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

Myriad Genetics Inc. (NASDAQ:MYGN)

Q3 FY08 Earnings Call

May 06, 2008, 10:00 AM ET

Executives

Peter D. Meldrum - Director, President and CEO

James S. Evans - CFO

Gregory C. Critchfield - President of Myriad Genetic Laboratories

Adrian N. Hobden - President of Myriad Pharmaceuticals

Analysts

Ian Sanderson - Cowen & Co.

Edward Tenthoff - Piper Jaffray

Alastair Mackay - GARP Research & Securities

William Ho - Banc Of America Securities

Charles Duncan - JMP Securities

Matt Roden - JP Morgan

Annabel Samimy - UBS

Operator

Welcome to the Myriad Genetics' Third Quarter Fiscal 2008 Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded Tuesday, May 6, 2008. It's now my pleasure to turn the conference over to Mr. Peter Meldrum, Chief Executive Officer, please go ahead sir.

Peter D. Meldrum - Director, President and Chief Executive Officer

Thank you. Good morning and welcome to the Myriad Genetics' earnings call for our third fiscal quarter, ending March 31, 2008. 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'll begin the discussion this morning with a brief review of the past quarter and 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'll turn the call over to the operator for the question-and-answer portion.

Please note that there is some information presented here today that 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 those 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.

Thanks to the hard work of the entire Myriad team. I think we had a pretty good quarter. Once again our Molecular Diagnostics business achieved record revenues of $59 million for the three months ended March 31, 2008 as compared to $38 million for the same period in the prior year, an increase of over 55%. I am also pleased to report that we experienced double-digit quarter-to-quarter growth from all five of our molecular diagnostics products. Importantly, we continue to see strong growth in the Northeast region, as a result of our direct-to-consumer marketing campaign, which concluded at the end of the last month. The DTC campaign has clearly had a significant impact on our revenues over the past two quarters. And our sample volume has remained strong during the month of April. To assess the staying power of the DTC campaign, we will be calculating a return on investment in June 30 of 2008 and again on December 31, 2008.

However, we are pleased enough with the initial results that we have decided to continue the DTC campaign again this fall. Dr. Critchfield will discuss the new campaign in more detail later on in this call. With most of the Northeast DTC campaign spend behind us, the net operating profits for the Molecular Diagnostic business increased to a record $28 million, resulting in a net operating margin of 47%. This compares favorably with the prior year's third quarter profits of $16 million and a 43% net operating margin. Since the launch of our first test about a decade ago, Myriad has offered a compassionate use program for individuals who lack insurance coverage. These individuals can receive our testing free of charge. In light of our consistent impressive net operating results, we have decided to expand this program and be more aggressive in advertising it to our physician customers. So that everyone with a family history of cancer can benefit from this important genetic predisposition information. We do not expect this endeavor to have a noticeable effect on the company's gross profit margins.

Myriad pioneered the field of molecular diagnostics a decade ago with the launch of the first genetic predisposition test for a major common disease, breast cancer. Myriad's mission is to remain a leader in this exciting industry by discovering, developing, and marketing novel molecular diagnostic products that enable physicians to make more informed decisions concerning the management of their patient's healthcare. And in doing so, help their patients who have longer, healthier, more productive lives. Myriad continues to pioneer new advances in personalized healthcare. And we are excited about the future as a major player in this important and growing industry.

Turning our attention now to our Therapeutic business, the company continues to make excellent progress in advancing its drug candidates toward market approval. I am pleased to report that last patient in the US Flurizan Phase III clinical study has now completed the trial and moved on into the open label study. Remarkably, after a year-and-a-half in the Phase III study, 84% of the patients who completed this study have elected to continue on Flurizan in the open label study rather than switch to another experimental drug trial. This high retention rate implies that Flurizan is reasonably well tolerated and that patients care givers, and physicians believe that Flurizan is providing a benefit in the treatment of Alzheimer's disease. The coprimary end points for this study are ADAS-cog and ADCS activities of daily living. If the results for both end points are statistically significant we plan on submitting an NDA to the FDA before the end of this calendar year. All Alzheimer's drugs to-date have been approved in approximately six months.

On the assumption that the FDA will approve our drug within historical timeframes, the company has made plans for the commercialization of Flurizan and will be ready to launch Flurizan in July 2009. The Global Phase III study has also proceeding on schedule and is approximately six months behind the US study. It will conclude on October 20, 2008. After the data has been collected and cleaned and the database locked we will unbind the study and we expect to report our top line results for that study in December 2008. If the global Phase III study also meets statistical significance on its two clinical end points, we will submit Flurizan to the EMEA for approval and will be prepared to launch Flurizan in Europe in late 2009.

I believe that this quarter's accomplishments and the upcoming results of our Phase III clinical trial on Flurizan will underscore the strength of our corporate strategy. It is one that combines the profitable, rapidly growing Molecular Diagnostics business with an explosive growth opportunity in pharmaceuticals. Our goal is to provide our shareholders with significant upside on the therapeutic front while maintaining the stability and financial security of a profitable operating business. In this regard I believe that Myriad represents a unique investment opportunity.

