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Myriad Genetics, Inc. (NASDAQ:MYGN)

Q2 FY08 Earnings Call

February 5, 2008, 10:00 AM ET

Executives

Peter D. Meldrum - President and CEO

James S. Evans - CFO

Gregory C. Critchfield, M.D. - President

Adrian N. Hobden, Ph.D. - President

Analysts

Geoffrey Meacham, Ph.D. - JP Morgan

Annabel Samimy - UBS

Charles Duncan, Ph.D. - JMP Securities

William T. Ho - Bank of America Securities

Mark Monane - Needham & Company

Jeff Goater - Cowen and Company

Lucy Lu - Citigroup

Operator

Good morning. My name is Janet and I will be your conference operator today. At this time, I would like to welcome everyone to the Myriad Genetics' Second Quarter Fiscal 2008 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. [Operator Instructions] Thank you. Mr. Meldrum, you may begin your conference.

Peter D. Meldrum - President and Chief Executive Officer

Thank you. Good morning and welcome to the Myriad Genetics earnings conference call for our second fiscal quarter ended December 31, 2007. My name is Peter Meldrum, and I am the President and Chief Executive Officer. I am joined today by Jim Evans, our Chief Financial Officer; Gregory Critchfield, President of Myriad Genetic Laboratories and Adrian Hobden, President of Myriad Pharmaceuticals.

I will begin the discussion this morning with a brief review of the past quarter and then will be followed by Mr. Evans who will discuss our financial results. Dr. Critchfield will review the company's molecular diagnostics business and Dr. Hobden will discuss our drug development activities. At the end of the presentation, I will turn the call over to the operator for the question and answer period.

Please note that some of the information presented here today may contain projections or other forward-looking statements regarding the future events or future financial performance of the company. These statements are based on management's current expectations and 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.

The financial results for our second quarter which ended December 31, 2007, represent a truly outstanding performance by the company and its 900 talented employees. Once again, our molecular diagnostic business achieved record revenues and record gross profit margins, and as a result recorded a record net operating profit of over $20 million. Our molecular diagnostic revenues grew to $53.1 million for the three months ended December 31, 2007 as compared to $34.2 million in the same period of the prior year, an increase of over 55%.

With the exception MELARIS, which grew a respectable 8.6% last quarter, we experienced double-digit quarter-to-quarter growth from all of our molecular diagnostic products. Even though it is early in our Direct-to-Consumer marketing campaign, we are definitely seeing a strong bolus of samples from the Northeast region.

The DTC campaign is clearly having an impact on our revenues and was a major contributor to our exceptional revenue growth this quarter. Dr. Critchfield will discuss the impact of the campaign in more detail later on in the call.

Our gross profit margins continue to strengthen, rising 86% for our second fiscal quarter compared to 78% for the same period of the prior year. The implementation of new, more efficient technologies in our laboratories and economies to scale are the principal drivers of these margin improvements. We believe that these gross profit margins are sustainable for the foreseeable future.

Obviously, molecular diagnostics is a very exciting business and one that Myriad has pioneered with commercial products in both the predictive medicine and personalized medicine areas. We believe that this new diagnostic field represents not only a significant near-term opportunity but the future of medicine. Historically, medicine is focused on treating disease, not preventing disease. Typically, we wait for someone to get sick and only then do we attempt to treat their illness. This reactive approach to the healthcare management of patients instead of a more proactive preventive strategy is not only less beneficial to patients, but considerably more expensive to our healthcare system.

The future opportunities in medicine lie in our ability to identify individuals who, based on their genetic makeup had a genetic pre-decision... pre-disposition or heightened risk of developing of major disease later in life. Armed with this information, physicians can take action to prevent disease, reduce the risk of disease or delay the onset of disease in these high risk patients. The advent of predictive medicine will save countless additional lives, improve the quality of life of patients and help reduce the skyrocketing cost of our healthcare system.

Additionally, there are frequently a number of different causes for each particular disease and often many different therapeutic approaches in treating them. We are also aware that patients respond differently to drugs based on their genetic differences. Using this knowledge, we can provide critical information to physicians, so that they can put the patient on the correct drug at the optimal dosage and for the appropriate period of time. This new healthcare paradigm complements our goal of saving lives, improving the quality of life and saving precious healthcare dollars.

Myriad's mission is to remain a leader in this exciting new industry. By discovering, developing and marketing, novel molecular diagnostic products that enable physicians to make more informed decisions concerning the management of their patients' healthcare.

And in doing so, help them live longer, healthier lives. Myriad continues to be a pioneer in bringing about the future of healthcare, and we are excited about our future as a major player in this important, growing industry.

On the therapeutic front, the company continues to make excellent progress in advancing its drug candidates toward market approval. I am pleased to report that the two Flurizan Phase 3 clinical studies are proceeding well and remain on schedule. The independent data monitoring committee meets every quarter and analyzes the safety data from our Phase 3 trail.

