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

Myriad Genetics, Inc. (NASDAQ:MYGN)

Q1 2012 Earnings Call

May 1, 2012 4:30 pm ET

Executives

Rebecca Chambers – Director of Investor Relations

Peter D. Meldrum – President and Chief Executive Officer

Mark C. Capone – President, Myriad Genetic Laboratories

James S. Evans – Chief Financial Officer and Treasurer

Analysts

Scott Gleason – Stephens Inc.

John Wood – Jefferies & Company, Inc

Amanda Murphy – William Blair & Company, L.L.C.

Michael Yee – RBC Capital Markets

William T. Cook – Piper Jaffray, Inc.

Doug Schenkel – Cowen and Co.

Tycho W. Peterson – JPMorgan Securities LLC

David Ferreiro – Oppenheimer Securities

Isaac Ro – Goldman Sachs

Kevin DeGeeter – Ladenburg Thalmann Securities

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Myriad Genetics 2012 Third Quarter Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards we’ll conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded Tuesday, May 1, 2012.

I would now like to turn the conference over to Ms. Rebecca Chambers, Director of Investor Relations. Please go ahead.

Rebecca Chambers

Good afternoon everyone, and welcome to the Myriad Genetics’ Third Fiscal Quarter Earnings Call. During the call, we will review the financial results we released today and the progress 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 myriad.com.

Presenting from Myriad today will be Pete Meldrum, President and Chief Executive Officer; Mark Capone, President, Myriad Genetic Laboratories; and Jim Evans, our Chief Financial Officer. This call can be heard live via webcast along with the slide presentation at myriad.com. The call is being recorded and will be archived in the Investors section of our website.

Please note that some of the information presented here today may contain projections or other forward-looking statements regarding future events or the future financial performance of the company. These statements are based on management’s current expectations and the actual events or results may differ materially and adversely from these expectations for a variety of reasons. We refer you to the documents the company files from time-to-time with the Securities and Exchange Commission, specifically the company’s annual report on Form 10-K, its quarterly reports on Form 10-Q, and its current 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 D. Meldrum

Thank you, Rebecca. To begin, I would like to provide highlights of our third quarter results and introduce the company’s updated guidance for this fiscal year. I’m extremely pleased to report that third quarters increased 27% year-over-year to reach a new record $129.8 million. All of our products contributed to this excellent performance, but COLARIS stood out with a 51% year-over-year growth. The second quarter in a row where COLARIS grew more than 50% year-to-year.

Net income for the third fiscal quarter increased to $29.6 million, and resulted the diluted earnings per share of $0.34. These results were beyond our expectations, primarily due to our strategic initiatives to expand our oncology and women’s health markets.

Given the continued performance of these initiatives, we’ve decided to increase our guidance for fiscal 2012, for the second time this year. Revenue is now expected to be in the range of $492 million to $496 million, which represents 22% to 23% growth over the prior fiscal year. Diluted earnings per share guidance has also been increased to $1.29 to $1.31 representing a 17% to 19% growth over fiscal 2011.

These strong results have positioned us well for continued success, particularly when combined with the strategic directives that we are focusing on for long term growth. Myriad is dedicated to improving patient care through the development and marketing of transformative tests across multiple medical specialties, which do have present clinical needs. With this strategy in mind we’ve put forward the following three strategic directives. One to grow existing tests and markets, two to expand our business internationally, and three to launch new transformative products including companion diagnostic tests across a diverse set of major disease indications.

Our international strategic initiatives continue to proceed ahead of schedule. Our five country managers and clinical affairs team have concluded the orientation and training program in Salt Lake City, and have now returned to their home countries to focus on growing Myriad’s presence in Germany, Switzerland, Italy, Spain and France.

During the third quarter, Myriad hosted a personalized Medicine Symposium and ribbon cutting ceremony at the Company’s new laboratory in Munich, Germany. Approximately 100 physicians, scientists, politicians and journalists attended the event, and heard presentation on the latest advancements and companion diagnostics and personalized medicine including recent results in melanoma and prostrate cancer research.

In addition to Gary King and me, the presenters included Dr. Horst Domdey, the Director of the Bavarian Biotech Cluster; Dr. Thorston Zenz, Professor of the National Center for Tumor Diseases at Heidelberg; and Dr. Helmuth Kotter, Director of the Medical Laboratory at the University of Innsbruck. The event was extremely well received and represented an important step from Myriad in building relationships in region, and increasing our visibility among the key opinion leaders in Europe.

Our Prolaris clinical programs in Europe are also progressing well. Pro-009 is a clinical study from a German cohort of approximately 450 radical prostatectomy samples with the clinical endpoint of biochemical recurrence; and I am pleased to report it is ahead of schedule. We’ve received most of the prostate tumor samples for this study, expect to have results published next year. This represents our ninth clinical validation study on Prolaris.

We are also in discussions with large institutions in Australia and France, and hope to initiate additional validation studies with these groups later this year. Our progress in Europe is ahead of schedule as we progress towards our goal of $15 million of international revenues, by fiscal 2016.

Our first strategic initiative is to launch new molecular diagnostic test to meet unmet clinical needs in oncology, women’s health, urology, dermatology, autoimmune and the neuroscience. Our industry leading pipeline of products includes 13 candidate tests across this diverse set of disease indications.

Our melanoma test from the in-licensing of technology from Melanoma Diagnostics, which determines whether a skin biopsy is benign or malignant, was recently planned for commercial launch later this fiscal year as an immunohistochemistry assay. We are now simultaneously assessing a quantitative PCR test, which we agree to increase the sensitivity and specificity of our test, which will be important for maximum reimbursement and rapid adoption.

