Myriad Genetics, Inc. (NASDAQ:MYGN)
F2Q2014 Earnings Conference Call
February 4, 2014 04:30 PM ET
Scott Gleason - VP, Investor Relations
Peter D. Meldrum - President and Chief Executive Officer
Mark C. Capone - President, Myriad Genetic Laboratories
James S. Evans - Chief Financial Officer
William Hagstrom - President and Chief Executive Officer of Crescendo Bioscience
Bill Quirk - Piper Jaffray
Amanda Murphy - William Blair
Drew Jones - Stephens
Sung Ji Nam - Cantor
Isaac Ro - Goldman Sachs
Dan Leonard - Leerink Swann
Ladies and gentlemen, thank you for standing by. Welcome to the Myriad Genetics Second Quarter 2014 Financial Earnings 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, Tuesday, February 4th 2014.
I would now like to turn the call over to Scott Gleason, VP, Investor Relations. Please go ahead, sir.
Thank you, (Petra). Good afternoon everyone, and welcome to Myriad Genetics second quarter fiscal year 2014 earnings call. My name is Scott Gleason, Vice President of Investor Relations here at Myriad Genetics, Inc.
During the call, we will review the financial results we've released today, after which we will host a question-and-answer session. If you've not had a chance to review the earnings release, it can be found in the Investor Relations section of our website at www.myriad.com.
Presenting for Myriad today will be Pete Meldrum, President and Chief Executive Officer; Mark Capone, President, Myriad Genetic Laboratories, and Jim Evans, Our Chief Financial Officer.
This call can be heard live via webcast at myriad.com. The call is being recorded, and will be archived in the Investor section of our website.
Please note that some of the information presented here today may contain projections or other forward-looking statements regarding future events or the future financial performance of the company. These statements are based on management's current expectations, and the actual events or results may differ materially and adversely from 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 reports on Form 8-K. These documents identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.
With that, I'd now like to turn the call over to Pete.
Peter D. Meldrum
Thank you, Scott. To begin the call, I am pleased to announce that Myriad will acquire Crescendo Bioscience for $270 million. Crescendo is a global leader in the autoimmune disease diagnostics area, with a very exciting rheumatoid arthritis product that accurately measures disease activity in RA patients.
We are fortunate to have Bill Hagstrom, President and CEO of Crescendo join us this afternoon. Bill will be providing an overview of Crescendo later on in the call.
I am also pleased to announce that Myriad delivered another exceptional quarter. Second quarter revenues rose to a record of $204 million, growing 37% year-over-year. All of our product groups experienced solid growth rates this quarter, reflecting continued strong demand from our physician and patient customers.
Net income was $50 million, an increase of 44% year-over-year, which resulted in earnings per share growth of 57% to $0.66 compared to $0.42 in the same period of last year.
Given these solid results, we are once again raising our financial guidance for fiscal year 2014. We are now projecting revenues of $740 million to $750 million, representing 21% to 22% growth, and earnings per share of $2.09 to $2.12, representing 18% to 20% growth. This guidance incorporates the impact of the Crescendo Bioscience acquisition, which we anticipate will close by the end of this fiscal year. Jim will provide more details surrounding our guidance later on in the call.
Today in my prepared remarks, I would like to highlight our strategic goals of continuing to deliver excellent performance and growing our business in the future. The first component of our strategy is well underway. As we are in the progress of transitioning and expanding our product portfolio to ensure that we maintain our current level of leadership position in the hereditary cancer testing market.
The second strategic initiative is to grow our business globally. We are seeing meaningful progress in the international market, and have a clear line of sight to several major growth catalysts.
Finally, we are at a point where our product pipeline will begin contributing meaningfully and will enable us to deliver and diversify our business over the coming years.
Let's look at each of these individual growth strategies in more detail beginning with the hereditary cancer market. As investors are aware we are in the process of transitioning our single cancer testing to myRisk, our new 25 gene hereditary cancer panel. I am pleased to announce that in the second fiscal quarter, myRisk generated $11.5 million in sales, representing approximately 6% of our total revenue. The initial reception for myRisk among key opinion leaders was extremely positive, and so we have commenced an expanded access launch to roll myRisk out to physicians across the country.
The myRisk test dramatically expands all of our barriers to entry. The analysis of 25 genes at Myriad's clinical accuracy is extremely difficult and complex for competitors to duplicate. Additionally, Myriad is able to leverage the economies of scale associated with our large testing volumes combined with decades of expertise and laboratory informatics and engineering to deliver myRisk at a price that is comparable to single cancer testing. We are also able to provide these results with a turnaround time at volume of less than two weeks, which is essential for cancer patients where the test may guide surgical decisions.
Finally our large database that correctly identifies harmful mutations versus benign mutations is a major competitive advantage for Myriad. We have already classified over 20,000 mutations in nine of the genes in myRisk, and we are rapidly building databases for the other 16 genes as well. Mutation classification is a numbers game. And since we test hundreds of thousands of patients every year, we believe we will dramatically expand our mutation classification advantage and further widen the gap between Myriad and its competition.
As we successfully accomplished with our BART test, we are in the process of performing clinical studies to expand NCCN and ASCO guidelines to reflect the value of myRisk's increased sensitivity. Once new guidelines have been established, the number of patients appropriate for hereditary cancer testing will increase significantly, which we believe will double the size of our oncology market.
Next, I am pleased to focus on our international business. As we reported in our November earnings call, international revenues are growing rapidly, and this quarter was no exception. International revenues increased to 138% over the prior year. Success in Europe depends on product differentiation. And as in the United States market, Myriad has substantial areas of differentiation in terms of the quality of our test, our ability to classify mutations, our turnaround times, and our high level of service.