At their last meeting in January, they indicated to the company that they had no safety concerns and no safety issues about Flurizan and encouraged us to continue the study. The U.S. trail will be completed on March 30, 2008. Because this was a large 18 month study conducted at over 130 sites, there is a lot of data and it will take us several months to collect the data and lock the database. Therefore, we plan on providing top line results for this study in June 2008.

I am also pleased to report, that we will be presenting a more complete analysis of the Phase 3 data at the International Congress on Alzheimer's disease in Chicago during the week of July 26, 2008.

The European Phase 3 study is approximately six months behind the U.S. study and will conclude on October 20, 2008. After the data has been collected, cleaned and the database locked, we expect to report our top line results for that study in December 2008. I believe that it is important to note that the dropout rate for both of our Flurizan Phase 3 studies remains below the 40% historical dropout rate for Alzheimer's disease studies. Additionally, over half of the participants in the U.S. Phase 3 study have already completed the 18 month study period. And I am pleased to report that over 80% of these patients have elected to remain on Flurizan in the open label portion of the study. Needless to say, we are very pleased with the progress of both our Phase 3 clinical studies on Flurizan.

Now it is my pleasure to turn the call over to our CFO, Jim Evans.

James S. Evans - Chief Financial Officer

Thank you, Pete. It's my pleasure to present a more detailed look at Myriad's financial results for our second fiscal quarter ended December 31, 2007.

Myriad's total revenues for the quarter ended December 31 were $56.7 million as compared to $37.1 million for the same period of the prior year. Drilling down into this impressive 53% growth, we find that both components of total revenue: molecular diagnostic revenue and research revenue, contributed to this unprecedented top line performance.

As Pete has already mentioned, molecular diagnostic revenues for the quarter were $53.1 million, which is an increase of $18.9 million over the same quarter of our previous fiscal year.

On a percentage basis, this is a growth of 55%. Sequentially, molecular diagnostic revenues grew 15% during our second quarter of fiscal 2008 as compared to our first quarter of this fiscal year. Pete has touched on the main drivers of this growth, but suffice it to say we are very satisfied with these results as compared to the Thomson First Call consensus estimate of $50 million. Sample flows continue to look strong during the current quarter.

Myriad's high growth technology has shown continued improvement and efficiency gains as can be seen in our gross margins for the quarter ended December 31, 2007.

Cost to produce our molecular diagnostic revenues for the December 31, 2007 quarter were only $162,000 more than the total cost of goods sold for the quarter ended December 31, 2006. In other words, Myriad was able to increase molecular diagnostic revenues by 55% while only increasing cost to produce those revenues by 2%. Net operating profits continue to be very impressive with anticipated improvements from the current levels as the final cost of the Consumer Awareness Campaign are pushed through the income statement in our third fiscal quarter and as our newest sales representatives become fully trained and integrated.

Research and development expenses for the quarter ended December 31, 2007 were $27.3 million compared to $24.8 million in the same quarter of the prior year. Research and development was primarily comprised of the costs associated with our 7 human clinical studies. The largest component of these costs was associated with our Alzheimer's disease clinical trials. In addition to the two phase 3 double blind placebo controlled trials, Myriad has also initiated an open label study for Flurizan. This study is available for all trail participants who at the conclusion of their 18 months in the Phase 3 trial wish to remain on drug or be moved from placebo to drug. The study requires most of the same types of expenditures that are incurred in the blinded trial. For example, cost of drug compound, medical supervision and safety data monitoring.

We are very encouraged that over 80% of the participants that have completed the Phase 3 trial have elected to continue in the open label study. The result of this high participation rate is that our R&D expenses will not be dramatically reduced at the completion of the Phase 3 trial in March of this year. Additionally, we continue to invest heavily in developing new molecular diagnostic products and plan on launching at least one additional new product this year.

Since we expect to move additional drug candidates into the clinic and advance our current clinical program... our current clinical drug program as well as develop new molecular diagnostic products, we believe our research and development expenses will continue to fluctuate over the next several quarters.

Selling, general and administrative expenses for the quarter ended December 31, 2007 were $30.5 million compared to $26.5 million for the prior quarter ended December 30, 2007. The 15% increase over the prior quarter was attributable to expenses incurred to support the 15% growth in our molecular diagnostic revenues, including sales commissions, our DTC campaign, the expansion of our OB/GYN sales force and $1.7 million of non-cash stock option expense.

Additionally, we have recently initiated a number of programs that we believe will improve our customer service and turnaround time. These initiatives work to streamline the reimbursement process with insurance companies. As a result, Myriad has taken on some additional risks by not seeking insurance preauthorization before a sample is processed. Consequently, our bad debt has seen an increase from 4% to a respectable 5% of sales. This modest increase in bad debt has allowed us to meet the turnaround time requirements needed by oncology surgeons to make appropriate, timely intervention decisions. We believe that these programs have more than paid for themselves with the increase in revenues from that sector of our market.

We expect our selling, general and administrative expenses will continue to increase depending on a variety of factors, including the number and scope of new product launches, growth in molecular diagnostic revenue and future non-cash stock option expense.

