Myriad Genetics (MYGN) Mark C. Capone on Q4 2016 Results - Earnings Call Transcript

| About: Myriad Genetics, (MYGN)

Myriad Genetics, Inc. (NASDAQ:MYGN)

Q4 2016 Earnings Call

August 09, 2016 4:30 pm ET

Executives

Scott Gleason - Vice President, Investor Relations

Mark C. Capone - President, Chief Executive Officer & Director

R. Bryan Riggsbee - Chief Financial Officer

Analysts

Tycho W. Peterson - JPMorgan Securities LLC

Amanda L. Murphy - William Blair & Co. LLC

William R. Quirk - Piper Jaffray & Co.

Jack Meehan - Barclays Capital, Inc.

Tim C. Evans - Wells Fargo Securities LLC

Isaac Ro - Goldman Sachs & Co.

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Myriad Genetics Fourth Quarter and Year End 2016 Financial Earnings Conference Call. As a reminder, this conference is being recorded today, Tuesday, August 9, 2016. I would now like to turn the conference over to Mr. Scott Gleason, Vice President of Investor Relations with Myriad Genetics. Please go ahead, sir.

Scott Gleason - Vice President, Investor Relations

Thank you. Good afternoon and welcome to the Myriad Genetics fiscal fourth quarter earnings call. My name is Scott Gleason, and I'm the VP of Investor Relations. During the call, we will review the financial results we released today, 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 on the Investor Relations section of our website at myriad.com.

Presenting for Myriad today will be Mark Capone, President and Chief Executive Officer, and Bryan Riggsbee, Chief Financial Officer. This call can be heard live via webcast at myriad.com. The call is being recorded and will be archived in the Investors section of our website. In addition, there will be a slide presentation pertaining to today's earnings call on the Investors section of our website and which has been filed following the call on Form 8-K.

Please note that some of the information presented 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 document 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 am now pleased turn the call over to Mark.

Mark C. Capone - President, Chief Executive Officer & Director

Thanks, Scott. Good afternoon and thank you for joining the call today. I would like to start by providing a summary of the substantial progress we made throughout fiscal 2016 on the execution of our five-year strategic plan that was introduced at the beginning of the fiscal year. Following this overview, Bryan will review our financial performance in the fourth quarter and our financial guidance for fiscal year 2017, which includes the recently announced acquisition of Assurex Health. Finally, I will conclude with commentary around our initiatives to drive growth and future shareholder value consistent with the objectives in our five-year plan.

Importantly, Myriad returned to growth in its fiscal 2016 with revenues up 4% year over year to $754 million. We also demonstrated financial leverage with pro forma adjusted earnings per share growing 14% year over year to $1.63. Both our revenue and earnings performance in fiscal 2016 were consistent with our expectations. And with the addition of two exciting new acquisitions, we remain on track to achieve our strategic goals.

Hereditary cancer revenues for the year were $632 million, which was relatively flat when compared to fiscal 2015. Through fiscal year 2016, we implemented a number of initiatives to maintain our leadership in this franchise. We signed long-term managed care contracts representing 65% of our revenue that provides future pricing visibility. We completed the conversion to myRisk among our targeted physicians and have made gene panel standard of care within the marketplace.

With this transition, we have more than doubled our Variant Classification database and introduced innovative new algorithmic methodologies for Variant Classification that will ensure Myriad's tests remain the gold standard for accuracy for years to come. And we made significant progress on broadening the indications for hereditary cancer testing that will ultimately double the size of the oncology market.

We also made significant progress in our near-term new product pipeline. With Prolaris, we nearly doubled our clinical volumes this year, with total volume up 94%, with more than 15,000 tests ordered for the year. And we established Prolaris as the market leading gold standard test for prostate cancer prognosis.

For Vectra DA, we successfully grew test volumes 11% year over year, implemented a collaboration with LabCorp to expand access, launch practice integration programs to deepen penetration and initiated a prospective clinical study.

From a payer perspective, we gained promising traction with these two critical new products. We received a Medicare local coverage determination for Prolaris and signed private payer contracts representing an additional 29 million lives. For Vectra DA, we signed our first five commercial payers, representing 3 million additional covered lives.

On the companion diagnostic front, with our partner TESARO, we validated myChoice HRD in a prospective clinical study that demonstrated highly statistically significant improvement in progression-free survival for ovarian cancer patients. We currently have more than 22 ongoing clinical studies in the area of companion diagnostics for PARP inhibitors with multiple cancer types, which in total represent a $6 billion global opportunity.

We also laid the groundwork for our next generation of pipeline products. With myPath Melanoma and myPlan Lung Cancer, we have now completed all of the studies necessary for reimbursement and will submit dossiers as soon as these studies are published. Furthermore, we completed the first validation study for myPlan Renal Cancer and began enrollment in our prospective validation study for myPath Bipolar. In aggregate, our stage two and three pipeline tests represent market opportunities of greater than $25 billion per year and can leverage our existing commercial infrastructure.

Importantly, we completed two significant acquisitions in fiscal 2016, including Sividon Diagnostics and Assurex Health. These companies bring to Myriad strategically important products that will allow us to leverage our commercial infrastructure and drive greater long-term value for investors.

Lastly, we made excellent progress in our international business during fiscal 2016. We ended the fourth quarter with international revenue contributing 6% of total revenue, which represents substantial increase compared to the beginning of the year at 4%. We believe this progress remains on track for international revenue to represent 10% of total revenue which is consistent with our strategic plan.

Overall, I'm pleased with our progress in fiscal 2016 and remain confident in our strategy to transform Myriad into a much larger diversified global leader in personalized medicine.

With that, I will turn the call over to Bryan to review our financial results for the quarter and financial guidance for fiscal year 2017.

R. Bryan Riggsbee - Chief Financial Officer

Thanks, Mark. I'm pleased to provide an overview of our financial results for the fiscal fourth quarter of 2016 followed by additional detail on our fiscal year 2017 financial guidance. Fourth quarter total revenues were $186.5 million compared to $189.9 million in the same period in the prior year, a decline of 2% year over year.