We now expect a optimal version of this test to be launched in calendar 2013. We’re also excited about our new homologous recombination deficiency or HRD test. Homologous recombination is a process that occurs within all cells to repair [control] breaks that occur in DNA, known as double-stranded DNA breaks.

The HRD test will incorporate a tissue break analysis, and is designed to provide solutions with a tool to determine which patients will likely benefit from DNA damaging agents, such as platinum therapy and PARP inhibitors. Data shown at our HRD test can identify patients who have a homologous recombination deficiency caused not only by the BRCA genes, but by other genes as well.

Recently, Myriad presented a poster at the American Association for Cancer Research meeting, which demonstrated a significant relationship between HRD status and BRCA1 and BRCA2 status in ovarian cancer patients. In this study, researchers saw a significant increase in the number of tumors with HRD defects beyond mutations in just the BRCA1 and BRCA2 genes. This data, an important step in the development of our HRD test, our data suggests that this HRD assay will be more informative and identify significant number of additional patients who could benefit from platinum and PARP-inhibitor therapies beyond the BRCA positive patients.

We have recently signed a research agreement with Stanford University to advance the development and validation of this novel test. And are in discussions with a number of major pharmaceutical partners for the use of this test as a companion diagnostic in their clinical trials. If successfully commercialized, those new tests would guide therapeutic decision and represent a significant market potential since the homologous recombination pathway is known to play an important role in a number of cancers, including breast, ovarian, lung, pancreatic and esophageal cancers.

I’m also pleased to report that our lung cancer prognostic test is progressing through the clinical validation stage. As a remainder, this test is being developed to guide therapeutic decisions for patients diagnosed with Stage 1 or Stage 2 adenocarcinoma of the lung. We have recently completed a study on 256 patient samples using overall disease survival as a primary outcome measure, and we’ll be presenting this data at an upcoming professional society meeting. We are also underway with a validation study on approximately 400 patient sample. We expect to launch this test once these two studies have been published in peer-reviewed journal, sometime during calendar 2013.

The other products in our test pipeline are also progressing well. And we will be providing updates on these molecular diagnostic tests during future earnings calls. Complementing our strategy of diversifying across multiple products and disease indications, we continue to be very pleased with the progress being made at Myriad RBM.

Revenues increased sequentially to $6.5 million in the third quarter. And the pipeline for projects in the companion diagnostic services business continues to be robust. Importantly, Myriad RBM recently entered into a collaboration with the Max-Planck-Institute and the various blood donation service. This project will analyze hundreds of samples in an effort to identify a blood-based, early colon cancer detection test.

As part of the agreement, Myriad RBM will receive exclusive commercial rights to the early cancer detection product. We are also making excellent progress on a number of other fronts towards meeting the goals set forth in our strategic plan to diversify across multiple disease indications and grow revenues both domestically and abroad. We are pleased with the strong performance of our core business in fiscal 2012 to date, and believe in our ability to execute on our strategic plan for the long-term growth.

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

Mark C. Capone

Thanks, Pete. For the third quarter in a row, we saw a strong growth in molecular diagnostics revenue with contributions across our portfolio of tests including a record quarter for both BRACAnalysis and COLARIS. These results are due to successful execution of the initiatives associated with our first strategic directive to grow our existing tests and markets.

I will provide a brief update on the progress of these initiatives, and our Prolaris test. Our oncology segment grew 19% year-over-year in the third quarter. This accelerated growth was due to a 51% growth rate in COLARIS, and a 14% growth rate in BRACAnalysis in the oncology market. Our efforts to grow the oncology market for BRACAnalysis through the development of the ovarian cancer, carcinoma in situ, and triple-negative breast cancer indications again contributed significantly to growth this quarter.

As a reminder these indications increase the addressable oncology market for BRACAnalysis by approximately $200 million to an annual market potential of $650 million. In total, these indications grew 57% this quarter compared to the third quarter of last year.

We continue to educate physicians on the updated NCCN guidelines for triple-negative breast cancer and as a result are testing newly diagnosed patients, and also reaching patients which have been diagnosed prior to the updated guidelines. We believe the BRACAnalysis oncology market is approximately 45% penetrated, and anticipate continued opportunities for future growth.

I would also like to provide an update on our strategy to pilot cancer specialist teams in our oncology segment. As a reminder, this program added an 8% colon cancer specialist team to sell COLARIS, COLARIS AP, TheraGuide, and OnDose alongside what became a breast cancer specialist team focused solely on BRACAnalysis.

I’m pleased to report that this program is demonstrating strong results. Since the beginning of the program, both the pilot colon cancer and the breast cancer teams have grown revenue of close to twice the rate of national average and generated approximately $1.5 million of incremental revenue.

This increased focus has allowed these specialist teams to spend more time with the specialty physician groups, mammography centers or GI centers that see large numbers of high-risk patients. We are continuing to monitor the progress of this program and are planning on expanding the program in fiscal 2013.

In the women’s health segment, we again encountered headwinds of reselling and higher deductibles in the beginning of the calendar year. As a result, women’s health revenue declined 3% sequentially, but more importantly compared to the prior year, women’s health revenue grew 25%. We continue to deliver strong results from our initiatives to grow same-store sales in new territories in addition to our interactive marketing campaign.