Now it's my pleasure to turn the call over to our Chief Financial Officer, 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 third fiscal quarter ended March 31, 2008. Myriad's total revenues for the quarter ended March 31, 2008 were $61.8 million as compared to $41 million for the same period of the prior year. This impressive growth was fueled by the 55% increase year-over-year of molecular diagnostics revenues. As Pete previously mentioned, molecular diagnostics revenues for the quarter were $59 million, which is an increase of $21 million over the same quarter of our previous fiscal year.

Sequentially molecular diagnostics revenues grew 11% during our third fiscal quarter as compared to our second quarter of this fiscal year. It is important to note that Myriad has not increased prices on its molecular diagnostics tests for two years. All of the growth that we are seeing in testing revenues has been driven by increases in sample flow, which continued to be strong during April. Actual product revenues of $59 million for the third fiscal quarter compared favorably to the average analyst projection of $56.8 million. Cost to produce the 55% growth in molecular diagnostics revenues for the quarter ended March 31, 2008 increased by only 9% over the same quarter of the prior year. Myriad had been remarkably successful in implementing technological and systematic improvements for processing samples. We continue to evaluate the latest advancements in sequencing technology, information processing, and workflow enhancements with an expectation that gross margins will continue modest improvements over the next year or two.

Net operating margins for the Molecular Diagnostics segment climbed to an outstanding 47% for the quarter ended March 31, 2008. This result is all the more impressive when compared to a net operating margin of 39% for the quarter ended December 31, 2007. A closer look at the number shows a dramatic reduction in marketing spend, specifically DTC spend, during the March 31 quarter as our DTC campaign wound down. We spend approximately $2 million less this third fiscal quarter on the direct-to-consumer campaign than we did during our first and second quarters of this fiscal year.

Research & Development expenses for the quarter ended March 31, 2008 were $31.2 million compared to $22.9 million in the same quarter of the prior year. Research & Development was primarily comprised of the costs associated with our six ongoing human clinical studies, the open label continuation of the US Phase III Flurizan trial and a data collection and analysis from the recently completed US Flurizan Phase III trial. 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 drug programs, 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 March 31, 2008 were $30.2 million compared to $30.5 million for the prior quarter ended December 31, 2007. This small decrease over the prior quarter was attributable to the reduction in DTC costs offset by expenses incurred to support the 11% quarter-to-quarter growth in our molecular diagnostic revenues. We expect our selling, general and administrative expenses will continue to fluctuate depending on a variety of factors including the number and scope for new product launches, growth in molecular diagnostic revenue, and future non-cash stock option expense.

Our net loss for the quarter ended March 31, 2008 was $4.6 million, or $0.10 per share. This favorable result represents a 22% improvement over the same quarter in the prior year, which was $5.9 million, or $0.14 per share and also beat the Thomson First Call Consensus loss of $4.7 million. Of the $4.6 million loss for the quarter, $4.4 million is directly attributable to the non-cash stock option expense.

Cash, cash equivalents, and marketable investment securities actually grew from $303 million at December 31, 2007 to $310 million at March 31, 2008. During our last earnings call, I discussed Myriad's conservative investment policy and the fact that there are no mortgage-backed or asset-backed securities in Myriad's investment portfolio. Since that call, the market for auction rate securities has been [inaudible] resulting in many failed auctions. As I am sure, most of you are aware when an auction fails, the interest rate paid by the security increases to the maximum as stipulated by the perspectives. With the increased cost of these dead instruments, many of the issuers of asset-backed securities are calling back to securities at par with the plan of raising funds through cheaper means. Today, of the $310 million in cash, cash equivalents, and marketable investment securities held by Myriad only $4.9 million is in auction rate instruments. While the liquidity of these securities has been impacted, we are very comfortable with the underlying credit strength of the issuers and we do not anticipate the need to access the $4.9 million in the near future, allowing us to enjoy the higher interest rate being paid by these issuers.

We believe that Myriad's entire portfolio continues to be sound with preservation of capital as our number one priority. Our accounts receivable are of a high quality in the average collection period as measured by the number of days sales outstanding improved to 61 days for the quarter ended March 31, 2008 as compared to 65 days for the quarter ended December 31, 2007.

To conclude, it is my pleasure to state that Myriad has no debt and no convertible securities and that the total number of shares outstanding at March 31, 2008 was a modest 44.6 million shares.

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

Gregory C. Critchfield - President of Myriad Genetic Laboratories

Thank you, Jim. It is a great pleasure to speak with you today about our Molecular Diagnostics business. As Jim mentioned, the quarter three fiscal '08 revenues for Molecular Diagnostics business were $59 million, a new record representing a 55% increase over our previous year's quarter three revenue of $38 million. This was achieved with an 11% quarter-to-quarter increase in revenue for the third quarter of fiscal year 2008. As testing volumes grow, we continue making improvements to efficiently process the samples and to improve the quality of our testing procedures. We continue to implement higher throughput instruments in robots that allow us to achieve excellent turnaround time for our test with the in-laboratory analysis averaging mere seven days.