Our net loss for the quarter ended December 31, 2007 was $5.1 million or $0.11 per share. This favorable result represents a 48% improvement over the same quarter in the prior year, which was $8.8 million or $0.22 per share and also beat the Thomson First Call consensus loss of $7.8 million or $0.17 per share. Stock option expense for the quarter ended December 31, 2007 was $0.09 per share compared to $0.04 per share for the prior year.

Moving now to the balance sheet. Cash, cash equivalents and marketable investment securities were a remarkable $303 million at December 31, 2007. This compares favorably to $203.5 million at December 31, 2006. Myriad's conservative investment policy requires us to invest in instruments with a quality rating of P1 or better by Moody's, A1 or better by Standard & Poor's and F1 or better by Fitch as well as long-term ratings of at least A. I am pleased to report that we had no mortgage-backed or asset-backed securities in Myriad's investment portfolio. We believe that our investments continue to be sound with preservation of capital as our number one priority.

Our accounts receivable are of a high quality and the average collection period, as measured by the days... the number of days sales outstanding, remained at 65 days for the quarter ended December 31, 2007, unchanged from the quarter ended September 30, 2007.

And finally to continue a long held tradition, it is my pleasure to state that Myriad has no debt and no convertible securities and that the total number of shares outstanding at December 31, 2007 was a modest 44.4 million shares.

With that, I will now turn the call over to Dr. Greg Critchfield.

Gregory C. Critchfield, M.D. - President

Thank you, Jim. It is a great pleasure to speak with you today about our molecular diagnostics business. As Jim mentioned, quarter two fiscal 08 revenues for our molecular diagnostics business were $53.1 million, a new record, representing a 55% increase over our previous year's quarter two revenue of $34.2 million. This was achieved with a 15% quarter-to-quarter increase in revenue for the second quarter of fiscal year 2008.

As testing volumes grow, we continue to make improvements to efficiently process the samples and to improve the quality of our testing procedures. We continue to implement higher throughput instruments and robots that allow us to achieve excellent turnaround time for our tests with the in-laboratory analysis averaging between 7 and 10 days.

We deploy additional process improvements through the application of lean systems quality paradigms. Our database migration to Oracle has demonstrated greater reliability and provides massive scalability of our systems as we continue to grow our testing volumes. We have built a software testing environment that permits us to develop future improvements in our systems independent of current production, making installation into our production environment more predictable.

We believe that all these operational efforts, both in our laboratory operations and our information technology architecture, position us well to support the exceptional growth that we are experiencing as the leader in molecular diagnostics.

A number of factors have contributed to the outstanding growth in molecular diagnostic revenues. The recent expansion of our sales force into the OB/GYN market segment, recent guidelines by the society of gynecological oncologist that expands the scope of patients to be considered for genetic testing and the bolus of growth from the Consumer Awareness Campaign activities launched upon in the Northeast United States.

During the last... during the past quarter, we completed a substantial expansion of our women's health sales force to raise the awareness of our products among OB/GYN physicians. As of December 31, 2007, the number of individuals in our sales organization now exceeds 200 with one quarter of these individuals calling on the OB/GYN market segment. Our experience shows that new OB/GYN sales representatives become profitable as rapidly as new oncology sales representatives. The large sales force expansion allows us to substantially increase our visibility among medical oncologists, surgeons and now OB/GYN physicians. We will not add any new sales reps this fiscal year, but are considering a modest expansion of our OB/GYN sales force during the next fiscal year.

Myriad has certainly benefited from the new guidelines published recently by the society of gynecological oncologists. SGO is an organization whose members perform surgical management of patients with gynecologic cancers. The SGO guidelines were developed through a comprehensive literature review and through discussions with gynecological oncologists, medical oncologists, genetic counselors and other gynecologic cancer professionals and are very important to OB/GYN physicians.

The new SGO guidelines specifically emphasize the importance of two of Myriad's test: BRACAnalysis and COLARIS. The guidelines help practitioners identify patients at risk for hereditary breast, colorectal, ovarian and uterine cancer.

Looking at BRACAnalysis for example, individuals with a personal history of breast or ovarian cancer, women who have a close relative with breast cancer aged 50 or ovarian cancer at any age should be tested for COLARIS. The guidelines specify that individuals diagnosed with endometrial or colorectal cancer before age 50 can benefit from testing. The guidelines further discuss the rationale for testing individuals who do not have a particularly strong family history of breast or ovarian cancer or colon or uterine cancer, because their history may be influenced by adoptions in the family, small numbers of individuals in the family tree or small numbers of females in the family. Finally the guidelines emphasize the importance of uterine cancer in evaluating women for the hereditary nonpolyposis colorectal cancer syndrome.

In summary, the guidelines give practitioners the assistance they need to properly identify individuals in their practices who are good candidates for testing.