In addition, we believe there are two major events on the horizon that will significantly expand our competitive advantage in the European market.
First, we will be launching myRisk and myPath Melanoma in Europe this quarter. The recent successful launch of myRisk in the United States and the new data showing an increased sensitivity of greater than 50% has created considerable interest among physicians in Europe.
Secondly, we believe AstraZeneca is on track to receive EMA approval for Olaparib within the next 12 months. Since physicians will need test results very quickly in order to find patients who may benefit from Olaparib, our two-week turnaround time puts us in a strong position to capture an attractive market share of this new market opportunity.
More importantly, we are launching a tumor BRAC test in Europe that will detect 30% more responders to Olaparib than conventional germline BRAC testing. We are not aware of any other commercial lab in Europe that can perform tumor BRAC testing.
The initial indication for Olaparib is in ovarian cancer, which represents a $100 million annual market opportunity for Myriad. However, PARP inhibitors are also being investigated in lung cancer, advanced breast cancer, gastric cancer, and other cancers, so the market has the opportunity to expand dramatically.
Myriad has had an exciting inflection point in terms of its product pipeline. Prior to 2009, we invested almost all of our R&D resources in a pharmaceutical pipeline. Since the spin-off of our pharmaceutical subsidiary, we have focused exclusively on our diagnostic pipeline and expanded those investments over the years. The investment has paid off with three product launches this year.
In addition to myRisk hereditary cancer test, we have two additional products that we believe will contribute significantly to Myriad's revenue growth next year.
The first is PROLARIS, which we believe will receive Medicare coverage by the end of this fiscal year. Mark will discuss PROLARIS in more detail during this call.
The second is Vectra DA, Crescendo's test of major disease activity in rheumatoid arthritis patients. The Crescendo acquisition provides Myriad with a strong presence in the autoimmune diagnostic market. It also diversified our product revenues, and will help drive our future revenue and income growth.
Overall, we anticipate five major benefits as a result of the Crescendo acquisition. First, the autoimmune diagnostic market is an exciting one with little competition. We believe molecular diagnostics will play a major role in improving patient healthcare through risk assessment, disease monitoring, prognostic outlook and therapy selection. While Crescendo's initial product addresses rheumatoid arthritis patients, we envision a significant opportunity to expand their technology to other autoimmune diseases.
Second, Vectra DA is currently on a revenue run rate of approximately $10 million per quarter, and is growing rapidly. This will provide diversification to Myriad's revenue stream. During the December quarter, Crescendo performed over 27,000 tests, compared to 22,000 in the September quarter, and 16,000 in the June quarter. Vectra DA represents a $3 billion global market opportunity for Myriad.
Third, the acquisition cements Myriad's status as a world leader in protein-based diagnostics. With Myriad RBM and now Crescendo, we are one of the only companies that has significant expertise in the discovery of novel DNA, RNA and protein biomarkers, making us the companion diagnostic partner of choice for the pharmaceutical industry.
Fourth, we will be able to accelerate Crescendo's growth by leveraging our commercial infrastructure. Myriad has developed significant expertise in customer service, sales and marketing, managed care and product development. Importantly, Myriad's 45% international sales team will open up new market opportunities for Vectra DA and other Crescendo products outside of the United States.
Finally, Crescendo offers meaningful long-term financial benefits. We expect the acquisition to be modestly diluted to earnings in our next fiscal year, but accretive to earnings in fiscal year 2016 and beyond. Looking out a few years, we believe Crescendo will be a major driver, a profitability growth for Myriad.
It is now my pleasure to introduce Bill Hagstrom, President and Chief Executive Officer of Crescendo Bioscience. Bill has done a phenomenal job transforming Crescendo into a world-class molecular diagnostic company. And he brings with him a talented group of individuals. Bill?
Thanks, Pete. Let me start by saying that on behalf of the entire Crescendo team, we are all very excited to join an organization with the reputation and track record of success that Myriad brings to the table.
I really believe that the combined strength of Myriad's operational expertise and Crescendo's outstanding products will bring our business to new heights over the next few years.
As Pete mentioned, Crescendo is a molecular diagnostics company focused solely on autoimmune and inflammatory diseases. Over 23 million Americans suffer from some form of autoimmune disease. And this leads to total healthcare expenditures of over $120 billion, compared to $70 billion in direct healthcare costs for cancer.
Autoimmune disorders tend to be lifelong chronic debilitating conditions that require decades of intervention and monitoring. We also tend to be poorly characterized with subjective or qualitative diagnostic tools, which can lead to significant variation in care and outcomes.
We believe this is a field of medicine that is highly underappreciated and right from molecular diagnostics to play a leading role in providing risk assessment, diagnosing disease, stratifying disease, severity, guiding therapy and associated response as well as tracking ongoing disease actually towards the ultimate goal of remission.
Our first commercial product, Vectra DA, is a great example of how molecular diagnostics can aid patient care in this arena. Vectra DA is a quantitative objective, protein-based test to routinely assess disease activity and provide rheumatologists with timely insights in how to more effectively treat their patients.
Prior to Crescendo, the standard of care for assessing disease activity and progression as well as guiding therapy for RA patients was the DAS28 composite index, whereby rheumatologists would make a subjective physical assessment of disease activity by squeezing and evaluating 28 joints throughout the body.
In contrast, Vectra DA directly measures the biology of a patient by serving 12 biomarkers that are key mediators of disease and cover significant pathways and mechanisms of importance.
