Myriad Genetics, Inc. F4Q08 (Qtr End 06/30/08) Earnings Call Transcript

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 |  About: Myriad Genetics, Inc. (MYGN)
by: SA Transcripts

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Myriad Genetics Fourth Quarter Financial 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, August 19th, 2008.

It is now my pleasure to introduce Mr. Peter Meldrum, President and Chief Executive Officer. Please go ahead, sir.

Peter Meldrum

Thank you. Good morning and welcome to the Myriad Genetics earnings call for our fourth fiscal quarter and year ended June 30th, 2008. My name is Peter Meldrum, and I’m 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 year and will be followed by Mr. Evans who will discuss our financial results. Dr. Critchfield will review the company’s molecular diagnostic business and Dr. Hobden will discuss our drug development activities. At the end of the presentation, I will turn the call back 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 future events or the future financial performance of the company. These statements are based on management’s current expectations and the actual events or results may differ materially and adversely from these expectations for a variety of reasons.

We refer you to the documents the company files from time to time with the Securities and Exchange Commission, specifically the company’s annual report on Form 10-K, its quarterly reports on Form 10-Q, and its current reports on Form 8-K. These documents identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

The company was extremely disappointed with the results of the Phase III Flurizan study, and as previously announced, has discontinued all development of Flurizan. Because of the additional development risks associated with all CNS disorders, the company has lost its appetite for further drug development in the CNS area, and will now focus its efforts exclusively on cancer and infectious diseases.

These indications – Myriad is fortunate to have a very strong clinical and preclinical pipeline of novel drug candidates, including Azixa, Vivecon, MPC-2130, MPC-3100, MPI-451936, and MPI-461359. Even with the Flurizan results, I am very pleased to report that Myriad enjoyed another highly successful year, particularly in our molecular diagnostic business.

As a result of our increased sales efforts including the recently completed direct-to-consumer marketing campaign, Myriad achieved a record product revenues of $223 million, record gross profit margins of 85%, and record net operating profits of 43%.

Our fiscal 2008 revenue which represented a 53% increase over the prior year was driven by significant increase in customer demand across all of our molecular diagnostic products. In fact, BRACAnalysis, COLARIS, and MELARIS, all experienced sample-flow growth rates of 50% of higher when compared to the prior fiscal year.

We are also pleased that fiscal 2008 saw the launch of our first personalized medicine produce THERAGUIDE 5-FU. While, our other products assess a person’s risks as developing cancer later in life, THERAGUIDE 5-FU guides the therapeutic decision by identifying patients who have a high risk of suffering a severe toxic reaction to the commonly used chemotherapeutic drug 5-FU. THERAGUIDE 5-FU has been embraced by oncologists and has exceeded our expectations during its first year of commercial sales.

With this strong product portfolio, Myriad is the global leader in this exciting field of molecular diagnostic. Molecular diagnostics has the potential of saving lives, guiding the healthcare management, and improving the quality of life of patients, and reducing overall healthcare costs. This critical industry will change the practice of medicine and should grow significantly. The annual market potential for our five molecular diagnostic products approaches $1.4 billion in the United States alone.

BRACAnalysis for the genetic pre-disposition of breast and ovarian cancer has a revenue potential of over $700 million per year. COLARIS which tests for the genetic pre-disposition of colon and uterine cancer is projected at $360 million per year, while THERAGUIDE 5-FU is estimated at $270 million per year. Even our smallest product MELARIS for the genetic pre-disposition of melanoma has a market size of over 50 million per year. Clearly, the future of our molecular diagnostics business is bright.

Myriad’s present hybrid strategy of combining a profitable rapidly growing molecular diagnostic business with the significant opportunities of a pharmaceutical business has served the company well. It has enabled us to invest in drug development with the cash flow from our molecular diagnostic business rather than having to continually go back to our shareholders. And as a result, we only have a modest 44.7 million shares issued and outstanding.

This strategy reduced the risks, typically associated with more traditional biotechnology companies, while preserving the upside of new pharmaceutical product development. Additionally, since the initial public offering, our stock has performed well for our shareholders, appreciating over 600%.

Myriad is now embarked on an exciting new era, one of sustained profitability, and we are going to be viewed very differently by Wall Street as a profitable company. The challenge facing the company will be to address Wall Street’s growth and earnings expectations without shortchanging our investment in R&D and the long-term future of the company. While our hybrid strategy certainly benefited the company in the past when we were not profitable, I believe it is incumbent on the Board and management team at Myriad to revisit the strategy in light of the dynamics surrounding a profitable company.

As a management team, our goal will be to recommend to the Board a strategy that maximizes both the potential of our molecular diagnostic business and the opportunity associated with our pharmaceutical research and development programs, thereby maximizing shareholder value.

The strategy must allow the company to continue its strong revenue and earnings growth while maintaining its position as a leader in the molecular diagnostics field. It must enable the introduction of new products, both internally developed and those acquired from other organizations. Equally important it must support a strong commitment to research and development to ensure that we realize the promise of our pharmaceutical candidates.

