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Executives

Pete Meldrum – President and CEO

Mark Capone – President, Myriad Genetic Laboratories

Jim Evans – Chief Financial Officer

Rebecca Chambers – Director of Investor Relations

Analysts

Scott Gleason – Stephens, Inc.

Jon Wood – Jefferies & Company

Amanda Murphy – William Blair & Company

Tycho Peterson – JP Morgan

Michael Yee – RBC Capital Markets

Isaac Ro – Goldman Sachs

Dave [Kler] – Piper Jaffray

Ashim Anand – Natixis Bleichroeder

Peter Larson – Mizuho Securities

Laura McGuigan – B. Riley

Gartner, Inc. (MYGN) F1Q12 Earnings Call November 1, 2011 4:30 PM ET

Operator

Welcome to Myriad Genetics’ FQ1 Earnings Call. (Operator instructions.) As a reminder, this conference is being recorded Tuesday, November 1, 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, Lindsey. Good afternoon, everyone, and welcome to the Myriad Genetics’ FQ1 2012 Earnings Call. During the call we will review the financial results we released today and the progress we have made on our strategic directives, after which we will host a question-and-answer session. If you have 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 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 along with the slide presentation at www.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’ll now turn the call over to Pete.

Pete Meldrum

Thank you , Rebecca. Myriad’s strategy is to become a leader in the commercialization of transformative molecular diagnostic tests that save lives and improve the quality of life for patients with chronic diseases. In an effort to implement this strategy we are focusing on three strategic directives: one, to grow existing tests and markets; two, to develop an international presence; and three, to launch new tests – both as a result of investment in in-house research and development and through the acquisition of new test and technologies which expand our disease focus. We believe the successful implementation of these directives will position Myriad as an international molecular diagnostic leader with transformative tests across all disease indications.

Today I will discuss the company’s key initiatives to introduce new tests and to expand internationally, each of which I believe will move us closer toward achieving our goal. Mark will provide an update on our first strategic directive to grow our existing tests and markets. In September, Myriad announced a significant deal with Crescendo Biosciences, a molecular diagnostic company focused on autoimmune and inflammatory diseases. Myriad loaned Crescendo $25 million and secured an exclusive three-year option to acquire all of their outstanding shares at a predetermined formula price based on Crescendo’s revenues and growth rate at the time the option is exercised.

The loan is secured by Crescendo’s intellectual property rights in the United States and carries an interest rate of 6% with interest payable annually. If Crescendo is successful with its commercial plans and Myriad exercises its option to acquire Crescendo, the loan will be applied to the purchase price. If Myriad decides against the acquisition the loan is payable at the end of the six-year term. We believe this transaction is an attractive, low-risk strategy to position Myriad in the autoimmune and inflammatory disease markets.

Crescendo’s initial product, Vectra DA, is the only blood-based molecular diagnostic test on the market that determines the level of disease activity in patients with rheumatoid arthritis. There are over 1.5 million Americans living with this debilitating disease, and 100,000 additional Americans will be diagnosed with rheumatoid arthritis this year. Vectra DA goes beyond the outward signs and symptoms of the disease to provide a deeper biological understanding of disease activity. This insight will enhance the healthcare management of all patients with rheumatoid arthritis.

This deal has the potential to complement Myriad’s expanding disease focus by adding autoimmune and inflammatory disease products to our current portfolio of tests in oncology, women’s health, urology, dermatology and neuroscience. No other molecular diagnostic company has Myriad’s breadth of opportunities in development across multiple disease indications.

Complementing our strategy of diversifying across disease indications, we continue to make progress with the integration of Myriad RBM in Austin, Texas. We have projected Myriad RBM’s companion diagnostic services revenue for this fiscal year to be between $24 million and $26 million. Therefore, we were pleased that the companion diagnostic service revenue for FQ1 was $6.5 million, which is trending toward the upper end of our guidance. Initially, five of the candidates in their product pipeline, which have the most significant commercial potential, are being developed and are proceeding toward future commercialization.

We are also aggressively expanding internationally. Our laboratory facilities in Munich, Germany, have been completed and we are now in the process of equipping and staffing them. We remain on track with the laboratory accreditation and we should be fully certified to perform molecular diagnostic testing by the end of December. This means we will be generating European revenues in January, 2012. Our current facility will have sufficient capacity to generate over $50 million in revenues each year and we hope to meet this level of revenue within the next five years.

Our European headquarters have been established in Zurich, Switzerland, and we have hired the country sales managers for Germany, Switzerland and France, and will soon add Spain and Italy to our territory. We have reimbursement for BRACAnalysis, COLARIS and COLARIS AP, and are making progress on obtaining reimbursement for PROLARIS. The international opportunity is an exciting one for Myriad and we are pleased that we are able to achieve and accelerate entry into Europe by a full year.