In the third quarter, same store sales grew an impressive 24% year-over-year. The new territory split in the beginning of fiscal 2011 grew 23% year-over-year during the third quarter, and the new territory split in the beginning of fiscal 2012 grew 31% year-over-year.

Our interactive new campaign also continues to progress well. During the quarter we launched a new website called mySupport360. This has unique personalized resource to patients and provide information and encouragement about testing for hereditary forms of breast, ovarian, colon and endometrial cancers. The purpose of this website is to provide guidance, education and support through the testing process thereby empowering people to be proactive about their health and their wellness. We also continue to optimize our physician website, myriadpro.com, which has resulted in a 56% increase in revenue directly attributed to these online enquiries.

In total, during the third quarter, we’ve seen a 100% increase in our physician and patient website visits to over 30,000 visits per quarter. While we are happy to report that the utilization environments improve this quarter, these initiatives have been put in place in an effort to grow the women’s health segment independent of OB/GYN offices.

COLARIS and COLARIS AP continue to gain traction in the field. Revenue from these tests grew 51% during the third quarter benefiting from both the impact of PMS2 and an increase in overall demand. The impact of the PMS2 led to approximately 60% of the growth, and the loss from an increasing demand and market share gains.

In the third quarter, we presented a poster at the American College of Medical Genetics that showed their 14% of mutation carriers were attributed to mutation in the PMS2 gene. As a result conversations with payers on PMS2 reimbursement are progressing well with more than 90% of our top payers now reimbursing for our forging test. In addition, we received New York state approval for PMS2 in the third quarter, which will provide additional revenue growth in the fourth quarter and beyond.

Now, I would like to provide an update on the clinical research program for Prolaris. During the third quarter, our clinical research and commercialization efforts showed significant progress. Pro-003, our second study for the preprostatectomy indication was published in the British Journal of Cancer.

Additionally, Pro-004, our second study for the prostatectomy indication conducted in collaboration with UCSF was presented at ASCO GU and won the best poster award at the EAU annual congress, and has been submitted for publication to a major journal.

Pro-006, a 250 patient Phase IV study being preformed in conjunction with the clinical research organization that represents 25% of the Community of Urologists in United States is enrolling well. The study is designed to document the distribution of Prolaris scores and the resulting treatment decisions, both of which will be useful for reimbursement discussions.

As of the end of March, more than 180 patients have enrolled in the study, and we expect to complete enrollment during the fourth quarter. We’ve concluded laboratory processing for Pro-005 at 320 patient biopsy study conducted in collaboration with Duke University, which is designed to asses biochemical recurrence for patients selecting either radiation or prostatectomy.

For Pro-007, we have collected 25% of the biopsy samples which will eventually be correlated to biochemical recurrence. Lastly we signed a research collaboration agreement with Intermountain Healthcare covering numerous potential research projects that first of which will be Pro-008, a 200 patient biopsy data set evaluating biochemical recurrence after radical prostatectomy. In total after completion of all nine of these studies, we will have tested Prolaris on about 3500 patients.

Our commercialization efforts are also progressing well for Prolaris. We almost doubled our sales team, and now have hired 18 of the 20 field based personnel focused on Prolaris. Urologists have been well receptive to utilizing a new diagnostic tool and we receiving commercial samples from physicians. Our laboratory has been successfully producing Prolaris results or 95% of biopsy and post-prostatectomy samples which are much more challenging to work with on blood samples.

Our conversations with pairs have also been very positive, both from a clinical utility and the pricing perspective. By the end of the fourth quarter, we expect to have meetings completed and dossier reviews under way or completed with all of our major peers.

In summary, we are very pleased with the performance of the molecular diagnostic business. We have diligently focused on execution of first strategic initiative to grow our existing test in market, which led to strong financial results for the third quarter. We continue to see significant opportunities for growth from our existing products and in future from Prolaris.

I will now turn the call over to Jim.

James S. Evans

Thank you, Mark, and good afternoon, everyone. It is my pleasure to present a more detailed look at Myriad’s financial results for the third quarter of fiscal 2012. As Pete mentioned Myriad’s revenues for the fiscal third quarter were $129.8 million, an increase of 27% over the same period in the prior year.

Molecular diagnostic revenue grew 20% year-over-year to $123.3 million drive by increased sample volumes and new products. The contributional price to the third quarter revenue growth was not material.

A breakdown of revenue by product shows total BRACAnalysis revenue grew 17% to $105.9 million, compared to $90.3 million in the same period last year. Revenue from COLARIS and COLARIS AP increased 51% year-over-year to $11.2 million, and Myriad’s other molecular diagnostic products grew 34% year-over-year to $6.2 million. Companion diagnostic services grew 24% sequentially, which equaled $6.5 million.

Moving down the income statement, we see the financial impact from the exciting long term investments we are making to ensure ongoing growth. This quarter, research and development expense increased 76% to $11.8 million or approximately 9% of revenue as we have previously guided. This increased expenses associated with a large number of clinical research programs we are investing in to grow and diversify revenue in the future. These programs has been put in place not only further adoption of our existing products, including OnDose and Prolaris, but also further the development of important pipeline products such as the Melanoma Diagnostics, HRD, and lung cancer prognosis tests Pete mentioned earlier.

Third quarter SG&A expense was $54.7 million or approximately 42% of revenue. As a percentage of revenue, SG&A expense increased 30 basis points versus the prior year due to increased conditions associated with higher revenue. Investments in our European operations, administrative costs from Myriad RBM and a modest increase in bad debt expense. We expect bad debt to remain stable around this level in the coming quarters.