In determining the future course from Myriad management will do a comprehensive review and consider a variety of strategic alternatives including but not limited to a possible corporate restructuring that would separate the molecular diagnostics business from the pharmaceutical operations as independent operating entities. To assist the Board in considering and evaluating these alternatives the company has engage the investment banking firm of JP Morgan. JP Morgan and the company management will be reporting their analyses to the Board of Directors at the fall Board meetings and, of course, the Board will be responsible for determining the most appropriate strategy to move the Company forward in this new era of profitability. We anticipate announcing the Board’s deliberations by the end of this calendar year.

Now it is my pleasure to introduce our CFO, Jim Evans.

Jim Evans

Thank you, Pete. As Pete has discussed Myriad's fiscal 2008 and specifically the quarter ended June 30, 2008 have been very significant for the company. This is also true as we take more detail both Myriad's financial results for those periods. Myriad's total revenues for the quarter ended June 30, 2008 were $166.9 million as compared to $45.5 million for the same period of the prior year. Total revenues for the fiscal year were $333.6 million as compared to $157.1 million for fiscal 2007. The first component of total revenue that jumps out is a new line on our income statement pharmaceutical revenue.

As you will recall, on May 22 of this year Myriad announced that it had entered into collaboration with Lundbeck where in Myriad received an upfront non-refundable payment of $100 million. At that time it was determined that the $100 million will be taken into revenue straight line over the 15-year contract term. The intended accounting treatment changed with the June announcement of the unsuccessful Flurizan U.S. Phase 3 trail and the company’s decision to discontinue the development of Flurizan.

While we are engaged in various activities to wind up the discontinued development of Flurizan some of which have carried over into physical 2009 we have determined in consultation with our auditors that as of June 30, 2008 under the terms of the agreement, we had no further substantive obligations to Lundbeck, this resulted in our booking the entire $100 million into revenue in the quarter ended June 30, 2008. I will also point out that on June 30, 2008 Lundbeck announced that it was writing off it's $100 million investment in Flurizan European rights.

The (inaudible) therapeutic revenue we continue to see impressive growth of Myriad’s molecular diagnostic sales. Molecular diagnostic revenues for the quarter were $64.7 million, which is a 53% increase over the same quarter of our previous fiscal year. Similarly annual product revenues grew by 53.4% to $222.9 million or an increase of $77.6 million over the prior year. I will again point out that the growth we are seeing in testing revenues has been driven entirely by increases in sample flow, which continue to be strong during July and August. We are pleased to note that both the quarter and annual molecular diagnostic revenue numbers exceeded the average analyst projections.

Cost to produce the 53.4% growth in molecular diagnostic revenues for the year ended June 30, 2008 increased by only 5% over the prior year. Myriad’s gross margin percentage grew from 79% for the fiscal year ended June 30, 2007 to 85% for the 2008 fiscal year.

Gross margins for the quarter ended June 30, 2008 were 86%. Workflow and automation enhancements to our laboratory process have allowed us to make substantial improvements to our margins over the past year. These major initiatives have resulted in reduced per sample, labor, and re-agent costs while improving our processing time. Not only do we feel that these margin levels are sustainable, we expect to see continued modest improvements over the next year or two.

Research and development expenses for the quarter ended June 30, 2008 were $55.2 million. This includes a one-time license fee of $20 million, that was accrued to reflect the maximum amount that maybe payable by Myriad to the licensor of Flurizan.

Let me further explain, to set the stage, I take you back to December of 2000, when Myriad license from Oncor Pharmaceuticals surgeon rights what will become Flurizan. As part of that license Myriad agreed to pay to Oncor 20% of any related sub-license payments Myriad might receive. Additionally, the Oncor license agreement allows Myriad to offset against the 20% payment obligation certain credits and expenses incurred by Myriad in developing Flurizan. The $100 million payment from Lundbeck triggers the sub-license clause of the Oncor agreement, we must now work at Oncor to determine the appropriate credits and expenses which are allowable as an offset to the payment obligation we owe under the license agreement.

But until a final resolution is reached, we are required to book the entire $20 million. If it is determine that we owe less, we will reverse the expense at the time of that determination. The balance of research and development expenses recognized during the June 30, 2008 quarter is primarily comprised of the cost associated with our pharmaceutical, pre-clinical and clinical studies. Including the U.S. open label Flurizan trial, the global Phase 3 Flurizan trial, and a data collection and analysis from the U.S. Flurizan Phase 3 trial. Also included in these expenses was approximately $3 million for cost associated with the termination of the Flurizan study. Additionally, we continue to invest in developing new molecular diagnostic products and plan on launching at least one additional new product this year.

Selling, general and administrative expenses for the quarter ended June 30, 2008, were $36.4 million compared to $30.2 million for the prior quarter ended March 31, 2008. The increase over the prior quarter was attributable to cost necessary to support the double-digits quarter-to-quarter sales growth and to several important company initiatives including the initiation of direct-to-consumer campaign in the South and expenses associated with a preparations for Flurizan launch.

Taking a close look at these initiatives, during the June 2008 quarter we kicked-off the direct-to-physician portion of the Southern DTC campaign, spending approximately $2 million more than what spent in the March 2008 quarter. This spend is consistent with the amount incurred for the Northeast DTC for the same quarter of the prior year.

We plan on running the Southern DTC with approximately the same budget as a Northeast DTC spread over the year in a similar fashion as we encountered last year.