We've announced a program to our customers, where we have streamlined insurance verification, the pre-laboratory part of our process and we anticipate that during the next fiscal year the total turnaround time for our customers from the time the test is ordered to the time the information is back in the hands of the doctor will be two weeks or less. This more rapid turnaround time enables medical decisions to be made earlier for patients diagnosed with cancer, further improving the clinical impact of our testing. We have achieved these efficiencies through deployment of lean systems quality paradigms and our enhanced computer database. We continue to believe that all of these operational efforts, both in our laboratory operations and our information technology architecture, positions us well to support the exceptional growth we are experiencing as a leader in molecular diagnostics.

A number of factors have contributed to the outstanding growth in molecular diagnostic revenues, including the recent expansion of our sales force into the OBGYN market segments and guidelines by the American Cancer Society and the Society of Gynecological Oncologists to emphasize the importance of identifying individuals with mutations for hereditary cancer. Another factor in the growth of our business is the positive impact we are seeing from the BRAC Analysis public awareness campaign activities conducted from September 2007 through March 2008 in the Northeast United States. I will discuss more on this campaign in a moment.

The OBGYN markets... OBGYN segment of the market for BRAC Analysis represents our largest market segment. This segment is many times larger than that of individuals newly diagnosed with cancer. Strategically we look at this market segment as the one where our test have the potential to make the greatest public help impact by preventing disease before an individual has cancer. During this fiscal year we have completed several initiatives to raise the awareness of our products among OBGYN physicians, including expansion of our OBGYN sales force. Our experience shows that new OBGYN sales representatives achieve profitability as rapidly as new oncology sales representatives. In light of these data we will continue the expansion of our OBGYN sales force during next fiscal year to approximately 90 sales representatives.

I would like to highlight the purpose and share the results of our Northeast BRAC Analysis public awareness campaign. The campaign has the goal of increasing the number of physicians who are routinely identifying individuals in their practice who are at high risk of hereditary cancer. So these individuals can avail themselves of life saving medical technologies. The consumer awareness campaign focused on the demographic of women between the ages of 25 to 55, who have a strong principle and our family history breast or ovarian cancer. The message of the campaign was simple, yet powerful. If breast or ovarian cancer runs in your family you need to speak to your physician, because there is a test that can help identify your risks. This target audience saw on average 20 BRAC Analysis as during the seven-month period of the campaign. Because of the interest generated by the campaign we also received a tremendous amount of free publicity that accompanied the launch of the campaign including major articles in both the Wall Street Journal and New York Times, National Network coverage, articles in leading women's magazine, local television and radio coverage, as well as Internet articles.

Physicians are our customers and are key element in the campaign. In strong contrast to some companies offering molecular diagnostics products to consumer without physician involvement, Myriad's policies require that a prescription be written and health care provider evaluate the patient before ordering the test. The physician then works with the patient after the test to determine the appropriate medical management strategy for that individual. Our approach is entirely consistent with established medical society guidelines emphasizing that appropriate individuals be identified and a decision on testing be made in consultation with the patient's physician. The results from the Northeast public awareness campaign thus far have been better than expected. There were tens of thousands of visits to our BRAC Analysis website. We’ve had an increase in the number of physicians who order our test for primary goal of the campaign. We also achieved a 79% increase in the revenue from quarter three last year in the campaign territory. To assess the value of the campaign, we will be conducting an ROI analysis at the end of this fiscal year June 2008 and at the end of the calendar year.

However, in order to conduct a further public awareness campaign next fall, we need to secure airtime this spring. Because of the early indications of success and because we are very encouraged by the results of the campaign today, I am pleased to announce the launch of a second regional BRAC Analysis public awareness campaign to be held in the southern region of the US, principally Texas and Florida. This campaign area represents 18% of the US population. We currently have experienced OBGYN sales and medical support teams in place. The direct-to-physician phase of the campaign has already commenced with a physician education phase that needs to precede the media advertising to consumers. As with this year's public awareness campaign, the new consumer-advertising phase of the campaign will run from September 2008 through March 2009. The cost of the Southern BRAC Analysis public awareness campaign will be about the same as the Northeast campaign, even though it is a larger territory.

You may have heard recently about the passage of GINA, the Genetic Information Non-Discrimination Act. This Bill has been passed by the House and the Senate with broad bipartisan support. GINA provides sweeping protections against discrimination by insurers and employers for individuals undergoing genetic testing. We feel that GINA's passage will have a positive impact on our product revenues. Our molecular diagnostic 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 - President of Myriad Pharmaceuticals

Thank you, Greg and good morning. As Pete has already told you, we are very actively involved in cleaning the data from the US Phase III trial of Flurizan. There was a huge amount of data generated in the trial since it involved 1,684 patients who had efficacy and safety assessments made on them every three months for 18 months. This means that we have a lot of checking to do on the data before we can unbind the trial. For example, we have to confirm that efficacy and safety data was entered for all the patients at all the time points. And that lab values for blood measurements make sense and were not generated by error. We are making excellent progress with this work and on schedule for the release of top line results. I am also happy to announce that our principle investigator on the trial Dr. Bob Green from Boston University is scheduled to present a full analysis of the data at the International Congress on Alzheimer's disease on July 29, in Chicago.

