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Executives

Peter D. Meldrum – President and CEO

Mark C. Capone – President, Myriad Genetic Laboratories

James S. Evans – CFO

Rebecca Chambers – Director of IR

Analysts

Amanda Murphy - William Blair & Company

Jon Wood – Jefferies & Company

Scott Gleason - Stephens Inc.

Michael Yee - RBC Capital Markets

Doug Schenkel - Cowen & Co.

Tycho Peterson – JP Morgan

Isaac Ro - Goldman Sachs & Co.

William Quirk - Piper Jaffray

Dan Leonard - Leerink Swann

Peter Lawson - Mizuho Securities USA Inc.

Myriad Genetics, Inc. (MYGN) F2Q12 Earnings Call January 31, 2012 4:30 PM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Myriad Genetics’ Fiscal Second Quarter Earnings Call. (Operator instructions) As a reminder, this conference is being recorded Tuesday, January 31, 2012.

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’ Second Fiscal Quarter Earnings Call. During the call we will review the financial results we released today and the progress we have made this quarter 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 from Myriad 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 www.myriad.com. The call is being recorded and will be archived along with the presentation 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.

Peter Meldrum

Thank you, Rebecca. To begin, I would like to provide highlights of our second quarter results and introduce the company’s updated financial guidance for fiscal 2012. I’m extremely pleased to report that our second quarter revenue increased 22% year-over-year to a record $122.8 million. This is the second quarter in a row that grows in the total company revenues exceeded 20%.

Molecular diagnostic revenue grew 17% as compared to the second quarter of fiscal 2011, with all of our products demonstrating strong growth, especially COLARIS. For the second quarter in a row demand for the COLARIS test exceeded expectations as product sales grew 56% year-over-year to $10.9 million. We remain excited about the clinical value of this product and expect strong growth to continue in the future.

Our profitability improved during the second quarter as operating income grew 18% year-over-year to $45.5 million and diluted earnings per share increased 27% to $0.33. Given these strong results, we’ve increased our guidance for fiscal 2012.

Revenue is now expected to be $465 million to $475 million, which represents a 16% to 18% growth over the prior fiscal year and a significant increase from our original fiscal 2012 revenue guidance of $445 million to $465 million.

Our expectation for higher revenue growth is due to the strong results we’ve seen from several initiatives that we have put in place to expand our oncology and women’s health markets. Mark will provide an update on each of these initiatives later on in the call.

Diluted earnings per share guidance has also been increased to $1.24 to $1.28 representing a 13% to 16% over fiscal 2011 earnings per share of a $1.10 and up from the original guidance of $1.20 to $1.25. These strong results have positioned us well for continued success particularly when combined with the strategic directives that we’re focusing on for a long term revenue growth.

First, we’re aggressively growing our existing tests and markets. Second, we’re committed to expanding our business internationally. Third, we intend to launch new transformative products across diverse set of major disease indication. Mark will provide an update on the first strategic directive, to grow existing tests and markets and I’ll focus my remaining comments on our European operations and new product development.

With respect to our international strategy, I’m pleased to report that our laboratory in Munich, Germany is open and operational as of the beginning of January. As a reminder this lab has sufficient capacity to generate $50 million in revenues each year, a level which we believe is achievable within the next five years. We’ve hired country managers for all five major markets that we’re focused on, Germany, France, Italy, Spain and Switzerland.

These individuals will be travelling to Salt Lake in February to complete their training sales program, after which they’ll be focused on growing various presence in each of their respective countries. We’ve obtained reimbursement in all five major markets for three of our products, BRACAnalysis, COLARIS and COLARIS AP.

Additionally, we’re initiating clinical studies in numerous European countries to demonstrate the clinical utility of our Prolaris product. We feel these trials will help accelerate demand Myriad’s prostate cancer prognostic test in Europe. We’re pleased with the progress made in Europe thus far and continue to view this as an exciting growth opportunity for the company.

Our third strategic directive is to bring new products to market including those for companion diagnostics. Today our industry leading pipeline across multiple disease indications continues to progress nicely. We believe it will provide patients and physicians with answers from the most pressing clinical needs and the six medical specialties identified in our strategic plan. As a reminder these medical specialties include oncology, women’s health, urology, dermatology, autoimmune and inflammatory disease and neuroscience.

To accomplish this strategic goal of growing and diversifying our business in the future, we’re pursuing a combination of internal product development, technology and biomarker and licensing and company acquisitions.

We recently announced the acquisition of an exclusively worldwide license with co-exclusivity in Germany to intellectual property for the RAD51C gene for hereditary breast and ovarian cancer testing. This intellectual property will augment our already strong IP position around hereditary breast and ovarian cancer and we anticipate that the RAD51 gene will play an important role in our future product development.

The RAD51C gene’s associated with breast and ovarian cancer was identified by the German consortium for hereditary breast and ovarian cancer. Data published in the April 22, 2010 issue of nature genetics show the mutations in the RAD51C gene were present in 480 pedigrees with the family history of breast and ovarian cancers, but not in any of the 2,912 cancer free individuals.