Vectra DA test results as dated are quantitative and reported back on a scale of one to 100 providing a high level of reproducibility as well as resolution. The combination of external patient assessment in conjunction with Vectra DA provides a much more complete picture to improve patient care.
In major clinical trials looking at the gold standard endpoint or rate of graph of progression, Vectra DA significantly outperforms the DAS28 in its ability to characterize patients in remission or with low, moderate or high risks of progression. This allows the physician to potentially tailor patient therapy and adjust therapy much earlier in the disease cascade to see if a patient is going off course. And potentially help prevent irreversible joint damage.
Unfortunately the risk for disability is very high in RA patients and beyond 11 billion in direct healthcare costs. They are also substantial sociological cost in terms of vast productivity. The pharmacoeconomic argument to support test such as Vectra DA is strong and multidimensional. This is also a market characterized by a lack of competitive activity where we are establishing a strong position in creating major competitive barriers to entry.
First, we are pursuing a broad intellectual property strategy with patent filings and our testing methods and biomarker algorithms that when issued will extend into the 2030s, perhaps a significant result. We have a major head start over any potential competition. We believe the development curve for competitor would take at least four to five years to replicate our clinical program with cost of up to a $100 million.
Additionally, much as you see in the oncology space with prognostic testing through our extensive clinical collaborations, we have enabled to secure numerous one of a kind sample cohorts that we have extended patient follow-up data with them. Without access to cohort networks like Crescendo (inaudible), it will be virtually impossible for a new entrant to validate a product in a way that would allow it to compete with a comprehensive data reproduced and published on.
Finally, we have substantial first move of our advantage where we plan to make the Vectra DA brand and product standard of care in the coming years. This strategy also includes developing novel informatics tools like Vectra View, which allows physicians to analyze their entire RA patient population and document improvements and outcomes over time. It also includes mobile software tools like MyRA, which allows patients to track ongoing disease symptoms and better communicate with their physicians.
As we pursue this approach we have made significant penetration into the market as 25% of the approximately 3500 practicing rheumatologists in U.S. are now ordering Vectra DA.
In the United States there are 1.5 million individuals with RA who are typically seen four to six times per year by the physician. Vectra DA has multiple utilities and has often ordered to monitor patients provide clinical insight in conjunction with these office visits.
Medicare currently pays for two tests per year. And consequently based on Medicare coverage guidelines, our adjustable market is calculated approximately 3 million tests per year in the United States or over 1.5 billion based on our expected average selling price. On a global basis, this is 3 billion.
As I have mentioned, RA patients are seen by a relatively small group of 3500 rheumatologists in the United States. Consequently, the RA market represents a very concentrated channel. This is highly attractive as we can provide national coverage with a relatively modest investment. Currently, we have 33 highly trained rheumatology specialty representatives in the field, and we believe national coverage for an even larger business with multiple products is able to be leveraged with 40 to 50 sales representatives.
In terms of reimbursement, we obtain Medicare coverage for Vectra DA in May of 2013 with our current pricing at $575 per test.
Medicare is an important payer for us representing close to 40% of the RA population. We are also in the process of contracting with private payers. Along these lines, we recently began to generate wins with Medicare advantage plans. Currently, we receive some form of payment from approximately 80% of private insurance companies. And with the help of Myriad's managed care team, we plan to extend this coverage meaningfully over the next two years.
We are also working on a pipeline of products that Myriad will help bring us the resources to further develop as well as commercialize. We have four products in the concept phase in rheumatology. We work in such areas as risk assessment, early diagnosis, cardiovascular risk in RA population and therapy selection.
In regards to therapy selection, we have collaborations with several major pharmaceutical companies looking at biomarker-based solutions to help predict therapy response.
Overall, we believe this acquisition represents a great strategic move of Crescendo as well as Myriad. And we are very excited to take our business to new levels in the coming years as part of the Myriad team.
With that, I'd like to turn the call over to Mark to provide an operational update.
Mark C. Capone
Thanks, Bill. I am pleased to provide a more in-depth look at our operational performance. As Pete mentioned, Myriad had an exceptional second quarter. Our oncology division posted total revenues of $101.6 million representing 12% year-over-year growth.
Our Women's Health division delivered revenues of $94.6 million representing an impressive 90% year-over-year growth. The Women's Health segment accounted for almost half of our molecular diagnostic revenues in the fiscal second quarter and continues to be our highest growth segment. We see ample room for additional growth in the Women's Health channel since there is less than 10% penetrated and our sales force currently calls in only half of the 35,000 practicing OB-GYNs in the United States.
We are making exceptional progress across the full spectrum of our new commercial products. And I would like to provide some highlights starting with the myRisk hereditary cancer test.
As Pete mentioned, we got off to a great start this quarter with myRisk test generating almost $12 million in revenue, which is about 6% of total revenues. The feedback we have received from our early access launch has been very satisfying. Almost universally, physicians find myRisk easier to order given that they no longer have to prioritize and compromise on which genes to test.
In addition, the comprehensive test report based upon genetic test results and family history provides an easy summary of appropriate medical management recommendations that physicians find extremely helpful.
Additionally, physicians understand and appreciate the critical clinical value that myRisk provides for their patients. We presented data this fall demonstrating that myRisk increased the number of identified high risk patients by over 50% for hereditary breast and colon cancer patients.
Physicians and patients are reassured that every possible hereditary cancer gene has been evaluated, thereby increasing the value of a negative test result as well. The importance of this is not lost in the clinical community, and we have seen overwhelming demand to participate in our expanded access launch, which began this month. By the end of the fiscal third quarter, we plan to double the number of physicians that have access to myRisk.