Despite the huge effort that Myriad is expanding on cleaning the US Phase III trail and running the global study we continue to work hard on our other development programs. I thought I would take this opportunity to give an update on interesting observations from some of those programs. Our clinical development program for Vivecon is progressing very well. Vivecon is a novel maturation inhibitor for the treatment of HIV infection and it has now completed several dose escalations in healthy volunteers. We are able to confirm that Vivecon is orally bioavailable in humans and in fact appears to be very well absorbed. Furthermore, the half-life of the drug in humans is very long on the order of two to three days, which means it will be possible to administer Vivecon as a daily or even less frequent dose.

We have already reached plasma concentrations of drug that exceed the IC50 for inhibition of HIV replication. Vivecon appears to be very well tolerated and we have not seen any drug related adverse effects to date. We are actively planning to initiate a multiple ascending dose study in HIV positive about treatment-naive patients in the fall.

At a previous earnings conference call, I mentioned our excitement about our novel HSP90 inhibitor MPC-3100 that is currently in pre-clinical development. We except to submit an IND for MPC-3100 early in 2009. Of course, I don't have any human data to share with you but the animal data on MPC-3100 is very encouraging. As you will be aware, there are number of HSP90 inhibitors in clinical development and we have compared MPC-3100 to many of these compounds in head to head studies. Our review of the competitive landscape for HSP90 inhibitors suggest that compounds can be divided into two classes, semi-synthetics based on the natural product, geldanamycin, and completely synthetic small molecules which bare no resemblance to geldanamycin. MPC-3100 falls into the second class.

HSP90 is a molecular chaperone, which stabilizes oncogenic proteins such as HER2, AKT, and BCR-ABL. In addition, oncogenes often require mutations that confer drug resistance or inappropriate activation and these mutant forms depend on HSP90 to function. HSP90 inhibitors are most effective when dosed on a daily schedule, which means for practical purposes an oral drug form is essential. The natural product geldanamycin validated HSP90 as accounts of target in tumor cells, but was too toxic for use in animal models. Modified geldanamycins are still limited by organ toxicity for example in the liver, kidney and pancreas. They are given by infusion and cannot be administered orally. There are a number of synthetic HSP90 inhibitors in development, but most are not orally available. Therefore, we believe that those drugs will be less attractive as compared to our orally available drug. MPC-3100 is a highly potent and specific inhibitor of HSP90 and has very good oral bioavailability and pharmacokinetics in animals.

In head-to-head comparison with competing compounds, it reduced tumor volume in a NCI, N-87 HER-2 positive gastric tumor xenograft model without showing any evidence of toxicity. In contrast, a competing compound can reduce the rate of tumor growth, but did not show any reduction of tumor volume at its maximum tolerated dose. The standard chemotherapy for tumors of this type 5-fluorouracil cause significant weight loss and was also less efficacious. We are currently exploring the range of tumor types that are sensitive to MPC-3100 and find it to be very large. Coupling this observation with the apparent low toxicity of the compound, we believe this new class of anti-cancer compound has the potential to have a profound impact on the treatment of cancer.

Thank you for your attention, I will now hand the call back to Pete.

Peter D. Meldrum - Director, President and Chief Executive Officer

Thank you Adrian and I will turn it over to the operator for the question-and-answer period.

Question and Answer

Operator

Thank you. [Operator Instructions]. Our first question comes from the line of [inaudible]. Please proceed.

Unidentified Analyst

Hi, it was noted that with the Flurizan Phase III data that excellent progress is being made on unblind [ph] data and it was unscheduled to report top line results, I was just wondering unscheduled, what date can we expect to get those top line results versus those full results when you presented at the ICAD meeting?

Peter D. Meldrum - Director, President and Chief Executive Officer

The company has indicated that it anticipates providing top line results in June of this year and then of course as Adrian mentioned Bob Green will present the full data set at ICAD on July 27. So you should anticipate top line results in June.

Unidentified Analyst

So, sometime... anytime in June, any view on... will it be towards the earlier part of the month, later part of the month coming sooner rather than later?

Peter D. Meldrum - Director, President and Chief Executive Officer

No, we haven't given any guidance on exactly when in June and as Adrian mentioned its a fairly complex process to go through in terms of cleaning the data set and the data set has to be cleaned and locked before we unblind it. So, right now we are on schedule and we do anticipate providing those top line results via press release in June.

Unidentified Analyst

Okay. So just sometime during the month, obviously recognize that it’s a complex process but as I am sure you are all aware, people are quite anxious to get hold of that data, so thank you.

Peter D. Meldrum - Director, President and Chief Executive Officer

Thank you for your question.

Operator

And our next question comes from the line of Ian Sanderson with Cowen. Please proceed.

Ian Sanderson – Cowen & Co.

Good morning, thanks for taking the question. This is another Flurizan question. Given the emergence of another alternative potential end point here in the NTB for other trials. Should you fail to show statistical significance on the co-primary end points being used? Would you contemplate conducting another study of Flurizan using an alternative end point as well as perhaps some biomarkers or should this fail, is this… Flurizan done?