Next, our Pharmaceutical Commercial Operations group incurred expenses of approximately $5 million during our fourth fiscal quarter. The bulk of which were directly associated with planning for the launch of Flurizan.

Finally, as we have discussed in past years, our commission plan in corporate both quarterly commission goals and annual commission goals. The result is an increased commission expense in the fourth fiscal quarter as we payout both the quarter and annual awards.

We expect our selling, general and administrative expenses will continue to fluctuate 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.

Other non-operating expense for the quarter ended June 30, 2008, reflects a one-time $3 million write-off of Myriad’s investment in Encore Pharmaceuticals. As allowed under the Encore license agreement, the upfront and milestone payments made by Myriad to Encore were in exchange for an equity interest in Encore.

From time to time, Myriad employed an independent valuation consultant to asses the value of Encore and therefore the value of Myriad’s investment. Prior to the Flurizan results, Myriad carried its investment in Encore on its book of $3 million. Given the discontinuation of the Flurizan program and the fact that Encore’s valuation was substantially driven by the anticipated cash flows from Flurizan, Myriad has determined that the investment is impaired and has written the investment to zero.

Another new line on our income statement is income taxes. While Myriad had over $300 million in net operating losses to offset against its taxable income for the quarter and year ended June 30, 2008, Myriad is subject to a 20% corporate alternative minimum tax. Under the corporate AMT rules, NOLs can only offset 90% of income subject to AMT. We, therefore, have an AMT tax liability of approximately $600,000 and a resulting AMT credit that can be used against the regular tax liability in the future.

As a result of operations and the one-time events that I have discussed, our net income for the quarter ended June 30, 2008 was $65.5 million or $1.47 basic earning per share and a $1.40 fully diluted EPS. For the fiscal year ended June 30, 2008, our net income was $47.8 million or 1.08 basic EPS and a $1.2 fully diluted earnings per share. While this is the first profitable quarter for Myriad, we [generally] anticipate that it will not be our last.

Cash, cash equivalents and marketable investment securities grew from $310 million at March 31st, 2008 to $420 million at June 30, 2008. Even excluding the Lundbeck payment of $100 million, our cash balance grew during the quarter by approximately $10 million. Our accounts receivable are of a high quality, and the average collection period as measured by the number of days sales outstanding improved to 57 days for the quarter ended June 30, 2008 as compared to 61 days for the quarter ended March 31st, 2008.

Now before turning the time over to Dr. Critchfield, I want to make, take a moment to comment on our first return on investment analysis of the BRACAnalysis direct-to-consumer marketing campaign we launched last year in the northeast United States.

As you remember, the campaign had a goal of increasing the number of physicians that routinely order Myriad test. There were two phases to the campaign. First, a physician education campaign that began in June 2007 and the consumer awareness phase where advertising to consumers began in September 2007 and continued through March 2008. The cost for both phases of the campaign was approximately $8 million. The result was a 72% increase in the number of physicians ordering the test in a campaign area.

In conducting the ROI analysis we compared the projections of historical revenue growth in the target area as well as actual growth in the non-campaign areas to actual revenue generated during the campaign in the northeast territory. With only three months in our [belts] since the completion of the campaign, it was necessary to make some assumptions as to sustainability of future incremental revenue in the territory.

We then calculated the net present value of the future incremental revenue stream adjusted for cost of sales and calculated return on investment. The result was an ROI well in excess of our 10% benchmark. While it is still too early to assess the sustainability of the campaign, we are comfortable moving ahead on the DTC campaign in the South Texas and Florida.

The physician education phase is already underway and we look forward to launching a consumer advertising phase next month. We will complete a second ROI calculation in December 2008 wherein we will fine tune our sustainability assumptions, and that, we believe, will provide us with additional critical information needed to determine a wisdom of moving the campaign to other regions in the future. To conclude my comments, it’s my pleasure to state the Myriad has no debt and no convertible securities, and that the total number of shares outstanding at June 30, 2008 was a modest 44.7 million shares.

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

Gregory Critchfield

Thank you, Jim. It’s the great pleasure to speak with you today about our molecular diagnostics business. As Jim mentioned, year end fiscal ‘08 revenues for our molecular diagnostics business were $222.9 million, a new record, representing 53% increase over our previous year’s annual revenue of $145.3 million.

Even without the BRACAnalysis public awareness campaign, which ended in March, the last quarter achieved double-digit growth over quarter three fiscal ‘08 with $64.7 million in revenue. Our operating margin for the year was a record 43%.

We are focused on the growth strategy that has four components; increased penetration in the oncology market, expansion into the women’s health segment, broadened indications for our existing products, and the development of personalized medicine portfolio. We continue to make excellent progress in all four of these areas, and I’d like to provide details on our progress.

As Pete mentioned, the market potential for our hereditary cancer products is very large. We estimate the market potential for BRACAnalysis alone to be approximately $700 million per year. We believe that COLARIS, COLARIS AP, MELARIS and THERAGUIDE 5-FU have a large combined market potential that is high like that of BRACAnalysis.

We estimate the combined total annual market potential for our tests with current indications for testing to be over $1.3 billion. We anticipate significant growth given these large potentials for each of our product recognizing this potential is the focus of our two – two of our strategic initiatives to increase penetration in the oncology market and to expand our presence in the women’s health segment.

