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

Myriad Genetics (NASDAQ:MYGN)

Q4 2011 Earnings Call

August 09, 2011 4:30 pm ET

Executives

Peter Meldrum - Chief Executive Officer, President and Director

Rebecca Chambers -

James Evans - Chief Financial Officer, Principal Accounting Officer and Treasurer

Mark Capone - President of Myriad Genetic Laboratories Inc

Analysts

Scott Gleason - Stephens Inc.

Dane Leone - Macquarie Research

Charles Duncan - JMP Securities LLC

Tycho Peterson - JP Morgan Chase & Co

Michael Yee - RBC Capital Markets, LLC

Doug Schenkel - Cowen and Company, LLC

Unknown Analyst -

Jon Wood - Jefferies & Company, Inc.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Myriad Genetics 2011 Financial Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, August 9, 2011. I would now like to turn the conference over to Rebecca Chambers, Director of Investor Relations. Please go ahead, ma'am.

Rebecca Chambers

Thank you, Lindsay. Good afternoon, everyone, and welcome to the Myriad Genetics Fourth Quarter and Fiscal Year 2011 Earnings Call. During the call, we will review the financial results we've released today and detail the strategic directives, which will guide the company in fiscal 2012, after which we will host a question-and-answer session. If you had not had a chance to review the earnings release, it can be found in the Investor Relations section of our website at myriad.com.

Presenting today will be Pete Meldrum, President and Chief Executive Officer; Mark Capone, President, Myriad Genetic Laboratories; and Jim Evans, Chief Financial Officer. This call can be heard live via webcast along with the slide presentation at myriad.com. The call is being recorded and will be archived along with the presentation in the Investors 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 report on Form 8-K. These documents identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

With that, I'll now turn the call over to Pete.

Peter Meldrum

Thank you, Rebecca. To begin, I would like to provide highlights of our fourth quarter and full year results before introducing the company's strategic directives for fiscal 2012. I am pleased to report that fourth quarter revenues increased 14% year-over-year to a record $107.4 million. Fiscal 2011 revenues grew 11% to $402.1 million as compared to $362.6 million in the last fiscal year. These financial results contributed to a record of consistently delivering annual double-digit revenue growth now for the 12th consecutive year.

Additionally, Myriad's full year profitability increased to an impressive 17% year-over-year with operating income of $157.8 million. These strong results have positioned us well for continued success, particularly when combined with the strategic investments we are making for future growth. We continue to increase investments in our research and development programs in an effort to discover and develop exciting new products and also to enhance the clinical support for our current product portfolio. In addition, we have been strategically deploying capital with the in-licensing of novel technologies from Chronix Biomedical and the Melanoma Diagnostics and the acquisition of Rules-Based Medicine in addition to repurchasing over $200 million of our stock this year.

Now I'd like to move on to the company's expectations for fiscal 2012. We expect total revenues of $445 million to $465 million. This level of revenue is expected to result in fully diluted earnings per share of $1.20 to $1.25. Jim will speak more to the specifics of our guidance later on in the call. This compelling outlook will require a focus on executing our 3 strategic directives for long-term revenue growth: Grow existing products and markets, develop an international presence and invest in new products and capitalize on the companion diagnostic opportunity.

Shortly, Mark will discuss our strategy to recognize the full potential of our current product portfolio, and I will focus my remaining comments on our European operations and investing in our product pipeline to fuel innovative product introductions and revenue growth for years to come.

I will begin by providing a brief update of our international expansion to Europe. We are making excellent progress completing, equipping, staffing and certifying our laboratory in Munich and are on track to begin receiving samples and generating revenues in January 2012, 1 year ahead of schedule. We are also working with distributors to expand our presence in Latin America and Asia. We view this international expansion as an exciting growth opportunity for Myriad and are working aggressively to make it a reality.

As I previously shared with you, we have made it a priority to increase our internal investment in research and development to continue to deliver new transformative molecular diagnostic products, which assess a person's risk of disease, guide treatment decisions and help improve a patient's quality of life. Additionally, the 2 licensing deals and the acquisition of Rules-Based Medicine have augmented our already strong product pipeline. Our strategy is to aggressively pursue a combination of internal development, technology in-licensing and acquisitions to grow our business in the future. And we, therefore, expect to further increase our investment in this area in fiscal 2012.

As detailed on the following slide, we currently have 13 innovative products under development in various stages. I would like to briefly discuss several of these new product opportunities that I'm particularly excited about. The first product candidate is based on technology we in-licensed from Melanoma Diagnostics last December. We plan on launching the first of several products from this technology this fiscal year and believe this product will assist the dermatopathologist in determining whether or not a skin lesion is cancerous or benign. Current pathology analysis is unable to determine malignancy on approximately 10% of the 3 million skin biopsies done every year in the United States. And this test could provide a molecular answer for physicians that would improve the healthcare management of their patients.

Another product candidate in the development is a tissue-based breast cancer test, which will allow physicians to determine whether a breast cancer tumor has lost BRCA function. The hypothesis currently being tested in numerous clinical studies is that tumors with BRCA deficiencies are very susceptible to DNA-damaging agents, such as PARP inhibitors, providing physicians with knowledge on both the somatic and germline BRCA status of tumors will increase the number of patients that are suitable candidates for this exciting new class of DNA-damaging agents.