Peter D. Meldrum - Director, President and Chief Executive Officer

Let me answer that and then I’ll ask Adrian to comment and give you an update on NTB. We have powered the Phase III study and it is very well powered, it's powered at 95% confidence level to achieve statistical significance for the fairly modest effect size of 30%. Based on ADAS-cog, which is the least sensitive and most difficult to achieve significance on, so we have a very high degree of confidence that if the drug in fact does provide benefit toward Alzheimer’s disease that we will see it and it will be statistically significant. If unfortunately we do not achieve statistical significance with ADAS-cog, it really probably means the drug is not effective in Alzheimer’s disease and we would proceed to abandon the drug, we would not consider doing additional studies with other clinical endpoints or with other biomarkers. But Adrian, maybe you can comment a little bit on NTB.

Adrian N. Hobden - President of Myriad Pharmaceuticals

As Pete said, ADAS-cog is the least sensitive, but it is unfortunately the established standard for cognitive assessments and the outcome measures of the FDA has seen many times. NTB is widely regarded as being more sensitive, but it's never been used for submission to regulatory authority and therefore it’s unknown quantity. In addition, Phase II study used ADAS-cog, so we know exactly what to expect in terms of decline over 18 months for the patients and the standard deviation of that outcome, we actually don't have that information for NTB. We are interested in NTB to see how sensitive it is in comparison with ADAS-cog and for that very reason we put it in as a secondary outcome in our global study, the second study. So we will be able to report at that time the relative sensitivity of the two. But as Pete said, we are very confident that we powered our studies for ADAS-cog and we see no reason to use NTB at this time.

Ian Sanderson – Cowen & Co.

Thank you very much.

Operator

And our next question comes from the line of Ed Tenthoff with Piper Jaffray. Please proceed.

Edward Tenthoff - Piper Jaffray

Great, thank you very much. And I guess maybe just asking one other thing. With the co-primary endpoints, say we get kind of a split result here, like for example assist the daily living heads but ADAS-cog misses, how do we stand there and I know we're trying to kind of guess at what may be happening but what would your thoughts be along those lines?

Peter D. Meldrum - Director, President and Chief Executive Officer

Well, it's an interesting hypothesis or question, Ted. Again, we feel very confident that studies have been powered to achieve significance on ADAS-cog and it being less sensitive, if we hit as ADAS-cog, we will have no trouble with ADCS activities of daily living. Because of the closed proximity of the global study, if we had a split result on the US study, we would continue to proceed with the global study, as I mentioned it ends in October, and we'd want to turn over that card and see those results. If the global study were to hit on both endpoints, then we would have discussions with the FDA, because as you are aware Namenda was approved with one of the studies meeting both endpoints as statistically significantly. Qualis [ph] the other study missed one of their endpoints. And so there is precedence for submitting an NDA based upon a split result that you've hypothesized. I don't think that's a very strong likelihood of occurring again. We think this study is powered very well to achieve both of the endpoints, but we do have the second global Phase III study to look at in a very short proximity to our US Phase III study.

Edward Tenthoff - Piper Jaffray

Great Pete. That's really helpful to help understand your thinking on it. So thank you.

Operator

And our next question comes from the line of Alastair Mackay with GARP Securities, please proceed.

Alastair Mackay - GARP Research & Securities

Yeah, good morning. This is partly a Flurizan question. Could you talk a little bit about what you see as any diagnostic opportunity in the area of Alzheimer's disease in terms of biomarkers or molecular diagnostics? And if that might connect with a successful set of trials with Flurizan?

Peter D. Meldrum - Director, President and Chief Executive Officer

As you probably aware, there are no validate of biomarkers or imaging techniques in Alzheimer's disease. And so at present there are no surrogate markers that we can use and we do rely on the psychiatric battery of test like ADAS-cog, NTB activities of daily living. Myriad is very interested in developing diagnostic around Alzheimer’s disease and particularly around Flurizan. And I'll let Greg talk a little bit about some of the work that's going on here at Myriad.

Gregory C. Critchfield - President of Myriad Genetic Laboratories

As you maybe aware, there are several companies that have done some early work in looking at diagnostic tools for the assessment of Alzheimer's or the proclivity of a person to develop Alzheimer's disease. Myriad has some internal programs. We have collected specimens in our own trials that could be analyzed at some point in time and could be part of the discovery efforts. So, this is an area that we are actively looking at and are quite interested in the development since as these technologies are moving forward.

Alastair Mackay - GARP Research & Securities

Okay, thank you.

Operator

[Operator Instructions]. Our next question comes from the line of David Jackson with [inaudible]. Please proceed.

Unidentified Analyst

Sorry for the pause, gentlemen. Congratulations on the quarter.

Peter D. Meldrum - Director, President and Chief Executive Officer

Thank you.

Unidentified Analyst

This question is for Adrian about MPC-3100. I wondered if the company has taken the compound into any of the human cell toxicity models that might suggest a little bit more about its potential toxicity?

Adrian N. Hobden - President of Myriad Pharmaceuticals

I'm wondering what specifically that you are thinking about in any studies we do, we always looked to see whether there is non-specific toxicity of the compound. We really don't see any evidence of profound toxicity with the compound. I’m sure that we could go to a high enough concentration and any… any compound can be taken to a high enough concentration to ensure toxicity, but certainly at the levels that we are showing efficacy in the animal models we have no obvious acute sense of toxicity of the compound, which might be shown typically in a xenograph model as weight loss in the animals. But we don't see anything like that. The animal is perfectly healthy, but the tumors shrink. So, we are thinking the compound at the moment looks extremely safe. But, I don't want to say that we won’t find a concentration where there is some toxicity level.