In terms of process optimization, we have already made substantial progress in reducing turnaround times. As we showed at our Analyst Day, turnaround times for myRisk averaged 20 days in the early-access phase, which is ahead of our 21-day goal and substantially better than the 80-day turnaround times for competitors.
We have now optimized sample tracking (and that size) implemented additional automation and put in place other process improvements, which we believe will reduce turnaround times for the majority of samples to the critical two-week timeframe our customers expect.
Lastly, we look publishing a significant amount of supporting clinical validation data over the next several months, and are collecting clinical utility data from our early-access launch. We are also finalizing the pharmacoeconomic data supporting the value of myRisk and reducing overall costs. In aggregate, this information will be used starting this quarter with leading private payers as we begin reimbursement discussions.
We continue to expect to completely transition the hereditary cancer market to myRisk by the summer of 2015. Overall, I am extremely pleased with the execution of our team on the myRisk transition plan.
Next, I would like to discuss our urology division as we are making excellent progress with PROLARIS. At the Society of Urologic Oncology meeting this fall, we presented data from 1604 biopsy patients, showing that 28% of men have less aggressive cancer compared to the standard pathologic prediction. And 28% of men had a more aggressive cancer. In other words, the tumor aggressiveness of over half of the prostrate cancer patients was incorrectly categorized. This study demonstrates the importance of PROLARIS as an independent predictor of prostrate cancer outcomes beyond standard pathology.
At the ASCO GU meeting in late January, we presented final data from our PROCEDE 500 clinical utility study for PROLARIS, where we saw a 65% change in physician behavior. More specifically, based upon a PROLARIS score, urologists reduced therapy for 40% of patients and increased therapy for 25% of patients. The impacts on PROLARIS on physician decision making is substantially greater than for any other prognostic test.
Given the strength of this data and the unprecedented clinical validation data with 11 clinical trials in over 5000 patients, we continue to expect a CMS coverage determination PROLARIS before the end of our fiscal year. We believe that with Medicare approval, we will see material increase in sample volumes and revenues.
Next, I would like to provide an update on our dermatology business unit and the myPath Melanoma product launch. In our early-access launch, which began on November 12th, we initially targeted 30 thought leaders out of the 1500 U.S. pathologists that specialize in dermatology.
In the first eight weeks, we received 600 test orders, which we view as outstanding given the early stage and limited breadth of the launch. We believe this demonstrates the substantial unmet clinical need for a highly accurate diagnostic test for suspicious skin lesions.
As you may recall, we released later this fall showing that myPath Melanoma accurately differentiated malignant malenomas from benign skin lesions across all major melanoma subtypes with greater than 90% diagnostic accuracy. Given the substantial progress on our clinical utility studies and the additional clinical validation studies underway, we are on pace to submit a dossier to Medicare for reimbursement coverage in the second half of fiscal year 2015.
We are also making excellent progress with myPlan Lung Cancer test. As a reminder, we presented data at the 15th World Conference of Lung Cancer in Sydney, Australia, showing that myPlan Lung Cancer was highly effective at stratifying early stage lung cancer patients into high and low risk cohorts.
Patient from the low risk cohort had approximately half the mortality risk from lung cancer within five years as compared to those in the high risk group. We initiated our early-access launch in late October and have seen significant interest in the test. myPlan Lung Cancer is strategically important since lung cancer has the highest incidence and one of the lower survival rates of all cancers. Given the opportunities we see for future companion diagnostic test such as HRD, we envision leveraging this channel with additional products.
Lastly, I would like to provide some additional details on the BRACAnalysis market. There the many dynamics in this market, so it is becoming increasingly difficult to assess market share loss over time. Based on our analysis, we believe there was only modest additional market share loss in the second quarter. The share loss has been concentrated in the genetics portion of our oncology business, which compromises approximately 15% of our total revenue.
We have increased our outreach to genetics customers over the last quarter because they are the most technically advanced customers and are particularly interested in the quality differences between tests.
We have continued to present this quality difference dated to private payers, and have proactively had discussions with payers responsible for 75% of our revenue. Payers continue to appreciate the impact the quality has on both patient care and downstream costs. We have seen no material change in either the network status or the average selling price for our hereditary cancer products from private payers.
We are in the process of publishing a significant amount of this data in peer review journals to increase the visibility of these differences. The first of a series of publications on our Variant Classification program was recently published in Clinical Genetics, demonstrating our industry leading myVision Variant Classification program.
In this publication, Myriad showed an overall uncertain variant rate of 2.1% for the BRCA 1 and 2 genes. In addition, the publication highlights the results of Myriad's major investments over the last several years and reducing uncertain variant rates for specific ethnic populations.
For example, the uncertain variant rate for individuals of Latin American and African-American heritage will reduce from over 25% in 2002 to only 3% today. This is important to physicians since new test entrance will have particularly high uncertain variant rates within these ethnic groups, thereby creating differential care. These reductions in uncertain variant rates have been powered by proprietary Variant Classification techniques developed by Myriad, which cannot be matched by any competitor.
Additionally, we recently shared data on the very concerning inaccuracies in unregulated public databases that were designed for research and not clinical practice.
For example, in the highly respected Leiden Open Variant Database or LOVD, 66% of deleterious or some uncertain variants were classified incorrectly when compared to Myriad database. Mistakes such as these have major ramifications on patient care and healthcare costs, which is why a health economic analysis demonstrated that Myriad's BRACAnalysis test in favor pay over $2600 per patient tested.