While revenues in the quarter with within the range of our previously provided financial guidance, hereditary cancer revenue came in below our expectations. Total hereditary cancer revenue in the fourth quarter was $152.8 million and was down 2% on a sequential basis. The sequential decline was mostly attributable to some incremental market share losses concentrated in the oncology segment of our business.

On a year over year basis, hereditary cancer revenue was down 7%, which was mostly related to volume declines and some incremental price declines consistent with the full implementation of the long-term contracts that have been negotiated.

Vectra DA revenue reached a new record in the fourth quarter with total revenues of $12.7 million, which was up 8% year over year. Total volume was 41,300 tests which represented a 5% increase year over year. During the quarter, we saw improved collections on Medicare Advantage claims, which led to revenue growth outpacing volume growth.

Prolaris revenue was $3.5 million in the fourth quarter. Again, Myriad experienced record volumes with total test ordered at 4,750, which was up 91% year over year and 11% sequentially. Revenue associated with our pharmaceutical and clinical services business was $12.7 million and was up 14% year over year.

I now would like to discuss our financial metrics for the quarter. Gross margins were 78.6% in the fourth quarter compared to 80.3% during the fourth quarter of last year. The year over year decline was primarily attributable to product mix with more revenue from lower margin segments such as pharmaceutical and clinical services and lower fixed cost absorption on lower hereditary cancer revenues. Additionally, we had a one-time laboratory rework issue during the fourth quarter, which reduced gross margins by approximately 60 basis points. Lastly, there was a small impact from the price reductions associated with the full implementation of our long-term contracts.

Moving on to our operating expenses, GAAP research and development expenses were $19.5 million in the fourth quarter and grew 4% relative to the fourth quarter of last year. GAAP SG&A expense this quarter was $91.3 million and declined 6% relative to last year. However, last year's GAAP SG&A included approximately $8.3 million of executive transition costs. GAAP operating income in the fourth quarter was $35.7 million and declined 1% year over year.

On a non-GAAP basis, our adjusted research and development expense was $19.4 million compared to $18.5 million last year and grew 5%. The increase in research and development spend was anticipated as we initiated our prospective clinical trials for myPath Bipolar and our Vectra DA prospective outcome study. Adjusted SG&A expense this quarter was $88.1 million and was up $2 million from last year's fourth quarter. The fact that SG&A was relatively flat year over year is reflective of our efforts to leverage our existing infrastructure as we look to drive growth with our pipeline products.

Adjusted operating income was $39 million in the fourth quarter and declined 19% relative to the fourth quarter of last year. The decline in adjusted operating income is based upon lower revenue, the mix of our revenue toward lower margin products, and slightly higher operating expenses.

This quarter and fiscal year we recognized a tax benefit associated with a reevaluation of our stock-based compensation expense due to the adoption of the new accounting standard ASU 2016-09. From an accounting standpoint, we were required to apply this benefit throughout fiscal year 2016 in the quarters when it was generated. The benefit for the fourth quarter and full year was $300,000 and $12.7 million, respectively. This new rule will result in variability in our tax rate due to the excess tax benefits and expense we will record associated with equity compensation. Given the potential variability and unpredictability of this change, we plan to exclude these adjustments in our non-GAAP earnings going forward.

Adjusted earnings per share were $0.36 for the fourth quarter compared to $0.41, respectively, in the fourth quarter of last year.

Our fully diluted share count decreased sequentially by approximately 1.2 million shares to 72.4 million shares outstanding. This reduction was driven by our share repurchase program. During the quarter, we used approximately $55 million to repurchase 1.6 million shares of Myriad common stock at an average price of $33.86 per share. During the quarter, Myriad's Board of Directors approved an additional $200 million repurchase authorization. As of the end of the fourth quarter, we had $195 million remaining on that authorization.

For fiscal year 2016, our free cash flow was $161 million, and our share repurchases have totaled $163 million, which reflects our goal to match these two metrics over time. As we stated last week, based upon the acquisition of Assurex Health, our primary use of cash in the short term will be debt repayment.

Our cash and cash equivalent balance at the end of the fourth quarter was approximately $239 million, which declined from our cash balance of $286 million at the end of the third quarter. The primary reason for the decline was the use of cash for the Sividon acquisition.

I now would like to provide you with some additional commentary on our fiscal year 2017 financial guidance. We are guiding to total revenues of $740 million to $760 million and adjusted EPS of $1.00 to $1.10. This financial guidance includes the impact of the recently announced Assurex Health acquisition.

Let me discuss our assumptions underlying our fiscal year 2017 revenue guidance, beginning with hereditary cancer. As you can see on the graph, the hereditary cancer revenue for the past 10 quarters has been relatively flat. However, we saw some incremental share erosion in the oncology segment of the market in the fourth quarter and some incremental price declines associated with our long-term contracts.

While we are working on a number of initiatives to address the share decline, until these initiatives have demonstrated success, we will not include this upside in our guidance. Consequently, we are assuming marginal declines in hereditary cancer revenue in fiscal 2017 of a magnitude similar to what we saw in the fourth quarter of fiscal year 2016.

We would note that at this level of hereditary cancer revenue, we remain within the envelope of potential outcomes from our Monte Carlo simulation upon which we based our five-year plan. As a reminder, even at the lower boundary of our hereditary cancer revenue, we were still able to exceed our total revenue growth goals due to new products which has only improved with the addition of GeneSight.

Moving on to our newer products, we expect continued strong volume growth from Prolaris, Vectra DA and EndoPredict; however, consistent with our previous approach to financial guidance, we are only assuming known reimbursement coverage. Our guidance does not assume any revenue impact from myPath Melanoma, myPlan Lung Cancer, or myChoice HRD. In addition, we are not assuming any U.S. EndoPredict revenue in our guidance for fiscal 2017.