In the oncology market increased utilization has been driven by three factors; enhanced professional society guidelines, decreased turnaround times leading to physicians incorporating tests for real-time decision making, and sales and marketing efforts focused on expanding the physician customer base.

New guidelines by the American Cancer Society and the Society of Gynecological Oncologists now further emphasize the importance of identifying individuals with mutations for hereditary cancer. The American Cancer Society guidelines show the importance of testing for mutations with BRACAnalysis and following every patient – and following patients securing mutations with a more sensitive MRI screening technology.

Society of Gynecological Oncologists guidelines expand the kinds of patients that are candidates for testing, including individuals that may have less extensive family histories of cancer due to small numbers of individuals in the family, a lack of female relatives or adoption where family history is not available.

From an operational standpoint, we continue to utilize more efficient automation systems and work processes, which have now led to an average total turnaround time of our tests of 10 days. This is significant because it allows physicians to use hereditary cancer tests for real-time surgical decisions and increases their sense of urgency to order the tests.

Lastly, we have improved sales and marketing programs increased our physician customer base by 59% over the last fiscal year. Our second strategic focus is to increase the penetration for hereditary cancer test into the women’s health market by expanding our OB/GYN sales force and further conducting the BRACAnalysis public awareness campaign.

We are on track in our expansion of the number of OB/GYN sales reps by 40 during this year. By fiscal year-end, the number of OB/GYN sales reps will be approximately 100. As we have seen previously, our OB/GYN reps become profitable every bit as rapidly as their oncology counterparts.

The OB/GYN physician customer is positioned perfectly as many women use their OB/GYN as their primary care doctor, and OB/GYNs are accustomed to providing preventive healthcare services to their patients. We are pleased to see that OB/GYNs understand the importance of ovarian and uterine cancers, hereditary risks, risk factors in our BRACAnalysis and COLARIS tests.

Our third area of strategic focus is to broaden indications for our current genetic tests. The BRCA1 and BRCA2 gene discoveries have demonstrated utility beyond increasing the risk of breast and ovarian cancer in the future. We were involved in a number of studies with key groups who are interested in knowing if BRCA mutations, BRCA1 or BRCA2 can predict a more favorable drug response to certain kinds of drugs.

In particular, in-vitro data show that intact BRAC1 function is necessary in order for drugs like taxanes stint a poisons to work. By contrast, drugs that damage DNA have been shown to be 1,000 times more effective against tumor cells that lacks BRCA function. Myriad is involved in a number of clinical studies to look at these important questions. Two of these are the AstraZeneca trials in advanced breast and ovarian cancer, where mutation carriers are given PARP inhibitors. PARP, poly-ADPribose polymerase is an enzyme involved in the normal metabolism of DNA. If it is inhibited, breaks and DNA occur. The large breaks are normally repaired by BRCA protein switch if defective as they are in tumors of mutation carriers the tumor cells will die. This [high positives] argues that it is important to understand the BRCA status of every breast and ovarian cancer patients through BRACAnalysis in order to administer the best drug possible for the patient. This is targeted personalized medicine at its best. We are working with other groups on similar approaches for drugs they are developing for breast, ovary, colon and pancreas cancers.

Our last strategic focus is to expand our personalized medicine business and we are on-track to launch one new molecular diagnostic product a year. Our next product will be an oncology product. We are working both on internal development programs and external business development opportunities that we anticipate will yield new important molecular diagnostic products.

Myriad has made a number of important discoveries in cancer biology including BRCA1, BRCA2, P10, P16, and HPC2 ELAC2. All of which are covered by strong Myriad intellectual property. These genes and associated proteins are important elements of cancer pathways and many of them have implications both for pathway signaling and drug response. Beyond internal discoveries and development, there are number of additional opportunities we are actively exploring to in-license new products into Myriad from external sources.

Given our demonstrated commercial expertise in growing our molecular diagnostics business, our strong sales force presence in both oncology and woman’s health. Our ability to secure excellent insurance reimbursement and our focus on innovative high value products Myriad is increasingly the choice with which company’s explored partnerships when they lack these capabilities. We are currently in discussions regarding over 30 potential product or technology acquisitions. We believe we are in an excellent position to evaluate and select opportunities that make sense from a scientific, medical, and commercial perspective.

Our molecular diagnostic products make a significant difference in the lives of individuals at high risk for cancer and in treating cancer. We look forward to future growth of our current products and launching new innovative products that make a difference for patients. 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 Hobden

Thank you, Greg and good morning. It’s, of course, a huge surprise and disappointment where Flurizan did not show clinical efficacy. However, as promised, we presented the data to the audience at the international conference on Alzheimer's disease, and we will provide the data to the Alzheimer's disease co-operative study group so that it can assist others in designing their clinical trials.

Myriad will not be pursuing further studies in Alzheimer's disease and in fact, have decided to see all research and development in the CNS arena. In stead, we will be concentrating on our core expertise of cancer and infectious diseases particularly on Azixa, Vivecon, and MPC3100.

We continue to make good progress with our clinical programs with Azixa in melanoma and glioblastoma. As you may recall, Azixa is a very potent inhibitor of tumor and rapidly induces [epitosis] in the dividing cells.