We’re making progress on a number of fronts towards the goal set forth in our strategic plan to diversify across multiple disease indications and grow revenues both domestically and abroad. We’re pleased with the strong performance of the core business in this fiscal 2012 to-date and believe that our ability to execute on our strategic plan for the long terms growth is very strong.

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

Mark Capone

Thank you, Pete. As Pete mentioned we saw strong growth in molecular diagnostic revenue during the second quarter. This was driven by substantial growth in all products and segments of the business including a record quarter for COLARIS.

The oncology segment grew 15% year-over-year while women’s health grew 22%. Simply put these significant growth rates our direct result of the focused execution by talented employees on the strategies articulated for our first strategic directive to grow our existing tests and markets.

I’d provide a brief update on the progress made during the second quarter on these strategies and then also provide an update on the Prolaris launch. In our oncology segment BRACAnalysis growth was driven continued focus on the ovarian cancer, carcinoma in situ and triple negative breast cancer indications. As a reminder these indications increased the addressable oncology market for BRACAnalysis by approximately $200 million to an annual market potential of $650 million.

In total, these new indications grew 41% this quarter compared to the second quarter of last year and we continue to see significant opportunity for growth. Most importantly the growth in the triple negative breast indication has been impressive given that the NCCN guidelines were updated in April 2011 and within six months Myriad was able to obtain reimbursement from all of our major insurers.

The women’s health segment continues to focus on growing same-store sales, adding new territories and implementing our interactive media direct-to-physician and direct-to-consumer campaign. In the second quarter same-store sales initiatives new territories added in fiscal year 2011 and interactive media campaigns generated over $5 million of revenue growth. By way of example our interactive media campaign has led to over 100% increase in our web traffic and a 700% increase in our social media followers.

We’re also starting to see contributions from the new territories added in the beginning of fiscal 2012, which experienced a 35% increase sequentially in revenue. In the women’s health segment we continued to monitor physician office visit trends, in the second quarter we saw somewhat mixed signals from IMS data which showed office visits up and Thomson-Reuters data which showed visits down. In triangulating with our field teams, we continued to view physician visits as essentially flat last quarter and going into the third quarter. However, with the women’s health segment less than 10% penetrated, there remain significant growth opportunities in this market for the foreseeable future.

The record 56% growth rate in COLARIS product family was attributed equally to the impact of PMS2 and increased demand from market growth and market share gains. We expect COLARIS to continue to demonstrate strong double digit growth in the second half of this fiscal year.

From our market research, customers are choosing Myriad because of the strength of our database and varying classification system, our short turnaround times, excellent customer service relative to reimbursement, strong field support and the availability of a saliva based sample as an alternative to the more invasive blood sample. Despite a number of competitors and no IP competitive advantage, Myriad has demonstrated the ability to capture the majority of this market.

We also have seen promising early results from our eight member colorectal cancer specialist team in our oncology segment. We’ll be discussing this strategy in more detail on our next conference call.

Lastly, I would like to summarize a number of positive advancements in our commercialization efforts for Prolaris. Prolaris is a 46 gene expression assay which distinguishes indolent or less aggressive forms of prostate cancer from more aggressive forms. POLARIS has demonstrated strong predictive power in both biopsy and post-prostatectomy tissue. We have completed four clinical studies and have three more underway representing over 3,000 prostate cancer patient samples.

Study PRO-003, our second pre-prostatectomy study which was presented at ASCO last June has been accepted for publication in a British Journal of Cancer and should be published within this quarter. Study PRO-004, the second post-prostatectomy study conducted in collaboration with UCSF is in the process of being submitted for general review and has been accepted as an abstract for the presentation at the ASCO GU meeting coming up this weekend in San Francisco.

The PRO-006 study, a face for prospected US study with an organization representing 25% of community urologists is designed to document the distribution of Prolaris scores and the resulting treatment decision both of which will be used of reimbursement discussions. This study has been extremely well received and recruitment is exceeding traditional metrics. This spring we’re also presenting Prolaris related abstracts at the EAU annual congress in Paris at a special AACR conference on advances in prostate cancer research in Orlando and a podium presentation during the May AUA annual meeting in Atlanta.

Our commercialization efforts are also progressing well of Prolaris. We’ve completed extensive market research with physicians and payers and have seen a significant increase in interest that can be attributed to three factors. The first is the recommendation to suspend PSA screening until a test can distinguish between the indolent and aggressive forms of prostate cancer.

The second is the removal of a digital pathology test from the market that had similar indications as Prolaris. This test had an order run rate in excess of 10,000 samples per year and those users are looking for another solution.

Lastly, recent publications have demonstrated the clinical and health economic benefits of adjuvant radiation post-prostatectomy for aggressive prostate cancer yet have highlighted serious underutilization. As a result of these positive developments, I’m pleased to announce that we will begin accelerated commercialization of Prolaris in February with both payers and physicians. As part of this accelerated commercialization we’ll double our urology sales team to approximately 20 field based personnel.