Unidentified Analyst

Yes, I wasn’t referring to just necessarily in the animal model, but some of the... I guess [inaudible] of cellular models of… for instance a better [ph] toxicity?

Adrian N. Hobden - President of Myriad Pharmaceuticals

We don't have any evidence for that right at this moment. I think as we form [ph] it will be, but at the moment we don't see any signs of toxicity. Optimus [ph] related to metabolism of the drug and the drug is metabolized by people in 50s but we don't have any evidence for any other toxicity at this time.

Unidentified Analyst

Thank you, Adrian...

Adrian N. Hobden - President of Myriad Pharmaceuticals

They might like to see with the geldanamycin for example.

Unidentified Analyst

Okay, great. Might ask another question to Greg?

Peter D. Meldrum - Director, President and Chief Executive Officer

Sure.

Unidentified Analyst

Thank you. I would like to know if the soon to be launched next molecular diagnostic is either a predictive or perhaps more of a personalized medicine product?

Gregory C. Critchfield - President of Myriad Genetic Laboratories

Yeah, as you know we've been working on developing new molecular diagnostic test. The next product will be an oncology test. We've not specified whether it will be predictive or a personalized test.

Unidentified Analyst

Great, thanks again gentlemen.

Peter D. Meldrum - Director, President and Chief Executive Officer

Thank you.

Operator

And our next question comes from the line of William Ho with Banc Of America Securities. Please proceed.

William Ho - Banc Of America Securities

Hi, guys. Thanks for taking my question and congratulations on the strong quarter. I guess the question I have is with respect to the upcoming Flurizan trial, what do you spend annually on that program and should that sell, how quickly do you think you can get that to spend down and how much do you think your R&D and SG&A expenses would come down by?

Peter D. Meldrum - Director, President and Chief Executive Officer

Thank you, Will. Currently the company spends about $120 million on R&D. About $20 million of that is directed specifically toward diagnostics, the remaining $100 million is of course focused on therapeutic drug development and Flurizan represents the majority of that, I would estimate about $60 million. If the Flurizan study were to sell as I mentioned earlier we would abandon the drug, we would not try to do additional studies or stay married to the drug. As Adrian has pointed out, we have a very strong pipeline, a number of very exciting drug candidates both in the clinic and about to enter the clinic and we would certainly pursue those drug candidates, but we would stop development on Flurizan. The Flurizan study for Europe, the global study is so close to being completed, we would continue to run that through its conclusion. And then there are some costs in terms of winding down these Flurizan study. But my guess would be about $50 million of the $60 million could be saved almost immediately should the Flurizan study fail.

William Ho - Banc Of America Securities

Great. And just a follow-up to the other question on pursuing other drug candidates, Adrian, could you possibly discuss what pre-clinical efficacy [ph] you have that gives confidence in the maturation inhibitor?

Adrian N. Hobden - President of Myriad Pharmaceuticals

Vivecon, you are talking about?

William Ho - Banc Of America Securities

Yes.

Adrian N. Hobden - President of Myriad Pharmaceuticals

Well, the ... we have very good anti-viral activity of the compound in sale lines with no evidence of toxicity of the compound, we've looked against a range of different viral strains particularly against virus resistant to the current classes of compounds and we see good potency, in fact no reduction in potency against protease-resistant strains and reverse-transcriptase-resistant strains and so across a variety of clinical license of HIP, we see good activity, I guess that's the answer to your question.

William Ho - Banc Of America Securities

Okay. And how long do you think that versus [ph] the… I guess proof of concept in HIV patients would take?

Adrian N. Hobden - President of Myriad Pharmaceuticals

We are envisaging it as dose escalation study, we really... as also a safety study. But the idea is to be clear in patients, what dose you need to get to get anti-viral activity. The complication in this is the compound is protein bound and so we need to understand what does that protein binding has on potency of the compound and so it's not. You can't automatically assume that you got the anti-viral concentration just based on calculation. Since that's what we expect, we don't... we won't be going to very high doses, we are going to doses that give us effective reduction in viral load. So, we expect that to go fairly drastically.

William Ho - Banc Of America Securities

Okay, thanks.

Operator

And our next question comes from the line of Charles Duncan with JMP Securities. Please proceed.

Charles Duncan - JMP Securities

Hi guys. Let me add my Congratulations on a very strong quarter. I had a question on the drug side specifically on Flurizan. I also have a follow up in terms of the PM business. Regarding Flurizan, Adrian I am wondering if you could give us some insights on the types of patients that you were able to enroll in the trial with regard to their base line Alzheimer’s severely as well as perhaps Jim could expand on the cost of the pre-launch activities that you spoke about?