Additionally, we are assuming lower revenue from pharmaceutical and clinical services this year. We had an exceptionally strong second half of fiscal year 2016 for Myriad RBM, and we are assuming this business will return to a more normalized trajectory in fiscal year 2017.

Moving on to Assurex Health, we are anticipating revenues from GeneSight of approximately $50 million in fiscal year 2017. We have assumed ownership of Assurex starting on October 1, and we have assumed some minor sales disruption as we work through the integration process.

Moving on to the bottom line, we are assuming higher research and development expenses throughout fiscal year 2017, based upon our prospective outcome study for Vectra DA and our prospective clinical validation study for myPath Bipolar. Additionally, we will have other R&D expense associated with the Assurex Health acquisition as we work to broaden the indications for use for GeneSight and expand the product offerings for other tests such as GeneSight Analgesic and GeneSight ADHD.

From a selling, general and administrative standpoint, we expect only minor growth in expenses with the exception of additional Assurex Health and Sividon expenses. As we previously communicated, we expect Sividon to be neutral to fiscal year 2017 earnings and accretive in fiscal year 2018.

We expect Assurex to be approximately $0.20 dilutive to adjusted EPS in fiscal year 2017 and become accretive in the first half of fiscal year 2018 based upon current reimbursement coverage. Any significant coverage expansion for GeneSight could accelerate this timeline. We expect the dilution from Assurex to be more heavily weighted towards the first couple of quarters as we grow revenue, achieve operational efficiencies and pay down debt throughout fiscal year 2017.

As a reminder, we are planning to finance the acquisition with cash on hand and approximately $200 million in debt. We are assuming this debt will have an interest rate of approximately 4%. Additionally, we will have some one-time closing costs as well as restructuring charges associated with the acquisition of approximately $20 million. Furthermore, we will have incremental non-cash amortization charges associated with both the Sividon and Assurex acquisitions of approximately $15 million for the full year. We will exclude these acquisition related charges and non-cash amortization expense from our adjusted earnings per share.

From a tax perspective, we are assuming a GAAP tax rate of approximately 38% for the fiscal year. Additionally, as we have previously stated, we are not assuming any share repurchase activity throughout fiscal year 2017.

Moving on to the first quarter, we are guiding toward revenue of $168 million to $170 million and adjusted EPS of $0.25 to $0.27 per share. This guidance reflects the typical summer seasonality we experience in the fiscal first quarter for all of our diagnostic test as well as the recent trends in hereditary cancer that were discussed previously. Fiscal year 2017 will be a year of investment for Myriad as we look to drive greater traction with Vectra DA, Prolaris and GeneSight, integrate two major acquisitions and lay the foundation for our companion diagnostic portfolio.

While these investments will dampen our short-term profitability, we remain highly confident in our ability to achieve the goals laid out in our five-year plan, and the recent acquisitions completed by the company only strengthen our longer-term outlook.

Now I would like to turn the call back over to Mark to discuss our fiscal 2017 initiatives to deliver upside potential to our guidance.

Mark C. Capone - President, Chief Executive Officer & Director

Thanks, Bryan. As Bryan discussed, while our philosophy is to provide revenue guidance based upon current trends and current reimbursement, our initiatives and efforts are focused on delivering upsides to this guidance. I would like to provide some commentary on our plans for fiscal 2017 to deliver on some of these upsides, starting first with hereditary cancer.

For our hereditary cancer business, we are pursuing a number of initiatives to stabilize and grow this segment of business that is not reflected in our guidance. First, we laid the foundation for doubling the hereditary cancer oncology market in fiscal 2016 with the goal of translating this progress into revenue this year. As a reminder, guidelines have been expanded for colon and endometrial cancer and have been incorporated into approximately 53% of payer plans.

In addition, we have submitted data to NCCN on expanding indications in breast cancer and pancreatic cancer. Lastly, recent data on prostate cancer patients and recommendations to expand guidelines to all metastatic patients would significantly expand hereditary cancer indications. In total, these market expansion activities would represent greater than $1 billion per year in incremental market potential and could represent upside to our fiscal 2017 guidance.

Also, we are continuing to update the myRisk product to ensure it remains the most valued hereditary cancer test for our customers. I am pleased to note that we are launching two important changes this quarter. First, the myRisk Hereditary Cancer test will be expanded to incorporate three new genes, including POLE, POLD1 and GREM. These genes were recently added to NCCN guidelines as important for identifying risks of hereditary colon cancer. We are also evaluating whether to continue to include NBN on the myRisk panel based upon updated NCCN guidelines, which convey limited clinical utility with this gene in a relatively small patient population.

Furthermore, in the first quarter, we are launching a customizable myRisk panel option for those genetics experts that would like to tailor their gene selections to specific patients. This will ensure that these expert customers have access to the highest quality tests with the flexibility of ordering specific gene panels.

Additionally, we continue to expand the number of our long-term hereditary cancer contracts. While we typically don't comment on individual payers, given the publicity around a few individual plans, we wanted to provide an update. I am pleased to announce that we have entered into a new agreement which retains our previous in-network status with Blue Shield of California.

Additionally, we continue to have productive conversations with the few remaining payers that have chosen to evaluate their hereditary cancer portfolios. We now have plans representing 65% of our revenue under long-term contract, and we continue to believe that payers will recognize the differential value of the service Myriad provides relative to other laboratories.

By way of example, payers are now seeing recent published data showing the difference in accuracy amongst hereditary cancer tests. For example, in the prospective registry of multiplex testing, called PROMPT, there are significant conflicting interpretations of genetic variants by commercial laboratories. Among variants entered into the PROMPT registry with classifications from multiple labs, 26% had discrepant classifications. Among those discrepancies, 36% would affect patient management.

The implication is that close to 10% of patients are receiving information that would lead them to pursue the wrong decision. And these wrong decisions can cost hundreds of thousands of dollars, let alone the impact to patients. Only Myriad offers the innovative myVision variant interpretation program to ensure accuracy when it comes to variant classification.