Next is a lung cancer prognosis test that may guide therapeutic decisions for patients with lung cancer. Lung cancer patients, particularly those that are in stage Ib or IIa, are faced with a question of whether or not to undergo chemotherapy. This product candidate may help a physician determine the aggressiveness of the cancer and, therefore, whether or not the chemotherapy might be appropriate for their patient. The kidney damage product candidate from the Myriad RBM portfolio will allow the identification of kidney damage at a much earlier stage then can be accomplished by current methods. This could provide physicians with critical information to begin treatment earlier in the course of disease and prevent some of the co-morbidities that may occur when treatment is delayed. This is particularly important for transplant patients and those with diabetes. Several other product candidates acquired with the RBM acquisition include an antipsychotic diagnosis product and a differential diagnostic prognosis product for psychiatrists. These products will help psychiatrists categorize patients between schizophrenia, bipolar disorder and major depression to ensure that the patient receives the appropriate therapy. Not infrequently, patients are initially misdiagnosed and given inappropriate therapies that can be harmful to the patient.

Our next product candidate is for hepatitis C therapy response, which could allow a physician to determine whether or not a patient will likely respond to the interferon alpha class of drugs or whether they would be better off with one of the other hepatitis C treatments.

Scientists at Myriad RBM are also developing an antidepressant response product, which would allow physicians to select between different classes of drugs and determine whether or not a patient is responding to a particular treatment.

We are also working on an exciting candidate for the early detection of cancer from blood. In May, we announced the in-licensing of technology from Chronix Biomedical, aimed at an early cancer detection in prostate, breast and colon cancers. If successful, we believe this product candidate represents a substantial market opportunity for the company and will revolutionize early cancer detection.

Finally, the last product I will discuss is focused on a next-generation hereditary screening product based on the strengths of next-generation sequencing. This will include a large panel of genes for increased sensitivity to determine an individual's risk of developing any hereditary cancer. We envision this product to be the natural progression of our current cancer-specific products.

As you can see, these products have the potential to transform healthcare and solve many of the issues currently facing the healthcare system. I hope you are as excited as we are about these possibilities for future growth, as we develop products to help patients and physicians understand the risk of getting disease and guide the appropriate course of treatment.

Before handing the call over to Mark, I would like to briefly discuss the ruling made by the Federal Circuit Court of Appeals a few weeks ago. I was very pleased that the court declared that the composition of matter patent claims covering the isolated DNA and cDNA sequence of the BRCA1 and BRCA2 genes are patent eligible and reinstated 9 claims, which had previously been held invalid by the lower court. We now have over 100 composition of matter patent claims covering our BRACAnalysis product, some of which provide protection until 2018. The court also decided that 5 of the company's 6-method claims at issue did not satisfy section 101. These 5 claims were very broad in nature, as is typical in patent drafting. Fortunately, we have additional specific method claims covering essentially the same patentable subject matter that remain in full force and effect. For example, one claim that was not overturned by the Federal Circuit Court covered a current comparison of a patient's DNA sequence with a normal sequence, regardless of the method used. We have related claims that remain enforceable, covering a comparison of a patient's DNA sequence with the normal sequence using a variety of DNA sequencing technologies.

Additionally, we have over 230 remaining method claims that cover transformative processes that were not affected by this ruling and remain in full force. Today, our intellectual property protection for BRACAnalysis is as strong as it was before the ACLU brought suit against Myriad.

Now it is my pleasure to turn the call over to Mark Capone.

Mark Capone

Thank you, Pete. As Pete mentioned earlier, our first strategic directive is to grow our existing products and markets. I would like to share with you all the initiatives we will be focusing on over the coming months to further penetrate the market for BRACAnalysis and realize the potential of COLARIS and PROLARIS. As we discussed in the second quarter of fiscal 2011, we are focused on developing the ovarian triple negative and carcinoma in situ indications for BRACAnalysis in our Oncology segment. The unrealized annual potential for these indications, including newly diagnosed patients and survivors, is $200 million with a total oncology market potential of over $650 million annually. I am pleased with our progress on these initiatives, which contributed to the 11% growth in oncology during the fourth quarter. And I would like to outline some of our fiscal 2012 approaches to further penetrate these indications.

About 22,000 ovarian cancer patients are diagnosed each year, and professional guidelines have firmly established that all of these patients should undergo BRACAnalysis testing. For the ovarian cancer indication, we realized the 21% growth rate in fiscal year '11, raising our penetration to about 30%. Our efforts have been focused on educating gynecological oncologists that are typically responsible for treating these patients. Due to the publicity associated with PARP clinical studies, gynecs [ph] have been keenly aware of the importance of understanding the BRCA status of their patients. Promotional materials specific to this segment have been developed as well as interactive media approaches designed to raise awareness directly with patients.

We also continue to work on expanding testing in triple negative patients. Until recently, less than half of the 35,000 newly diagnosed triple negative patients met testing criteria for BRACAnalysis, and only 30% of those that met criteria were tested. Recently, NCCN guidelines were updated to include all triple negative breast cancer patients under the age of 60, expanding the market potential to 70% of all triple negative patients. To that end, we are conducting additional speaker training events, sponsoring regional and national symposia, updating promotional materials and changing our test request forms to specifically address triple negative status.