With over $400 million in cash, marketable securities and investments, we have tremendous flexibility to diversify our business across multiple disease indications and grow our business both domestically and abroad with the singular goal of becoming a global leader in this exciting field of high-value molecular diagnostics. Now it is my pleasure to turn the call over to Mark Capone.

Mark Capone

Thank you, Pete. As Pete mentioned, our first strategic directive is to grow our existing tests and markets. On the last earnings call I laid out our strategic plan to grow BRACAnalysis, COLARIS and PROLARIS. I would like to provide a brief update on the progress we have made during FQ1. I am pleased to report that the oncology segment grew 12% this quarter, driven by continued execution of the BRACAnalysis initiatives focused on developing the triple negative breast cancer, carcinoma in situ, and ovarian cancer indications. These indications increase the addressable oncology market for BRACAnalysis by approximately $200 million to an annual market of $650 million. In total these new indications grew 21% this quarter compared to FQ1 last year, and we continue to see significant opportunity for growth in the oncology segment.

Specifically, we have seen progress in our efforts to identify triple negative breast cancer patients. During the quarter we published a paper in the journal Cancer which detailed the prevalence of BRCA mutations in 246 triple negative patients. This publication demonstrated that 11% of patients with triple negative breast cancer had a BRCA mutation, a positive rate which exceeds the typical threshold for testing. This publication also noted that increasing the patient age threshold from the current NCCN guidelines of 60 or younger, to 65 or younger, would have identified all of the BRCA carriers. We have also been successful in updating reimbursement criteria to reflect the NCCN guideline changes for triple negative breast cancer, with 100% of our top payers having adopted the new reimbursement criteria.

The women’s health segment grew 15% year-over-year during FQ1. We were pleased to achieve this level of growth despite lower reported OB/GYN office visits during FQ1, which were down 4% versus the prior year according to Thomson-Reuters data. Our ability to achieve double-digit revenue growth in this segment in the face of continued economic headwinds was driven by the impact of the same-store sales initiatives, the additional sales representatives added in FQ1 2011, and our DTC and DTP interactive media campaign. We have been particularly encouraged with the results of new approaches to further same-store sales as existing territories grew 11% year-over-year during FQ1.

As one small example of our lean systems efforts, a sales and medical professional worked with a OB/GYN practice in the Midwest to map out process improvements in patient identification. As a result this office with three OB/GYNs, increased testing from nine patients per quarter to 72 patients per quarter following the process change. We’ve also continued to see an impact from the new territories added in the summer of F2011, which grew 26% year-over-year in FQ1.

Lastly, our initial efforts to shift our DTC and DTP programs away from conventional television advertisements towards interactive media have shown significant promise. By way of example, we completed a social media campaign that generated 8.5 million impressions at a cost per impression equal to 2% of our historical mass media campaigns. We also completed a direct-to-physician campaign that, with a very nominal investment, added 100 new physician customers. We are developing plans to increase the scope of these interactive media efforts in future quarters.

Next, I would like to provide an update on how we are progressing with COLARIS. I am pleased to report COLARIS revenue grew 35% this quarter, driven by both an increase in demand and higher per-test revenue due to the inclusion of a fourth gene, PMS2. Approximately one-third of this revenue growth resulted from increased demand and two-thirds was from the addition of PMS2. We expect the product to continue to grow in the double digits for the rest of this fiscal year. To this end, we continue to execute the strategic plan set forth including educational outreach to professional societies and key opinion leaders on the important findings of the health economic study for COLARIS published in the Cancer Prevention Research last November. Payers have been very receptive to this message, and approximately 70% of our top payers now reimburse for PMS2.

We have also fully hired and trained a colon cancer specialist sales team during FQ1. As a reminder, this is a new sales team in our oncology segment that is exclusively selling our four colon cancer products. We look forward to updating you on this pilot program as it progresses.

Lastly, I would like to provide an update on PROLARIS. Our goal with PROLARIS is to offer a test which can distinguish between indolent and aggressive prostate cancer in two different indications. The pre-prostatectomy indication is appropriate for the 241,000 prostate cancer patients diagnosed yearly to help determine whether active surveillance, surgery or radiation is the most appropriate course of action for the patient. The need for PROLARIS has become even more critical with the recent USPSTF recommendation that PSA testing on healthy men may do more harm than benefit because physicians can’t distinguish between patients with a slower-growing cancer and those with an aggressive form of the disease. As a result, many patients are over treated and there is an unnecessary burden on the healthcare system.

We hope to address this unmet clinical need with the launch of the PROLARIS pre-prostatectomy indication this fiscal year. To date, we have published a 337-patient study in Lancet Oncology and have completed and submitted a second 350-patient study for publication which was based on data presented in June at ASCO. Both of these studies have shown that the PROLARIS score is the stronger predictor of outcomes and more significant than either Gleason or PSA. We believe that the publication of this second pivotal study on biopsy tissue will accelerate our reimbursement and physician adoption efforts.