Lastly, I would like to provide an update on the Medicare segment of the BRACAnalysis business, which represents 9% of our total revenue. Myriad has submitted reconsideration comments to Medicare voicing our significant concerns surrounding the rationale and process utilized in determining the reimbursement rate for the sequencing of BRCA 1 and BRCA 2 genes. It remains unclear how CMS actions were consistent with capital regulation with the requirements for medium pricing and why BRCA 2 is no longer reimbursed.
Trade association has submitted similar substantial concerns to Medicare including the American clinical laboratory association, the coalition for 21st century medicine, California Clinical Laboratory Association and AdvaMed.
In addition, physicians and patient groups have submitted concerns that lower quality test can in now way be used as an appropriate reference point without harming patients and increasing downstream costs.
Medicare recently extended the comment period until February 28th and we expect Medicare will make a decision on reimbursement by April 1st of this year.
In conclusion, our hereditary cancer portfolio is rapidly transitioning to the higher value added myRisk test. PROLARIS is on the cusp of obtaining broader reimbursement and myPath Melanoma and myPlan Lung Cancer are off to an outstanding start. We continue to be very excited about the future growth prospects of our transformative molecular diagnostic business.
And with that, I would like to turn the call over to Jim Evans to provide a financial update.
James S. Evans
Thanks, Mark. First, I will provide a breakout of our financial performance in the quarter followed by a more detailed look at Crescendo Bioscience's financials and concluding with our thoughts surrounding our race in the fiscal year 2014 financial guidance.
The second quarter was another record quarter for Myriad, with total revenues of $204.1 million, growing 37% year-over-year. This represents our 10th consecutive quarter where top line growth has exceeded 20%.
Molecular diagnostic revenue in the first quarter or in same quarter was a $196.2 million, up 39% year-over-year. As Mark discussed, oncology revenues increased 12% to a $101.6 million and represented 52% of molecular diagnostic revenues. Women's Health revenues increased 90% to $94.6 million and represented 48% of our diagnostic revenue. Women's Health revenues benefited from celebrity publicity early on in the quarter. However, the benefit was indiscernible by December. Our best estimate is that celebrity publicity contributed between $15 million to $20 million to our revenues this quarter. And excluding this impact, the Women's Health revenue growth would have been approximately 35% year-over-year.
Company diagnostic revenues in the second quarter were $7.9 million and represented 4% of our total revenue. BRACAnalysis revenue in the quarter was $141.2 million, a 28% compared to the same quarter in the prior year. BART revenue was $24.7 million, up 57% year-over-year. And almost all BRACAnalysis tests now have a corresponding BART test.
COLARIS and COLARIS AP revenue increased 29% compared to the fiscal second quarter of 2013 to $15.6 million. We are continuing to capture market share in the hereditary colon cancer market, given the quality advantages of our laboratory. myRisk revenue was a $11.5 million representing approximately 6% of our total sales during the first full quarter of that early-access March.
We are very pleased with the uptake of myRisk to-date. In fact as we shared at the San Antonio Breast Cancer Symposium, we actually saw a 25% increase in utilization among early-access users in the six weeks following the launch of myRisk, when compared to their ordering patterns in the previous six weeks. Other revenue with myRisk removed, was $3.2 million growing 25% year-over-year.
Moving down the income statement, gross margins this quarter were 87.2%. The 50 basis point increase over the prior year was driven primarily by product mix. Research and development spending was 8.4% of revenues this quarter. And we continue to expect Research and Development expense were approximately 9% of revenue for the full year.
Selling, general and administrative expense was 38.1% of revenue in the second quarter. And for the full year, we continue to anticipate SG&A expense of approximately 41%, as we invest in sales and marketing for our three new product launches.
Our operating margins were 40.7% in the quarter, up 340 basis points compared to the same quarter of last year. This is primarily driven by leverage in our SG&A expense. Total operating income was $83 million, an increase of 49% year-over-year.
As anticipated, our tax rate returned to 40% this quarter, which is in line with our expectations for the remainder of the year. Net income for the quarter was $50.4 million having grown 44% year-over-year. Our fully diluted share count decreased to 76.8 million shares based primarily on our share repurchase activity. This translates to GAAP EPS of $0.66 for the quarter, which is up 58% compared to the $0.42 we posted in the second quarter of last year.
Looking at our balance sheet, we ended the quarter with $488.8 million in cash and cash equivalents, or $6.36 in cash for fully diluted share. We utilize approximately $78 million of our cash to repurchase 3.2 million shares of our common stock this quarter.
During the second quarter, we were out of the market for a period of time as we worked through the Crescendo deal and we are in possession of material non-public information.
As of the end of the December quarter, we had 273 million remaining on our share repurchase authorization. And Myriad will continue to repurchase shares at valuation thresholds that we feel are now reflective of the true long-term value of the company.
Now, I would like to spend some time talking about the Crescendo Bioscience acquisition to assist you with modeling. As we stated in our press release, we will pay $270 million for Crescendo, minus the $25 million loan we provided to them in 2011. Since we are funding the acquisition entirely through cash on hand, our cash balances will decrease by approximately $245 million upon the closing of the transaction.
Clearly, Crescendo has gross margins of approximately 50% due to the relatively low volumes and the fact that only a portion of the revenues are being reimbursed.
As the business ramps to a meaningful scale, we estimate more mature gross margins in the 75% range. In addition to cost of goods sold, Crescendo's expenses are running at a rate of approximately $11 million per quarter. As Bill mentioned, there are only 3500 practicing rheumatologists in the country. Consequently, even at scale, the sales infrastructure for Crescendo will be substantially smaller, then for our current markets today. Despite a lower gross margin profile for Vectra DA, we believe mature operating margins for Crescendo will be very similar to our existing business today.