Strong growth is also occurring as a result of Myriad's Direct-to-Consumer campaign in Northeastern United States. The campaign, which will continue through this month and into March, has the goal of increasing the number of physicians that are routinely identifying individuals at risk for hereditary breast and ovarian cancer. Once an individual is identified, healthcare providers discuss the individual's risk of hereditary cancer and the benefits that BRACAnalysis confers. This knowledge empowers the patient to access potentially life saving measures. We have had tens of thousands of visits to our website because of the DTC campaign. Individuals are spending more than twice as much time on the BRACnow website than is usual with most of the time spent on pages that help find a healthcare provider or in reading frequently asked questions.

We are very pleased and a little surprised to see such a positive impact on revenues from DTC activities during our second fiscal quarter. We will continue to examine the impact of the campaign and are considering additional regional campaigns in other parts of the country as we document the success of this campaign. The value of Myriad's predictive cancer products grows because knowing who is at risk of disease later in life and being able to effect interventions that make a difference in saving lives... in being able to effect interventions makes a difference in saving lives and in saving healthcare dollars. This utility is recognized by medical specialty societies, by managed care and other insurance organizations and importantly, by patients.

Our products give information that effectively focuses healthcare resources where the resources can do the most good, delaying the onset of disease or preventing it. Our molecular diagnostics products make a significant difference in the lives of individuals at high risk for cancer and in treating cancers. We are pleased to be helping more individuals as our business continues to grow.

Thank you. I would like now to pass the microphone to Dr. Adrian Hobden. Adrian?

Adrian N. Hobden, Ph.D. - President

Thank you, Greg, and good morning. I'm pleased this morning to be able to give you an update on progress on several of our drug development programs.

On December 4th, we announced the submission of an IND on our HIV maturation inhibitor Vivecon. Vivecon is a novel, small molecule drug candidate that Myriad has designed to be taken orally and to inhibit viral maturation. The drug candidate inhibits viral particles from reaching maturity, so they are incapable of infecting other cells by targeting the capsid-SP1 cleavage site in the HIV Gag protein. One of the last steps in viral maturation is the enzymatic cleavage of capsid from SP1 by the viral protease. Vivecon inhibits this cleavage step, leading to inhibition of development of the viral core. It does not inhibit HIV protease itself.

Vivecon has been tested extensively for anti-viral activity and safety in preclinical studies with both in vitro and in vivo models. It demonstrated anti-viral activity with an IC50 over less than 10 nanomolar against a variety of HIV viral strains with at least a 1000 fold therapeutic safety index. Vivecon has also been shown to be active against viral strains that are resistant to the currently marketed anti-HIV drugs, including nucleoside reverse transcriptase inhibitors such as AZT, non-nucleoside reverse transcriptase inhibitors such as Efavirenz and protease inhibitors such as Ritonavir. Vivecon has also shown a good safety profile in a variety of preclinical animal studies.

The IND was approved by the FDA in less than the 30 day period that the regulatory authority usually takes to review INDs. And Vivecon is already being administered to healthy volunteers in a Phase 1 single ascending dose study.

The current clinical development plan for Vivecon is designed to expedite the drug candidate through the clinical development path. The first Phase 1 trial is intended to assess the pharmacokinetics, absorption and tolerability of the compound. Assuming successful completion of Phase 1, the plan calls for the rapid initiation of a Phase 2a multiple ascending dose trial in HIV infected individuals to evaluate safety, pharmacokinetics and Vivecon's ability to inhibit viral replication.

Myriad believes this may permit Vivecon to skip the more conventional Phase 2 clinical trial and potentially move more quickly into Phase 3 studies. Vivecon is the first Myriad anti-viral drug candidate among several in development to advance into clinical trials.

Myriad's anti-viral drug discovery program began with the discovery of the interaction between the HIV Gag protein and the human host protein, TSG101 in the viral budding/maturation pathway of HIV. This research was published in the October 5, 2001 issue of the scientific journal, Cell, where it was featured as the cover article.

Myriad scientists have made subsequent discoveries regarding the biology of HIV viral particle maturation, viral fusion with host cells and intracellular events in the lifecycle of HIV, which has enabled Myriad to identify several additional novel targets which may inhibit HIV infection.

A future candidate for drug development arising from this research program is MPI-451936, a novel, orally-available, small molecule fusion inhibitor against HIV virus. MPI-451936 targets viral Gp141 protein and uniquely inhibits fusion of HIV virus that utilizes the CXCR4 co-receptor, instead of the more common CCR5 co-receptor. No small molecule drugs have yet been developed against virus that utilizes the CXCR4 co-receptor.

It is believed that use of the new generation of CCR5 antagonists will ultimately lead to resistance to the CCR5 antagonist class of drug virus switch of HIV virus away from utilizing CCR5 co-receptor and toward utilizing the CXCR4 co-receptor. I hope to be able to tell you more about this program in the near future.

Myriad also has a very full program of anti-cancer drugs, spearheaded by Azixa, which is three Phase 2 studies for glioblastoma multiforme, melanoma and non-small cell lung cancer. To remind you, Azixa binds very potently to tubulin and inhibits both cell division and disrupts the neovasculature which supplies tumors with blood and oxygen.

