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Myriad Genetics, Inc. (NASDAQ:MYGN)

22nd Annual Oppenheimer Healthcare Conference Call

December 14, 2011 9:40 a.m. ET

Executives

Mark Capone - President

Rebecca Chambers - Director, Investor Relations and Corporate Communications

Analysts

David Ferreiro - Oppenheimer & Co.

David Ferreiro - Oppenheimer & Co.

David Ferreiro with life science tools and diagnostics analyst. Welcome to second day of the Oppenheimer Healthcare Conference. Very happy to have Myriad Genetics here today, one of the premier molecular diagnostics companies out there in the U.S. right now. From Myriad today are Mark Capone, President of Myriad Genetics Laboratory, and also Rebecca Chambers to make sure that nothing inappropriate is said. So with that I will turn it over to Mark.

Mark Capone

Thank you, David, and good morning to everybody. We are going to thank Oppenheimer for the opportunity to be at the conference today and hopefully this presentation will be a beginning to a joyous holiday season for all of you. I am privileged today to talk about Myriad and where we are going as a company and our opportunities for growth. As always I may make forward-looking statements and we would encourage you to look to our website for our detailed SEC filings, where we’ll outline the risks that are associated with any investment in Myriad Genetics.

Myriad is industry leader in what we like to call transformative molecular diagnostic products. These are products that we think can fundamentally change the way that healthcare is delivered in this country and around the world. Myriad has broad scale capabilities. We have got nine innovative products that are on the market now, 13 in the pipeline. A 350 person sales force and a 182 issued patents.

Last fiscal year 2011, we delivered strong financial results. $402 million in revenue, $158 million in operating profit, $189 million in cash, which then was deployed through a $200 million share buyback in fiscal year 2011. Now we talk about transformative molecular diagnostics and the case for transformation in our healthcare system is abundantly clear. We have a very effective healthcare system but not a very efficient healthcare system. We spent twice as much as the percent of GDP as other developed countries and yet for that additional investment we actually have, in many cases, lower life expectancy in this country. And it has to do a lot with the structure of our healthcare system.

We think this healthcare system, the structure is going to fundamentally change over the next five years, and we think Myriad is well positioned to be part of the solution and the changes that are going to have to happen in our healthcare system. The types of products we work on, disease prevention, that is the most cost effective way to treat patients, early diagnosis or an optimal treatment. And all of these solutions that Myriad is bringing to bear, we think will make a very profound impact on the healthcare structure over the coming years.

Myriad has identified three strategic directives for growth, and I am going to go into a little more detail on each of the three of these in the coming slides. First is growing our existing products in our existing markets. Second is developing our international presence, and third is a plethora of new opportunities in new tests and companion diagnostics. Each of these strategic directives has a $1 billion plus market potential, and that’s why I want to outline the initiatives that we are undertaking in each of these strategic buckets.

First, in the existing products, we have nine products on the market right now. Our flagship product is BRACAnalysis, which is about 81% of our revenue. The first five products on this slide are all products in the hereditary cancer space. BRACAnalysis is a good example of that. BRACAnalysis evaluates the mutation status of two genes, BRCA one and two. If a patient is found to have a mutation in one of these genes, that patient will have an 87% lifetime risk of developing breast cancer and up to a 44% chance of developing ovarian cancer. But the important thing is that if a patient knows they have that mutation, with appropriate medical management steps they can reduce the risk of those cancers by over 90%.

The second product on this slide is COLARIS. The story is similar for COLARIS except that looks at genes that are responsible for hereditary colon cancer or endometrial cancer. Now the OnDose, PREZEON, TheraGuide 5-FU, those are all products that we called personalized medicine products. Those in particular allow an oncologists to determine what appropriate chemotherapies might be for patients with cancer, and in particular in this case, it’s for the administration of 5-Fluorouracil which is the backbone of chemotherapy for colon cancer.

And the last test on this slide is PROLARIS. PROLARIS is a prognostic test that helps a urologist determine whether a prostate cancer is indolent or whether it’s a very aggressive form of prostate cancer. And I will talk a little bit more about our strategies for commercializing that product in a second. So these are the nine commercial products.

Now I want to specifically talk about three that have very significant opportunities for growth in the near term. The first is BRACAnalysis. BRACAnalysis has a market potential of over $1 billion. We’ve penetrated that market less than 30% at this point. And there are a number of initiatives that we are working on to further penetration in the market. First in ovarian cancer, in triple negative breast cancer and carcinoma in situ. Also we are looking to expand our OB/GYN sales force. The unexpected marketplace for BRACAnalysis, these are patients that don’t have cancer yet but have a family history and therefore would like to prevent that cancer from happening. That’s a very large market. The market size over $10 billion potential market and we have penetrated that market less than 7%. So there is a significant opportunity for growth in that market and we continue to expand our women’s health sales force to take advantage of that.