Next, I would like to update you on our pipeline tests and the efforts we are making to create revenue inflection points above current run rates for our stage three products starting with Vectra DA. At our current run rate, we are less than 3% penetrated in a market that is $3 billion on a global basis and our efforts to improve this are focused on increasing adoption and improving private payer reimbursement.

Adoption will be driven by our practice integration efforts and in this past quarter, we completed a record number of programs. While it takes some time for results to materialize, this is the same strategy that was highly effective at altering the growth trajectory of the preventive care market, which has more than tripled in size since the initiation of the practice integration strategy launched in 2009.

Additionally, we continue to present payers with a growing body of clinical data that further supports the ability of Vectra DA to alter clinical decisions and improve patient care. At the European League Against Rheumatism meeting in London, Myriad and our collaborators presented two important new studies. The first study demonstrated the ability of Vectra DA to predict sustained clinical remission and the risk of flare in patients following the discontinuation of Humira.

In the study, those patients with a low Vectra DA score typically fared well, with 57% experience clinical remission, while those patients with a high Vectra DA score experienced flare rates of approximately 60% within one year after discontinuation.

A second study evaluated 180 treatment-naive patients with early rheumatoid arthritis in patients starting a new therapy. The study demonstrated that Vectra DA was a statistically significant predictor of clinical remission with 12 month remission rates meaningfully higher in patients with a greater change in Vectra DA score versus those with a smaller change. These data have now been incorporated into our reimbursement dossiers.

We are beginning to see this evidence turn the tide in payer coverage decisions. This quarter we saw three private payer plans cover Vectra DA. While these were regional payers totaling about 1 million lives in aggregate along with the meaningful progress we made last quarter, it is increased evidence that our narrative is beginning to resonate with the payer community.

Transitioning to our urology division, we continue to set Prolaris apart as the gold standard product and in the fourth quarter we achieved a volume run rate equivalent to an 8% market penetration. We estimate that 33% of the 9,000 urologists who treat prostate cancer patients have now ordered Prolaris. Along with the expansion of private coverage we saw over the last two quarters, we also have been in discussions with Medicare on a local coverage determination expansion request for favorable intermediate patients. There is a clear clinical need for a prognostic solution in this patient population and our dialogue to date has been very productive. Yet we have not included this additional potential reimbursement in our fiscal 2017 guidance.

The next stage three product that represents a potential upside is EndoPredict, with the US launch and the potential for expanded international reimbursement. As we mentioned on our call in May, the acquisition of Sividon included US distribution rights to EndoPredict and we plan to launch the test in the United States in the second half of fiscal year 2017. We have received a significant positive reaction from US physicians with the recent publication of the large head-to-head study of EndoPredict with Oncotype DX that was published in the Journal of the National Cancer Institute.

The study, which evaluated 928 women from the TransATAC study, showed that EndoPredict significantly outperformed Oncotype DX with a prognostic power that was more than four times greater. Additionally, EndoPredict low-risk patients had a 10-year rate of distant metastases of 5.8% versus low-risk Oncotype DX patients at 10.1%.

What is remarkable is if this increased prognostic power was delivered without relying on an intermediate classification. Intermediate patients are the most difficult to classify and the first-generation tests lacks the discriminating power necessary to avoid this frustrating result. Intermediate patients also have important cost implications for payers since many intermediate risk patients unnecessarily opt for chemotherapy out of an abundance of precaution.

Furthermore, a deeper analysis of the data demonstrates that when EndoPredict and Oncotype DX disagree, EndoPredict is most often correct. The table on this slide shows the rate of 10-year metastases based upon the patient classification from EndoPredict and Oncotype DX. In patients where EndoPredict classified the patient as low risk but Oncotype DX labeled the patient as intermediate or high risk, the rate of 10-year metastases was 10.2%. However, in patients where EndoPredict classify the patient as high risk and Oncotype DX labeled the patient as low risk, the rate of distant metastases was 26.9%. This demonstrates that EndoPredict provides significant prognostic power beyond Oncotype DX.

EndoPredict already has ASCO guidelines, which has led to coverage with Aetna and indications of coverage for Medicare. We are actively reaching out to additional payers and will announce our US commercialization plans as we get closer to launch in the second half of fiscal 2017. It is important to note that we have not included any US revenue from EndoPredict in our fiscal 2017 guidance.

Another important stage three products is GeneSight, and we see some significant opportunities to unlock greater value with this newly acquired product, which is one of the fastest growing new molecular diagnostics in history.

First, the largest component of this market is not even being addressed today, since most patients with depression are treated in the primary care segment. Assurex already submitted an LCD expansion request to Medicare to obtain approval for primary care physicians to order GeneSight. Importantly, this market is relatively concentrated with 16,000 high-prescribing primary care physicians responsible for 40% of the antidepressant prescriptions. If we are successful at obtaining an expanded LCD, we will launch this indication with our current preventive care team, which could represent upside to our guidance.

Additionally, Assurex is pursuing two very important indication expansions in both anxiety and bipolar disorder. These two indications in combination would more than double the current GeneSight addressable market opportunity.

Furthermore, we have not included any revenue from myChoice HRD in our fiscal 2017 guidance. As a reminder, myChoice HRD was validated in TESARO's NOVA study and was shown to be highly statistically significant in identifying responders. Having seen the full dataset for this study, we are aggressively completing a pre-market approval submission for the FDA that will be submitted in conjunction with niraparib.

TESARO has projected FDA approval for niraparib in the second half of fiscal 2017, and we would anticipate approval at the same time for myChoice HRD as a companion diagnostic. Given the uncertainties on the timing of approval, we have not included any revenues in fiscal 2017 but would certainly expect revenue in early 2018.

While myChoice HRD has been extensively validated in retrospective studies, this was the first prospective validation study of the technology with a PARP inhibitor. Based upon the strength of this data, the level of interest from pharmaceutical partners has increased dramatically.