Operating income for the quarter was $46.1 million resulting in operating margin of approximately 36%. This level of operating margin represented a 150 basis point contraction sequentially due primarily to the impact of the accelerated commercial relation for Prolaris including the impact of doubling the sales force, increased investments in marketing, Myriad RBM, research and development, investment in European operations and higher bad debt expense.

The third quarter income tax rate was approximately 38% as compared to the 34% tax rate in the same period of the prior year. As a result of following, our fiscal 2011 tax returns during the third fiscal quarter will recognize additional R&D tax credits which lowered our effective tax rate this quarter.

Diluted weighted average shares outstanding were 86.5 million shares, during the third quarter we bought back $12 million worth of our stock, and add $161 million of the current $200 million repurchase authorization remaining. Diluted earnings per share were $0.34 for the third quarter of fiscal 2012, an increase of 10% over the $0.31 reported in the same period of the prior year.

Moving onto the balance sheet and cash flow, our annual cash and investments for the quarter were $466. 7 million. This compares to $428.3 million at the end of the second quarter. Cash from operating activities equals $40.7 million in the third quarter, and $100.01 million year-to-date.

Total cash generated accounting for the intact of excess cash benefits equaled $125.1 million year-to-date. [Hires] for the first nine months of fiscal 2012 included an increase in revenue of 23% year-over-year, and 17% growth in molecular diagnostic revenue. Operating income grew 15% as compared to last year, and earnings per share have grown 19%. We are pleased with our result thus far part and are now focused on delivering strong results in the fourth fiscal quarter.

Given our performance in the first nine months in the fiscal year, we have again increased our expectations to fiscal 2012. As Pete mentioned, revenue is now expected to grow 22% to 23% year-over-year, and equal to $492 to $496 million.

We’ve increased our guidance for molecular diagnostic revenue to $467 million to $471 million. We continue to expect Companion Diagnostic revenue of $24 million to $26 million.

Diluted earnings per share guidance is now about $1.29 to $1.31 for presenting 17% to 19% growth over fiscal 2011 earnings per share of $1.10. This EPS guidance takes into account the impact of stock buybacks completed to date, but do not factor the impact of any future buybacks.

Additionally we have increased our operating cash guidance net of excess tax benefits $240 million from $130 million. Other items considered in this guidance are as follows. Fourth quarter R&D expense is expected to be approximately 9% of revenue, as we continue to invest in our clinical research programs.

In regard to fourth quarter SG&A expense, we expect to incur the remaining $2.5 million of the $6 million investment in salaries and marketing in Europe, and also we recognized a full quarter impact of the additional urology sales representatives. And finally, the fourth quarter tax rate is expected to be 40%, we do not see this tax rate changing in the foreseeable future.

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

Rebecca Chambers

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

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Peter Lawson with Mizuho Securities USA. Please go ahead.

Rebecca Chambers

Peter, are you there?

Operator

I’ll just move onto the next question.

Rebecca Chambers

Thank you.

Operator

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

Scott Gleason – Stephens Inc.

Pete, Tim, Mark, thanks for taking my questions.

Peter D. Meldrum

It’s our pleasure.

Scott Gleason – Stephens Inc.

I guess, I’ll start off with, when we look at the BRACAnalysis, Pete, could you give us a little bit more granularity on what happened in Europe this quarter, was there a meaningful impact from a revenue standpoint from Europe, and can you give us a little bit. You mentioned that you had a plan. Can you give us a little bit more color there?

Peter D. Meldrum

Thank you. Yes we have and opened up the European labs in full operation and accepting samples. As I mentioned on the call, we had our ground, we’ve been cutting ceremonies in March. And so the operations have been in full swing for only about a quarter. And revenues are too smaller yet to breakout separately, but as Europe, we certainty, we provide additional color and guidance on the international revenues.

Scott Gleason – Stephens Inc.

Great, and then just a real quick follow-up when we look at the PMS2 gene and the COLARIS, can you give us a sense for what percent of inbound COLARIS orders are basically incorporated in the PMS2 genes, there?

Peter D. Meldrum

Sure, thanks, Scott. Over 80% of the tax rate now, physicians are requesting all 4 genes, so it’s clearly evolved to the point, whether that’s becoming a standard at this point. And again when data get published like what we get – we showed a 14% of mutation, mutation carriers attributed to the PMS2 gene. I think that increased a lot of sensitivity in order to people to gravitate towards that as well as a new standard of care.

Scott Gleason – Stephens Inc.

Great, thanks for taking my questions guys.

Operator

The next question comes from the line of John Wood with Jefferies. Please go ahead.

John Wood – Jefferies & Company, Inc

Hey, thanks a lot, good afternoon. I think it’s for Mark, so if you look at the COLARIS demand related growth over past few quarters or so, it’s been about 20%, just looking for some indication of how we should look at that assay once we lap the introduction with PMS2 gene, I mean there is 20%, the right level is at too high? Can it accelerate from there? Any color you can give on kind of the direction from the demand perspective would be wonderful?

Mark C. Capone

Sure. Thanks, John. Well, first, I’d like to just characterize again the size of the market. So we are talking about a product that has a $400 million market potential, we penetrate only about 10% of the market. So just from a big picture standpoint, there is still ample market opportunity for COLARIS, and so we continue to be excited about what this can represent over the long term, why – as we break this out and tease out the PMS2 part, which will start to become comp next year, the underlying demand is in that mid-teens to 20% type of range.