Our last BRACAnalysis oncology initiative is focused on carcinoma in situ or CIS. CIS is diagnosed in approximately 62,000 patients per year, 1/3 of which are appropriate for testing. In fiscal year '11, we grew this indication by 20% to a market penetration of 30%. Our educational efforts are directed towards enhancing awareness of a study published last December in the journal, Cancer Prevention Research. This study analyzed the relationship between BRCA1 and BRCA2 mutations and patients diagnosed with carcinoma in situ and demonstrated an increased prevalence of BRCA mutations in the CIS patient population. As a result of these types of studies, CIS is already been incorporated in the professional society guidelines as a red flag for hereditary cancer.

The Women's Health segment grew 15% year-over-year, and initiatives to continue to deliver strong growth in this segment are focused on growing both new stores and same-store sales. The current Women's Health sales force calls on about half of the 35,000 community-based OB/GYNs in the United States. In planning for the upcoming fiscal year, we performed a thorough analysis of the fiscal 2011 territory splits. Based upon that analysis, we are adding 20 new sales representatives to territories with large physician counts. This will bring the total number of Women's Health representatives to 185. It is important to note that it normally takes a new sales representative 6 to 9 months to contribute to growth.

In addition, we are making progress in our efforts to increase same-store sales for existing territories. In fiscal year '11, existing territories grew revenue over 12%. To continue growth in fiscal year '12, we have developed an advanced targeting tool for our largest territories to identify high-volume primary care physicians that treat significant numbers of women. In addition, our market research has shown that the biggest reason experienced physicians do not test all appropriate patients is because of the time and logistics required to integrate testing into their practice. To address this concern, we recently completed a successful lean systems pilot program that involve detailed process mapping similar to the approach we used to drive margin improvements in our laboratory. The results showed significant increases in patient identification without increasing staff time commitments. We are now expanding these efforts to a larger national subset of experienced physicians.

Lastly, we are providing these practices with utilization comparisons between hereditary cancer testing and other standard of care screening tests, such as pap smears and breast exams.

Historically, we have conducted a regional DTC campaign to increase patient awareness for BRACAnalysis. Today, we have held DTC campaigns across 4 regions, which all resulted in an attractive return on investment and increased patient testing. A significant portion of the country has now been covered by a campaign with only the Western region remaining. In planning for the upcoming fiscal year, we analyzed the expected rate of return from a Western DTC campaign and found that it did not meet our internal hurdle rate due to high media costs associated with that region. Therefore, we have decided to explore new approaches in a next-generation DTC campaign, which utilizes an interactive media strategy. Our plan for this next-generation DTC campaign are focused on educating through discussions on social media sites, such as Facebook; enhancing awareness with patient stories on outlets, such as YouTube; and disseminating patient stories through blog sites. We also intend to partner with patient advocacy groups to increase patient visits to our websites. Our early pilot work shows that this approach may be significantly more efficient than mass media approaches at generating appropriate patient leads. We also plan to extend this next-generation campaign to other products beyond BRACAnalysis at the appropriate time.

Next I would like to provide an update on how we plan to recognize the potential of COLARIS. I'm pleased to report we successfully added a fourth gene, PMS2, to the COLARIS product during the last month of the fourth quarter. With the addition of this gene, we now offer the most robust, sensitive and accurate test for hereditary colon cancer. This is evidenced by the fact that we have seen a significant increase in the volume of COLARIS since the introduction of PMS2 with a large percentage of orders requesting PMS2 as an additional test.

We also have successfully obtained Medicare reimbursement for the 4-gene COLARIS product using new, less stringent criteria. These new criteria replaced the criteria that were historically used and are now similar to those for BRACAnalysis. If these criteria were to be adopted by all payers, it would increase the market size by over $50 million. In addition, we continue to execute on our strategic plan to educate professional societies, key opinion leaders and insurers on the important findings of the health economic study for COLARIS published in Cancer Prevention Research last November. As you may recall, the study concluded that it would be cost effective to test unaffected patients with as little as a single affected family member, which is even broader criteria than the recent NCCN changes.

Additionally, due to the number of opportunities in our oncology portfolio, we have launched an initiative to increase adoption of our 4 colon cancer products: COLARIS, COLARIS AP, OnDose and TheraGuide. In this initial geography, we have added an 8-person colon cancer specialist team alongside what has become a breast cancer specialist team. We have already seen evidence that this increased focus has led to significant increases in all 4 colon cancer products in our portfolio and facilitates quicker penetration of the additional BRACAnalysis indications. Depending upon the success of this initial team, we may add further colon cancer specialists to other geographies later this fiscal year.

Lastly, we were incredibly encouraged with the prostate biopsy data presented at ASCO, which demonstrated that PROLARIS was the strongest predictor of cancer death outcome and more significant than either Gleason score or PSA. We are currently working to get this exciting data published in a peer review journal. This will be our second published study, which is generally the threshold for professional society guidelines and payer reimbursement. In addition, 6 other retrospective studies are in progress as well as a health economic study. We are also initiating a prospective Phase IV study with key opinion leaders to establish clinical experience with the product. These opinion leaders will subsequently attend speaker training scheduled for the second quarter of this fiscal year.