As PARPs move into first-line therapy in larger cancer populations such as breast, lung and prostate cancer, the need for a biomarker such as myChoice HRD will become even more pronounced. We anticipate the release of additional myChoice HRD data in fiscal 2017 as we build towards a $6 billion global companion diagnostic market.

We anticipate further advances in fiscal 2017 for two other new products that have not been incorporated into our guidance: myPath Melanoma and myPlan Lung Cancer. Both products have successfully completed all necessary studies for reimbursement and the data look outstanding.

Since payers have increasingly shifted towards considering only published data, upon completion of these publications, we will start the reimbursement process. We are anticipating beginning this process in fiscal 2017 so I've not included any revenue in our guidance.

Finally, we are making excellent progress in expanding our international business with revenue up 93% year over year in the fourth quarter and total international revenue reaching a record 6% of sales in the fourth quarter. Much of this growth was attributed to higher EndoPredict revenues as a result of obtaining reimbursement in France. We are anticipating EndoPredict reimbursement in Germany this year, but have not included that in our guidance, nor have we included UK and Canadian reimbursement which are actively being pursued.

Additionally this quarter, we signed a preferred provider agreement with BMI Healthcare in the United Kingdom covering Myriad's complete testing portfolio including EndoPredict, Prolaris, tumor BRACAnalysis and hereditary cancer testing, including myRisk and all legacy tests. BMI Healthcare is the largest private hospital group, comprised of 59 hospitals and clinics across the UK, servicing 1.5 million outpatient visits per year. This adds to the agreement we announced with HCA in the UK last quarter that covered approximately 500,000 patient visits per year.

In summary, we are making significant steps towards our long-term strategic vision, and it is worthwhile to reflect on the financial implications of this strategy. If we were fully reimbursed for the test volumes we ran in fiscal 2016 for Prolaris, Vectra DA and GeneSight, we would have generated an additional $300 million per year in revenue and an additional $2 per share in incremental earnings. And this does not include the substantial potential upside for myChoice HRD, EndoPredict, myPath Melanoma and myPlan Lung Cancer, let alone our stage one pipeline with multi-billion-dollar potential.

Lastly, this does not include any additional acquisitions that could be highly accretive when launched in our existing commercial channels as a result of our 4 in 6 strategy. We believe that the substantial revenue potential from this entire pipeline, added on top of the leading hereditary cancer franchise in the world, represents a compelling opportunity for long-term value. Progress in this industry is never made in giant leaps, but we have demonstrated that steady and continual progress is ultimately rewarded.

Importantly, our scientific advances are crucial to containing spiraling healthcare costs, and we continue to believe this will result in future reimbursement for our products. We remain passionately committed to making this vision a reality and expect to build on the substantial progress we made in fiscal 2016, in the current fiscal year.

Now I'd like to turn the call over to Scott.

Scott Gleason - Vice President, Investor Relations

Thanks, Mark. As a reminder, during today's call, we use certain non-GAAP financial measures. A reconciliation of the GAAP financial results to non-GAAP financial results and a reconciliation of GAAP to non-GAAP financial guidance can be found under the Investor Relations section of our website.

Now, we are ready to begin the Q&A session. In order to ensure broad participation in today's Q&A session, we're asking participants to please ask only one question and one follow-up.

Operator, we're now ready for the Q&A portion of the call.

Question-and-Answer Session

Operator

Our first question comes from the line of Tycho Peterson with JPMorgan. Your line is open. Please go ahead.

Tycho W. Peterson - JPMorgan Securities LLC

Hey, thanks. I'll start with a question on guidance, which I'm sure is on top of everybody's mind. Can you maybe just talk about what's factored in terms of share and price erosion in the oncology assumptions? And given your comments about going back in-network with Blue Cross Blue Shield of California and the renewed United contract, can you maybe just talk about any pricing assumptions that are embedded with those?

Mark C. Capone - President, Chief Executive Officer & Director

Thanks, Tycho. I'll start and then, Bryan, of course you can fill in if there is any other commentary. Obviously we considered all three of those things, as you mentioned, Tycho, what do we think will happen to market, what do we see from a price and what do we see from a share perspective.

I think from a pricing perspective, what was important in the fourth quarter, this was really a first quarter that fully reflected all of the long-term contracts that we'd put in place, the 65% of our revenue that is under long-term contract. So the pricing in the fourth quarter, the results in the fourth quarter are reflective of that pricing, and of course, that's fixed for this next fiscal year. So that gives us pretty good visibility on pricing, at least in that 65% of the business that's locked up.

Much of the rest of the business frankly are smaller regional players that have not necessarily expressed interest in evaluating their hereditary cancer portfolios. And so we wouldn't necessarily expect any material changes in pricing from those other regional payers. And so that leaves really a few others that we're in discussions with at this point, and any thoughts around those discussions that are ongoing have been reflected in any price assumptions that we've made for this guidance. So that handles the pricing piece.

From a share perspective, as Bryan mentioned, we've chosen that to use the fourth quarter as our guide, as we look to provide guidance for this fiscal year. And so we've really used that trend we saw in the fourth quarter, the year over year trend between fourth quarter of last year and fourth quarter 2016 as a guide as we set the share expectations for the year. And so, and really it was that in combination that dictated our market growth assumptions as well. So the volume overall that we saw between fourth quarter of 2015 and fourth quarter 2016 really addressed both market and share.

So that's the thinking that really went into the setting of our guidance from hereditary cancer. I think the philosophy is let's use current trends and let's use current reimbursement as the basis for guidance, reflecting that any improvements to those would be upside. Bryan, any other comments from?

R. Bryan Riggsbee - Chief Financial Officer

Nothing to add.

Tycho W. Peterson - JPMorgan Securities LLC

And maybe just as a follow-up, what gives you confidence that you won't be moved out of network for other payers? I know you listed that as a risk, but how do we handicap that?