In our Phase 1 studies, there were several observations of anti-tumor activity against the number of cancers including melanoma, ovarian and testicular. We also noticed that it disrupts the blood vessels, leading oxygen to the tumors. An observation that we were subsequently able to confirm with detail studies in (inaudible).

By itself, these observations would make Azixa, a very exciting compound. However, the molecule has two other properties that make it truly unique. Firstly, it is not a substrate for any of the multi-drug resistance pumps that are up regulated in tumors as a result of repeated treatment with the current generation of chemotherapy agents.

We would expect therefore that tumors that become resistant to [taxo] which is another (inaudible) agent would remain fully sensitive to Azixa. We have been able to confirm this in [xenograph] studies. Secondly, and perhaps of most significance, Azixa has the remarkable ability to cross the blood-brain barrier and accumulate in the brain. We have now examined this phenomenon in two animal species and find that Azixa have between 15 to 30 times higher concentrations in the brain and the plasma.

Furthermore, the drug is evenly distributed to all parts of the brain. Surprisingly, there have been no observations in non-clinical animal studies or in our clinical studies to-date of CNS toxicity. As a result of these observations, we have concentrated our resources on metastatic-melanoma, where there is a very high instance of brain metastasis’s upto 90% of patients by some estimates, and on glioblastoma, where patients have relaxed, following surgery and radiation. Although the glioblastoma study is relatively early, significant shrinkage of tumors has been observed. The primary endpoint of course is survival. Myriad also has an orally available analog of Azixa, which we have yet to progress into clinical studies. This compound also has extensive CNS penetration and accumulation.

We see great potential for such a compound, the continued outpatient treatment for patients who have responded to Azixa but we will await more definitive evidence of activity from Azixa before moving this compound into the clinic.

Our clinical development program for Vivecon is progressing very well. Vivecon is a noble maturation inhibitor for the treatment of HIV infection and it has now completed several dose escalations in healthy bone tears. We are able to confirm that Vivecon is orally available in humans, furthermore the half-life of drug in humans is very long which should allow us to administer Vivecon as a daily or even less treatment of dose. We have already reached plasma concentration to 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, but treatment naïve patients and expect to initiate that study later this year.

Earlier in development we have a backup to Vivecon MPI-46 1359 which is equally potent but has a longer half life and an even greater oral bi-availability. A decision to initiate development to this compound awaits further data from Vivecon clinical trails. We also have a very potent inhibitor of HIV fusion, MPI-45 1936. We expect to be able to make a decision about further development to this compound shortly.

In our previous earnings conference calls, I have mentioned our excitement about our novel HSP90 inhibitor MPC-3100 that is currently in pre-clinical development. We expect to submit an IND for MPC-3100 early in 2009. We continue to be very excited by the pre-clinical data on this compound. As you will be aware, there are a 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 bear 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 acquire 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 a cancer target in tumor cells, but was too toxic for use in animal models. Modified geldanamycin’s are still limited by severe organ toxicity, especially liver, kidney, and pancreas. They are given by infusion and cannot be administered orally.

MPC-3100 is a highly potent and specific inhibitor of HSP90, which has very good oral bioavailability and pharmacokinetics in animals.

In head-to-head comparison with competing compounds, it reduced tumor volume in a gastric tumor xenograph model without showing any evidence of toxicity. In contrast, a competing compound could reduce the rate of tumor growth, but did not show any reduction of tumor volume.

The standard chemotherapy for tumors of this type, 5-Fluorouracil caused significant weight loss and also was less efficacious. Coupling this observation with apparent low toxicity of the compound, we believe that MPC-3100 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 Meldrum

Thank you, Adrian. I will turn the call over to your operator for the question-and-answer portion.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question is coming from the line Jeff Meacham from JP Morgan. Please proceed.

Jeff Meacham - JP Morgan

Hi, guys. Can you hear me?

Peter Meldrum

Yes.

Adrian Hobden

Yes.

Jeff Meacham - JP Morgan

Okay. Thanks for taking the questions. Congrats on a quarter. I wanted to – if you can comment to the extent that you can about your operating expenses related to the overall therapeutics business. I know in the past you guys have broken out the percent of R&D that was attributed to Flurizan. I am wondering if you break out the, in a general way, the expenses attributed to just drug development on the R&D and on the SG&A side. Just trying to get a better sense for what a spin-off could look like?

Peter Meldrum

Thank you, Jeff. I’ll have Jim elaborate on this. First of all, our total R&D spend is about $120 million. About $20 million of that is associated with our diagnostics group, about a $100 million associated with pharmaceutical development. And of course, we indicated that we would discontinue all development of Flurizan which was about $60 million of that $100 million spend.

I would also direct you to the 10-Qs and our 10-Ks, which breaks out using segment analysis, the R&D and some of the other expenses among the various operating divisions within Myriad.

Jim Evans

Yes, Jeff. As far as – you know that I think Pete helped out with the R&D pretty specifically. On the SG&A, it’s relatively small what is directly associated with the pharmaceutical business. Since I have pointed out in my comments earlier, we did have about $5 million of costs that went through the SG&A associated with preparations for Flurizan launch. And those obviously will be reduced during forward until the time that we are preparing our next drug for launch. And so, that should be reduced fairly significantly in the coming months.