And last initiative we are driving is direct to consumer efforts that are being conducted through our interactive marketing campaigns. All of those initiatives led to an 11% year-over-year growth in the first fiscal quarter of this year for BRACAnalysis. The second product is COLARIS. COLARIS is for hereditary colon or endometrial cancer. It’s a market size that has potential of over $400 million annually. We penetrated less than 10% of that market. The initiatives we are focused on are the addition of a fourth gene called PMS2 that will make the test more sensitive. We are focused on improving reimbursement through the use of some innovative health economic data. And lastly, we have begun a pilot effort to develop a specific colon cancer specialist team that will sell our four colon cancer products.

In combination, all of these initiatives were responsible for a 35% year-over-year growth in the first fiscal quarter of this year. And the last product I would like to talk about is PROLARIS. As I mentioned, this is to help a urologist define indolent versus aggressive prostate cancer. 230,000 men every year are diagnosed with prostate cancer. Unfortunately with the tools that are currently available, a urologist doesn’t know whether that’s an aggressive form of prostate cancer or not. And as a result of that, over 90% of men actually chose some form of treatment. Typically these treatments are very expensive, a $17,000 to $20,000 for surgeries. And so if you can identify which of those 10% actually really, truly need those treatments, you can make a big difference not only in the healthcare system but also for patients because these surgery interventions have some significant side effects.

We have two indications that we are preparing to launch for PROLARIS. One is pre-prostatectomy and one is a post-prostatectomy indication. We expect to launch those in the next six months as we continue to publish some clinical data. Two studies have been conducted, two additional studies have been concluded, and all four of those studies show that PROLARIS is the best indicator of aggressive forms of prostate cancer, much more so than currently available technologies.

This is a product with a market potential of over $700 million and as I said, we are just in the early stages of launch of that product. So that’s in that first category of existing products in market. Obviously, well over $1 billion in market potential. Now in that second category, is expansion into international marketplaces. In many molecular diagnostic companies, the international revenue is on par with what's seen here in the United States, for Myriad less than 1% of our revenue right now is currently being delivered from our international markets. And we have accelerated our entry into the European marketplace because we see some significant opportunities there.

So, next month in January, we will be launching officially in Europe. We have a laboratory that’s been built in Munich. We have our headquarters in Zurich and we have sales and marketing teams that will be on board in five countries, Spain, France, Germany, Switzerland and Italy. All told, the market in those five countries for the products that we will be introducing is over $600 million and as I mentioned we have really trivial amounts of revenue from those countries currently. Our go to market strategy will be focused on the hereditary cancer products, BRACAnalysis and COLARIS, that we just talked about. And subsequent to that then we will introduce our prognostic product PROLARIS, which has significant opportunities in those five markets.

Now the third category is in our expanding portfolio of new products and companion diagnostics. Currently, our portfolio is made up of products focused on the specialties of oncology, which is about 70% of revenue, and the preventive care market which is about 30% of revenue. We’ve decided to focus strategically on a pipeline that is going to broaden our medical specialty focus because we see significant clinical and health economic needs in those areas. And so our future portfolio will add in urology, dermatology, autoimmune diseases and neuroscience diseases, as these six medical specialties that we have chosen to focus on. And so as you look at our pipeline, you will see what we believe one of the strongest molecular diagnostic pipelines in the industry, and you will see those products are beginning to be funneled into those six medical specialties.

We obviously don’t have time today to go into detail about this pipeline. If you look on the right hand side you will see the market potentials for those various products that are in development right now. There is very significant market opportunities there. If even a fraction of these product were to be successful, you will see market potentials over $1 billion for these new products. The last area in addition to those is in the space of companion diagnostics. Our data shows right now that about 50% of the products that are currently in development from pharmaceutical companies are being developed in conjunction with the companion diagnostics. It’s very clear that the wave of the future will be to have some sort of companion diagnostic that helps identify those patients that are most likely to respond to a pharmaceutical product.

Myriad has a number of projects underway in this companion diagnostic space. First in the utilization of BRACAnalysis as a companion diagnostic for PARP inhibitors. We have already announced three relationships with pharmaceutical companies, AstraZeneca, BioMarin and Abbott. Those are the three projects that are currently underway. Those all, were they to be successful, would expand the market by over $600 million of market potential for BRACAnalysis as an indicator for PARP inhibitors.