We continue to believe that there was opportunities exist, that increase is coming both from increases in demand and increases in market share because there are some other competitors in this market. And so, I mean we are comfortable that as you look in our mid-teen range, high-teens, that those opportunities continue to exist for COLARIS.

John Wood – Jefferies & Company, Inc

All right, that’s good color. Thank you. My follow-up is, I think for Pete. So on the capital reallocation front, so you guys just kind of slowed down the pace of buyback over the past couple of quarters. Just looking for any perspective into that, does that have to do with the M&A pipeline, does that have to do with valuation – I’d love to hear any update from the board level on the cash dividend policy?

Peter D. Meldrum

Yes, thank you. Myriad is committed first of all to reinvest our cash in growing the business, and as I mentioned on the call we have three very important strategic initiatives which will diversify revenues and grow revenues for the long term.

However Myriad does generate a significant amount of cash, and we have enough cash generation to return cash to the shareholders, and we’re very committed to doing that.

As Jim mentioned today, we’ve repurchased over $340 million worth of Myriad stock and have an additional about $160 million authorized from the board. The dividend topic has come up from time-to-time as we meet with investors; particularly over the last several months, and I will certainly share these conversation with our board at an upcoming board meeting.

As our board continues to weigh the pros and cons of either issuing a dividend during the stock buyback or that I think it is also appropriate, a combination of both dividend and stock buyback.

John Wood – Jefferies & Company, Inc

Okay, thanks for the color.

Operator

The next question comes from the line of Amanda Murphy with William Blair. Please go ahead.

Amanda Murphy – William Blair & Company, L.L.C.

Hi, thanks. I had a question on the guidance increase, just curious obviously you had a number of out-performance areas in the quarter, but as you look through the year, what kind of gives you the confidence and the guidance to be specific with in terms of sales, what is the specificity in terms of the driver?

Peter D. Meldrum

Thank you. Let me start off, and I’ll ask Mark to add some additional comments as well. As we look at the guidance going forward, we have noticed that we have been very successful with a number of initiatives to launch and growing existing products and expanding existing markets.

And I think Prolaris is a good example of that, two quarters in a row now, we’ve north of 50% revenue growth. I think we are also very excited about Prolaris, and even though that’s a relatively new, as Mark pointed out, we have seen very good receptivity among Urologists. So I think those internal initiatives give us the most confidence in terms of increasing guidance for the future.

But certainly we are seeing increased physician office visits and we certainly benefit from that as well.

Mark C. Capone

Yeah, I might just add. Thanks, Amanda, what we continually look at are – what are the sequential growth rates, how do those low qualities to what we’ve seen historically. And so we model those historically, and what we hear from the field about activity that’s going on back in course, obviously continue to be the drivers in most of that in Q4.

And we’ve worked out that information, and feel comfortable with the guidance that we have provided that the sequential growth rates that would be necessary to meet that guidance or things that we feel good about. So we’ve lot of data points internally and from the field that help us provide that guidance.

Again BRACAnalysis market, only 45% penetrated, and oncology less than 7% penetrated, and women’s health and colon is less than 10% penetrated, still ample opportunities for growth in all those markets. And with the initiatives that we put in place we think we’re continually tapping into those growth potential. So again, we feel confident with the guidance.

Amanda Murphy – William Blair & Company, L.L.C.

Got it. And then I guess as a follow up to that, there has been a lot of talk about what’s going on with Medicare related reimbursement, but curious again kind of thinking about the year, revenue trajectory, how do you guys think about private payers, especially as you’re launching new tasks and I think you usually get a year or so in grace period, but curious has the newer test become a bigger component of your revenue, how you think about that?

Peter D. Meldrum

So I think for Prolaris, as I mentioned, we’re really right in the midst of the payer conversations, which would include Medicare. I think what we’ve been encouraged by what we’ve seen from CMS decisions around pricing over the last quarter or so, is that they had consistently priced products according to value. So a $3,000 price points have been relatively consistent with CMS pricing. And so continually CMS talks about and recognizes importance of valued-based pricing, if in fact some of these products like Prolaris, which offers the opportunity to save the healthcare system substantial amounts of money, if those products are going to continue to be developed.

And so we’ve been encouraged by the environment for pricing and the CMS discussions that we’ve had and we think the clinical dossier that we will be providing for medicare is rather substantial. And so we are looking forward to those conversations and we think Prolaris is very well placed from the standpoint of the $3,400 list price point that will be the starting point for our discussions.

As it relates reimbursement around our other products, BRACAnalysis and COLARIS those conversations as you aware will continue. I think our next discussion point around that will be the July clinical lab fee schedule public hearing that CMS will schedule. We continue to believe that our products make sense beyond the clinical laboratory fee schedule, since they are not physician interpreted tests. And so, again, all of our conversations that we had with CMS and around the topic of reimbursement continue to make us believe that this should be reimbursed there, and that our products are well positioned from a reimbursement standpoint?

Amanda Murphy – William Blair & Company, L.L.C.

Okay, thanks very much.

Operator

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

Michael Yee – RBC Capital Markets

Hey, group, thanks. Let me be the first to congratulate you on a good quarter. But my question actually is digging a little bit into Prolaris and reimbursement, so following up here a little bit, what is the time line to actually get in a CMS answer on a Prolaris? And then secondly, what would be the breakout of private pay versus CMS reimbursent on Prolaris? Thanks.

Peter D. Meldrum

Sure, thanks Michael. As I mentioned in my opening comments, this next quarter we will be having conversations with all of our major payers including CMS, and those will be additional conversations where can present all of clinical data, and the value proposition behind the product.