We are currently expecting the deal to close by the end of this fiscal year. For fiscal '14, we expect Crescendo to contribute approximately $10 million in revenue and lead to an operating loss of approximately $6 million or the $0.05 per share dilutive to earnings after tax.
Distribution will moderate quickly as Crescendo's revenues increase and as private payer coverage increases. While we anticipate that Crescendo will be modestly dilutive in fiscal 2015, we expect the acquisition to be highly accretive to our earnings in fiscal '16 and beyond.
Taking these expectations into the consideration, I will now like to provide you with a more detailed look at Myriad's revised fiscal year 2014 financial guidance. We are now guiding investors toward total revenue of $740 million to $750 million, which represents 21% to 22% growth, relative to our fiscal year 2013.
As I mentioned before, this guidance incorporates approximately $10 million of revenue from Crescendo, $25 million from Myriad RBM, and $705 million to $715 million for our core molecular diagnostic business.
As a reminder, due to the cut in Medicare reimbursement, we will see a 40% reduction in pricing on the 9% of our business that is comprised of payments from Medicare. Additionally, we will not see any ongoing publicity benefit in our revenues for the rest of the year.
On the bottom line, we are guiding towards GAAP EPS of $2.09 to $2.12, representing 18% to 20% growth. This guidance does not incorporate future share repurchase activity and takes into consideration our anticipated dilution from the Crescendo acquisition for this year.
Additionally, upon closing of the Crescendo acquisition, we do anticipate some non-cash non-recurring expenses, which are not incorporated in this financial guidance.
With that, I will now turn the call back over to Scott for the Q&A.
Thank you, Jim. In order to ensure broad participation in today's Q&A session, we are asking participants to please ask only one question and then jump back into the queue. Operator, we are now ready for the Q&A portion of our call.
Thank you. (Operator Instructions) Our first question comes from the line of Bill Quirk with Piper Jaffray. Please proceed with your question.
Bill Quirk – Piper Jaffray
Great, thanks. Good afternoon, everybody. First question, I don't think there is any doubt that Crescendo is an extremely attractive asset. It obviously, as you alluded to, does take you down a new sales channel. So I was hoping if you could elaborate a little bit about managing this, and then also should we think about whether or not this is trying to send us a message regarding the base business? And then I guess third part of one question here is just what happens to the Crescendo team, will Bill stay on to help lead that group?
Mark C. Capone
Thank you, Bill. We are very excited about the opportunity to combine with Crescendo. And as I mentioned on my remarks, Bill Hagstrom has put together an outstanding team. As we have done with Myriad RBM, Crescendo will maintain it's identity . They will still be called Crescendo Bioscience, but it will be noted that they are a wholly owned subsidiary of Myriad Genetics. Bill will remain as the President of that wholly owned subsidiary, and as with Myriad RBM in Austin, they will operate relatively independently of Myriad. This is a different sales channel, and while we can provide synergies in the area of customer service, managed care, product development, it is a totally different sales channel, and we will rely on Bill and his team to grow that -- not only rheumatoid arthritis, but complete autoimmune disease market.
So they will remain as part of Myriad, a very integral part of the Myriad team, and we don't anticipate really any significant change in the operations within Crescendo Bioscience. And Bill, do you want to elaborate on anything beyond that?
Thanks for the question, Bill. Yes, we've got an exceptional team and a great group of resources have come around this cause of building a global autoimmune franchise. And we look forward to continue to see that team thrive and prosper within the Myriad organization. We think that the structure that Pete has elaborated upon allows us to do that, as well as allowing us to further expand our commercial infrastructure, look at product pipeline, and accessing other resources that will be helpful to accelerate our growth.
Our next question comes from the line of Amanda Murphy with William Blair. Please proceed with your question.
Amanda Murphy – William Blair
Hi, thanks. So I had a question about the private payer side. So it's been a couple of months since the whole Medicare cut happened, at least presumably for 2014. So, could you just talk a little bit more about what kind of conversations you've had with the private side both in terms of the BRCA1 and 2 tests, and And then also in terms of the myRisk panel, I'm assuming you are still billing that as a BRCA test, but just curious about conversations with them, longer term around myRisk. Thanks.
Mark C. Capone
Thanks, Amanda. As I mentioned in my prepared remarks, we've now had almost eight months of competition, so we've had discussions with private payers throughout that entire time. And up till now, we've had discussions with private payers that represent about 75% of our revenues. The discussions post the posting by CMS have not been very different from those that occurred before. Generally, they have been mostly focused on understanding what the quality differences are between these tests. There is broad recognition that they are not the same tests, and they really would like to understand what some of those differences are when we talk about the quality differences, when we talk about the myVision program, we talk about how much we can save them in downstream costs by more accurate test. They have been very receptive to that. And as a consequence as I mentioned, we haven't seen any material changes in either network status or in the average selling price in our private pay segment.
Specifically as it relates to myRisk, we have just as I mentioned started to begin to have conversations about myRisk. It was really only on as we provided some of the clinical data, which we just rolled out to be definitive data on the breast cancer side in December. And so, as a result of that, we have now begun to start having conversations to expose them to that data and to some of the advantages of the myRisk panel, and so early stages in conversations, they are very interested. All of them interestingly enough have examples where they have paid $10,000, $15,000 on the same patient because they have been subjected to a la carte testing for a variety of genes. And so, as I hedge against what they know their systems can't catch, they are all very interested in that and do understand that there is increased sensitivity for essentially the same price as single gene, single syndrome testing. It can be very favorable to their health economics, so I think early conversations have gone well, but there is still a lot of conversations that will continue.