In summary, we’re very pleased with the execution of our strategic initiatives and our financial results for the second quarter. We continue to see significant opportunities for growth with our existing products and are excited to be leading the evolution of the urology market with new transformative molecular diagnostics.

I’ll now turn the call over to Jim.

James Evans

Thanks, Mark and good afternoon everyone. It is my pleasure to present a more detailed look at Myriad’s financial results for the second quarter of fiscal 2012. As Pete mentioned Myriad’s revenues for the fiscal second quarter were $122.8 million, an increase of 22% over the same period in the prior year.

Molecular diagnostic revenue grew 17% year-over-year to $117.6 million, of this 17% growth, price contributed approximately a point and a half and the impact of increased sample volumes and new products including PMS2 contributed approximately 15.5 points to grow.

Our breakdown of revenue by products was BRACAnalysis revenue grew 14% to a $101.4 million compared to $89.2 million in the same period last year. Revenue from COLARIS AP increased 56% year-over-year to $10.9 million and Myriad’s other molecular diagnostic products grew 24% year-over-year to $5.3 million.

Companion diagnostic services revenue equaled $5.2 million. We expect companion diagnostic services revenue to fluctuate from quarter-to-quarter due primarily to the timing of projects with our pharmaceutical partners.

Moving down the income statement, second quarter SG&A expense equaled $51 million or 41.5% of revenue. This represented an increase of 17% over the prior year and was used to support the company’s 22% revenue increase and included $2.7 million in administrative cost from Myriad RBM and approximately $800,000 associated with our new European operations.

Research and Development expense was $10.2 million or 8.3% of revenue versus the $6.1 million reported in the second quarter last year. As we have discussed in the past, Myriad is increasing its investment in R&D to grow and diversify our business. R&D tends to be lumpy given the timing of sample acquisitions and external costs associated with our ongoing clinical trials. In the second half of the year we project these activities will increase and R&D expense will be approximately 9% of revenue as we invest in new products and accumulate additional clinical evidence for Prolaris and OnDose.

Operating income for the quarter was $45.5 million resulting in an operating margin of 37%. This level of operating margin represented a 140 basis point contraction year-over-year which is primarily a result of higher R&D expenses to ensure future revenue growth and diversification, higher bad debt and the impact of increased SG&A cost associated with our European subsidiary and Myriad RBM.

The second quarter effective tax rate was 39.5% as compared to the 38.1% tax rate in the same period of the prior year. For the full year we now expect an effective tax rate of approximately 40%. This increase is due 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 operations, and the distribution of revenue among states with higher or lower income tax rates. Additionally, as of December 31, we’ve exhausted our net operating loss carry forward and therefore we will begin paying cash taxes in the second half of the year.

Dilutive weighted average shares outstanding were 86.2 million shares. During the second quarter we bought back $18 million in stock and have a 173 million of the 200 million authorizations remaining. Diluted earnings per share included booked tax were $0.33 for the second quarter of fiscal 2012, an increase of 27% over the $0.26 reported in the same period of the prior year.

Moving onto the balance sheet and cash flow, our ending cash and investments for the quarter were $428.3 million. This compares to $401.7 million at the end of first fiscal quarter. Cash from operating activities equaled $27.5 million, capital expenditures were $3.1 million and included purchases of new instrumentation for our production and research and development laboratory. Total cash generated during our second fiscal quarter equaled $38.9 million and year-to-date $85.7 million.

Highlights of the first half of fiscal 2012 include an increase in revenue of 21% year-over-year and 15% growth in molecular diagnostic revenue. Operating income grew 17% as compared to last year and earnings per share have grown 24%. We’re pleased with our results thus far and are now focused on executing in the second half of fiscal 2012.

As Pete mentioned, given our strong performance to the first half of fiscal year, we’re increasing our expectations for fiscal 2012. Revenue is now expected to grow 16% to 18% year-over-year, $465 million to $475 million. We’ve increased our guidance for molecular diagnostic revenue to $440 million to $450 million while we continue to expect companion diagnostic revenue of $24 million to $26 million.

Diluted earnings per share guidance has been increased to a $1.24 to $1.28 representing 13% to 16% growth over fiscal 2011 earnings per share of $1.10. This EPS guidance takes into account the impact of stock buybacks we had completed in the first half of fiscal 2012, but does not factor of any future buybacks. Additionally, the timing and magnitude of buybacks will continue to be opportunistic and dependent on market conditions.

Other items considered in this guidance are as follows. During the third fiscal quarter, we typically encountered headwinds of newly reset and higher deductibles compared to the prior quarter. SG&A expense is expected to increase in the second half of the year as a number of investments ramp up as compared to the first half of the first half of the fiscal year. Specifically, the impact of the commercial launch of the pre-prostatectomy indication for Prolaris including the impact of the additional urology sales representative, a modest increase to bad debt and the remaining $4 million of the $6 million investment in salaries and marketing in Europe. And finally, the impact of a projected full year income tax rate of approximately 40%.

With that I’ll hand it over to Rebecca for the question-and-answer portion of the call.