Mark C. Capone - President, Chief Executive Officer & Director

Yeah, thanks, Tycho. Obviously, for the 65% that are under contract, that's already been resolved. It's really the remaining few that we're in discussions with. And like I say, a lot of the 35% that are not under long-term contract haven't really expressed an interest. So for the remaining ones that are under contract, as I mentioned in the script, our conversations have been productive. I think they continue to understand that the value that Myriad offers for accuracy is very important.

I underscore that PROMPT data that's relatively recent, where up to 10% of patients may in fact receiving the wrong medical management and recognizing that that medical management, those mistakes are $100,000 mistakes. That's very important information to payers as they reflect on network options. And so I think we've had to continue to have productive conversations with those few remaining payers and I think that's all been reflected as we look at our fiscal 2017 guidance.

Tycho W. Peterson - JPMorgan Securities LLC

Okay. Thank you.

Operator

And our next question comes from the line of Amanda Murphy with William Blair. Your line is open. Please go ahead.

Amanda L. Murphy - William Blair & Co. LLC

Hi. Good afternoon. So I guess just following up to Tycho's questions on guidance. So, if you do the math on the numbers, you're talking about quite a meaningful decline in revenue year over year and obviously you cited pharma as an issue there. But even if you assume $20 million, $25 million on that front, it does seem like the magnitude is quite meaningful even if you consider as well that there's market share growth in the hereditary cancer business as well as growth in the other products that you have currently generating revenue.

So just trying to rationalize that with your comments on market share loss and pricing, I appreciate the points there in Q4 but it does feel like the magnitude is something quite larger as it relates to the trends that you saw in Q4 rolling forward. So, just wanted to get some context there in terms of is it something am I missing. It's not a contract that you're losing that you were projecting, but it does seem like quite a difference in magnitude.

R. Bryan Riggsbee - Chief Financial Officer

Yeah, Amanda. This is Bryan. I'll take the question. When I look at the guidance and think about the midpoint of the guidance range and back out the

$50 million that we talk about with respect to Assurex, I'm looking at about a 7% down year over year for the base Myriad business. That's consistent with our hereditary cancer when we look at it for the current quarter relative to the prior-year quarter.

Some of the other movers that are taking place in there, as I mentioned, pharma and clinical services, that business was about $47 million, $48 million in the current year, which includes the clinic as well as RBM. We would expect that to return to a more normal rate next year. And then, you have the ups, the growth in Prolaris year over year as well as Vectra are sort of the moving pieces. So I'm happy to spend more time talking about it, but I'd say the primary driver is that change in hereditary cancer since that's the predominant share of our revenue.

Mark C. Capone - President, Chief Executive Officer & Director

The other thing I might add Amanda, your question was, is there something else here, some contract that we lost or something like that. And no, none of that is really contemplated in this guidance. To Bryan's point, as we looked at year over year trend in the fourth quarter, we think it was prudent to guide that we'd see that in this upcoming fiscal year as well. And so it was really based more on current trend analysis, because as we said, we obviously saw, we had expected some slight increase in hereditary cancer sequentially Q3 to Q4. That did not materialize and so we think it's just prudent to reflect for guidance purposes that trend that we saw from Q3 to Q4.

I think it's important to note that we really understand the nature of some of that and are obviously working on a number of initiatives to change that trajectory, things we can talk about, but we thought at least for guidance, it's prudent not to necessarily expect success from those and leave success from those initiatives as potential upside to guidance.

Amanda L. Murphy - William Blair & Co. LLC

Yes, Mark, thanks for that. Maybe just I guess taking that last point as a follow-up. And I know you talked about this a bit, but maybe talking about the share loss dynamics there. I mean, so in terms of, it seems like there was a bit of an acceleration. Can you help us understand that a bit more? Just thinking about all the stuff that you've talked about in the past and you've got the database and you have pricing or contracts lined up with a lot of payers at this point and I think the Prolaris for the most part are relatively the same. So just maybe help us understand and obviously you talked about the expansion into more of an à la carte model, so maybe that is one sort of driver. But just helping us understand the trajectory of the loss, it seems like it accelerated a bit here in Q4.

Mark C. Capone - President, Chief Executive Officer & Director

Yes, thanks, Amanda. So a couple things that are worth noting. First, the magnitude of the difference in our expectation is worth reflecting on. It really equated to about 20 tests per day, so that's the magnitude of what we had expected to see in Q4 that we didn't was an additional 20 tests per day. So that gives you a sense of at least magnitude. These are not large numbers. And so when we actually teased apart and looked at what were the root cause of that 20 sample a day, really most of it related to some sales force turnover that we saw in the oncology portion of our business. Turnover in the last half of the year was above, significantly above what we would normally experience.

And when we looked at the weakness, it was really associated mostly with territories where we had experienced that turnover, and it was really largely in those areas that probably are most exposed to that lack of a salesperson, which would be in that genetic segment. And so knowing that, of course we've already taken steps to address that. But I think that was the source of the weakness that we saw going into the fourth quarter was the cumulative effect of having lost some of those sales territories. That's ultimately what led to that 20 sample per day gap.

Amanda L. Murphy - William Blair & Co. LLC

Got it. Thanks very much.

Operator

And our next question comes from the line of Bill Quirk with Piper Jaffray. Your line is open. Please go ahead.

William R. Quirk - Piper Jaffray & Co.

Great. Thanks. Good afternoon everyone. So I guess first question, Mark, I was hoping you can kind of elaborate a little bit more on Amanda's. I think in your prepared comments, you made some references to weakness in the oncology side of hereditary cancer. And obviously in response to Amanda's question, you talked a little bit about some, I guess, territory exposure on the genetic side. And so I guess the question is, you've obviously done just a terrific job over the past several years hanging on to oncology share, in particular. And so I guess, if we could just drill down on that market subsegment, I guess what changed there? Was that also sales force turnover? Thanks.