Jeff Meacham - JP Morgan

And just a follow-up question on the predictive medicine business, you guys have done – run DTC campaigns in the northeast, you are in the southeast now. What other markets in the US do you consider yourself to be under-penetrated? How do you think about, maybe the West Coast opportunity versus where you are today and maybe Midwest? Thank you.

Peter Meldrum

Thank you, Jeff. I think if you look at the main population centers, that reflects fairly accurately our revenue density throughout the country. So, if we decide to continue the DTC campaign beyond the south region, we would look at the West Coast, the Chicago area, other areas of the country that are the population density centers.

Operator

Our next question coming from the line of William Ho from Banc of America Securities. Please proceed, sir.

William Ho - Banc of America Securities

Hey guys. Congrats on the great quarter. Can you just elaborate a little bit on Jeff’s question with respect to SG&A? How much do you generally spend on advertising expenses and campaigns in order to push the sales in predictive medicines?

Peter Meldrum

Hi, Will. As Jim mentioned earlier, we spend about $8 million on the direct-to-consumer marketing campaign in northeast, and that represents about 12% of our total revenue base. The south region is actually larger. It represents about 18% of our total revenue base. Yet we will hold the spend to roughly that same $8 million. So, for the regions that we would look at as we go from region to region, I think you can rely on that $8 million as a reliable figure for the cost of the direct-to-consumer campaign.

William Ho - Banc of America Securities

Alright. I guess more specifically, in this year of the approximately $120 million or so in SG&A expenses, how much of that is compensation for sales and marketing staff for campaigns, etcetera, versus how much is generally rents, etcetera, a finance group, etcetera?

Jim Evans

We have never broken out that type of detail what the SG&A cost is for each of those individual components. We talk about the major initiatives and what it’s costing to the DTC campaigns or those kinds of one-off type of things. But I don’t have for you the detail on each of those individual line items within SG&A.

William Ho - Banc of America Securities

Okay. And then just one final question I guess for Greg. Do you get a lot of questions from investors about concerns about the top line, and whether or not you will hit any kind of a glass-filling leading to revenue slowing down. That being said over the last four years or so, you’ve had very, very robust growth from the top. Do you see anything that could potentially slow that revenue growth, or do you see yourself accelerating revenue growth or constraining revenue growth from here?

Gregory Critchfield

Well, this has been a concern that’s been expressed also over the last four years well, and we’ve had excellent growth. I think it’s very important to pay attention to the large market potentials of all of our products, and that includes BRACAnalysis as well as our other four products. We see this revenue potential is something that will allow us to continue to grow and to grow at significant rate. I think that that’s what we anticipate saying and we are excited about that.

This would be accelerated even further if we’re able to broaden indications for our current products, and that’s why that is one of the prongs of our four-pronged strategy. So, we will increase penetration in both our oncology and woman’s health markets. We are working on that. We have talked about those initiatives. And then broadening the indications will further increase the potential and allow us to continue excellent growth.

William Ho - Banc of America Securities

I think the last time we had an update, Jamie still been the CFO, though at that time some of the other markets or other products were growing at significantly higher growth rates, potentially even in the triple digits. Are they still growing at that rate or at a similar rate?

Jim Evans

Will, in this earnings conference call, I mentioned that for the last year BRACAnalysis COLARIS and MELARIS, all threw, grew in excess of about 50%.

William Ho - Banc of America Securities

Okay, great.

Operator

Our next question coming from the line of Annabel Samimy from UBS. Please go ahead.

Annabel Samimy - UBS

Hi. Thanks for taking my call. Just on the line and broadening out the predictive medicine platform, the molecular diagnostics platform. When you think about new products and expansion in new technologies, is there still more room in personalized medicine and does this bring a whole new level of competition for you and how do you address that? Or are there areas that you are looking at in terms of personalized medicine areas that you have IP around.

Peter Meldrum

Thank you, Annabel. As you are aware, Myriad is focused and the general feel that molecular diagnostic, but in particular, on predictive medicine and personalized medicine, and more recently our last product was a personalized medicine product. In all of these areas Myriad seeks a strong IP protection as we can obtain, and we are fortunate at the end of the test that we look at are all based on disease causing genes or genes that metabolize specific drugs as oppose to association studies where the IP situation is more tenuous.

So, we do have very strong IP in the products that are in our pipeline under development, and we feel very comfortable with the intellectual property around those. Having said that, however, I would like to point out that Myriad had strong competitive advantage in other areas in terms of it's customer service, it's insurance reimbursement programs, the excellent turnaround time, and quality of the test results and a very strong and talented sale force. So, I think our competitive advantage goes well beyond just the IP projection.

Annabel Samimy - UBS

Okay, one other question if I maybe, I guess Jim you had mention that with the $5 million that was associated with Flurizan launch cost that SG&A will be kind all those fluctuate what -- could you give us a sense of what is the right number to sort of look at a run-rate going forward I mean is that just $36 million with $5 million or is it sort of something different?

Jim Evans

Projecting of the future is difficult. Like I said, the bulk of that 5 million will go away. We have those other issues that I described as far as the commissions that came through in the quarter and so that, that will be backed off a little bit. So, without giving guidance as we don’t do I’ll reiterate those couple of items that are kind of out of the ordinary one-time things that would run into, obviously we plan on having the expense associated with DTC campaign go through the next couple of quarters. So, you can project that to be fairly consistent for the next couple of quarters, but just taking into consideration those other items that are kind of one-time out of the ordinary and hopefully that will get you to SG&A number for your models going forward.