We have also initiated a 250-patient Phase IV study with a clinical research organization that represents 25% of the urologists in the United States. The goal of this study is to document the distribution of PROLARIS scores and characterize the impact these scores had on physician and patient decision making. We expect to complete this study by the end of this fiscal year. In addition, we have another 800-patint biopsy study underway which should be completed within the next calendar year. Upon completion of these additional studies we will have correlated the PROLARIS score to outcomes for over 1700 pre-prostatectomy patients.

A second PROLARIS indication will enable post-prostatectomy patients to determine whether radiation or additional adjuvant therapy might be necessary. There are approximately 1 million men who have undergone prostatectomies in the last five years that might benefit from this indication. To date we have published a 366-patient study in Lancet Oncology and recently completed a second study in 413 post-prostatectomy patients.

The results of the second study will be submitted for presentation at the GU Symposium in February, 2012. Both of these studies have also shown that the PROLARIS score is the best predictor of the aggressiveness of prostate cancer. Lastly, a 350-patient study is in progress that will evaluate biochemical recurrence after surgery with or without radiation as a function of PROLARIS score. After all seven of these studies have been completed we will have published PROLARIS data on over 3000 prostate cancer patients.

In summary, I am pleased with the success we demonstrated this quarter in executing our strategic plan to grow our existing products and markets. We will continue to focus on these initiatives in an effort to deliver strong financial results and further our mission of preventing disease and improving the lives of our patients. Now I will turn the call over to Jim for a detailed review of our FQ1 results.

Jim Evans

Thank you, Mark, and good afternoon everyone. It is my pleasure to present a more detailed look at Myriad’s financial results for FQ1 2012. Myriad’s revenues for FQ1 were $110.5 million, an increase of 20% over the same period in the prior year. Molecular diagnostic revenue grew 13% year-over-year to $104 million. Of this 13% growth, price contributed 1.5% while the remaining 11.5% came from an increase in sample volumes and new products. A breakdown of revenue by product shows BRACAnalysis revenues grew 11% to $89.5 million compared to $80.7 million in the same period last year, and represented 81% of total revenues. Revenue from COLARIS and COLARIS AP increased 35% year-over-year to $9.6 million or 8.7% of total revenues. Companion diagnostic services equaled $6.5 million and represented 5.9% of total revenue. Myriad’s other molecular diagnostic products grew 20% year-over-year and accounted for 4.4% of total revenues or $4.9 million.

Moving down the income statement, FQ1 SG&A expense equaled $46.1 million. This represented an increase of 17% over the prior year and was used to support the company’s 20% revenue increase, and included $2.6 million in administrative costs for Myriad RBM and $1.1 million associated with our international expansion. Research and development expense was $8.5 million, or 7.7% of revenue, a 48% increase versus the $5.8 million reported in FQ1 last year. As we have discussed in the past, Myriad is investing more in R&D to grow our business. R&D expense tends to be lumpy given the timing of sample acquisitions and external costs associated with our ongoing clinical trials. We continue to expect full-year R&D expense to be approximately 9% of total revenue as we are committed to investing in new product research and development and furthering the clinical evidence for the company’s newer products such as PROLARIS and OnDose.

Operating income for the quarter was $41.5 million, resulting in an operating margin of 37.5%. This level of operating margin represented a 120-basis point contraction year-over-year, which is primarily a result of higher R&D expenses to ensure future revenue growth and diversification and the impact of increased SG&A costs associated with Myriad’s European subsidiary, Myriad GmbH and Myriad RBM.

The FQ1 effective tax rate was 40% as compared to the 38% tax rate in the second period of the prior year. This rate will continue to fluctuate depending on a number of factors including the timing and magnitude of tax deductions associated with incentive stock options, the amount of expenditures outside the US for our international expansion, and the distribution of revenue among states with higher or lower taxes. This quarter, due to the utilization of net operating loss carry forwards that offset the majority of our taxes payable, the company continues to pay very little cash taxes.

Dilutive weighted average shares outstanding were 87 million shares. As previously announced during FQ1 we repurchased approximately $28 million of stock and completed our third $100 million authorization ahead of our FQ4 earnings call on August 9th. Over the rest of the quarter we repurchased an additional $9 million under the new $200 million buyback authorization announced on August 15th. Earnings per share including booked tax were $0.29 fully diluted for FQ1 2012, an increase of 21% over the $0.24 reported in the same period of the prior year.