Mark C. Capone - President, Chief Executive Officer & Director

Yeah. Thanks, Bill. Really, it was related to that, to the sales force turnover. So the genetics customers are sprinkled throughout virtually every account executive's territory. And as you might imagine, those are a generally high frequency ordering customers. And so when you have an empty territory, it's going to certainly impact that genetics portion of that business probably more so, because most our competitors are really spending the majority of their time in the genetics segment. So I think that's the segment that's probably most exposed to a lack of us having sufficient share of voice in those offices. So I think it really related to that same phenomenon. And so most of this incremental loss that we can detect really was still concentrated in the genetics segment and largely associated with sales territory turnover.

William R. Quirk - Piper Jaffray & Co.

Okay. Understood. And then apologies if you answered this in Tycho's question, but the assumptions you've made about incremental if any price degradation on hereditary cancer from any new deals that you'd enter into in fiscal 2017, I guess what's the moving part of that relative to share loss? And just I guess a question, just to make sure I'm doing my math right here, but it looks like you guys have quite a low double digit decline in the US dialed in. I appreciate that Bryan said I think 7% for the entire, for the worldwide business.

Mark C. Capone - President, Chief Executive Officer & Director

Yeah. So thanks, Bill. We obviously don't give out specific pricing and so I think my commentary to Tycho's question, I can elaborate on a little bit. The 65% we know. The majority of the 35% that remains are really contracts that we're not in active discussions, because payers aren't necessarily interested. So then there is a portion of that where we are in active discussions and any expectations around pricing for those remaining contracts are things that we have factored into this guidance for this year. We won't provide direct quantitative numbers, but those were contemplated as we provided this guidance.

William R. Quirk - Piper Jaffray & Co.

And then lastly, Bryan, is my low double digit number in the ballpark for the US? Thanks.

R. Bryan Riggsbee - Chief Financial Officer

Yeah, we didn't break out the US versus international component. That number I gave was total company

Operator

Our next question comes from the line of Jack Meehan with Barclays. Please go ahead.

Jack Meehan - Barclays Capital, Inc.

Hi. Good afternoon, guys. I wanted to ask again about the assumptions going into the hereditary cancer business for 2017, specifically around the market share. Just, could you elaborate? I understand some of it's related to sales force turnover. Could you just maybe quantify how that level is different relative to prior years? And were any of the, maybe just the losses that you've ceded, did they pair up with any geographies where you've had any notable payer changes in the last six months?

Mark C. Capone - President, Chief Executive Officer & Director

Yeah. Thanks Jack. Yeah, the turnover numbers, they were high enough that obviously they caught our attention. So you're looking at turnover that's probably close to double what we would typically see and the losses that we experience are related in fact to those territories that are empty. And so, we saw a pretty good correlation there and it was more pronounced certainly than the turnover levels that we would typically see for any of our sales organizations.

Jack Meehan - Barclays Capital, Inc.

Okay. Any maybe could you just talk about, as you reflect on the business, just is there any sort of urgency to either fill the seats with new hires, or does it change the way that you think about managing the business?

Mark C. Capone - President, Chief Executive Officer & Director

Well, I think what it underscores is something we've always known, is that the impact from our sales team is very pronounced. This is a very, very high touch business, and we know that it's imperative that you have very high talented sales people. This is not something you can just put on the Internet and expect somebody to understand how to do this appropriately. That's not a business model that works in this industry. It really requires a very high touch. So obviously, there is a significant urgency to address not the root cause, certainly fill the territories and address the root cause.

I think one of the things – and I was at our national sales meeting just a few weeks ago and had a chance to interact with our oncology team, and there is a palpable level of excitement for sales people. They like to see new breakthrough technologies, and we're entering into an era of new product launches in oncology that we have never experienced as a company. Our lung cancer product is on the verge of getting reimbursement, clearly a best-in-class product for a cancer that has no good way to determine whether or not chemotherapy should be provided. We are preparing for the launch of EndoPredict, which is the best-in-class second generation product.

It was interesting as you talk to sales people, many of them remarked on the fact that never in their career have they had such a positive journal article that said their product markedly outperformed another product with four times the prognostic power. Those types of things are not something that most of us in this industry have always had the benefit of that type of very clear positive endorsement for the next generation product.

And then at the same time, we're preparing for myChoice HRD with a PMA for a product that can really revolutionize the way that we approach most solid tumors, and in fact it will revolutionize the way we even approach the hereditary cancer business, because that business will begin in the tumor and then reflex to germline testing as a secondary product. And so when you started to look at this series of best-in-class products, our oncology team could have four of those, and that's almost unheard of. Typically in your portfolio, you'll have one, but to have four is really unique.

So there is a palpable excitement. Obviously, we're filling territories with people that are excited about participating in this next phase of growth for oncology business. And I think the result, the reason we see this turnover, and it's one we actually saw in Vectra as well, frankly, our sales team is very talented. They're very well trained. And so anybody that's looking to expand sales teams in advanced diagnostics or in some case pharmaceuticals, they're always trying to take that opportunity to look at our talent. And so that's something that we've addressed, and we're pretty excited about what we can offer for these folks in the future.

Jack Meehan - Barclays Capital, Inc.

Yeah. Thanks, Mark. I can appreciate that. And if I can squeeze in one more, I think I caught $50 million for Assurex. What are you assuming for volume growth? And screen is lighter than what we were thinking about. Could you just maybe put that into context for us? Thank you.

Mark C. Capone - President, Chief Executive Officer & Director

Yeah. Thanks, Jack. Obviously, the one data point we gave out for last year was $60 million in revenue for fiscal year, our fiscal year 2016. I think as we contemplate the three quarters in which we will have owned Assurex, I think one of the things that we're taking into consideration is that inevitably when you do one of these integrations, there could be some disruption in the sales force. And so we wanted to make sure that as we contemplated guidance that we accounted for that.