Annabel Samimy - UBS

Okay, thank you.

Operator

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

Michael Yee - RBC Capital Markets

Congratulation on great quarter. Couple of questions, regarding the DTC that was previously in the Northeast, can you kind of characterize better for us how well that message was sticking with doctors, patients and what was the growth in this region specifically relative to last quarter and then how would characterize demand in this regions from (inaudible) this quarter and last quarter?

Peter Meldrum

Thank you, Michael. As we mentioned, we saw very excellent growth in our physician customer base in the Northeast region as a result of the DTC campaign. I think it's important to remember that our customer is the physician it requires a physician to order any of the Myriad test and it is physician that we directed our attention to. And as Jim mentioned and Greg mentioned we saw 72% increase in our physician customer base in that region. So, that is very exciting in terms of the DTC campaign based on the assumptions we made certainly exceeded our ROI hurdle.

Real question, however, is the sustainability of that after the adds of stock running, and so that’s something we will be looking at very closely over the next several months and we’ll actually do a formal ROI calculation in December of this year. But we have seen excellent growth from the campaign, the campaign looks like it's been very effective at getting the message out and increasing our physician customers.

As Greg mentioned our reps that cover the OB-GYNs achieved profitability just as fast as the oncology section. We are, of course, much more penetrated, into the oncology market having addressed that market now for a number of years, but we see the growth potential in the OB-GYN market as being substantial and we look at those reps coming up to speed just every bit as fast in the oncology market.

Michael Yee - RBC Capital Markets

On the margins on the diagnostics business about 44% or so this quarter, things are good on the gross margin, now where do you think both the gross margin and the EBIT margins can go to over a year or longer term and do you think that’s getting over 50%?

Peter Meldrum

Well, we do consider that we have room to grow on both of those numbers, gross margins would seem 600 basis points increase over the last year. I think, I would like to say with a kind of pick the low hanging fruit there, but there is still are areas where we can improve our processes and increasing our -- reducing our turnaround time and improving the cost per sample. So, I would anticipate we would continue to see improvements in the gross margin over the next couple of years.

Last quarter we had 47% net operating margins, which, I think gives us an idea of the strength of the net operating margins in a non-DTC period and so we will continue to monitor how well the DTC campaign performs as we determine if we are going to roll that board into other areas in the future, that obviously will have an impact on the operating margins. Now if we were able maintain the DTC campaign spend in the $8 million range or less as we have been able to do with the last two campaigns, obviously that number becomes less of an impact as the top line number continues to grow. So we would expect to see margins, the net operating margins improve as well as we go forward.

Michael Yee - RBC Capital Markets

Right. I am just thinking on the R&D and SG&A line there, probably a lot more leverage so that’s why the sensitivity being the DTC spend that would be reasonable.

Peter Meldrum

Yes.

Michael Yee - RBC Capital Markets

Okay. Thanks.

Operator

Our next question coming from the line of Kim Lee from Pacific Growth Equities. Please proceed.

Kim Lee - Pacific Growth Equities

Good morning. I have a couple of questions for you. The first, the line financial question, do you expect additional costs associated with the termination of the Flurizan program going forward in the next couple of quarters, or have we seen the last of those expenses?

Peter Meldrum

No, as we were able to look forward and since the viability of the contract and the discontinuation of the Flurizan program, we were allowed to go through and say if we had any solid invoices that are associated with the wrap-up of that program even those some of those expenses might happen in the 2009 period, we were able to accrue those back into 2008, but that was only for expenses that we had invoice in hand for, and so that’s the $3 million that I mentioned earlier that we were able to accrue for the termination cost.

We still anticipate that there will be additional cost as invoices come in the next couple of quarters somewhere probably in $4 million to $5 million range that we’d expect to see going forward as we wrap-up the final [license] of the project.

Kim Lee - Pacific Growth Equities

Okay, and I assume you expect those cost earlier in ’09 versus working in fiscal year '09 versus broad out.

Peter Meldrum

Yeah, I would expect it will be working diligently to try to get all those new sense wrapped-up and get those costs booked, as soon as we can.

Kim Lee - Pacific Growth Equities

Great, and also, just curious what are your days payable outstanding right now?

Peter Meldrum

Yeah, probably in the 60s I think it’s about 66 days actually. So, we take our time in getting those turned around.

Gregory Critchfield

And that was for last quarter and that does represent a substantial improvement over the prior quarter. So, we do feel that our receivables are of a very high quality and a 66 day sales outstanding, I think, is excellent in industry.

Peter Meldrum

Oh, I am sorry, you are asking about payables or receivables?

Kim Lee - Pacific Growth Equities

Payables. Yeah, payable changed a lot more days than the normal.

Peter Meldrum

Payables, we normally are in the 45 to 60 day period. But obviously we try to stretch those out for as long as we can each month and take advantage of the interest rate we get on conserving our own cash. So, yeah, those fluctuate from vendor to vendor but I would say in the 45 to 60 day period.