And so it’s little early to make any additional commentary as to what those conversations will be like. We have had preliminary discussions with those payers and with consultants. We generally believe that the value proportions is very strong for Prolaris, so excited about having those conversations with all those pairs including CMS.

CMS will probably represent about 60% of the patient population that is appropriate for Prolaris, so obviously they are much more important part of that mix. Then for our current portfolio which is more like 10%, and we so recognize the importance of that catalog. If you would reflect historically on how long did it take CMS to ultimately make decisions with all these type of molecular diagnostics. Those decisions can take anywhere from 6 to 24 months, and obviously we’re doing all we can to make sure we’re – sure we ended that timeframe. But you’re never really sure that, that’s going to look like, and so we sit down, put the data in our hands, and begin to see what other questions they might have.

Michael Yee – RBC Capital Markets

Okay, thanks.

Operator

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

William T. Cook – Piper Jaffray, Inc.

Thanks, good afternoon everybody. I wanted to – I was trying to pick up on one of Amanda’s questions, and Pete, when we consider the guidance range for the quarter, on the lower end of that, you’re basically forecasting a flat sequential growth, and if my model is correct here, I think we’ve only had that type of scenario play out in something like two years of the past decade or they’re about – and so I guess, first question, is there something in the market that we’re seeing – or it’s just the business should go flatter in fourth quarter?

Peter D. Meldrum

Thank you, Bill. Your analysis is correct, the lower end of the guidance would anticipate a flat quarter. But again I think historically, Myriad has tried to provide relatively conservative guidance, and I wouldn’t read into anything else in that guidance number.

William T. Cook – Piper Jaffray, Inc.

Got it. And then secondly, and then perhaps it’s one for is Mark. Just thinking a little bit about Europe, can you just refresh for us, Mark, how you’re thinking about the overall size of the market, and then the piece the Myriad is directly addressing right now? And I know one of your strategies was to go after some lab business with labs that are currently are not making money, and then in fact, I think in some cases you’re loosing quite a bit.

So may be you could outline for us, kind of the time of sky, the applicable market, and then kind of what the low-hanging fruit is? Thank you.

Mark C. Capone

Thank you. If you look at the overall diagnostic market in Europe, that’s about 75% the size of the U.S. market. So it certainly represents a significant opportunity. In Europe today there are probably a market size of about 100 million annually and BRACAnalysis and COLARIS testing. So again it's a significant opportunity for Myriad to come in and take market share away rather than trying to build out a market from scratch. Our discussions are progressing well throughout the region, of course our marketing strategy as you eluded is to address key oncology and generic opinion leaders, major hospitals and networks within the country that do a large portion of the testing. And also physicians that order the molecular diagnostic testing directly. And with our laboratory now open, we are moving forward aggressively on all three of these fronts and I think the discussions that we’ve had with physician, hospitals and the networks are proceeding well. So we are very pleased with the progress we’ve made today.

William T. Cook – Piper Jaffray, Inc.

Great, thanks guys.

Operator

Next question comes from the line of Doug Schenkel with Cowen and Co.. Please go ahead.

Doug Schenkel – Cowen and Co.

Yeah, guys and thanks for taking the questions. You talked a good deal about the strength of the quarter for COLARIS and for BRAC. But one thing that I don't think was touched on real specially was the strength of other molecular diagnostics which I believe were up close to 30% year-over-year in the quarter. Is that mostly Prolaris I'm just curious if there is anything there of note to talk about, that would be interesting of course if Prolaris is a key contributor to that out performance and actually I think it was up close to 35%?

Peter D. Meldrum

Yeah, yeah, I think you have those numbers correct, as far as the growth of that other bucket that we provide. Prolaris, we are receiving samples for Prolaris, but it’s still very early, at this point, as we still need to work through some of those reimbursement issues that we’ve talked about. So it was a large driver of growth during the quarter in stead all the rest of our tests in that other bucket performed very well during the third quarter. And so we continue to see growth among those other tests driving that other bucket with a lot of potential performers, but that really was not one of the key drivers during the third quarter.

Doug Schenkel – Cowen and Co.

Okay. Thanks for that. And then, in fiscal Q1, you came into the year with R&D spend at around $8.5 million, seems like you are going to end the year around $12 million in fiscal Q4. We continue to assume that you’re going to spend at those levels for the foreseeable future or if you continue to outperform, will you, potentially use that as an opportunity to keep investing in the pipeline at higher levels?

Mark C. Capone

Thank you. Myriad does have three industry-leading product pipeline, as I mentioned, with 13 molecular diagnostic tests under development. And we’re very committed to reinvesting in the business and growing the business for the future. We did see as you pointed out strong investment in R&D this year, I think we are comfortable with the 9% of revenue level. So I think you see revenue by the end of – sorry, research expense growth that in proportion with revenues next year, but I don’t think you are going to see another jump as a percentage of revenue beyond the 9% level.

Doug Schenkel – Cowen and Co.

Okay. Thanks for the color. Actually if I can sneak in quick one. On reimbursement I just want to confirm that you guys still have not received a survey pursuant to moving BRAC over the physician fee schedule?

Mark C. Capone

Yeah thanks to that get advantage to equity but we’ve not received any surveys that would be the initial step in any consideration for physician fee schedule placement. So we have not received any surveys.

Doug Schenkel – Cowen and Co.

Okay, thanks again.