Moving on to the balance sheet and cash flow, our ending cash and investments for the quarter were $401.7 million. This compares to $417.3 million at the end of FQ4. Uses of cash during the quarter included $37 million on share repurchases and a$25 million loan to Crescendo Bioscience. Cash from operating activities equaled $31.9 million. Capital expenditures were $2.1 million and included purchases of new instrumentation for research and development use in addition to leasehold improvements at the Myriad RBM facility. Total cash generated during FQ1 equaled $46.8 million.

Through FQ1 we were very pleased with the trends that we have seen in sample flows and demand for our tests, and in October we have continued to see good sample volumes even in light of what can be characterized as a very choppy macroeconomic backdrop. At this point, our guidance for F2012 remains unchanged with revenue in the range of $445 million to $465 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.

As a reminder, this EPS guidance included the impact of the 28 million stock buyback completed ahead of the last earnings call but does not take into consideration the impact of any additional buybacks. At this time we are not changing our EPS guidance for the impact of additional buybacks due to uncertainty around the timing and magnitude of those buybacks.

Lastly, as of September 30th, we have approximately $38 million in net operating loss carry forwards. We expect to fully utilize these NOLs by the end of FQ2 and will begin paying cash taxes in the back half of the year. And finally, the timing and magnitude of buybacks under the new authorization will be opportunistic and dependent on market conditions. As such, we do not expect to complete the entire $200 million authorization in this fiscal year.

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

Rebecca Chambers

Thank you, Jim, and in order to ensure broad participation in today’s Q&A session, please limit your questions to one plus a related follow-up and then jump back into the queue. Lindsey, we are now ready for the Q&A portion of the call.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions.) Our first question comes from the line of Scott Gleason with Stephens. Please proceed.

Scott Gleason – Stephens, Inc.

Hey Jim, Mark, thanks for taking my questions. I guess the first question, just when we look at the data that you guys are building around PROLARIS, can you give us any anecdotal information regarding your conversations with payers about potential coverage or any sense for what kind of timeline we’re maybe operating under where we could see potential coverage decisions for PROLARIS?

Mark Capone

Yeah, this is Mark; thanks for the question. Just a general comment on PROLARIS – what we know is that based on data, probably only around 10% of men that are diagnosed with prostate cancer actually need some form of surgery or radiation, and yet in the United States probably 80% plus of men actually get some form of treatment. So that’s a story that you might imagine plays very well with payers. I think they all recognize it; it’s well known, even with the USPSTF recommendations, that there is a lot of over treatment in the United States and that a test that could help differentiate and find the 10% that truly need to be treated is something that payers are willing to embrace. So they’re very interested in the data.

As to timing for those discussions, as I mentioned the biopsy data that we have provided top line results on and have submitted for publication, we believe the publication of that – which will be a third study and a pivotal study – will really allow us to begin a dialog with payers on exactly the type of reimbursement that we could expect for PROLARIS. And we expect that publication to happen yet this fiscal year.

Scott Gleason – Stephens, Inc.

Great. And then I guess when we look at the RBM acquisition and the partnership that they had with the US military on schizophrenia, are there any new developments in terms of potential use of VeriPsych for the military population or any new developments on that front?

Pete Meldrum

Thank you, Scott. The military is looking at VeriPsych and doing additional analysis on the discovery map that Myriad RBM has developed, and so we’re very excited about the potential application of identifying individuals in the military before they’re sent overseas and put in a stressful combat situation; of identifying those individuals that might suffer a traumatic episode. And so I think there’s great potential for the product in that application and we’re working very closely as we speak with the military on that.

Scott Gleason – Stephens, Inc.

Okay, thanks for taking my questions, guys.

Operator

Our next question comes from the line of Jon Wood with Jefferies. Please proceed.

Jon Wood – Jefferies & Company

Hey, good afternoon. Thanks. This is for Mark Capone. Mark, you kind of blended the three new indications of BRAC, CIS, ovarian and TNBC together. Would you call out the TNBC growth rate and remind us where the penetration is for that product. I know that the guidelines were just updated so looking to get a little bit more color on that specific indication.

Mark Capone

Sure, thanks Jon. As I mentioned in the call, if you lump all three of those together we saw a 21% year-over-year growth rate in those three indications, which relative to the oncology growth rate overall of 12% is a nice uptick and was obviously part of that 12% growth. I think the triple negative breast cancer, the other two indications actually had already been in guidelines so both the carcinoma in situ and the ovarian cancer indications had already been in guidelines, and much of our work there is just to remind physicians that in fact those are the guidelines.

For triple negative breast cancer, that was actually new to guidelines and as we discussed, we were able to make some very significant progress in getting those guidelines established just this past quarter. And so we still believe we’re only about30% penetrated in that particular indication and so there’s still a significant opportunity for us to continue to grow that; and with guidelines established, payers now establishing criteria we think that’s still an engine for growth in the upcoming quarters.