Rebecca Chambers

Thank you, Jim. 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 Amanda Murphy with William Blair. Please go ahead.

Amanda Murphy - William Blair & Company

Hi, thanks. I just had some questions on the international side, so you mentioned that you’re getting reimbursement for the three primary products, I’m curious is it basically coming in minus where you expected and any, in terms of the guidance increases or any contribution thereof from the international operations?

Peter Meldrum

Thank you, Amanda. No, the international operations having just opened their doors in January won’t make a substantial contribution this fiscal year. The reimbursement has come inline with what we were anticipating, of course, it varies from country to country and in certain countries within state to state or canton to canton. But, we’re very pleased with the reimbursement on BRAC, COLARIS and COLARIS AP, very excited about the European opportunity that I think that you’ll see that make a much more significant contribution in 2013.

Amanda Murphy - William Blair & Company

Got it, okay. And I had this one more it’s not really related, sort of positive for that bit. I’m curious if you look at the deductible of fact that you’ve seen over the years you have been selling the BRAC test, have you seen that change it all in terms of the impact of revenue through to year that is getting more meaningful every time, just curious with the impact and how deductible plans et cetera?

Mark Capone

Sure, Amanda, this is Mark. Thanks for the question. As you rightly mentioned, we’ve always seen a cyclical nature to our business in the second quarter, our strongest quarter as (cafeteria) plans come to an end and then the reset of deductibles in the third quarter that is a headwind for us going into that quarter and that’s a pattern that we continue to expect to see as the percentage of people in high deductible plans, in particular continues to increase which looks like it will be somewhere north of 37% this particular year.

Now that being said, we have seen a gradual change in that pattern, but overall, it hasn’t been monumental shift, it’s one that we continue to look at in the women’s health segment which is the most impacted by more elective testing. We’re less than 10% penetrated and so as I talk to our team and as they will get opportunity there is still plenty of women coming into the physician’s offices that have healthcare plans that allow them to entertain purchases of these tests early on in the year. so, there is an affect, it has become a little more pronounced over the years, but we still think there is plenty of opportunities for us to work with the patients that we have coming into the office.

Amanda Murphy - William Blair & Company

Okay, thanks very much.

Operator

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

Jon Wood – Jefferies & Company

Hi, thanks a lot. So, this is for Mark I think on Prolaris. When do you expect to be able to offer some update on reimbursement traction there. Can this happen within the six months or so, kind of that February ramp date or do you expect we’ll have to wait longer, kind of for the initial traction there?

Mark Capone

Thanks for the question, Jon. As I mentioned the exciting new news is that the additional study had been accepted by the British Journal of Cancer that will now give us two studies in the pre-prostatectomy indication and as a basis of that we’ll be going in and talking to payers beginning in February. We never liked to try to project exactly what the outcome of those discussions will be, but we do believe on the pre-prostatectomy indication that we have sufficient evidence to provide the types of data that those payers generally look for, for reimbursement.

On the post-prostatectomy, we’ve completed fourth study that second post-prostatectomy study and that study we were in the process of submitting to journal articles and we think with that second post-prostatectomy study we can then begin the discussions with payers on that indication as well. And so, we will have a much better idea on where we stand on the reimbursement discussions probably on our next conference call, but we certainly believe there is sufficient data to begin those discussions in earnest and as you know, payers are particularly interested in this, this unlike some of our others offers the opportunity for some cost savings to payers in the same year because they potentially can avoid some very costly treatments. And so, they’re very interested in this data and are anxiously awaiting the additional data that we’ll be presenting in February.

Jon Wood – Jefferies & Company

All right, I appreciate the color, Mark, one unrelated one, sorry. On the women’s health side, your revenue per rep grew at the fastest rate in memory during this quarter, what would you say was the largest driver to kind of the increase in the sales force productivity in women’s health?

Mark Capone

Yeah, I think it was, I don’t know that was the single item, I think all of the items that we mentioned, I think, certainly have had an impact on some of the work that we’ve been doing in direct-to-physician and direct-to-consumer through our interactive media clearly had some affect. We’ve got a same-store sales initiative where we’ve introduced some name systems type approaches to help physicians that have already shown an interest in testing but need additional help in identifying all of the appropriate patients that certainly we’ve seen some improvements there as well. And, I think, we’ve been very pleased with the new territories that we’ve added in fiscal year ’12 as I mention, we’ve seen some significant sequential growth with the new territories for fiscal year ’12 which typically we see in six to nine months or we actually beginning to see some impact from that a little earlier. So, I think it’s really the combination of all of those things, I’m not sure one in particular was probably the most impactful, but overall, we’re pleased that we’ve set a good direction and the execution has really been outstanding.

Jon Wood – Jefferies & Company

Very good, thanks for the color.

Operator

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

Scott Gleason - Stephens Inc.

Hi guys, congratulations on a great quarter. I guess just a start up. We’re looking at COLARIS, can you guys give us an idea of kind of what percentage the doctors now are in PMS2 gene in concert with kind of the core COLARIS test?