Having just completed a National Advisory Board meeting with urologists excited about this new data, we will be expanding to regional meetings during this quarter. Myriad will be submitting data for presentation at 4 regional American Urology Association (sic) [American Urological Association] meetings in the fall as well as the Society of Urologic Oncologists meeting in December. We believe our current 8-person urology sales team is well positioned for a successful launch of this new PROLARIS indication as soon as the latest study is published.

In summary, I am pleased with the success we demonstrated in growing the Women's Health and Oncology segments in fiscal 2011 and the prospects for continued growth. In addition, we are excited about the potential to revolutionize the practice of urology with the PROLARIS biopsy launch later this year. And we continue to prepare to commercialize the other exciting near-term pipeline products outlined by Pete.

Now I will turn the call over to Jim for a detailed review of our fourth quarter and fiscal 2011 results. Thank you.

James Evans

Thank you, Mark, and good afternoon, everyone. It is my pleasure to present a more detailed look at Myriad's financial results for the fourth quarter and fiscal year 2011. Myriad's revenues for the fiscal fourth quarter were $107.4 million, an increase of 14% over the same period in the prior year. We were pleased that fourth quarter revenues exceeded expectations of $104.6 million. Companion diagnostic services contributed $2 million to total revenue, and molecular diagnostic revenue contributed $105.4 million for 12% year-over-year molecular diagnostic revenue growth. Of this 12% growth, price contributed 1%, while the remaining 11% came from an increase in sample volumes and new products.

By segment, $74.7 million of revenue was generated from the oncology market, an increase of over 11% versus the fourth quarter last year. Revenue from the Women's Health or OB/GYN segment, grew 15% year-over-year to $30.6 million.

A breakdown of revenue by product shows BRACAnalysis revenues grew 12.5% to $92.8 million compared to $82.5 million in the same period last year and represented 86.5% of total revenues. Revenue from COLARIS and COLARIS AP increased to $7.6 million or 7% of total revenues. COLARIS volumes were impacted by the launch of PMS2 as we saw a delay in orders during the first 2 months of the quarter in anticipation of the launch of the more robust 4-gene panel. As Mark mentioned, demand for the COLARIS product has increased after the product update was completed, and we expect COLARIS to return to growth levels seen earlier in the year. Myriad's 6 other products grew 21% year-over-year and accounted for 4.5% of revenue or $4.9 million. Lastly, companion diagnostic services represented 2% of revenue.

Moving down the income statement. Fourth quarter SG&A expense decreased 150 basis points as a percentage of sales to $43.9 million. Research and development expense was 8.6% of sales or $9.2 million, a strong increase versus the $5.3 million reported in the fourth quarter last year. This increase represents a commitment by the company to reinvest in its business and reflects investments made in new product research and development, including the launch of PMS2, upfront fees associated with the in-licensing of the Chronix technology, protein analysis research at Myriad RBM and the cost of samples for clinical studies to support the company's newer products, such as COLARIS and OnDose.

Operating income for the quarter was $41.8 million resulting in an operating margin of 38.9%. This level of operating margin represented a 110-basis-point contraction year-over-year, which was primarily a result of higher R&D expenses to ensure future revenue growth and diversification.

The fourth quarter effective tax rate was 38.2%, and our diluted share count was 88.1 million shares. During the fourth quarter, we repurchased approximately 22 million of stock and ended the quarter with approximately $28 million of the current stock repurchase authorization left to complete. I am pleased to report that today, we're close to finishing the remaining authorization and expect it to be completed soon. On a per share basis, Myriad produced a pretax diluted earnings per share of $0.48 compared with $0.39 for the same quarter of the prior year, an increase of 23%. Earnings per share, including booked tax, was $0.30 fully diluted for the fourth quarter of 2011, exceeding consensus estimates of $0.29 per share.

Highlights of fiscal 2011 include revenue of $402.1 million, an increase of 11% year-over-year. Molecular diagnostic revenue was $400.1 million and companion diagnostic services contributed $2 million. Full year SG&A expense increased only 5% to $169.8 million, as we continue to leverage our infrastructure to grow revenue faster than investments in sales and marketing. Research and development expense grew 27% year-over-year to $27.8 million as we continue to invest in the new product pipeline, acquisition of technologies and clinical studies to support our existing products. Operating income for the year equaled a record $157.8 million. Despite the increased investment in R&D, operating margins expanded 190 basis points year-over-year to 39.2%.

Moving onto the balance sheet and cash flow. Our ending cash and investments for the year were $417.3 million. This compares to $488.4 million as of the prior year end. Uses of cash during the year included buying back over $200 million of stock and acquiring Rules-Based Medicine for $80 million. Cash from operating activities equaled $130.8 million and total cash generated equaled $185.8 million.

I'll now move onto our expectations for fiscal 2012. As Pete mentioned earlier, we expect fiscal 2012 revenue of $445 million to $446 million with molecular diagnostic revenue of $421 million to $439 million and companion diagnostic service revenue of $24 million to $26 million. This level of revenue is expected to result in diluted earnings per share of $1.20 to $1.25.