Jon Wood – Jefferies & Company

Okay, great, thanks for that color. My unrelated follow-up is for Jim. On the stock buyback front, it’s safe to say you’ve built nothing else in besides the $10 million or so you did in FQ1 for the rest of the year. Is that a fair assumption?

Jim Evans

Yes. On the guidance that we provided it does just have the amount that we had actually built in, had discussed on our last call that had taken place. So the $9 million that we have done subsequent to that point and anything else we do going forward were not taken into consideration with our earnings per share guidance.

Jon Wood – Jefferies & Company

Okay, great. Thanks Jim, bye.

Operator

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

Amanda Murphy – William Blair & Company

Thanks. I had a question actually on the OB/GYN side of the business. If you look over the past few quarters that’s been growing in the mid-teens or so for a while now, so I’m curious – do you see that growth rate accelerating at all, whether it’s in a better macro environment or I don’t know where we stand with the payers having to waive the copay on the preventative side? But just curious if you could give a perspective there.

Mark Capone

Sure, thanks Amanda, and you’re right – we’ve been growing in the mid-teens. Just first of all a commentary on the market as a whole: we still think we’re only about 7% penetrated in the OB/GYN market so there’s a significant opportunity in that market. And I think the initiatives we’ve been working on over the past couple of quarters are designed to try to penetrate that market faster than we’ve been able to do in the next few quarters. Obviously there are still some headwinds in there.

As we’ve mentioned, we are seeing declines in OB/GYN visits year-over-year – that 4% decline we need to combat with some of these other initiatives. It’s obviously unclear where that’s going to go. As Jim said, it’s a bit choppy right now and so it’s unclear what those economic headwinds may be and how that would affect OB/GYN visits in the future, but we still think there’s a lot of opportunities there and we think some of the initiatives that we’re working on really will provide opportunities to penetrate that market faster. That’s our goal and that’s what we’re going to try to make happen in the coming quarters.

Amanda Murphy – William Blair & Company

Okay, and then I guess I also have a sort of unrelated follow-up. If you look at the revenue guidance you’ve given on both sides of the business, can you just remind us what the swing factors are between the low and the high end at this point?

Pete Meldrum

Yes, Amanda, this is Pete. The revenue guidance we’ve given assumed the economy would stay basically the same as when we gave that guidance last summer. So if the economy improves we will trend toward the upper end of the guidance and if the economy deteriorates we still think we’ll achieve guidance but it will trend toward the lower end of the guidance.

Amanda Murphy – William Blair & Company

Okay, thanks very much.

Operator

Our next question comes from the line of Tycho Peterson with JP Morgan. Please proceed.

Tycho Peterson – JP Morgan

Hey, good afternoon. Maybe the first question on COLARIS: you had talked last quarter about some delays ahead of the launch of the four gene product. How much of what you saw this quarter was maybe pent up demand, or should we think about this as a decent run rate? And then as an add-on, you talked in the past about maybe going back and looking retrospectively at samples with the fourth gene. How do you view that opportunity?

Mark Capone

Thanks, Tycho. Yes, we did talk about the fact that there was some pent up demand as we transitioned into this. I would say that’s a small part of what we saw in the 35% growth rate. Some of that was in there but the growth rate was really pretty significant overall. Now, as I mentioned in my talk we continue going forward to expect double-digit growth rates and we expect it from both sides, both in overall demand plus just the contribution of PMS2 as another gene in the entire test.

As far as patients from the past, we see some opportunity there. In general that’s more difficult because that requires a physician to contact a patient, bring them back into the office. So most of really what we saw in this past quarter were generally newer patients; they were not necessarily patients that were doing what we’d call a catch-up test for PMS2. That opportunity exists. We certainly remind physicians about that opportunity but we don’t see that necessarily as large of an opportunity.

Tycho Peterson – JP Morgan

And then the follow-on is as we think about PROLARIS and I appreciate the commentary on reimbursement. As we think about your go-to-market strategy here, you’ve obviously got the dynamic with radiation therapy and you’ve got surgery and you’ll have competition from PCA-3 and other tests – how should we think about your approach? Will it be a similar kind of DTC approach ultimately when you bring the test to market or how do we think about building the sales channel and ultimately advertising?

Mark Capone

Sure. So right now we have an eight-person urology team that is out. They’ve been doing market development work for the past year or so. They’ve done a great job of targeting those physicians that they believe would be the rapid adopter physicians; those that are most interested in using PROLARIS in either of those two indications. And so their launch plans are pretty well set to focus on those. And in particularly the biopsy indication, and we publish that data in the coming months, they’ve identified they physicians that are most interested in pursuing active surveillance which is the alternative for urologists if they choose not to do surgery.