Mark Capone

Sure Scott thanks for the question. Overall, starting with the majority are now ordering PMS2 with the three gene product that number is now over 70% of physicians, so in effect it’s almost becoming a four gene product at this point.

Scott Gleason - Stephens Inc.

Okay, great. And I guess, if we look into the recent announcement by you guys of the RAD51C gene, when we look forward after you guys have done some internal validation work, is there the potential that that could become kind of addendum product for the term line, BRACAnalysis test as well, some more kind of what PMS2 is today?

Mark Capone

Thank you. The RAD51C gene is one that we’re in the process of doing additional studies and validation work on. And so, it’s a little premature to project exactly how we’ll use that particular gene, but we’re excited enough about it that we think it definitely will play a role in future product development and that role may go beyond even our current BRACAnalysis product. So, it definitely plays an important in hereditary breast and ovarian cancer and once we can develop additional studies to validate that we’ll give you additional clarity on what our strategy is in terms of launching that in future products.

Scott Gleason - Stephens Inc.

Great, thanks for taking my questions, guys.

Operator

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

Michael Yee - RBC Capital Markets

Great, thanks, question for Pete actually. It’s a high level capital allocation question and that is if you look at your free cash flow continues to grow, you’re planning a cash in your balance sheet, although you have a stock buyback program, where in the list of your priorities is a dividend and how reasonably likely is this as you think about your plans for next year?

Peter Meldrum

Thank you, Michael. As you are aware, Myriad has a very specific capital allocation plan that focuses initially on reinvesting in the company, both internal product pipeline developments as well as in licensing opportunities and acquisitions. But, as you pointed out, we’ve very strong cash flow generating capacity and we generate more cash then we can productively spend investing in the business and therefore are able to return cash to the shareholders. The Board of Directors decided that the most appropriate initial entry into returning cash to investors was through a stock repurchase program and we’ve repurchased today over a $300 million of company stock representing about 12% of the outstanding shares and have a $200 million stock repurchase program in place.

As you’re aware Michael, I’m supportive however of the concept of paying dividends and I do believe there are certain advantages to shareholders and dividends over share buyback that is however, a much more permanent commitment on the part of the company and one which periodically the Board of Directors discuss this from time to time. And while I can’t say anything specific about those discussions, it certainly not out of the question at some future day.

Michael Yee - RBC Capital Markets

Can I just follow up, is there something that would change or what would change your thinking about that, to be more confident on the other one?

Peter Meldrum

I think its just additional analysis and study on the part of the company to look at the advantages of paying a dividend versus the stock buyback and the thing that we’ve cognizant of is once you begin paying a dividend you can never stop paying that dividend and in fact you need to grow that dividend overtime, it can’t even be held constant. And so, at some point in time I think in the future the company will waive the benefits and the commitment that represents and then we’ll make an announcement.

Michael Yee - RBC Capital Markets

Okay, thanks.

Operator

Our next question comes from the line of Doug Schenkel with Cowen & Co. Please go ahead.

Doug Schenkel - Cowen & Co.

Hi, good afternoon. Clearly this was another very strong revenue quarter and it was a balance fee with that acknowledge, your guidance I believe and by that organic growth will moderate below, it’s either to about 10% or just below 10% in the fiscal second half, assuming I’m doing the math right, could you just provide some color on what support this outlook, don’t give me wrong that’s a pretty good growth rate especially in the current environment, but I just would love to hear how you guys are thinking about potential sources of upside versus downside risk given that seems like fairly conservative guidance coming up a couple very strong quarter?

James Evans

Well, our other expectations as you said have increased significantly since the beginning of the fiscal year. We’re looking at comparables to last year where in the first half of the year we’ve grown 8.1%, in the second half was 14%, so it does give us some tougher comps that are going to be compared against in the second half of the year. That being said, we think that our potentials for upside where we do want to be cognizant of some of the headwinds that we talked about earlier with the resetting deductibles and just looking at all the different factors that come into play, we were comfortable in increasing the relevant guidance to where what used to be the top end of the guidance is now the bottom end and would have been able to move beyond what our original expectations where, but we do want to make sure that we are conservative in looking at the guidance going forward and something that we feel very comfortable with.

Doug Schenkel - Cowen & Co.

Okay that’s helpful, thanks for walking through that. A high level question just on the broader environment, as I am sure you’re aware, Roche is a half a bit for alumina broad, a lot of attention to the prospect for broader utilization of Nomex and I would say specifically sequencing and diagnostics that being said there is still a lot of hurdles say certain areas of sequencing and diagnostics in terms of driving broader utilization, just a name of fields these include, bioinformatics, regulatory development and how you’re actually going to defend these tests from a proprietary standpoint. So, with that all said, in your mind is there any reason to think that the service model is not going to be the best model for sequencing based diagnostics at least over the next several years and is there a broader role you would envision for Myriad as, maybe Xsone and transcriptome sequencing becomes increasingly utilized in a clinical setting?

Mark Capone

Thank you for the question. Let me start up by talking a little bit about acquisitions that have occurred in our industry and then I’ll get more specifically into discussion about the service model.