But obviously, this is a very rapidly growing test. You can see that in the charts we've provided, probably the one of the most rapidly growing in the history of advanced diagnostics. So we remain very excited about its growth potential. But I think as we provide guidance for the year, we again thought it was prudent to reflect on the fact that we're just going to be acquiring this asset. And we need to contemplate that there could be some level of disruption.

Operator

And our next question comes from the line of Tim Evans with Wells Fargo Securities. Your line is open. Please go ahead.

Tim C. Evans - Wells Fargo Securities LLC

Thanks. Mark, what are you assuming for market growth in 2017 in hereditary cancer?

Mark C. Capone - President, Chief Executive Officer & Director

Yeah. Very difficult to determine precisely what's happening to market growth. As you know, Tim, we don't have other laboratories that are disclosing volumes. And so it's very difficult to know precisely what's going on in the market. I think for us, the volume determinant was really reflecting on the Q4 year over year numbers. The volume component of course being part share, part market growth. And that's the perspective that we looked at this as we provided guidance is, what are we seeing in totality for volume, because teasing that apart into share and growth is increasingly difficult with nobody actually disclosing data.

Tim C. Evans - Wells Fargo Securities LLC

Well, what I'm trying to get at is in your longer-term guidance, you had assumed market growth of 7% to 15%. Are you embedding that kind of market growth in your 2017 guidance?

Mark C. Capone - President, Chief Executive Officer & Director

Yeah, I think we continue to believe that this market, because of its low penetration, that those types of growth numbers, 7% to 15%, are very appropriate for the long-term growth in this market. Every indication would be that with the expanded indications that in fact that opportunity could even be greater. And so yes, we continue to believe that those are the long-term potentials that we've seen, and this business has historically grown at 10%. I think it's difficult to tease that out specifically for, let's say, a fiscal 2017. But I think as we think strategically, as we look at the long-term plan, we continue to believe those types of market growth numbers are realistic.

Tim C. Evans - Wells Fargo Securities LLC

Okay. So if your guidance is down 7% and you're assuming the market grows somewhere in that midpoint range, is it fair to say that share plus price together would probably be somewhere in the 10% to 15% range of erosion in share and price together?

Mark C. Capone - President, Chief Executive Officer & Director

Yeah, I'm not sure I'm prepared to comment on each component. I think the best way to think of it is the way we laid it out, is in fourth quarter we saw 7% year over year. That formed the basis of our thinking. And of course pricing, we've been able to take into consideration because the fourth quarter had the pricing in it associated with our long-term contracts. So I think that's the way we've really thought about guidance.

Tim C. Evans - Wells Fargo Securities LLC

Okay. I need to squeeze in one more. If your pharma and clinical revenue is going down, that is a little counterintuitive to me given the number of initiatives that you have going on with CDx. Can you just explain why that revenue would be going down?

Mark C. Capone - President, Chief Executive Officer & Director

Yeah. Thanks, Tim. Sorry, that's more of a classification issue. So the pharma and clinical services does not include our companion diagnostic numbers. Those numbers are in the molecular diagnostic portions of the business, so pharma and clinical services is specifically the clinic and our rules-based medicine business. Those are the two numbers that fall into that line item. And the reason we'd expect those to decline, Myriad RBM is very much a project driven organization and we saw some very large pharmaceutical projects in fiscal 2016 that we're not necessarily planning on seeing in fiscal 2017. And so that's I think a large reason we'd expect that to potentially see decline in that business back to more historical levels.

Tim C. Evans - Wells Fargo Securities LLC

Okay.

Operator

And our last question comes from the line of Isaac Ro with Goldman Sachs. Your line is open. Please go ahead.

Isaac Ro - Goldman Sachs & Co.

Good afternoon, guys. Thank you. Just another question on the assumptions behind your 2017 guidance. If we assume that about two thirds of your business in hereditary cancer is under contract, as you mentioned, and if we assume the volume with those payers is more or less flat, I'm just trying to square up what you're assuming for price and volume declines in the remaining 35%. Because it just seems like if I back into the numbers, you guys did about $630 million in hereditary cancer in 2016. If we take out that 35% that's left over, that isn't under contract yet, the assumption to get your 2017 number is I think something like a 20% decline. So just trying to make sure I understand the assumptions you're making for that remaining 35%.

R. Bryan Riggsbee - Chief Financial Officer

Yes, Isaac, this is Bryan. I'll give it a shot. I think it's consistent with the way that Mark had laid it out, which is that when we look at Q4, which is really a combination of price, volume, market growth, et cetera, we really use that as a jumping off point for our guidance for the following year. So we believe it incorporates market growth as well as share loss and price. So we're not going to get into breaking out each of the individual components, but the net of all that is that we would expect our 2017 number to be consistent from a trend perspective with our Q4 number.

Isaac Ro - Goldman Sachs & Co.

Okay. And then just maybe a follow-up on capital allocation. Obviously your stock's been under a little bit of pressure this year. It will probably be under pressure again tomorrow and you've obviously deployed most of your capital to M&A, which you've explained in a great amount of detail. I'm just curious, at what point do you guys consider being a little more aggressive with the resources you have to help your shareholders out here during this period of transition? If we accept that your growth trajectory is still in that 7% to 15% range, clearly 2017 does not set up to be consistent with that path. So is there a way you can kind of create some value for your shareholders throughout that period?

R. Bryan Riggsbee - Chief Financial Officer

Yes sure. From a capital allocation perspective, I think one of the items that we laid out earlier was that we expect to finance a large portion of the initial payment for Assurex. So we ended the quarter with roughly $240 million of cash. We'll always be opportunistic and evaluate capital allocation in terms of where we think, if we think our stock is severely undervalued and would act accordingly. So I think while our stated purpose for free cash flow will be to pay down debt, that doesn't preclude us from being opportunistic when it comes to share repurchase.

Isaac Ro - Goldman Sachs & Co.

Yeah. Thank you.

Operator

And Mr. Gleason, I'll turn the presentation back to you. Please continue with your presentation or closing remarks.

Scott Gleason - Vice President, Investor Relations

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

Operator

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

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