So that’s where we’ll focus first. As we look at the adoption in those physicians and we see increasing adoption we’ll look to expand our penetration into the urology marketplace with additional sales teams as well. And so DTC will not be something we focus on in at least the initial months, at least not in the traditional sense. What we will look at is bringing in interactive media as a DTC alternative. We’ll do that once we’ve really educated the physicians so that they’re prepared to answer any of the questions that they may get from patients that self-select and come into the office asking specifically about PROLARIS.

Tycho Peterson – JP Morgan

Okay, thank you.

Operator

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

Michael Yee – RBC Capital Markets

Great, thanks. Question on Europe: I know you said you’re getting validated and certified, and that all should be up and running by the end of the year. How do you expect revenue to sort of come on I guess early calendar ’12? Is this going to be small revenues, a couple million, a few million; and have you or can you confirm if you’ve actually signed deals with consortiums to assure yourself of business there? Or how are you thinking about that?

Pete Meldrum

Thank you, Michael. Yes, discussions are progressing well with a number of the major networks across the region. Our strategy in Europe is to address both the major networks in the form of a collaboration, but also to address the market directly with physicians who order tests for their patients. As I mentioned, Europe will be up and running January of 2012, generating revenues for the company. Our fiscal year ends June 30th so we only have six months and it’s in a ramp up phase, so I anticipate those revenues to be modest. But we’ll give you more color when we give our guidance for next fiscal year in terms of what we anticipate for Europe.

But certainly the overall opportunity is significant. We see the European market about 75% the size of the US market, so certainly many hundreds of millions of dollars for the products that we have. And we’re very excited by the fact that three of our major products – BRAC, COLARIS and COLARIS AP – have already received reimbursement levels in each of the countries that we initially intend to operate in.

Michael Yee – RBC Capital Markets

Okay, thanks.

Operator

(Operator instructions.) Our next question comes from the line of Isaac Ro, Goldman Sachs. Please proceed.

Isaac Ro – Goldman Sachs

Good afternoon, thanks for taking the question. The first item I wanted to touch on was COLARIS. I think it was touched on earlier but maybe you can put some more color around the sequential acceleration. It was pretty sizable, I think maybe 25% or 26%. So if you can kind of adjust for the pent up demand that you mentioned before and really kind of give us a better sense of the rest of the sequential increase there and what really drove that, that would be helpful.

Mark Capone

Sure, thanks for the question, Isaac. I think as I mentioned while there was some pent up demand, generally the growth rate we’ve seen came from first of all there has been a lot of interest in PMS2 over the last couple of years. It’s become apparent that the prevalence of PMS2 in patients that have familial colon cancer is actually relatively significant, and as significant as another gene – MSH6. Because of that knowledge there has been increasing interest from physicians to add PMS2 to the product and so I think that’s one of the primary drivers.

So two-thirds of that growth was really attributed to the fact that physicians who had been previously ordering COLARIS were now ordering that fourth gene which has a list price of $1400. So that’s one portion of that. The second is because this is somewhat of a competitive market, there are other laboratories that are offering tests. As Myriad now is able to offer the complete test and we think the most comprehensive, and in fact our PMS2 test has been extremely well-developed and is very sensitive, that then we’ve been able to bring people to meet Myriad; and that’s the source of the increased demand, is that we’ve got those physicians that may have been choosing to go to other places are now coming to Myriad to get this four-gene profile which they believe to be the most sensitive from Myriad.

In addition to that we have, as we talk about with BRACAnalysis and it’s also true for COLARIS, we have the lowest uncertain variant rates. Because we do such a large volume of testing for COLARIS we’re able to interpret more of those tests than other laboratories might, and so when you combine that sensitivity with the quality of the answers that we’re able to provide we think that’s what’s driven a lot of the interest in the increased demand side as well as the addition of PMS2 to already-existing demand. So we continue to believe that COLARIS has significant growth opportunities in the double-digit range in coming quarters, and we’re excited about that opportunity.

Pete Meldrum

COLARIS is a significant market – several hundred million dollars annually potential for the company, and we’re only about 7% penetrant in that market, far less than we are for example with BRACAnalysis. And we see this as a very exciting opportunity and one that we want to aggressively pursue, and as Mark mentioned on the call we’re running a pilot COLARIS sales force that is specifically focused on COLARIS and COLARIS AP. That is working very well and I think you’ll see that we’ll expand our direct sales efforts in COLARIS in the future to continue to drive growth.

Isaac Ro – Goldman Sachs

Okay, that’s very helpful; thank you for that. And then Jim, secondly on the tax rate, I think you guys were a little ahead of guidance this quarter. Assuming the rest of the year plays out the way you think it will is it still fair to say 38% for the year?