Certainly the news about alumina was good news for the life science tools and diagnostic industry since it validates the important future potential of our industry. While the number and quality of companies in this industry is declining, we certainly believe it represents an exciting future both for tools kit and service companies. Myriad is very much committed to the service model, it allows us to control the quality of the product that we offer and it allows us to capture the maximum value in the clinical utility of the products that we develop. We’re very comfortable with the regulatory environment and we’re very comfortable if that shifts to more of an FDA regulatory environment, because we think FDA regulation actually for companies as size of Myriad could be a positive since it creates barrier to market entry for some of the smaller venture capital backed companies.

We’re very comfortable with the progress that’s been made in sequencing and bioinformatics and we certainly invest heavily in the latter portion of our technology development and are on top of not only DNA sequencing, but Xsone sequencing and transcriptome sequencing. So, I think a very exciting industry, very much in its infancy, but with significant potential and I think even the complexity test, it’s very well suited for the service model and that of course is where Myriad has its expertise.

Doug Schenkel - Cowen & Co.

Great, thank you again.

Operator

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

Tycho Peterson – JP Morgan

Hi, good afternoon. Pete in your prepared comments you talked about some competitive disruption for digital pathology, can you just talk about how quickly you can go after some of those customers, I recognize you’re obliviously adding additional resources in that channel, but talk about how you think about swapping some of those accounts and then I think, did you say with 10,000 tests on a run rate?

Peter Meldrum

Yes, that’s correct. There was a product in the market that was recently withdrawn that represented about 10,000 patient samples that assisted pathologists and deliberations around prostate cancer and we are moving aggressively not only to expand ourselves forward, but to assist physicians in understanding the value and the benefit of a Prolaris score and to realize that Prolaris can provide that same benefit that if not better than the previous test. So, we do see that as an interesting opportunity to enter this market more aggressively than we had originally thought and that was via market put forth our strategy for the Prolaris product.

Tycho Peterson – JP Morgan

And as we think about in licensing with RAD51C obviously, you got some content around breast and ovarian, how should we think about, how much IP is out there for you to potentially in license and then should we think about kind of a consortium potentially around breast cancer and which you can in license a broader suite of biomarker, so I am just wondering where you are in the process of in licensing additional content here to offset that?

Peter Meldrum

Well, we have a very strong intellectual property of State around hereditary breast and ovarian cancer. A 23 issued patents in the United States, five issued patents in Europe and those composition of matter patents go out to about 2018, and we have method of used patents to go up to about 2022, but we are always looking to improve the patent of state and looking at in licensing additional opportunity such as RAD51C not only in breast cancer but in colon cancer, lung cancer, prostate cancer and in the other areas that we are focused on women’s healthcare, dermatology, neurology, autoimmune and infectious diseases. So, we view patent sales important. Myriad is fortunate to have one of the strongest patents of states in the industry and will continue to collaborate with our friends in the United States and Europe to augment our own in-house discovery and broaden at patent state as much as possible.

Tycho Peterson – JP Morgan

Okay and then last quarter you got noted a change in your kind of DTC efforts with more of a shift toward I guess social media as you describe it. How do you feel like this is resonating and you are getting more bank for your buck with more targeted campaigns?

Mark Capone

Yeah Tycho, this is Mark, thanks for the question. We’ve been very pleased with the shift, I think you’ll see some of that reflected in the results that we had, in particularly, in women’s health section where most of the traffic is generally more around some of the unaffected patients. I think I gave a couple of pieces of data that shows we’ve 700% increase in the number of followers we have on our social media, 100% increase in our web traffic. All of that, we actually have ways of tracking the hits or website and the ultimate resolution of those hits and so we can take a look at the impact of the business, how many people are following up requesting additional information and things like and we’ve been very pleased with that, we think it’s a more cost effective way then the mass media which obviously is not nearly as targeted as we can be with social media. So, we’ve seen significant increases on our return on investment by moving to this media and our approach now is really just to begin to broaden with more national efforts versus some of the smaller pilot activity that we had tried just to see if in fact we saw some sort of increases in the return. So, we’re pleased with it, you’ll see more of it and we think we’re already getting some nice returns.

Tycho Peterson – JP Morgan

Okay, last if I can, just quick one more. And we start taking a lot of question this time on reimbursement as we think about kind of CMS and vehicles to go later this year, any preliminary thoughts about any changes that we should be thinking about?

Mark Capone

Sure. There is not a lot new on the reimbursement front, we anticipate the next time that we’ll get some sort of indication will be late spring or early summer and CMS will have a public hearing on the clinical laboratory fee schedule in July and 60 days before that hearing, CMS will ask for public commentary and we think that’s when we’ll begin to see any indications around reimbursement for BRACAnalysis. I think its worth noting still that 10% of our business comes from Medicare and that’s the portion of our business that’s going to be directly impacted by some of those reimbursement discussions. We continue to believe that BRACAnalysis does not require physician interpretation and therefore would make the more sense to be on a clinical laboratory fee schedule and as a reminder as well, if we were to charge what Medicare allowable is for BRACAnalysis that would be over $5,000 to CMS. But, we already provide more than 35% discount to CMS on BRACAnalysis relative to what other laboratories charge for these similar codes.