Our next question comes from the line of Drew Jones with Stephens. Please proceed with your question.
Drew Jones - Stephens
Thanks, good afternoon guys. A lot of chatter in the investment community just around doctor surveys suggesting major share loss for you guys on the BRACAnalysis side, but if we look at the competitive lab launches, the high number of competitive lab launches we saw in 2013 combined with these results; that clearly doesn't seem to be the case. Can you walk us through where is the disconnect between conventional wisdom and what you guys are seeing on the ground, and just really any change in market dynamics to speak of over the past six months?
Mark C. Capone
Yeah, thanks for the question. Obviously we've glanced at some of those surveys. What I can say is first of all we see about 800 physicians a day and have had pretty extensive conversations with those physicians. So between the feedbacks we get from the field, between our own market research surveys, which are rather robust we feel like we have got a pretty good handle on exactly what our physicians are saying about our various different competitors. I think what continues to be the most important thing for physicians and for patients is to ensure that they have the most accurate test; above all, that's the most important. And they appreciate that Myriad's experience or myVariant Classification program and the very high accuracy that we perform, the sequencing will provide them the most accurate test. And so I think what we've seen, physicians are consistently providing that type of feedback to us.
As I noted in my comments that we only saw a modest incremental share loss in the second quarter, it was isolated to the genetics portion of our oncology business, which represents about 15% of our total revenue. So it really depends as you well know, on exactly what questions were asked to what physicians, when you do a market research survey to the extent that those surveys are focused on the genetics segment. I think you would get a very different picture than a word at a much broader survey. The other thing that's important to know for surveys are that as I mentioned we only call on about half of the OB-GYNs in this market place. And so we are surveys targeted or at to physicians that have had very little experience with BRACAnalysis I think you would get different answers than you would from those that have more significant experience with Myriad. So I think we have a pretty good handle on what our customers are saying and we'll continue to monitor that very closely.
Peter D. Meldrum
And let me just add that with 90% revenue growth this past quarter in the Women's Health market, I'm hard-pressed to find significant market share loss.
Our next question comes from the line Sung Ji Nam with Cantor. Please proceed with your question.
Sung Ji Nam - Cantor
Thanks for taking my questions. So I was wondering if I may ask another question to Bill. You talked about some competitive advantages of Vectra DA, and including novel informatics tool as well as first-to-market. Can you maybe talk about how important is the database in terms of providing a better product for the customers as a potential competitive advantage, as well as in terms of opportunities for companion diagnostic development? Thank you so much.
Sure, thanks for the question. The competitive advantages for Vectra DA can be created along several fronts. First, when you look at the uses of the product, they range from baselining a patient upon initial diagnosis to look at the severity of disease. Second, look at how do you baseline a patient going on to initial therapy such as lower cost (DMARDs). We would look at the response to those (DMARDs) as well as the potential to go on to more advanced biological therapy.
One of the key insights one would like to know before going on to a biologic is; what's the potential for radiographic progression because only a biologic provides radio protective benefit. That's something that Vectra DA can demonstrate to a physician. We can also show rapidly once you start a biologic, who is responding or who is not responding to that drug. Up to 40% of patients fail initial TNF therapy and need to be cycle bound to another drug.
Our test can also better parse out or separate the effects of confounders and comorbidities like fibromyalgia, which overlapped 20% to 25% with RA patients and we don't want to undertreat or overtreat based on fibro versus the RA effect. Our test can better tell who is in remission versus who has active and smoldering disease.
So the test with studies, we've now done over 20 studies and the data that we produced is very compelling to physicians as they grapple with decisions of various notes and the disease process. VectraView is a very novel capability that we have that allows a physician to see for all the patients in their practice, what's the relative level of disease activity.
In our market, treat to target is a guideline, which says that for every patient, the goal should be remission. And if you have patients that are not in remission, your objective should be taking action to bringing the disease actively down lower towards remission. VectraView can allow you to stratify to look at intensification of interventions for your highs to bring them to moderates or moderates to low and so it goes. So that's a unique and proprietary tool cumulative data.
Last point along those lines is that each doc has the ability to look at a relative frequency histogram of their patient's disease activity curve, and compare and contrast it to national data. So, these are all unique capabilities along with the MyRA tool that I mentioned, allows patients to track and report up to their physician.
Peter D. Meldrum
And let me just add to that, that there is no competitive markets of Vectra DA, competitive product of Vectra DA on the market. So, Bill has really been a pioneer in this whole field. And I'd also like to point out that this is a good example of bringing molecular diagnostics into a new disease area, one that I think benefits significantly, in terms of improving patient care and assisting and improving quality of life of patients.
Currently, physicians use a test that I'll refer to as the knuckle squeezing test to try to assess disease activity. So, bringing these new technologies into this marketplace is a great advancement and will certainly benefit patients in the future.
Our next question comes from the line of Isaac Ro with Goldman Sachs. Please proceed with your question.
Isaac Ro – Goldman Sachs
Good afternoon, Guys. Thanks for taking the question. Why don't you just spend a couple of minutes talking about margins today, specifically in the core businesses as well as longer term as you incorporate the autoimmune assets you're getting from Crescendo?
On the first part, just can you maybe give us an update on how you are looking at margins across the various segments of the core business, Oncology versus Women's Health and then maybe in the international business? And by margins, I'm talking about at the EBIT line, any color you can give on how you are scaling in those various segments, would be helpful.
Peter D. Meldrum
Yes. Let me start and I'll ask Jim to add a little additional color.