Jim Evans

It is difficult to say. There are a number of items that drive the effective tax rate. We’re still thinking it’s going to be in that 38%... 40% would be on the high end I believe but it’s still going to be in that range that we had talked about previously. Certain events could actually drive it down. As I mentioned, one of the drivers is the deduction that we get in association with our incentive stock options. If we see more option activity that would actually drive the effective rate down; in periods that we see lighter activity, that rate goes up. So there’s a number of items that we don’t have a lot of control over that will move the effective tax rate but I think we’re still in that same ballpark.

Isaac Ro – Goldman Sachs

Okay, fair enough. Thank you.

Operator

Our next question comes from the line of Dave [Kler] with Piper Jaffray. Please proceed.

Dave [Kler] – Piper Jaffray

Yeah, hi, good afternoon everybody. It’s actually Dave [Kler] here for Bill. The first question I have is just on the RBM pipeline. You said I think in the commentary that you have five companion diagnostic assays that are kind of progressing through the pipeline there. When should we expect to see data on these and when would the first one be launched?

Pete Meldrum

The company is very excited about a number of the products that have potential in the pipeline with Myriad RBM, and even though we’ve highlighted the high-priority five of those we are still working on the other three and moving those forward as well, just at a slightly lower priority. The ones that we are most excited about and have prioritized are number one, a kidney damage candidate product that would detect kidney damage at a very early stage in patients with Diabetes; a psychotic differential diagnostic candidate that may aide physicians in differentiating between patients with bipolar disorder and patients with major depression. Early on, often that’s very difficult to ascertain for a psychiatrist.

The third product is a kidney transplant candidate for the early detection of kidney transplant rejection; an NCI, Alzheimer’s candidate product that may aide physicians in differentiating between patients with mild cognitive impairment and patients with Alzheimer’s Disease; and finally a colon cancer detection candidate that may enable physicians to detect colon cancer from a blood sample at a very early stage. All of these are very exciting and all of these are moving toward eventual commercialization.

We have not given specific information on the timing of those five but I will point out that the next product we expect to launch is a product from the melanoma diagnostic agreement and we expect that to be launched at the end of this fiscal year. And that product will allow a dermatologist to determine whether or not a skin lesion is cancerous or benign. Current pathology analysis is unable to determine malignancy in about 300,000 skin biopsies done each year in the United States, and so this test could provide a molecular answer for physicians that would improve the healthcare management of their patients. And again, we expect that product to be launched this fiscal year.

Dave [Kler] – Piper Jaffray

Thank you. Then one quick one for Jim here, and I think you mentioned that the spend in Europe was about $1 million in the quarter. What should we expect for the fiscal year as far as spend to build out Europe?

Jim Evans

Yeah, in FQ1 we did spend about $1.1 million in the SG&A line as we’ve been establishing operations, hiring some of the positions that had been discussed earlier, getting the office space up and running in Zurich. We are estimating that we’ll spend about $6 million on the international operation build out in this fiscal year.

Dave [Kler] – Piper Jaffray

Thank you.

Operator

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

Ashim Anand – Natixis Bleichroeder

Thanks for taking my questions, guys. Recently the Department of Health and Human Services had advocated direct patient access to laboratory-developed tests, and obviously there are hurdles in terms of [PIAA] and HIPAA. So I just wanted to ask where maybe you stand on that issue considering that there could be significant benefit in terms of patients footing the revenue; on the other hand, consumer genetics, which has its own risks – that can be propagated also by that. And if you are for that, how would the direct to consumer campaign change if that indeed becomes a rule?

Mark Capone

Great, thanks for the question, Ashim. Yeah, so the Secretary, obviously in a move towards allowing patients to get more visibility into their healthcare has put forth the thought that at least for Medicare, that patients should have direct access to their test results, and has asked for comments on that particular position. ACLA amongst others are putting together commentary on that and while ACLA is supportive of that as is Myriad, there are some particular unique aspects as it’s related to genetic testing results.

Specifically what ACLA is concerned about is that these test results are complicated and require interpretation from physicians and that providing direct access to that information without that intermediary interpreting that information, you could end up actually doing more harm to patients than good. And so while this is well-intentioned, for genetic tests there needs to be some caution as to whether that information should go directly to a patient without physician interpretation. And so I think that discussion is ongoing right now and we’ll see ultimately where that ends up.

Now, as it relates specifically to how this would impact any direct to consumer campaigns, we don’t think there would be any impact to that. Again, our direct to consumer campaigns are shifting more towards interactive media. The idea behind those campaigns is actually to make patients aware of the fact that they may be at risk for certain diseases like hereditary cancer, and that they should in fact go to their physicians and talk to their physicians about that. And so in many ways this campaign is very aligned to that. It’s empowering patients, suggesting they understand more about their healthcare; but it certainly is pointing those patients towards physicians where they can actually have this testing done.