The following assumptions are included as part of this guidance. During the first fiscal quarter, we typically encounter seasonal vacation headwinds, which historically have resulted in revenue declining sequentially. While year-over-year physician visits trends are stable, we anticipate the sequential impact of the vacation season will be typical for the first fiscal quarter. Cost of sales are expected to be in line with current levels as a percentage of revenues. While we do not expect to incur the $6 million expense associated with the traditional media DTC campaign this fiscal year, we will be investing in 20 new sales reps, 2 new product launches, the next-generation DTC campaign and approximately $6 million to develop the European market. Our investment in R&D will continue to grow with development of our product pipeline, including spending associated with the acquisition of RBM and further clinical studies on existing products, such as OnDose and PROLARIS. As such, we expect full year R&D to be approximately 9% of revenue. Additionally, first quarter R&D is expected to increase sequentially due to the full quarter impact of Rules-Based Medicine and new clinical trials.

Finally, the effective tax rate is expected to continue at approximately 38%. We finished this year with approximately $87 million in net operating losses and expect to fully utilize our net operating losses by the end of the second quarter. Therefore, we expect to pay cash taxes in the back half of the fiscal year.

With that, I will hand it over to Rebecca for the Q&A.

Rebecca Chambers

Thank you, Jim. Lindsay, we're now ready for the Q&A portion of the call.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Jon Wood with Jefferies.

Jon Wood - Jefferies & Company, Inc.

First question is probably for Jim. Can you give us a sense of embedded within your fiscal '12 outlook, the price and volume ballpark that's embedded in your outlook for fiscal year '12 for the entire corporation?

James Evans

Yes. Since the list price increased from our most recent price augmentation, occurred back in April of 2010, we have really realized the bulk of that price increase, the majority of our contracts, our annual renewals, and so most of those have been built in over this past year. We do have a small number of contracts that do go out 2 and even 3 years. So we would expect any impact in fiscal 2012 to be less than 1 point of incremental revenue growth driven off of the price increase, so a fairly minimal price increase. The bulk of what we're projecting is going to be volumes.

Jon Wood - Jefferies & Company, Inc.

Okay, great. And then, Jim, have you baked in -- you discussed finishing the $28 million of share repurchases that are -- that you've got authorized, but have you baked in any incremental capital redeployment activity into that fiscal year '12 outlook at this point?

James Evans

No. Currently at this point, we're just building in the culmination of the existing programs that we've already announced. Nothing else has been built into those numbers for any additional deployment that we might bring together.

Jon Wood - Jefferies & Company, Inc.

Okay. And then on the cash flow side, understanding your comments on the NOL, can you give us a ballpark on operating cash flow guidance for fiscal '12 at this point?

James Evans

Yes. I mean, we haven't given official specific guidance on that. But we're expecting to see probably $130 million in cash from operations this next year.

Jon Wood - Jefferies & Company, Inc.

Okay, great. And then last one, you mentioned the European investment as being about $6 million. Have you baked in any expectation on the revenue side into your guidance?

James Evans

There's modest revenues from international expansions built into this expectations or guidance for this year. But while we expect the operations to be up and functional in the first part of the calendar year, it's still fairly modest expectations for the revenue coming from x U.S. at this point.

Operator

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

Unknown Analyst -

It's actually Sylvia here for Amanda. Just a question on the volume growth in the OB/GYN sector. Is it just more like increase of utilization or it's more like your sales average being realized?

Mark Capone

Well, last year, this past quarter, we saw a 15% growth rate in the OB/GYN segment or the Women's Health segment, which is pretty robust. That growth really came from both same-store sales, where we saw a 12% increase; and our new stores sales, which was substantially higher than that, which is what one would expect for the account executives. When we add those account executives at the beginning of the year, it takes them 6 to 9 months to begin to really make contributions, and we saw those contributions occur in the fourth quarter. So 15% growth rate, we felt pretty good about. I think we also feel very good about the initiatives that led to that 15% and how those will carry over into this next fiscal year.

Unknown Analyst -

Okay, sounds good. Maybe just a follow up. So except for the first quarter, fiscal first quarter, you would expect a little decline in volume. Do you expect the same run rate going through for fiscal 2012?

Mark Capone

I think traditionally what we've seen is, as Jim said, a sequential decline in the first quarter due to some of the vacation. Our second quarter has historically been our strongest, as people and their cafeteria plans, their deductibles and those types of out-of-pocket costs are lower in that -- our second fiscal quarter. Our third quarter, we see the headwinds then emerge as deductibles reset, and we would continue to expect that same sort of cyclical pattern this next year.

Unknown Analyst -

Okay, that's helpful. And maybe just in terms of the international expansion, is there any meaningful results from talking with large hospital network in your target countries or you will not announce that until next year?

Peter Meldrum

On the international front, the company is aggressively pursuing a variety of initiatives to penetrate that European market, which we believe is about 75% the size of the U.S. market. So it's a significant opportunity for Myriad. One is to go to the major cancer centers and networks and collaborate directly with them. That will take a little longer to materialize, but will have a quantum step impact on revenue growth. We'll also go directly to physicians and work with physicians and other labs in terms of bringing samples into our lab in Munich. So we're going to pursue the European sales on a number of fronts and try to penetrate that market as quickly and aggressively as possible.