The other projects we are working on with pharmaceutical companies is the use of a product called PREZEON. This measures the status of the P10 gene. The P10 gene has been implicated in virtually all major cancers. That’s a $600 million market opportunity. PREZEON is identified as a companion diagnostic for PI3 kinase inhibitors. Now in addition to those, with the acquisition of Rules-Based Medicine, there are over 20 strategic pharma alliances that RBM has established in the companion diagnostic space across many different disease states, and Myriad is integrating RBM after that acquisition, looking through the treasure chest of products that have been discovered through those relationship and defining which of those that we will bring to market as a companion diagnostic opportunity.

What the addition of Rules-Based Medicine brought to Myriad as well is an expansion in technology. Myriad historically has been strong at RNA and DNA, and with RBM now we bring in the strength they have with very complicated multiplex protein analysis which we consider to be three-legged stool of molecular diagnostics, RNA, DNA and proteins.

So in addition to those exciting growth opportunities, we have shown in our history our ability to deliver a strong value to shareholders. Our revenue in the last five years has grown from $145 million to $402 million in our last fiscal year. Our operating income has increased from $32 million to $158 million, so we have shown very strong operating leverage on the income statement over the last five years. Our guidance for this fiscal year ending June, is $445 million to $465 million, which is an 11% to 16% growth rate. And for earnings per share, our guidance is $1.20 to $1.25 per share which is a 9% to 14% growth rate in the current fiscal year.

In fiscal year 2011, we used a very balanced approach to capital deployment, we have a very strong balance sheet with over $400 million in cash on the balance sheet and last year you will see a variety of approaches to deploying that cash. First, as I mentioned we acquired Rules-Based Medicine for $80 million which allows us to grow our companions diagnostic portfolio and our new pipeline portfolio. In addition to that we did our licensing deal with Chronix BioMedical to get access to technology which will be a blood based early cancer detection technology which obviously has significant opportunities in our preventive care portfolio.

Third is we license technology from a company called Melanoma Diagnostics. That will allow us to enter into the dermatology space with a product offering that will help identify early melanomas. Fourth, a accretive investment in Crescendo Biosciences. This was a loan with an option to purchase the company at attractive revenue multiples if the company is successful in meeting certain revenue targets. This will allow us to expand into the autoimmune space. The autoimmune space is one that is responsible for a significant amount of healthcare dollars at this point, and if you can help identify patients that could respond to different types of rheumatoid arthritis compounds or a selection of rheumatoid arthritis compounds, it’s a very significant opportunity. And so Crescendo Bioscience gives us the potential option to enter into a market leading molecular diagnostic position in the rheumatoid arthritis and autoimmune space.

And lastly, as I mentioned, we repurchased $200 million of shares last year, that was about 12% of our outstanding equity. So you should continue to look for us to use a very balanced approach to capital deployment, first by investing in the business and second by returning cash to shareholders through share repurchases. We have announced another $200 million share repurchase program, although we have stated that we would be more opportunistic in those share repurchases then we were in fiscal year 2011.

So in summary, we have a very strong financial position, both on the income statement and on the balance sheet. We have significant growth opportunities and three strategic drivers in our existing products in our existing markets. And expanding globally into markets starting with the European marketplace and our new product pipeline which is probably one of the strongest in the industry and in the companion diagnostic space which is going to become increasingly important for pharmaceutical companies in the future. All of those, each of those has over a $1 billion of market potential.

And lastly, you should look to Myriad to continue to responsibly deploy our cash in a very balanced way. So we think Myriad represents a very compelling investment opportunity going forward and at this point we would be very happy to entertain any questions on the presentation. As mentioned, any questions we don’t answer today, Rebecca Chambers would be happy to answer it for you. So with that we are happy to take some questions.

Question-and-Answer Session

David Ferreiro - Oppenheimer & Co.

So will open it up to the floor, if there is any questions. Okay. I will ask the first one. Maybe you can dig a little bit deeper into the European opportunity in terms of, first, how is that market begin served right now? How do you differentiate yourself I that market? What your capacity is and how you expect that opportunity to play out?