It also has the unique ability to cross the blood/brain barrier and in animals showed 14 to 15 times more drug in the brains than in the periphery. Phase 1 studies successfully identified a maximum tolerated dose and showed some anti-cancer activity in a number of different tumors, including melanoma and non-small cell lung cancers. Unfortunately, it is too early to be able to make any statements of our progress in these trails. But again, I hope to be able to share some information in future conference calls.

Myriad has also recently moved another cancer compound, MPC-3100 into preclinical studies aimed at submitting another IND later this calendar year. MPC-3100 is a potent small molecule HSP90 inhibitor which has shown very good oral availability [ph] in animal studies. It is also very effective at inhibiting growth of tumor xenografts in animal models. Remarkably, for an anti-cancer compound, there was no apparent toxicity as indicated by an effect on body rate. We believe this will provide an opportunity for daily oral dosing with MPC-3100. Further data on this compound will be submitted to the 2008 annual AACR meeting being held in April in San Diego.

Finally, I am pleased to tell you that we have completed the Phase 1study on MPC-0920, our orally available thrombin inhibitor. MPC-0920 was shown to be orally available with a very close correlation between the concentration of drug in plasma and an effect on blood clotting as measured by an increase in pro-thrombin time. There were no apparent drug-related adverse events during the study.

Myriad's strategy is to aggressively seek a commercial partner for the thrombin inhibitor rather than pursuing further regulatory development on our own. We remain focused on our core areas of neurodegeneration, cancer and anti virals.

Thank you for your attention. I will now turn the conference call back to Pete Meldrum.

Peter D. Meldrum - President and Chief Executive Officer

Thank you, Adrian, and I will turn it back to the operator for the question and answer portion of the call.

Question And Answer

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Geoff Meacham of JP Morgan.

Geoffrey Meacham, Ph.D. - JP Morgan

Hi guys, congratulations on a good quarter. A couple of questions on the predictive medicine business. First, with the DTC campaign, can you tell us what percent of new docs or what percent of tests our being ordered from new docs previously who have not -- not ordering a predictive medicine test?

Gregory C. Critchfield, M.D. - President

Geoff, what we are doing in the DTC analysis is looking at the -- a generation of new physicians. And the focus of the campaign is clearly to grow the number of physicians that are ordering the test. And what we are seeing in the DTC area is an increase in the number of new physicians as we compare... as we look at the data. And this is very, very encouraging. It's very early right now and we still have several months to be able to see the long-term effect. So right now, we are very encouraged by the trends.

Geoffrey Meacham, Ph.D. - JP Morgan

And just to follow up on the TheraGuide the 5-FU test, can you guys give us sort of any qualitative comments on maybe the oncologists that were already targeting have adopted the test or what are sort of new to the test overall and then any comments that you have on payor adoption?

Peter D. Meldrum - President and Chief Executive Officer

Thank you Geoff. TheraGuide 5-FU, as we mentioned in the previous quarter, has been exceeding our expectations in terms of adoption by physicians and revenue growth. And as I mentioned today, it grew double digit quarter-to-quarter growth compared to the September 30, 2007 quarter. So we are very pleased with the adoption and acceptance of TheraGuide 5-FU and very encouraged by the launch of this new product.

Geoffrey Meacham, Ph.D. - JP Morgan

So you're just trying to say that that's a little too early to talk about anything specifics with respect to market share?

Peter D. Meldrum - President and Chief Executive Officer

Yes, I think it probably is, just because it was only launched on July 26th, so we are sort of barely six months into it.

Geoffrey Meacham, Ph.D. - JP Morgan

Okay. Thank you.

Operator

Your next question comes from the line of Annabel Samimy of UBS.

Annabel Samimy - UBS

Hi, thanks for taking my call and congratulations on a good quarter. Just a follow up on Geoff's question. 20% is the DTC campaign and the access to new docs creating pull through for some of the other products that you're selling such as COLARIS. You are targeting OB/GYNs, but can you give us some color around that?

Gregory C. Critchfield, M.D. - President

You bet. As you remember, there are two phases to the activities in the DTC campaign. First is a direct-to-physician phase that began in January where all physicians are trained on how to recognize all hereditary cancer syndromes. The focus of the media thrust of the DTC campaign is on BRACAnalysis. And what we are seeing is more time to talk to doctors, more interest in all hereditary cancer products and, as Pete mentioned, and the numbers show. We've seeing growth across all of our products.

Annabel Samimy - UBS

And you are seeing the same for TheraGuide 5-FU targeting new oncologists and being able to pull through other products?

Gregory C. Critchfield, M.D. - President

Yes, in fact, all of our products are complementary and do give pull through momentum to the other products.

Peter D. Meldrum - President and Chief Executive Officer

But Annabel, you make a good point. Any time we launch a new product, that gives us a reason to talk to on oncologist. We get a little more time to talk with that oncologist not only about the new product, but about the existing product line this company has as well. So it certainly is beneficial across all our product lines.

Annabel Samimy - UBS

And if I may, a question on SG&A. Can you help us understand how to think about SG&A as we go through the rest of 2008? Is the bulk of the DTC expense out of the way? And I think if I heard correctly, you are not adding any new sales people this year, but maybe next year.