Our margins for the Women's Health care segment and Oncology segment are essentially identical. And our margins crossed different product lines. Once they reach volume, are also very consistent. Internationally, the margins are lower. That's a new opportunity for the company as I mentioned, it's growing very rapidly, but it's still small. And when those revenues are roughly 5% to 10% of our total revenues, we'll actually break those out separately, so you can see those. But overtime, as international growth in volumes, we anticipate margins to be very similar to what we experience here in the United States.
It's interesting to know that our current reimbursement for BRACAnalysis and COLARIS in the major market countries in Europe is actually slightly higher than our current ASP here in the United States. So we would anticipate a similar margin structure there as well.
And Jim, I don't know if you want to add anything?
James S. Evans
Yes. Just a little bit on the gross margin lines specifically. We have talked about myRisk being a little bit more expensive of the test and what we've historically we've been able to accomplish with the single gene test. And so, from our 89% gross margin that we've talked about myRisk, we're projecting more in the 87% gross margin range. We talked about the impact of Crescendo and what their margins should look like. We are spending money as we continue to launch new products and so that could have a little bit of an impact on our earnings, our operating margin in the second half of the year, as we get those upfront cost going for some of these new products and get them launched and get materials put together from them. So, there will be some pressure on the operating margin, but really think they will still be very, very attractive.
Our next question comes from the line of Eric (inaudible). Please proceed with your question.
Good afternoon. Thank you for taking my question, just throwing in for Peter today. So the single gene test that performed pretty well this quarter, especially it might be of the strong myRisk launch. Could you provide a little more detail maybe into the pacing of that conversion dynamic and if you think that there's going to be some type of inflection point, where those BRACA and COLARIS revenue lines start to fall off as myRisk revenue increases?
Mark C. Capone
Yes. Thanks, Eric. So, we just successfully completed our early-access program. And as I mentioned, we will be doubling the numbers of doctors that are participating in what we have now launched as our expanded access program. That will carry us through until we can ensure that the performance of the test, the turnaround times and everything is meeting our customers' expectations. And from that point, we will continue to ramp to full conversion by the summer of 2015. And so you should look for, and we will provide additional guidance on the next call on exactly what that trajectory will look like after that expanded access launch. It is our strategy to convert the current hereditary cancer business to myRisk. So you should see a corresponding decrease in the BRACAnalysis and COLARIS revenue line as we begin to transition to myRisk.
As Jim mentioned, one of the things we did see in the early-access program is because of the interest, the scrutiny, the ease-of-use with myRisk, we were actually able to see an increased utilization in those physicians that were in the early-access program, which is why you may not have seen total (cannibalization) in this initial part of the program. We'll see how that goes in coming quarters, but overall you should anticipate reductions in BRACAnalysis and COLARIS offset by increases in myRisk.
Our next question comes from the line of Michael Yee with RBC Capital Markets. Please proceed with your question.
Hi. This is Shannon on behalf of Michael. Following on the point about myRisk, and obviously you did very well; you just passed on target of $10 million this quarter. It's very interesting that you made the comment that decisions have attributed different ordering behaviors, so they are ordering more test. Can you help us understand how much of that is the dynamic that you spoke of about them not having to prioritize different genes to order versus the absolute total market size that the test is eligible for since it covers so many different cancers? Thank you.
Mark C. Capone
Yes. I think in this case, it's more about increased penetration as opposed to a broader addressable market because we have yet to expand the guidelines. The addressable market at this point is the same as, Pete mentioned, our goal is to double the size of the addressable market in the Oncology segment. But that will require some additional studies and guideline changes. So, I think what we saw was just increased penetration into the current indications that we have.
I think as always when you participate in a program like this, there is -- the staff, the physician are much more in-tune with hereditary cancers. And I think because of that they're much more diligent in identifying patients that may be appropriate. There is an aspect as you mentioned that, they no longer have to prioritize. So it's simpler trying to decide whether to order COLARIS or BRAC. And so, that does facilitate some increased penetration into the market.
As we mentioned historically, we have less than 10% penetration into Women's Health market. And so any type of scrutiny or interest from the physician can allow us to penetrate in a market that's really underpenetrated at this point.
And so I think those are some of the dynamics that we've seen and we'll have to see if that plays out as you get to a broader physician participation.
Our last question comes from the line of Dan Leonard with Leerink Swann. Please proceed with your question.
Dan Leonard - Leerink Swann
Great, thank you. I will ask in two parts, and they are somewhat related. I guess, on reimbursement you are in discussions with a lot of your payers. I am wondering if now that you have additional published information differentiating your test, if any of the discussions are along the lines of Myriad potentially becoming an exclusive vendor or a preferred vendor for hereditary cancer testing. And then secondly, just kind of housekeeping, are all your genetic counselors, are they all reported in your oncology channel, presumably there will be plenty of referrals from where we began to genetic counselors as well, but I am just not sure how the buckets work? Thank you.
Mark C. Capone
Yes, thanks Dan. As you mentioned, we are in discussions with payers. We are just beginning the discussions about myRisk. We would always have a broad set of discussions, and those include everything from potentially exclusive contracts to a variety of other possibilities. We obviously don't get into that level of detail. But it is something that we will discuss with payers. And if they are interested in exclusive arrangements we can talk about the best ways to accomplish that, so that the patients get the best care.
To the housekeeping point, yes, all of our genetic segment is reported in through our oncology market. Any test that is ordered by an OB-GYN would come through our Women's Health segment. So, if the test was ordered by an OB-GYN and a counselor was called in to do counseling after the test had been ordered, those types of test would fall into our OB-GYN category because it was ordered originally by an OB-GYN.
This concludes our earnings call. A replay will be available via webcast on our website for one week. Thank you again for joining us this afternoon.
Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.
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