Adrian N. Hobden - President of Myriad Pharmaceuticals

As you probably aware Charles, the patient enrolled in our trail were mild Alzheimer’s patients. That defined as MMSC score 20 to 26. 20 being the most severe and 26 the mildest, 1,684 patients in the mild category of disease and when we look across the distribution from MMSC 20 to 26 we see a fairly even distribution across that. So the average MMSC score enrolled in this trail was 23, which is the same at [ph] factors of Phase II study. So, very, very similar demographics to the Phase II study in terms of average MMSC and average aging FAD. I hope that answered your question.

Charles Duncan - JMP Securities

Yes it does. Jim, in terms of the cost of pre-launch activity?

James S. Evans - Chief Financial Officer

Well, we will be going through if the data is positive we are all lined up to start hiring on additional people getting the sales force build and bringing the drug supply up to the magnitudes that will need for launch the...I think we point this out in the past with the rules require us to expense any other drug supply that we build up until to the point that the FDA approves the drug and so those will be significant dollars that we are talking about. I think drug supply alone we are $16 million or something along in those lines just to get the drug supply built up as well as the cost of recruiting and bringing the people on board that we are going to need. So, there will significant cost associated with preparing for the launch.

Peter D. Meldrum - Director, President and Chief Executive Officer

Charles, if I can add we have already put together commercial development team under Wayne Laslie. Wayne was reasonable for the launch of Abilify, which has proven to be a very successful drug at launch and since its launch. And he has assembled I think a very strong team, a VP of Marketing, VP of Sales. I would estimate that this year we have spent around $20 million in terms of working with the key opinion leaders, presentations at conferences, and preparing for the commercialization activities that as Jim pointed out will increase dramatically once Flurizan is successful. Let me also clarify that should Flurizan prove successful as Jim pointed out we do intend to hire a specialty physician sales force, a sales force that would address Neurologists, Geriatrics, Psychiatrists leaving KOLs [ph] in the area. That sales force is probably in the 200%, 250% person range and represents about a third of the scripts that are written for Alzheimer's disease. The company does however plan to seek a corporate partner for the primary care component. Primary care physicians will write scripts on the remaining two thirds of patients for the Alzheimer's area.

Charles Duncan - JMP Securities

That makes sense to me, Pete, thanks a ton. Could I ask a question on the sustainability of the PM business?

Peter D. Meldrum - Director, President and Chief Executive Officer

Sure go ahead, Charles.

Charles Duncan - JMP Securities

Okay, specifically you saw pretty good top line growth due to the Northeast campaign. Can you tell us, if that has really impacted demand for BRACAnalysis specifically or are there other benefits to or from other from some of your other products?

Peter D. Meldrum - Director, President and Chief Executive Officer

I am going to ask Greg to answer that Charles, but let me point out that this quarter like last quarter we did see significant growth 55% year-over-year strong double-digit quarter-to-quarter growth. About a third of that is due to the DTC campaign in the Northeast, but two thirds, say a larger portion is organic growth on across all over product lines throughout the entire country. So, I don't... well, we are very excited about the DTC campaign and I don't want to give the impression that represented the lion’s share of our top line growth.

Gregory C. Critchfield - President of Myriad Genetic Laboratories

Yes and I will give you some information on the effect of educating a physician to identify patients routinely for hereditary cancers. This of course is the primary purpose of the DTC activities. What we found is the once a physician becomes accustomed to identifying patients say for BRACAnalysis, they also are easier to convert into thinking about other hereditary cancers and I think there is a benefit that goes beyond just the BRACAnalysis portion of the campaign.

Charles Duncan - JMP Securities

That makes sense and the IP on the BRACA test as well as the value of the rest of the database do you see that long-term, long life and sustainable?

Peter D. Meldrum - Director, President and Chief Executive Officer

We do Charles. As you know we filed composition where we have received 22 issues tablets in the United States including Composition of Matter Patent on the genes themselves any fragment of the gene any mutation in the gene, the protein encoded by the gene and monoclonal antibodies that bind to the protein. We also have method of use patterns backing that up but we feel we have blocking patent protection until about 20-18, 20-19 based upon our Composition of Matter Patent that have been awarded to the company. Method of used patents and other specific mutation patents will go out into the early 2020s, but you've touched on a very important point and that is Myriad has tested hundreds of thousands of patients and has complied a proprietary data base difficult to characterize mutations and so that proprietary database we think is a very strong competitive advantage once our patterns have expired and there is competition from other organizations, but again I don't see that until we approach 2020.

Charles Duncan - JMP Securities

Thanks Pete. I’ll hop back in the queue.

Operator

And our question comes from the line of Jeff Meacham with JP Morgan. Please proceed.

Matt Roden - JP Morgan

Hi, this is Matt Roden. Thanks for squeezing in here towards the end of the call. My first question is on the geographic expansion of the DTC towards into the southern region of the US, just wondering if you guys are going to focus exclusively on OBGYNs and oncologists, and if there is anything really different that you are doing in the southern region compared to the Northeast?

Gregory C. Critchfield - President of Myriad Genetic Laboratories

Great question, Matt. What we are doing in the southern region is essentially the same strategy we used in the north. The lessons we learnt are that OBGYNs are an excellent primary target for the campaign. They were also involving oncologists, we began the physician training phase, the DTP portion of the campaign already. Looking up the oncologists and the primary care physicians in making sure that people understand how to order the test, where the patients can be referred for genetic services is an important part of the campaign and we are going to move forward with that. Our feeling is the more we involve physicians early, the better results that we have and clearly that's been the case in our experience with the northeast campaign. Our preliminary discussions with the thought leaders in the south are very, very favorable. They are excited about the campaign. They liked the fact that we are helping them to educate their patients about hereditary cancer risk.