Operator

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

Tycho W. Peterson – JPMorgan Securities LLC

Hi, good afternoon. If we look at new indication growth for BRAC, I think you said it was up 57%, it’s a noticeable acceleration I think you’d said 41% last quarter. Can you just talk to whether or may be we’re seeing an inflection point here, some of the new indications and underlying that are you stepping up your sales and marketing initiatives around some of your indications.

Mark C. Capone

Yeah, thanks Tycho. You are correct. We saw 57% growth attributed to the combination of those three strategies, we’ve been pursuing all year. Each of those have really contributed to that growth, I think probably the one that we highlighted and move further when the others were the triple negative indication. And got one has been, we’ve been particularly pleased with the speed with which physicians have adopted that a new indication. And so, I think we’re going to continue to see contributions from all of those. Again, we think we are only 45% penetrated, so there is ample opportunity for even a traditional indications, but as well these three indications we’ve yet to fully realize the growth potential in those. So we continue to expect to see that on a go forward basis.

Tycho W. Peterson – JPMorgan Securities LLC

And then I think last quarter you talked on rules based about the profitability they’re coming up a little bit late as a reflection of maybe some timing of contracts and geographic mix. Can you just talk a little bit about below the revenue line for the Rules-Based business, where the profitability is in trajectory there?

Peter D. Meldrum

Yeah. I think when we announced the Rules-Based Medicine acquisition, we indicated that we felt it would become accretive after about two years. And I think we’re still on schedule for achieving that goal. They will have a small launch this year, but that was budgeted in our forecast from the beginning.

Many of the cost associated with RBM are more of a fixed type, and so when we look at how that is impacting our gross margins, it really depends on what they are able to do on the top line, and we saw a stronger top line revenue number this quarter from RBM, which helped drive an improved gross margin percentage. And we expect that to fluctuate a little bit from quarter-to-quarter depending on the timing of those contracts, but we’re excited about the potential of RBM, and its contribution to the company as a whole.

Tycho W. Peterson – JPMorgan Securities LLC

And anything new on pipeline there for VeriPsych, any new other product set worth mentioning?

Peter D. Meldrum

Most of the peers working very aggressively on a number of the potential products from Myriad RBM. And we will be addressing some of those in future conference calls. With regard to VeriPsych specifically, we have done our discussions with the military as you’re aware. The military has now received the data from the VeriPsych study, and they are currently analyzing that data. I don’t have a specific timeline for a decision. But we are very interested in the military’s analysis, and we’ll certainly keep the market updated as we learn more on the outcome of that study and their decision around that.

Tycho W. Peterson – JPMorgan Securities LLC

Okay. Thank you.

Operator

Your next question comes from the line of David Ferreiro with Oppenheimer.

David Ferreiro – Oppenheimer Securities

Sure. Thank you. I just wondered if you can make just a comment about Prolaris, considering the amount of money that you’ve spent investing in this product and the clinical data that you’ve generated and also the early marketing efforts you’ve done, if you can compare it to the BRAC launch and maybe what you’ve learned from the BRAC launch and now you can make the Prolaris launch even better and contribute to revenue a little quicker?

Peter D. Meldrum

Sure. Thank you, David. So far we are very pleased with how Prolaris has gone. As you mentioned, we are in the early stages of both adoption and payer discussions, but we are very pleased with the reception that we’ve had in urologists mind that Prolaris clearly has a road to play, because I understand the tools that they currently have at their disposal are relatively blunt in sorting out aggressive from indolent prostate cancer. So, so far we have been very pleased with that.

You were right. One of our goals is to make sure that as we look at new product launches that we have entirely changed the adoption curve profiles that we’ve historically seen at Myriad, which for BRACAnalysis was a rather slow build. And so our strategy is to take the learnings we’ve had from our early molecular diagnostic days, apply that to a significant change in the adoption curve.

One of the critical differences that you can see is just the wealth of clinical data that we’ve already generated and continue to generate. That’s a very different profile than what you would have seen when we initially launched BRACAnalysis, that still had some data that – on medical management that had yet to be collected. And so really is that clinical data that’s going to make a fundamental difference in those physician’s option and payer reimbursement. And we think this 35,000 patient outcomes that we’re correlating to is substantial size, in fact if you were to look at just a pharmaceutical product in an prostate cancer space, the number of patients that would be in an Phase III study is never near the size of the studies that we’ve conducted on Prolaris.

And so we continue to be encouraged that the health economic story is strong, the clinical data is strong and that this can reach reduction curves that are fundamentally different than what we might have historically seen.

David Ferreiro – Oppenheimer Securities

Great. And then just one sort of and a follow-up, I was wondering if you can comment, I think you’ve already said that it’s early days in Europe. Maybe you can comment on how your interaction with payers over there have gone in terms of reimbursement?

Peter D. Meldrum

With regards to the operations in Europe, we’re fortunate and that we have reimbursement in all size of our major market countries for BRACAnalysis, Prolaris and COLARIS AP. We’re very excited about those products, but if I can tell you on what Mark said on Prolaris, even though we’re in the process of seeking reimbursement and don’t yet had reimbursement for Prolaris, the interest in that product from key opinion leaders and physicians in hospitals in Europe has been absolutely amazing. They really get it and they get it quickly. They see the value and the benefit both to the patient, and lowering the overall healthcare cost. So I think we’re very excited about Prolaris right now in terms of reimbursement in Europe.

David Ferreiro – Oppenheimer Securities

Thank you very much.

Operator

The next question is from the line of Isaac Ro with Goldman Sachs. Please go ahead.