Operator

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

Michael Yee - RBC Capital Markets, LLC

Two questions. One is can you talk a little bit about the macro environment? What are you seeing in terms of OB/GYN and physician office visits recently and going through the summer? What have you seen and what are you including in your guidance, I guess stable office physician visits, you're getting better? What do you think about the macro side of things? And then the second question is, I wasn't sure if you gave a more specific guidance about SG&A for fiscal '12. I know you said R&D was 9%. What do you think about SG&A? And when -- as part of that SG&A, you were talking about social interactive, advertising, et cetera, when would that kick in and when would you expect to see the expenses there and then, therefore, the benefits?

Peter Meldrum

Michael, I'll let Jim address the SG&A question. Physician office visits from the Thomson Reuters data that we collect for the fourth fiscal quarter ending June 30 were relatively flat. And in our guidance, we built in stable OB/GYN office visits. We haven't assumed they would increase or decrease significantly. So we've seen a stabilization there, and we're assuming a pretty much status quo going forward.

Mark Capone

Michael, this is Mark. I can -- let me address the social media question that you asked and that next-generation DTC. I think overall, the expenses we view are relatively modest in that--only because we see some pretty good efficiencies when, as opposed to what you see on the mass media side, there are other ways to do that very efficiently. So those expenses will begin in the first quarter, but they're actually very modest. I think any benefits from that, we would expect to begin to see in the latter half of the year.

Michael Yee - RBC Capital Markets, LLC

Okay. And maybe Jim will address more specific about that guidance, but have -- should I think about really the new salespeople as adding incremental expenses but then slightly offset by no -- none of DTC this year?

Mark Capone

Yes. So I think from the salespeople, most of those will be on board by September, so those costs will begin to incur in the first quarter. Again, generally, we don't see the benefits from those salespeople until 6 to 9 months out. And so that's when you would expect to see that.

Peter Meldrum

And, Michael, this is Pete. You can budget, it's about $225,000 per sales rep fully burdened cost for Myriad.

Rebecca Chambers

In addition to that, Michael, we'll also have expense -- the expense associated with investing in Europe and additional SG&A from being on Myriad RBM.

Operator

Our next question comes from the line of Scott Gleason with Stephens.

Scott Gleason - Stephens Inc.

I guess just to start off, it looks like on the PROLARIS side, you guys had some pretty strong data coming out of ASCO, and you've got 6 other studies going on, a health economic study. It seems like you guys maybe have met the criteria level to go to Medicare and potentially get Medicare reimbursement approval here pretty soon. Can you talk about how the discussions are progressing and what you guys are hearing from Medicare?

Mark Capone

Sure, thanks, Scott. I think as I mentioned briefly in my discussion, typically to engage in discussions with -- for reimbursement for payers, you generally need to have at least 2 pivotal studies. We obviously have the Lancet oncology paper that was published a few months ago. And so when we get this biopsy data published, which we're aggressively working on, we think we will have sufficient information to begin to approach payers, including Medicare. We certainly know the concept and the health economics behind the story is one that will be embraced by payers. When you begin to look at the level of intervention that prostate cancer patients generally undergo, yet you look at how many of them have cancers that are not very aggressive. We know that story is one that payers are certainly very willing to listen to. We have had preliminary discussion with payers about some of the abstract type data, and they are very interested in seeing the peer review data. So you should look towards that peer review publication from the biopsy data as really the beginning of our discussions in earnest with payers.

Scott Gleason - Stephens Inc.

Great. And I guess along that line, when we look at some of the new product launches you guys are planning that are in areas not in kind of your core focus markets of oncology and gynecology, is there any plan, I guess, throughout this year to build potentially have or add additional folks on the sales side, maybe in neurology or psychiatry?

Peter Meldrum

We certainly are going to be very aggressive as we're able to move PROLARIS forward and obtain reimbursement and clearly see additional urology sales additions. We're a little bit farther away in terms of the neuroscience area. So I don't think in this coming fiscal year you'll see additional salespeople to address the psychiatric market. But we are looking very closely at that and definitely see that as an opportunity in the fiscal 2013.

Operator

Our next question comes from the line of Tycho Peterson with JPMorgan.

Tycho Peterson - JP Morgan Chase & Co

Maybe just first question on guidance. Wondering if you can give us a little bit more color around your thoughts on OB/GYN versus oncology for BRAC for the coming year.

Rebecca Chambers

Tych, we don't typically split guidance down to that granularity.

Tycho Peterson - JP Morgan Chase & Co

Okay. I mean, can you just talk a little bit maybe then about how you're thinking about further penetration of triple negative and adenocarcinoma versus kind of additional sales and marketing initiatives within kind of the current customer base?

Peter Meldrum

Sure. So as we discussed, the 3 indications on oncology, carcinoma in situ, triple negative and ovarian cancer, 2 of those actually now have well-established guidelines. So carcinoma in situ and ovarian cancer, those are now in guidelines. And so we can very aggressively pursue patients that meet those criteria. And those initiatives are underway as stated. We think they contributed to some of the 11% growth in the fourth quarter for oncology, and we are pleased to see oncology in the double-digit growth for that quarter. As to the triple negative, that is a newer guideline that NCCN just published. And so we are now aggressively pursuing that to update criteria with payers. And historically, we've seen payers be very receptive to NCCN guidelines. And we are hoping that we will get the same receptivity to the expansion of criteria to include these triple negative patients that are under the age of 60. So those discussions are taking place right now as we speak. And we would hope that within the next 3 months, we will have been able to have those with all of the major payers, including Medicare.