Matt Roden - JP Morgan

Thanks, Greg. And then would it be correct to assume that the increased operating margin this quarter is primarily a result of the decreased DTC spending?

James S. Evans - Chief Financial Officer

That is a significant part of the improvement that we saw this quarter and so we will be giving some of that back as we launch our next DTC campaign.

Matt Roden - JP Morgan

Okay. And then just lastly a quick one on Flurizan, is there any update to the discontinuation rates on both the US and global trials?

Adrian N. Hobden - President of Myriad Pharmaceuticals

Yeah, I think we've said this publicly before, the calculation that we made for discontinuation rates would be… there would be 40% discontinuation over 18 months. That is to say, the expectation was 40%. Obviously with the US trial having finished, we have an exact number for the discontinuations in the trial. And I'm pleased to say that it's well less short of 40%. So the actual power of the study has obviously gone up as a result of having less dropouts in the trial. We will be revealing those numbers I guess at ICAD but up to that point we won't be talking about it. And in the global study, the dropout rates are actually even less than they were in the United States. I think that's probably a reflection of different behavior patterns of physicians in Europe versus United States. But it's in line with other people's expectations.

Matt Roden - JP Morgan

Thanks, it's really helpful and congratulations on a good quarter.

Peter D. Meldrum - Director, President and Chief Executive Officer

Thank you.

Operator

And our next question comes from the line of Annabel Samimy of UBS. Please proceed.

Annabel Samimy - UBS

Hi, thanks for taking my call. I just want to go over some of the outcomes for Flurizan study, what would you do in a scenario where you don't need statistical significance of 0.01 but you reached 0.05, how would you proceed at that point and how is the FDA view results like that?

Peter D. Meldrum - Director, President and Chief Executive Officer

Well obviously to achieve statistical significance, you need 0.05 not 0.01. We did power to 0.01 because we anticipate submitting an NDA to the FDA based on the US study with our Phase II study as supporting data. If the FDA were to require 0.01 instead of 0.05 for a single Phase III study and we hit only 0.05 in the US, as I mentioned the global study is only about six months behind. So it delayed slightly the approval of Flurizan, but 0.05 is statistically significant, they were two Phase III studies, we should have no difficulty submitting an NDA to the FDA based on those studies.

Annabel Samimy - UBS

Okay. Can you just talk as to does that FDA require 0.01, or is just powered for 0.01?

Peter D. Meldrum - Director, President and Chief Executive Officer

The study is powered for 0.01. And the FDA really can decide as they please what their requirements are. As I mentioned, with Namenda, the drug was approved when they didn’t even achieve 0.05 on one of their endpoints. They still got drug approval. Historically, the FDA requires two Phase III studies at 0.05 or they have typically looked at a single Phase III study at 0.01 with the supporting data with the Phase II. Obviously, in oncology you can get a drug approved off of a Phase II study and then do a post market Phase IV. So there is quite a bit of flexibility within the FDA, we powered the study for 0.01, we are planning on submitting the NDA based on 0.01, which is the most conservative approach in terms of the FDA, but obviously based on the efficacy of the drug and the need for drugs in the Alzheimer’s disease area except or not a less high hurdle or standard.

Annabel Samimy - UBS

Okay. And really quickly just on the Predictive Medicine business, when you mentioned that you are going to expand your DTC campaign to another region and you said they would be really no significant impact to the bottom line, could you just give us an idea of whether the 47% operating margin is sustainable or might we see a little bit of compression of that going into the fall?

Peter D. Meldrum - Director, President and Chief Executive Officer

I think, we will definitely see compression of that. As we pointed out, the gross profit margin a year ago for the March 31 quarter was 43% and we have seen the impact of the stand on the DTC campaign, which is about $8 million for the campaign spread over a number of different quarters. So that definitely has an impact and we saw the benefit of the 47% margin because of reduced DTC spend primarily. So when we ramp up fully in the south, you will see those margins be reduced to more historical levels. Once the DTC campaign is over, however, we do anticipate going back to the 47% gross… net operating profit range.

Annabel Samimy - UBS

Okay, great. Thank you very much.

Peter D. Meldrum - Director, President and Chief Executive Officer

It definitely has an impact on our bottom line, no question.

Annabel Samimy - UBS

Okay, thanks.

Operator

And gentlemen, we have reached the end of the time period allowed for the question-and-answer session. I will now turn the conference back to you, please continue with your presentation or closing remarks.

Peter D. Meldrum - Director, President and Chief Executive Officer

I would like to thank you everybody for attending and listening in on the earnings conference call for our third fiscal quarter ending March 31, 2008. This does conclude the conference call and again thank you for your attendance.

Operator

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

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!

Source: Myriad Genetics, Inc. F3Q08 (Qtr. End 03/31/08) Earnings Call Transcript
This Transcript
All Transcripts