conference Call
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