Tycho Peterson - JP Morgan Chase & Co

And then on COLARIS, with the addition of the fourth gene, can you just talk about whether there's an opportunity to retroactively go back? I think you've talked in the past about 46,000 patients that have been tested to date? How should we think about going back to some of those patients?

Peter Meldrum

Yes. There is definitely the opportunity for those that are historically tested. We are actually seeing tests come in now from some of those patients. I think the only caution on that is it does require a healthcare provider to have maintained contact with those patients from the time that they were tested, and some of those 46,000 were multiple years historically. And so while there is an opportunity and those that have good contacts with their patients that have maintained them over the past few years, they can reach back to those patients and recommend that they get PMS2 testing and we are pursuing with insurers reimbursement for patients that have been historically tested for the 3 genes. But it certainly takes some effort to go back and reach back to those patients.

Tycho Peterson - JP Morgan Chase & Co

Okay, and then just last one in Europe, and I appreciate the color you provided so far. I guess with regards to the network in Germany and then NCI Network in France. I mean, you haven't finalized any agreement there, is that correct?

Peter Meldrum

We would announce publicly through a press release if we executed agreements with either of those 2 organizations.

Tycho Peterson - JP Morgan Chase & Co

Okay. And then what about the pharma alliances in Europe, for PREZEON and p10? Anything that we should be thinking about in terms of timelines there?

Peter Meldrum

Well, Myriad is very fortunate the end of companion diagnostic space to have discovered 2 extremely important genes, p10, which may play a pivotal role as the companion diagnostic with PI 3-kinase inhibitors, which are currently being worked on by a number of major pharmaceutical companies; and the BRCA genes, which obviously play a critical role in the PARP inhibitors and other DNA-damaging agents that may come along. So the company is working very closely and pursuing those opportunities aggressively as well as augmenting our 2 primary positions with work that's being done at Myriad RBM. And they have collaborations with over 20 major pharmaceutical companies in terms of developing new companion diagnostics for new drugs being developed by those pharma companies. So this is certainly an area of interest and great opportunity for Myriad.

Operator

Our next question comes from the line of Doug Schenkel with Cowen and Company.

Doug Schenkel - Cowen and Company, LLC

In your prepared remarks, you talked about efforts to capitalize on the new NCCN guidelines. Could you see any change related to those guidelines during the quarter? And if not, any thoughts on when a related pick up in demand might occur as you ramp up efforts to take advantage of this?

Mark Capone

Yes, the NCCN guidelines I mentioned in the comments were related to the triple negative breast cancer. Those guidelines really had very little impact on the fourth quarter because we have to -- after NCCN establishes those guidance, we then need to take those payers and then get them to change their criteria. And so those are the discussions were engaged in right now is taking those to payers. So no impact in the fourth quarter. And then we will over the next 3 to 6 months work with insurers to update their guidelines. And as that happens, you will begin to see incremental impact as each of those contracts or criteria are updated.

Doug Schenkel - Cowen and Company, LLC

So it's probably fair to assume that you guys haven't baked in a whole lot related to that into your fiscal 2012 guidance. But if you were to execute the plan and if some of the payers came on board sooner than later that that could be a source of upside?

Mark Capone

Yes, I think it would be fair to say. If we got those payers on board very quickly, then I think there is upside to this plan or this guidance.

Doug Schenkel - Cowen and Company, LLC

Okay. And then related -- turning to COLARIS, the 4-gene product making that available, do you think there was some pent-up demand in advance of making that 4-gene product available? And if so, do you think you've worked through that at this point?

Mark Capone

Yes, that's a great question. We certainly know because the healthcare providers knew that we were working on this gene and the demand was high for that. We do know there was some pent-up demand, and that when the gene became available in June, we saw some impact from that. We think any pent-up demand is probably gone at this point. As we mentioned, we saw strong demand in June after this became available. And we have seen continued strong demand going into this first quarter as well for COLARIS. And we think we've worked through all of the pent-up demand.

Doug Schenkel - Cowen and Company, LLC

Okay. And one more, what hurdles need to be met for expanding the colon cancer specialist team? And how quickly would you envision making a decision on that and then broadening the initiative?

Mark Capone

Sure, the -- generally, for any of these initiatives, we look for a double-digit rate of return, and we would need to see line of sight to a double-digit rate of return on this additional sales team. So we have an 8-person team. We've hired most of that team. They will be in the field in September. We will monitor that on a very frequent basis. As soon as we see line of sight to a double-digit return, we would then look to expand that team into additional geographies, and it really would just depend on how quickly we might see that return. If we were very successful, I think you could see that happen yet this year, this fiscal year, that we would begin to look to add some additional teams.

Operator

Our next question then comes from the line of Charles Duncan with JMP Securities.

Charles Duncan - JMP Securities LLC

Most of my questions have been asked, but I wanted to ask you a question on the Rules-Based Medicine vector or the companion diagnostics vector. You haven't provided much detail on that one. What do you think are the trigger points for growing that business?