James S. Evans - Chief Financial Officer

Yes, Annabel, that's correct as far as the sales people expansion goes. We have fully staffed that area of the company for the current fiscal year. So we are not looking to make any additions there. And the DTC campaign will be wrapping up in the quarter that we are currently in, so we should see the last of those expenses pushed through.

Now on the other side of things, our 123R expense will continue to grow, commissions will continue to be high as long as we continue to have the kind of sales performance that we have. A number of things are driven by the revenue number, bad debt, some of those types of things, which, as revenues increase, those numbers will increase. So I'm not sure that we would see a tremendous drop off of the SG&A expense just because as those DTC expenses go away, other expenses will be increasing.

Annabel Samimy - UBS

Okay, great. Thank you.

Operator

Your next question comes from the line of Charles Duncan of JMP Securities.

Charles Duncan, Ph.D. - JMP Securities

Good morning gentlemen. Congratulations on a very strong quarter.

Peter D. Meldrum - President and Chief Executive Officer

Thank you.

Gregory C. Critchfield, M.D. - President

Thanks Charles.

Charles Duncan, Ph.D. - JMP Securities

I had a couple of questions on the PM business. One is, could you give us a little bit more color besides that they were strong on the sample flows really coming out of the quarter and whether or not that momentum has continued into the current period?

James S. Evans - Chief Financial Officer

Yes, Charles. We are very pleased to say that the trends continue to be very strong in the current period. As you know, we've not had a price change recently that would account for any of our molecular diagnostic revenue growth. The 15% growth that we have seen over the past quarter can be directly associated to increases in sample flow, and those numbers continue to be impressive as we enter into our third fiscal quarter.

Charles Duncan, Ph.D. - JMP Securities

Okay. And then following on on the Direct-to-Consumer campaign expenditures, can you give us a little bit more idea as to when you will be evaluating whether or not you'll expand that to the rest of the country?

James S. Evans - Chief Financial Officer

Certainly, Charles. We look at a return on investment for the DTC campaign, and we are certainly encouraged with the early returns. But our first ROI analysis will be taken at June 30, 2008. We will then do a second analysis at December 31, 2008 to look at the staying power that the campaign has once the ads have stopped. But as Greg mentioned, we've seen such strong demand and so early on in the campaign that we are right now evaluating whether or not to expand it to other regions. And we will certainly talk about this more at the next earnings conference call.

Charles Duncan, Ph.D. - JMP Securities

Then Pete, if I may hop over to Flurizan for a quick question with regard to the open label study. Adrian, what's your sense as to why you're getting a lot of people to join in on that open label study? Is it due to efficacy or is it due to supporting best standard of care? And then how long will that study go? Is that another 18 months or is there a certain period at which that will stop?

Peter D. Meldrum - President and Chief Executive Officer

Charles, let me start off and then I'll ask Adrian to join in as well. We're very impressed with the fact that over 80% of the people want to stay on drug even though there are other clinical trials that they could go into. And to me that says two things: One, the drug must be very well tolerated or they wouldn't to stay on the drug and continue in the open label study. And two, both the patient and the caregiver must perceive some benefit from the drug, or again, there are other clinical studies of other drug candidates in Alzheimer's disease that they could move into. So I think it's anecdotal certainly, but at least a hint of potential efficacy and safety.

Adrian N. Hobden, Ph.D. - President

Just to add to that, Charles, a little bit. Clearly, there are anecdotal stories that are arriving with us [ph] from investigators who have a large number of patients, of patients doing really well and equally of patients not doing well. And of course we do know that there is placebo and drug patients in the study, so we assume at big sites, there is at least a good distribution of both of those. So I have to assume at some extent that the physicians themselves are recommending to patients who even have done badly that they might be better off as they go straight into the open label. That's all presumption on our case for us. In terms of how long the open label will last, it will last until the drug is approved, and so we don't have a termination date for the open label study.

Peter D. Meldrum - President and Chief Executive Officer

Yes. It would be unethical if the drug is providing the patient benefit to deny the patient the drug. So we'll continue the open label study until the drug is commercially available.

Charles Duncan, Ph.D. - JMP Securities

Okay. Thanks for the added color. Congrats.

Peter D. Meldrum - President and Chief Executive Officer

Thank you, Charles.

Operator

[Operator Instructions] Your next question comes from the line of William Ho of Bank of America Securities.

William T. Ho - Bank of America Securities

Hi guys. Thanks for taking my question and once again congratulations on a strong quarter. Just with respect to the tests, Greg, historically, you guys have told how many tests per week. Can you by any chance give us any additional color on that? And then with respect to BRACAnalysis, how much of that market do you think we penetrated thus far and how much do you think we can grow?

Peter D. Meldrum - President and Chief Executive Officer

Again, let me jump in and I'll ask Greg to add his thoughts as well. As Jim mentioned, we're seeing very strong growth throughout the prior quarter, 15% quarter-to-quarter growth and we are seeing that same strong growth continue in this quarter. So we are very pleased with the growth that we're seeing throughout really all five of the company's products. It's a little difficult to give more specific information than that because we have a variety of tests that sell for a variety of different prices. But I think if you look at the revenue growth, that's a pretty good indication of the sample growth as well.