So, we’ll probably some indication in a few months and if asked between them we’ll obviously be providing feedback that CMS will use to crosswalk, but overall, I think where we stand we feel very good that we’ve been delivering some good value to CMS.

Tycho Peterson – JP Morgan

Okay, thank you very much.

Operator

Our next question comes from the line of Isaac Ro with Goldman Sachs & Co. Please proceed.

Isaac Ro - Goldman Sachs & Co.

Good evening, thanks for taking the questions. If I just could ask the first one on your guidance, just to be clear on your underlying assumptions, I think one thing everyone is referring right now is utilization and just to be clear on your revised guidance. Does that include any assumptions on improved volumes in the overall healthcare environment or at least relative to what you saw 90 days ago at this time?

James Evans

Well, as we mentioned in our remarks, we’ve seen office visits kind of flatten out we think and so that’s been what we’ve seen on the couple of quarters and that’s how we took into consideration as we put our guidance together.

Isaac Ro - Goldman Sachs & Co.

Got it. And then, just a second question more of a big picture on the regulatory environment there is obviously lot of controversy around the Palmetto practice and to things there, I’m wondering specifically if you have a view on what that will widespread practice down the road and if so how that it impacts your business and your strategy?

Mark Capone

Sure, thanks Isaac. As a reminder I think most know that we actually do not submit any of our products through Palmetto, we go through Meridian and as of yet, we’ve heard and we’ve been in conversation with Meridian, we’ve not heard any commentary as to whether or not they’re going to modify their process by which they will provide a local coverage decision. We do have local coverage decisions on BRACAnalysis and on COLARIS and were they to implement a go forward process it should not affect the local coverage decisions that has been already made on those two products.

Now, overall our view of what Palmetto is trying to do is, we’re very supportive of, what they’ve really done is just ask when you make a submission that you provide evidence of analytical validity, clinical validity and clinical utility those are all things that we do as a standard course of business and so we’re very prepared to provide any of the technical assessment data that might be requested, in fact, we already do that now. The other thing we’ve seen is in Palmetto’s process is a nice recognition for the importance of value based pricing on both CMS and Baltimore and Palmetto have gone out of the way to mention the importance of value based pricing if in fact, these products are going to be developed and the decisions that have been made already by Palmetto to that regard have been very supportive of value based pricing.

So as a process as a whole, we’re supportive of what Palmetto is doing, but as of now it doesn’t look like our local carrier has made any determination to embrace, changing in what historically has been their process.

Isaac Ro - Goldman Sachs & Co.

Got it, thanks very much.

Operator

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

William Quirk - Piper Jaffray

Good afternoon, thanks for squeezing me in. question, I was following upon last one there, in terms of some of the other payers and obviously Palmetto isn’t that big of a deal for you guys, but a lot of the payers are watching this pretty carefully but curious given that (inaudible) is expected to release code here in April/May, has to be curious to see you guys how quickly do you think that we could see other payers jump on here? Secondly, you mentioned that you’re in a process of preparing the appropriate information, is that safe assume guys that you’re going through the z code processes right now?

Mark Capone

Thanks for the question, Bill. As to how quickly other carriers might modify their processes and use or not use z-code, I think it would be hard to speculate, I think we might have seen something by now, as Meridian intended to go that way. It’s important to keep in mind that we’re already going to be shifting at least for most of the top molecular diagnostics to individual codes in 2013. And so, this interim step of shifting to a z-code which is individualized to a particular product and then six months later move into an alternative code from the ANA process. I am not sure whether others are going to actually go through that since the intention of this result to give visibility and that’s exactly what’s been done with the code established by the ANA. So, I don’t know we could speculate that, we haven’t heard anything, we haven’t been asked to prepare anything to that effect and so for us at least for our local carrier things are pretty much business as usual.

William Quirk - Piper Jaffray

Understood, and then as a follow up just working off I guess Amanda’s question earlier Pete you mentioned that you’re pleased to reimbursement, could you elaborate a little bit in terms of what indications I guess you can pursue in Europe with respect to BRACAnalysis, COLARIS and COLARIS AP and then I guess the second question there is can you just comment reimbursement levels obliviously they vary, how do they compare and aggregate to what you’re getting in the US, thanks?

Peter Meldrum

Thanks for the question. Let me start first with reimbursement levels. Reimbursement levels throughout Europe are actually quite comparable to what we get reimbursed here in the United States. I remind you that our ASP for BRACAnalysis in the US is about $3,000 and we get anywhere from €2,200 to €2500 in Europe for the BRACAnalysis tests. So, the reimbursement in Europe is actually quite comparable to that in the United States. It’s particularly good in Northern Italy compared to Southern Italy and it’s a little stronger in Switzerland and Germany then it is in Spain for example, but pretty much in our five major market countries, it’s quite comparable to the US reimbursement rate. So, we were very pleased with that and very comfortable with moving forward with our European operations given the strong reimbursement that we’re seeing. The reimbursement is primarily in the oncology setting, there is very little women’s health care pre-symptomatic reimbursement in Europe. That’s one of the things we will be doing to grow the market in Europe, but right now reimbursement on oncology for both breast cancer and ovarian cancer is quite comparable to the professional society guidelines that we have here in the United States for reimbursement and similar group of patients. So, I would say both cases very comparable to the US.