Kim Lee - Pacific Growth Equities

Okay, great, and one last question on, remember you mentioned going to product launches for this year you funded launched a product this year in the Oncology space, can you elaborate on one other products that are in your molecular diagnostics pipeline.

Peter Meldrum

I think you’re addressing that question to Adrian, but really it's a molecular diagnostic question. So, let me hand it over to Greg, can you feel free to jump in if you would like as well. Yes the next product we will launch is in the Oncology area. Of course Myriad is very strong in Oncology and we see tremendous upside potential in that. Myriad on the predicated medicine front has discovered genes associated with a pre-disposition of prostate cancer. We have discovered genes associated with genetic pre-disposition and the area of major depression, type II diabetes, are working on personalized medicine products in area of lung cancer, pancreatic cancer, ovarian cancer, breast cancer, and colon cancer. So, we have a very strong molecular diagnostics product pipeline in both the areas of predicted and personalized medicine and we are very excited about our ability to launch products in the future in both those stilts.

Adrian Hobden

Yes, Pete, I would just add in addition to this, the discovery as I mentioned that Myriad have made in cancer pathways, really gives us some insight and the ability to leverage some of these discoveries. That’s true and broadening indications for a test, the BRACAnalysis genes, the BRC1 and 2 are very important predictors of response to (inaudible) or to DNA damaging agents and there are large number of trials under way. Myriad is participating with key groups in this area to broaden those indications, and that will be an important area.

In addition, our internal research group is looking at these discoveries and the way that the cancer pathways are signaled, and looking at ways to leverage the information that they provide, and providing information about response to drugs and our prognosis. So, these are all the areas that we are looking. And as Pete mentioned, there are a lot of very interesting opportunities that we anticipate will come forward.

Kim Lee - Pacific Growth Equities

Great. Thanks a lot for the clarity.

Operator

Our next question coming from the line of Charles Duncan for JMP Securities. Please go ahead, sir.

Charles Duncan - JMP Securities

Good afternoon, guys. First of all, let me add my congratulations on a good quarter and strong execution. I had two quick questions. One is for Greg. Can you give us some insights on the timing, potential timings of some of that data that you outlined? That’s pretty intriguing news for BRACAnalysis, for example.

Gregory Critchfield

Yes, these are trials that take years to finally get the endpoints. As you may know Astra-Zeneca trial, we announced probably about two years ago, and that was a very preliminary trial. There were need to be more work done to have this come to fruition. But it takes usually a couple of years before the endpoints are known to see where it is, and we don’t really have a completion timeline at this point in time. All we know is that the trials are underway, and we anticipate hearing more in the future and we are looking forward to it.

There are some external groups that are working on trials now that are anticipated to last three to four years’ total. Some of these groups began these trails into 2005-2006 timeframe. So, they are getting closer to where they would have results. But with recruitment issues, some of them have been a little slower. Myriad’s involvement is actually going to accelerate things and make it easier for data to come out. When we have some more specific timelines, we’ll announce them. But right now, I can’t give a precise timeline on any of these.

Charles Duncan - JMP Securities

Thanks, Greg. And then my last quick question is perhaps for Pete. Can you outline perhaps the form in terms of the disposition of cash NOLs? Do you have some additional color on that, if the company decides to split itself into two?

Peter Meldrum

Thank you, Charles. Well, I don’t want to get ahead of ourselves, because the company has made no decision to change its current strategy or operating structure. As we mentioned in this call, periodically the Board does take a look at the strategy as is appropriate and make sure that we are still moving the company forward and operating the company in the best interest of shareholders. And we certainly are in that process right now.

As I mentioned, in the fall we will present our findings to the Board of Directors, and of course, it is a Board decision as to whether or not we do anything differently or maintain our current operating structure. So unfortunately, Charles, it’s a good question, but I think it’s premature until we’re further down the process to even think about what alternative structure the company may consider as appropriate, and how the company may move down to then implement that strategic decision.

Charles Duncan - JMP Securities

And then Pete, not to be 2Q, but definition of fall is, include September as well as November?

Peter Meldrum

Yes. As I mentioned, our hope is and again this is a Board decision, so it’s not completely within my control, but our hope is to have a final deliberation and assessment completed by the end of the calendar year. We do have two Board meetings in the fall, one in September and one in November around our annual shareholders meeting, and the Board will be deliberating certainly and discussing this in September. I will be very surprised if any decision is made as quickly as the September Board meeting. The Board will then reconvene. We have a two-day meeting in November. And again, if there are additional questions that the Board has or additional analysis they would like to have performed, we certainly can call telephone Board meetings as well. But I think –

Charles Duncan - JMP Securities

Okay.

Peter Meldrum

We should be in recently good shape to present to the Board in those fall meetings.

Charles Duncan - JMP Securities

Good deal. Thanks for added color. Congrats.

Peter Meldrum

Thank you, Charles.

Operator

Mr. Meldrum, I’ll turn the call back to you, sir, for closing remarks.

Peter Meldrum

Well, thank you very much. We appreciate everybody’s attendance on the earnings call this morning and appreciate the continued support in Myriad. This does now end the earnings call for our fiscal year-end 2008. Thank you, again.

Operator

Ladies and gentlemen, this does conclude the conference call for today. We thank you all for your participation, and ask that you please disconnect your lines. Have a great day everyone.

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