Gregory C. Critchfield, M.D. - President

With respect to the penetration of the BRACAnalysis market, one of the major reasons that we launched the direct-to-consumer activity is the fact that after more than a decade of testing, somewhere between only 3% and 4% of individuals in the U.S. who carry mutations have been identified to date. So that means that the great majority of individuals are out there walking around not knowing that they have mutations. These are individuals for whom more intensive interventions would offer very significant health benefits. So we believe that the market is largely in front of us and that we have penetrated it to a small extent thus far.

William T. Ho - Bank of America Securities

And just a follow-up question on Azixa. I know there is some anecdotal evidence, as Adrian had mentioned, that you hope that the outcome would be positive. But quite obviously, you have various investor basis from... due to the two sides of your business. Can you discuss a little bit as to what would your plans be should the outcome fail and would those expenses continue or what can investors look towards?

Peter D. Meldrum - President and Chief Executive Officer

I think it's important to note that the company has seven clinical trials ongoing. And we have very exciting drugs from Vivecon to Azixa to Flurizan in clinical studies. And as Adrian mentioned, MPC-3100, a very exciting cancer drug, should be moved into the clinic this year. So we have a very strong commitment to the pharmaceutical side of the company. And if any one drug fails, then we have five or six other drugs that we are moving forward toward regulatory approval. So we realize that this is a risky business and that it's difficult to develop new pharmaceutical products. And I don't think the company is going to be overly discouraged if one of the drugs doesn't sell.

On the same time, we are not going to stay married to a drug. So if a drug doesn't work well and we don't have a good reason to believe that doing additional studies would change that outcome, we will abandon those drugs very quickly and focus on the ones that we think have greater promise. But we do have a strong commitment to the pharmaceutical area, and the failure of a single trial is not going to discourage us from moving our other drug candidates toward regulatory approval.

William T. Ho - Bank of America Securities

Okay. Thank you. Are there any updates as to potential timing for Azixa data?

Peter D. Meldrum - President and Chief Executive Officer

Not really. Understand that Azixa is an adapted design. So there is no set time or study period and there is no set number of patients that we enroll in Azixa. Also, appreciate that because it's a three arm study, we have to do a stage one before we actually start the full scale Phase 2 study where we determine the maximum tolerated dose of the combination of Azixa and the other drug that is being used in the study. So I would not expect really any significant data on Azixa in this calendar year. I am really looking toward 2009 for the Azixa results.

William T. Ho - Bank of America Securities

Thank you.

Operator

Your next question comes from the line of Mark Monane of Needham & Company.

Mark Monane - Needham & Company

Good morning and thank you for taking my call rings [ph] from New York City. A question on the personalized medicine program, how is your market research... let me start again. The cancer diagnostic is a very powerful one, and if one gets it paid for by insurance, then clearly there will be reimbursement, but there is also a potential for the insurance agent and carrier to know the results of the BRACA test. Has your market research addressed this? And similarly, can you identify how many patients actually self pay for their test, thereby allowing a potential of keeping the results from an insurer?

Gregory C. Critchfield, M.D. - President

Yes. We work with a large number of insurance carriers as you know. The reimbursement for our test is excellent. In many situations, we have contracts with managed care companies where the results of the BRACAnalysis test are not... are contractually not given to those individuals. The results are returned to the physician and the patient. The physician and the patient are the ones that use that information to decide what they want to do next, and that paradigm has worked very, very well.

Peter D. Meldrum - President and Chief Executive Officer

With regard to reimbursement, if you look at the revenues for our first fiscal quarter ending September 30th, about 96% was paid by insurance. Only 4% was paid by private individual, and most of that was co pay. So it's very rare that a person would actually pay for the test. It really is reimbursed by essentially all insurance companies and HMOs, including Medicare.

Mark Monane - Needham & Company

That was very helpful. And in addition, I know you'redeveloping a drug for Alzheimer's disease. Is there efforts at the company to develop a personalized medicine test for early detection of Alzheimer's, which traditionally has been very hard to do?

Gregory C. Critchfield, M.D. - President

This is a very interesting area. We are looking at technologies that may be useful there and working with our pharmaceutical colleagues in the company to see which technologies are the most promising.

Mark Monane - Needham & Company

Thanks for the added information. Congratulations on the quarter.

Peter D. Meldrum - President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Jeff Goater of Cowen and Company.

Jeff Goater - Cowen and Company

Good morning and thank very much for taking the questions. Just two quick questions and a clarification. Jim, could you just give us a sense of the relative level of DTC spend thus far in the March quarter versus the December quarter?

James S. Evans - Chief Financial Officer

So in the March quarter, I am not sure that I... we only have a couple of million left that will be going through this last quarter, the most of it has already been spent up in the previous quarters. Obviously, the large amount of the DTC spend is in the development of materials, and that happened upfront. Now we are into just paying for the airtime that we'll continue to have through this quarter. So I think we are just down to $1.5 million, $2 million that would still come through this last quarter.