Mark Capone

Okay. Thank you, David. So as we mentioned, we will be launching in Europe next month. That market, for the products that we are going to launch, we think has a market potential overall of $600 million. Our go to market strategy will start first with BRACAnalysis. Right now there is about $100 million of BRACAnalysis business distributed in those five European countries. BRACAnalysis right now is done by a very fragmented number of laboratories in those countries. We think we have significant competitive advantages and that’s why we have actually accelerated our entry into that market with BRACAnalysis by a year. Those differentiating factors, first of all Myriad typically will turnaround a test in about seven days, whereas in those countries if you look at the average turnaround time, it can be over six months before a patients actually gets the test results. Now when they do get a test result, about 20% of the time there is an uncertain result, and that is there is some variant that was found in the genes but those companies are unable to interpret what those variants mean. Because Myriad has done such a large amount of testing, over 700,000 patients, we are actually in a position that we can do a much better job of interpreting those variants. And in fact our uncertain variant rate now is only 3% of the time here in the United States and we should see similar types of numbers in Europe. And so between a combination of turnaround time, better quality tests and better answers we think we are well positioned to be able to compete for that $100 million business that currently exists for BRACAnalysis.

The laboratory that we have designed in Munich is capable of doing about $15 million of business a year and what we have said is we expect over the next five years to be able to fill up that laboratory with business. What's also important to know is that $100 million business is growing in the double digits per year and so while we are competing for share, there is also a significant opportunity to grow that market which is probably about a third of the size of the equivalent market here in the United States. So we can get share because of our competitive differentiation and our sales and marketing efforts we think will allow that market to began to accelerate its double-digit growth. Yes, question?

Unidentified Speaker

I have a question on your prostate cancer diagnostic that you are about to launch. You have mentioned four studies etcetera, does your data primarily address the point that whether you have aggressive, the aggressive type of prostate cancer progression? Or does it differentiate between the point at whether the cancer has actually spread into the lymph nodes?

Mark Capone

Good, thank you, good question. The test actually differentiates whether or not it’s an aggressive form of cancer, and so what we look at are 46 different genes that are associated with rapidly growing cells and by understanding whether those genes are op-regulated, we know whether or not this is an aggressive form of cancer. So it looks specifically at -- in the pre-prostatectomy case, biopsy tissue. So we will look at biopsy tissue and we can determine whether or not those genes are op-regulated in biopsy tissue. In the post-prostatectomy, obviously it’s after the prostate has been removed and we will look at the tissue from the prostatectomy and determine whether the cells are op-regulated in that case as well. So we are defining aggressive versus non-aggressive, we are not actually diagnosing whether it’s prostate cancer but we are determining the prognosis for a prostate cancer.

Unidentified Speaker

Just a quick follow-up, do you think this will reduce biopsies otherwise that are currently the main approach towards establishing whether it’s aggressive or not.

Mark Capone

So we don’t think this test will actually reduce the number of biopsies. Our starting material for the pre-prostatectomy indication is actually the biopsy itself. So we think it will continue to be the same patient flow from the standpoint of biopsies. We don’t see a reduction in that. Now to that end, what could happen and should happen, is that once you identify more patients that actually don’t need prostatectomies, that 90% that have a less aggressive form, typically those patients are then shuttled over into an active surveillance process. And as part of active surveillance, there are repetitive biopsies that are done to ensure that the cancer hasn’t progressed. And so that’s a -- very likely possibility is that you see actually see increased numbers of biopsies by urologists because they have now frontal patients over into active surveillance as opposed to actually taking out the prostate initially.

Unidentified Speaker

Hi, just wanted to follow-up on the question earlier on the Europe opportunity and just to get clean a couple of things. One is, you said the lab that you have has annual capacity about $50 million a year in revenues, and you expect -- and to be clear, you are not expecting to add another lab in Europe then over the next five years. That will be the one facility that you’ll have.

Mark Capone

So, if we see uptick more significant than that and that we would fill up the lab and exceed its capacity, we would obviously expand. It’s not difficult to do this. There’s plenty of lab space around. We have looked at where we might expand and so if necessary we will expand into additional laboratory space. There is even some laboratory space where we currently have the lab that we might be able to expand into.

Unidentified Speaker

Got you. And did you, have you said what's embedded in your guidance for fiscal ’12? You gave the revenue guidance for Europe as part of that, have you given any?

Mark Capone

Yeah, so because we are because we are just launching those activities in January, there is really de minimis revenue in our guidance for fiscal year ’12. We haven’t talked specifically about fiscal year ’13 yet and I think when we provide guidance we will give some more granularity on Europe at that time.