Isaac Ro – Goldman Sachs

Hi, good afternoon, thanks for taking the question. Most of my product related questions have been answered, so I do want to just ask a question on the financials and first one would be on just sort of the EBIT margins, obviously you guys have made some considerable investments in the franchise, diversify the product portfolio in few quarters. And as a result operating margins have come in a little bit. Just wondering kind of as we look out on the horizon, the trajectory towards stabilization and maybe reexpansion of that operating margin over the long term. How do you look at that?

Mark C. Capone

Well, I think you are right. We have made a conservative effort to make investments in those key areas that we have talked about on the call. We do expect to see areas that we will be able to leverage in the future and we’d hope to be able to see those operating margins stabilizing there and then actually start moving to expand in the future. That’s all going to be driven off or to payback on these investments that we’ve been making up to this point. So as we see them start to approve we would expect that we would be able to see that improved operating margin and running through all way to the bottom line. But it is a declaration that the payback that we get on these investments.

Isaac Ro – Goldman Sachs

Okay, and just as a follow-up, if I look at sort of the tax planning side of things, I was wondering if there is anything, European operations have or may be help you on the long term, bringing that tax rate down. Is there something that you will do all together that sort of get back into a lower tax bracket?

Peter D. Meldrum

Yeah, I think we do have great opportunity with the European operations, as they start to grow, one of the reasons that we have targeted our Swiss headquarters was because of the aggressive tax rates that they offer there and we hope to be able to leverage that as we grow the operations over in Europe. But we are starting to recognize profits there to be able to have those – the benefit of the tax rate. So, it will take a little while before we get to that point where the Europe operations are throwing off enough profit that it helps impact the overall tax rate for the entire company.

Rebecca Chambers

And Isaac, as a reminder, in the fourth quarter, we do expect approximately 40% ETR and we expect that rate to continue for the near term.

Isaac Ro – Goldman Sachs

Yeah, understood. Thank you.

Operator

And our final question comes from the line of Kevin DeGeeter with Ladenburg Thalmann. Please go ahead.

Kevin DeGeeter – Ladenburg Thalmann Securities

Yes. I want to add my congratulations on a very nice quarter. And two quick questions to close out. Could you maybe provide a little granularity on the source of the strong same-store sales growth within the women’s health franchise? Is that translating through from the online media side? Is there specific change to the message? And how should we think about sort of a sustainable growth rate for the women’s health sales force?

Mark C. Capone

Thanks, Kevin. I think for the same-store sales, we mentioned a couple calls ago that one of the major focus we have is to try to increase the frequency of ordering for physicians that have shown a propensity to order, but generally order at a rate much lower what would be recommended by professional society guidelines. So we put a number of initiatives in place that tried to just focus on increasing the frequency of ordering from those physicians. I think what we’ve seen in this quarter is those initiatives are bearing fruits. Their teams are applying lean systems types technologies to work hand in hand with physician offices to help them identify patients that are appropriate.

Typically, what we will see in a physicians office, by guideline, you would expect somewhere between 4% to 6% of patients that come into the office to be appropriate, but even if 4% to 6% it’s clearly the minority of patients in that physicians office. And so ways in which the physician’s office could be more effective at identifying patients and letting them follow the cracks. All though it’s high sort of things we are doing that and driving those same store sales initiatives. As the future potential growth, again this is a market that we’ve only penetrated 7% and significant opportunities for growth in same store and new store sales. And so we are going to continue to look at these initiatives that have proven to be successful and continue to expand those.

I think a lot of comment I make, I’m going to interact with media (inaudible) that, we’ve began some more pilot type activities and those have been very successful and you’ll see and continue to now expand those into more national types of initiatives over the coming quarters. So while they keep contribute to what we saw in this quarter, I think as we expand those nationality, those have the opportunity to provide more meaningful growth on a larger scale.

Kevin DeGeeter – Ladenburg Thalmann Securities

Terrific and then just one more if I may, can you kind of give us your current thinking on M&A strategy? Company has done a fair number of product and licensing and acquisition transaction from the last 12 months, also some strategic transactions as well. Can you just give a sense of where the priorities are and – frankly bandwidth on further expansion pipeline which is and spend it very rapidly here in the last 18 months.

Peter D. Meldrum

Yes, thank you. As I mentioned the company is very committed to go on your business for the future and diversifying our product portfolio. And we are doing that by investing in R&D certainly and we are seeing that R&D investment throughout this year, but we’re also very aggressive at looking at the inlicensing technologies and products or actual acquisitions of the companies. And so we remained very active on the M&A front, we look very closely at a number of opportunities. Unfortunately, there aren’t a lot of significant opportunities in our space. So there isn’t a lot there to choose from. And hurdle rate for doing an acquisition of a company is actually relatively high, but we are committed to it, we are exited about it, but there just isn’t a lot of opportunity in the molecular diagnostic area.

In terms of our financial resources, obviously, we generate a lot of cash. We have $466 million on the balance sheet, unused borrowing capacity. So there is no financial constraint to M&A appetite. And I think as a company, we feel we could do another acquisition and still have the bandwidth internally to handle it, if in fact we found a company that we got exited about and wanted to consider acquiring.

Kevin DeGeeter – Ladenburg Thalmann Securities

Terrific. Thanks for the added color.

Operator

Ladies and Gentlemen, that is all the time we have for questions today. Ms. Chambers, you may now continue with the presentation or your closing remarks.

Rebecca Chambers

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

Operator

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

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

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

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

This Transcript
All Transcripts