All of our tests have to be ordered by a physician, and so even if a patient were interested they would need to make an appointment and go in to see their physician. And we don’t view ourselves as offering direct to patient testing; we only look to provide direct to patient information that would then enable them to have a discussion with their physician.

Ashim Anand – Natixis Bleichroeder

Secondly, unrelated but I was wondering: your other revenue part has done relatively well, and I was wondering if there was an outsized contribution from MELARIS considering the recent success of [Zebloraff] and (inaudible) containing diagnostic testing, though it’s not directly related to what MELARIS does. But I was wondering if that has increased the interest of dermatologists in that product?

Pete Meldrum

Thank you again for the question. The other products have grown nicely – 20% year-over-year this particular quarter, and as the contributors within the other product category get larger the company will be breaking those out separately so you can see the growth rate of those individual products. With regards to MELARIS, the overall market for MELARIS is relatively small just because melanoma is a smaller cancer compared to say breast, colon or prostate cancer. But as I mentioned, with our planned launch of a melanoma diagnostic product that could differentiate between a benign nevi or skin lesion and a malignant one, we have been aggressive in terms of increasing our communications with dermatologists and that’s certainly going to benefit the MELARIS product as well as facilitate the launch of the diagnostic product to determine malignancy in patients with skin lesions.

Ashim Anand – Natixis Bleichroeder

Thank you.

Operator

Our next question comes from the line of Peter Lawson with Mizuho Securities. Please proceed.

Peter Larson – Mizuho Securities

Jim, I just wondered if you could talk through the gross margins. It looks like there’s some weakness sequentially. I just wondered what the reason was there.

Jim Evans

Yeah, so I think if you look at the gross margins on the molecular diagnostic side of the business, they continue to be very robust at the 89% level that we’ve seen over the last number of quarters. What has had a bigger impact on the melded margin is the increased revenues from the RBM side of the business, from the companion diagnostic side. Given the nature of what they do, it’s more of a specialized product where every agreement that they enter into has its own profile of work that they would do for a client. And so they’re going to see a range of gross margins, depending on the complexity of different engagements they would enter into. So their margins are more in the 50% range rather than the high-80%’s that we see for the rest of our business.

This is the first full quarter with RBM contribution and so that has impacted the combined gross margin for the company, but it really is nothing being drawn down in the molecular diagnostic side, no additional expenses that we did not anticipate there. It’s really having a larger contribution from the companion diagnostic services.

Peter Larson – Mizuho Securities

Thank you. And then on the 20-person add in the OB/GYN channel, you start to see a benefit from that. It’s just you had great growth in that business despite the office visits being down.

Mark Capone

Yeah, thanks Peter. You’re correct – we did add additional OB/GYN salespeople this year. We completed the training and deployment of those salespeople in FQ1. Typically it takes six to nine months before we see significant impact from those salespeople so we’d expect that probably to occur more in FQ3 and FQ4 of this year. But we were able to complete the hiring and the training and the deployment of those salespeople. As we discussed on the call, if you go back a year prior, those salespeople we added in F2011 actually showed a 26% year-over-year revenue growth in FQ1 of this year, so that’s the type of impact ultimately that we expect a salesperson to have – it just takes probably two or three quarters for them to ramp up to that type of impact.

Peter Larson – Mizuho Securities

Great, thank you so much.

Operator

Our next question comes from the line of Laura McGuigan with B. Riley. Please proceed.

Laura McGuigan – B. Riley

Hi, thanks for taking my call; just a follow-on question with respect to the international opportunity. Has the recent economic turmoil in Europe tempered your near-term expectations for the opportunity you see there? And I guess what if to any extent has the current environment factored into that five-year timeframe to reach the $50 million in revenues?

Pete Meldrum

Yes, we did figure in the current challenges that the various countries within Europe are facing right now. We think that it can impact the company with regards to the fact that only about 10% of patients in Europe have private insurance; about 90% have the national insurance from the country themselves. And as economic pressures are placed on those countries that certainly is potentially at risk, but that has been factored into our projections in Europe.

And despite that, we see Europe as a very exciting opportunity just because there isn’t a lot of testing presently for breast, ovarian, colon and uterine cancer. And with those three products that Myriad offers having reimbursement, we’re very excited to go to Europe, deliver a much more accurate high-value test with turnaround times that are a fraction of what Europe is currently experiencing. So I think even though Europe faces challenges financially we’re going to see a very exciting opportunity for the company to take advantage of superior products in a market with unmet medical need.

Laura McGuigan – B. Riley

Thanks, guys.

Operator

Ms. Chambers, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Rebecca Chambers

Thank you very much, and thank you everyone. This concludes our FQ1 Earnings Conference Call. A replay will be available via webcast on our website for a week. Thank you again for joining us this afternoon and have a lovely evening.

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.

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