Unidentified Speaker

And my last question is, just can you quantify what kind of investment you are making to build out Europe over the next 12 to 18 months and any thoughts on -- if you had -- whatever that investment is, the analysis you did to say if you sort of double that or expanded that investment, what kind of potential uptick you may have, if you were to sort of accelerate that investment?

Mark Capone

Sure. So for fiscal year ’12 our budge is $6 million, so that’s the investment that we have made in Europe. That includes establishing the laboratory and the sales and marketing, all of the commercial activities associated with that. We will look to expand investment in Europe once we get a sense of exactly what the uptick curves are going to look like. So we will watch that very closely over the next six months. I think we again will provide some more guidance in six months or so as to what we would expect from an investment standpoint in Europe for the next fiscal year. But we are going to gauge that based on what sort of adoption curves we see in Europe.

Unidentified Speaker

We seem to all have a continental focus this morning. My question is, in Europe, what is the dynamics in terms of who is making the decisions about whether or not (inaudible) is this primarily patient driven, is this doctor driven. And could you just address that.

Mark Capone

Sure. Yeah, so the dynamic in Europe is probably a little more physician driven, from a decision making standpoint then patient driven. So typically what will happen if the patient will come in, in Europe, unlike here in the U.S., in the U.S. increasingly we are trying to prevent the first cancer from happening and so we will test on effected patients. There is very little of that testing actually done in Europe. Most of the market right now is really around patients after they have had cancer. And so typically their oncologists will identify them with a family history that’s potentially indicative of hereditary cancer. And at that point they will be referred on to a genetic center which is where the tests are actually, or the blood is actually drawn and then sent to the laboratory. So that’s the typical dynamic in Europe. It’s where the U.S. market was probably five to ten years ago, and that where the opportunity is I think as we go in to Europe, we are going to look to expand the market by changing that dynamics and actually we will getting to try to test patients before they get their first cancer as opposed to after.

David Ferreiro - Oppenheimer & Co.

May be I will add one last question. I thought we had a very good discussion last night on what you thought was happening on the CBT coding process. Maybe you could talk about how you think that’s going to impact Myriad reimbursement in the U.S. or not, and how you can maybe maintain price in that kind of an environment?

Mark Capone

Sure. Happy to talk about that. For those that aren’t versed in this, about a year or so ago there was a process, CMS really wanted to get some visibility into what they were spending on in molecular diagnostic products. And the way that the coding is currently done, they don’t have any visibility to where it’s exactly -- what there money is going to in molecular diagnostics. And so a process started whereby specific codes will be developed and associated with specific tests. And that’s the purpose of the effort. It wasn’t really an effort at focusing on reimbursement, it was understanding utilization, which is where CMS would like some additional information. BRACAnalysis and COLARIS both are going to have specific codes as part of that new process and those codes will become effective in 2013. The question that’s out there is, what is the level of reimbursement that CMS attaches to those codes. And that’s something we will expect to get clarity on somewhere between the summer and the fall as CMS does their assessments of that. Now I think what's important to note is that we have had multiple conversations with CMS over the years about the value of this test, and so it’s good to use a couple of benchmarks. First, we just published a study at San Antonio last week that showed what the health economic story is around BRACAnalysis. For BRACAnalysis, the study showed that at an $8900 price, it was still a very powerful health economic story to use BRACAnalysis. So that’s the value if you will, of the test.

Now the other thing that’s important to note, that is if Myriad currently charged the Medicare allowables for BRACAnalysis, the test would be over $5000. And those are the Medicare allowables that most, every other laboratory in the country is using to do this type of genetic testing. Currently Myriad charges CMS $3350, which is a already a 35% discount from the Medicare’s own allowables that most other laboratories use. And so that’s the conversation we will have, that there is a test that has substantial value, that’s already giving a 35% discount from what other laboratories are doing. And as CMS goes through the process by which they set reimbursement, they are going to cross walk all of the test to what it’s currently the benchmark that’s being used for their Medicare allowables. So Myriad thinks we are very well positioned to have a conversation with CMS about the value of this test and about its current pricing level and the fact that we are already proving a rather substantial discount to CMS. And so will see how that plays out over the coming months but we think it’s a dialogue we are very well prepared to have. CMS has stated just publicly that they see the importance of value based pricing if in fact personalized medicine industry is ever going to flourish, which is in the interest of not only patients but the entire healthcare system.

David Ferreiro - Oppenheimer & Co.

All right, thank you, and I think we are out of time. Thank you very much.

Mark Capone

Thank you, everybody.

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Source: Myriad Genetics' Management Presents at 22nd Annual Oppenheimer Healthcare Conference - Conference Call Transcript

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