Jeff Goater - Cowen and Company

Okay. Maybe just to ask that question in a different way, relative airtime in the March quarter versus December quarter, is it expected to be essentially the same?

James S. Evans - Chief Financial Officer

Yes, it should be about the same.

Jeff Goater - Cowen and Company

Okay, thanks. And then a quick question for Adrian. On the last call, you indicated you were going to submit the Natural History Staggered Start plan to the FDA feedback. Any update there?

Adrian N. Hobden, Ph.D. - President

Yes, we are still finalizing that. We are looking to make a publication out of this as well. So when we have publication quality material, we will be submitting it. But we don't want to rush into something ahead of time. We would like it to be the final thing when it goes to the FDA. Of course, that's only for their consideration. We don't expect to get approval from them for it. But it is widely talked about and we know that Dr. Katz [ph] has been talking about it at a number of public forums. So we are very encouraged by that analysis.

Peter D. Meldrum - President and Chief Executive Officer

I think that's an excellent question and one that I would like to elaborate on just a little bit. I think it is important to investors to appreciate that the protocol and the statistical analysis plan for Myriad's Phase 3 clinical trials, both the U.S. and the European, is a very standard vanilla plan. And we analyze the data just as previous Alzheimer's studies have done. We use the same clinical endpoint of cognitive function and behavior. Our statistical analysis is exactly what has gone before us. The historical staggered start design is a sub analysis that we do once we've done the initial statistical analysis in an effort to present an argument in favor of disease modification for Flurizan. So I would like to clarify that the historical staggered start design is a sub analysis in support of disease modification, not the overall statistical analysis. That is very standard, very vanilla as Alzheimer's... all Alzheimer's drugs have had in the past.

Adrian N. Hobden, Ph.D. - President

And just to add finally to that, that standard analysis data has been submitted to the FDA for their input. So we have done that part of it, the set piece, the Natural History Staggered Start is just a secondary analysis of the data, not the primary analysis.

Jeff Goater - Cowen and Company

Okay, thank you for the clarification. And just a clarification from a question earlier. In the past you've quantified the sample flow rate, Greg, for the diagnostics business. Can you provide us an update for this quarter?

Gregory C. Critchfield, M.D. - President

Yes, what we can tell you is that we are seeing strong growth rates, and that's really the case. Other than that, we are not commenting further.

Jeff Goater - Cowen and Company

Okay, thank you very much.

Operator

Your next question comes from the line of Lucy Lu of Citigroup.

Lucy Lu - Citigroup

Thank you. Basically, in terms of the positive impact of the DTC campaign, can you just give us a little bit more color such as what exactly is the magnitude of this impact and also like what is the incremental revenue from OB/GYN sales in the Northeast?

Peter D. Meldrum - President and Chief Executive Officer

Thank you Lucy. We are still in the process of analyzing and understanding the full impact of the DTC campaign. But I think, simply one way of looking at it is historically we have had about an 8% to 10% quarter-to-quarter growth, and of course this quarter we saw about a 15% quarter-to-quarter growth. The majority of that increase from 8% to 10% to 15% is as a result of the Direct-to-Consumer marketing campaign. And future conference calls, we will, as we analyze the data in more detail, give you a little more color on the impact of the DTC campaign.

Lucy Lu - Citigroup

So do you expect the DTC's effort or the impact on revenue to reverse itself once you conclude the DTC in the Northeast for now?

Peter D. Meldrum - President and Chief Executive Officer

That's a very good question, and that's one of the questions we are going to answer. One option is that the DTC campaign as it's designed, is really designed to create new physician customers. And we use the bolus of patients coming to those physicians to reinforce to those physicians the value and importance of the test. If we do create a new physician customer, one would anticipate we would be able to keep that customer pretty much for the life of that physician's practice. So we wouldn't anticipate seeing a drop of once the DTC campaign was concluded. And that certainly has been our strategy with the effort we have put in the direct to physician part of the campaign in the first half of last year.

Lucy Lu - Citigroup

Okay. And then the last question in terms of margin improvement, what can we expect going forward on the diagnostic business? Thanks.

Peter D. Meldrum - President and Chief Executive Officer

As I mentioned, we think the current gross profit margins are sustainable and we are continuing to make additional technology improvements in the laboratory. The company will probably have future price increases around our test as well, which should improve margins. So I think we feel very comfortable with this mid to upper 80% as not only sustainable but modest growth in the future.

Lucy Lu - Citigroup

Thank you.

Operator

We have reached our allotted time for the questions. Mr. Meldrum, do you have any closing remarks?

Peter D. Meldrum - President and Chief Executive Officer

I would like to thank everyone on the call for your participation. We are very pleased to be able to report the results for our second fiscal quarter and this does conclude the conference call. Thank you.

Operator

This concludes today's conference. You may now disconnect.

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Source: Myriad Genetics, Inc. F2Q08 (Qtr. End 12/31/07) Earnings Call Transcript
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