William Quirk - Piper Jaffray

Got it, thank you.

Operator

Our next question comes from the line of Dan Leonard with Leerink Swann. Please go ahead.

Dan Leonard - Leerink Swann

Thank you, just two quick ones, you mentioned that 10% of your revenue comes from Medicare, can you remind us what proportion of your commercial payers benchmark in Medicare in some fashion I may assume it is very small but this is probably something?

Peter Meldrum

Yeah, let me start it off and I’ll ask Mark to chime in with additional information. We really don’t have any of our current payers that benchmark out of CMS or Medicare. We negotiate contracts directly with the payers and give them a discount on our list price. So, based on volume they will get a discount for example on BRACAnalysis which has the list price of $3,340 and again the ASP is around $3,000, so it is based specifically on the list price not as a percentage or any reference to Medicare reimbursement. We also put a lot of effort into economic studies that show the value of BRACAnalysis and COLARIS and other products and have recently seen very strong support at recent publication for COLARIS that showed that COLARIS was as cost effective as mammograms and pap smears and colonoscopy and at the most recent San Antonio Breast Cancer Symposium showed the cost effectiveness of BRACAnalysis which was around $30,600 well below the $50,000 per quality-adjusted life year that is typically part of as cost effective. So, given the strong cost benefit, given the fact that we actually save the insurance system money as well as saving lives and improving quality of life, we feel very good with where all of our products sit on that cost benefit spectrum and again its based on direct discussions with the private payers and at discount to its price its not based on any relationship with what CMS reimburses.

Dan Leonard - Leerink Swann

Okay, thank you. And then for my follow-up, can you remind me what ability you have to purse a DTC strategy in Europe to target asymptomatic market. I might have believed the regulations over there are little bit different but could you sum up there?

Peter Meldrum

Thank you for your very easy question because we have no capability of doing a direct consumer marketing strategy in Europe that is not legal in the European environment so that is something that has worked well for us initially with the mass media and now much more cost effectively as Mark mentioned with the social media in the United States but is illegal in Europe so we will not be doing any of those campaigns in Europe.

Dan Leonard - Leerink Swann

That’s what I thought, thank you.

Rebecca Chambers

Thanks Dan. Operator, I think we have time for one more question.

Operator

Very good, then our last question comes from the line of Peter Lawson with Mizuho Securities USA. Please go ahead.

Peter Lawson - Mizuho Securities USA Inc.

Jim, the slight weakness in gross margins, swaying on them and what’s the impact from Europe on margins?

James Evans

Yes, margins are being impacted by the combination of RBM activities with our historic Myriad diagnostic activities. So, the margins that we see coming out of RBM are not going to be up to the same level that we’ve have seen historically so well our diagnostic testing continues to have the same type of margins that its always have we haven’t seen any degradation there. We see that the cogs for RBM are really most fixed in nature and so there will be influence by the amount of revenue that we happened to recognize in that particular quarter and that revenue really does fluctuate as I mentioned based off of the collaboration and the timing of samples that we receive from our partners in processing as partners, processing those samples I think you would see as a combination of the two companies together that margins will be little bit lighter than what we have seen historically, but that’s not any impact what’s been going on with molecular diagnostic side of the business.

Peter Meldrum

And let me just add in with regards to Europe we opened our labs January 1, so obviously we didn’t see any impact from the European operations on a gross profit margins this past December 31 quarter. Going forward into future, we’re using the same equipment and the same informatics processes in Europe. So at volumes we should have similar margins in Europe as we have here in the United States.

Peter Lawson - Mizuho Securities USA Inc.

Thank you and just another follow up on the other income, it bounced up a little bit what was behind that?

James Evans

Well, that’s something that direct results from our Crescendo deal that we announced last quarter we’re receding a 6% interest on the $25 million loan that we provided to Crescendo. Additionally, it gets a little complicated for accounting purposes, $17 million of that $25 million was classified as no receivable. We also needed to ascribe some value to the option that we have with that deal. Now obviously, at the end of the day we need to get that receivable back up to $25 million and so we accrete the value of that $8 million over the three year life of the option through interest income. So, we will recognize approximately $660,000 a quarter just of the accretion of that $8 million back in to establish that no receivable back to its full $25 million so it’s impact of the 6% interest and the accretion of the value of the option.

Peter Lawson - Mizuho Securities USA Inc.

Great, thank you, that’s very helpful.

Rebecca Chambers

This concludes our second quarter earnings conference call. A replay will be available via webcast on our website for one week. Thank you all for joining us this afternoon.

Operator

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

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