Peter Meldrum

Charles, if I understand your question correctly, and thank you for asking it, we have a number of opportunities in the companion diagnostics sector with Myriad RBM. As I mentioned, we have 20 different collaborations ongoing. These are mostly early stage new drugs and either animal studies or Phase I, Phase II studies looking for markers that would identify patients who would be likely responders or might suffer an adverse event from those drugs. So we're very excited about the future potential of that. And as I mentioned on the call, there are a number of products in our current product pipeline that have come out of research from RBM. And a number of those, we think, will be ready for product launch within the next 2 years or so.

Charles Duncan - JMP Securities LLC

Okay. And, Pete, you or Mark could provide a little bit more detail on the PROLARIS commercial strategy. It seems like over the course of the next so many quarters you might be adding to the infrastructure, commercial infrastructure. Might you use social media efforts as well that are capital efficient? Or how do you really intend to exploit the opportunity with PROLARIS?

Mark Capone

Yes, we are very excited about the data that we just released. It was outstanding. I know you've seen that data. And as we begin to -- as we submit that data through peer review process and that additional publication comes out, we will then use that first as the opportunity to then work with payers to obtain reimbursement and then to aggressively begin to market and sell that to the top urologists. We've already identified those urologists that we believe will be rapid adopters because we've had a sales team out in the field for the past year doing market development. So we clearly have identified those targets where we expect to see rapid adoption, and that effort will begin in parallel to the reimbursement efforts as soon as you see publication. We would not expect this year to probably move into the social media arena. Generally, we would like to do that once we've established sufficient contact with physicians because physicians want to make sure they're very comfortable with the product and how to use that before they might get inquiries from their patients. And so I think you'll see a social media strategy for PROLARIS more likely in 2013. The last thing I'll add as to what Pete already did, I'll just underscore again, is that as we begin to see adoption for PROLARIS, we will look to aggressively expand that urology sales team based on reimbursement and adoption from rapid adopters. And that's something that, again, we'll watch as soon as we get that additional publication completed.

Operator

Our next question comes from the line of Dane Leone with Macquarie.

Dane Leone - Macquarie Research

I guess my first one is maybe excluding Rules-Based Medicine, can you kind of give us some color on what you envision for, I guess, new product sales or new test sales in -- by 2012, maybe including new indications that you're pursuing off with some new tests that you might be launching?

Peter Meldrum

As I mentioned on the call today, the next product we plan on launching is a Melanoma Diagnostic product. We will launch it this fiscal year. Obviously, when you launch a new product, it takes some time for reimbursement and appropriate guidelines to be established and to develop the marketing and sales infrastructure around that new product. But we're very excited about it. As I mentioned, there are over 3 million skin biopsies performed in the United States every year, and about 300,000 of those really can't be determined with any confidence using current anatomical pathology methods. And so being able to determine whether or not a mole is benign or malignant is certainly very critical and we think has an exciting opportunity to improve patient health care. That's the only product this year that we're planning on publicly announcing. But as I mentioned on the pipeline, we have a lot of very exciting products that are in that pipeline that will come out over the next several years, not only in oncology, but in areas outside of oncology as well. So we are very excited about the pipeline. And so it's probably one of the strongest molecular diagnostic pipelines in the industry.

Dane Leone - Macquarie Research

Great. And I guess another question for me is, I think quarter-on-quarter there was a tick up in bad debt expense. Is there anything we should read into that? Was that just seasonality or some impact from higher deductibles from insurance plans?

James Evans

No, there's nothing specific to look at. It's more a case-by-case basis when you review our receivables and determine which ones might not be collectible or which ones we've gone through our whole series of steps to try to collect. But there's no overriding issue that we're concerned about in that area. As you know, year-over-year, that number has come down significantly. That's driven in part by additional preauthorization from some of the insurance carriers that helps us to assure the collection. But no, we're not aware of any overriding concerns in that area.

Rebecca Chambers

Dane, that's what props around a bit quarter-to-quarter, so I agree with Jim, there's nothing to read into there.

Dane Leone - Macquarie Research

Great. And then the last one for me, I just want to gauge your appetite for using debt in a potential M&A deal. Is that something that's been discussed or [indiscernible].

Peter Meldrum

You bring up a good point that debt has the lower cost of capital for Myriad obviously than equity. And the company has no aversion to using debt and taking advantage of that leverage to do an acquisition if we saw an acquisition that would warrant both the significant amount of cash in excess of $400 million that we have on the balance sheet and would require more than that and use debt to leverage to do that acquisition. So we're not yet adverse. We recognize the benefits of debt, particularly with the extremely low cost of borrowing that we're enjoying in this current environment. So we certainly are keeping our eyes open and where appropriate, we would certainly take advantage of that opportunity.

Operator

I believe this does conclude our question-and-answer session. Ms. Chambers, I would now turn the call back to you for any closing remarks you may have.

Rebecca Chambers

Thank you, Lindsay. This does conclude our fourth quarter earnings conference call. A replay will be available via webcast on our website for 1 week. Thank you all for joining us this afternoon.

Operator

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

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

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

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

Source: Myriad Genetics' CEO Discusses Q4 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts