Myriad Genetics (MYGN) Q2 2017 Results - Earnings Call Transcript

| About: Myriad Genetics, (MYGN)

Myriad Genetics, Inc. (NASDAQ:MYGN)

Q2 2017 Earnings Call

February 07, 2017 4:30 pm ET


Scott Gleason - Myriad Genetics, Inc.

Mark C. Capone - Myriad Genetics, Inc.

R. Bryan Riggsbee - Myriad Genetics, Inc.


Amanda L. Murphy - William Blair & Co. LLC

Sung Ji Nam - Avondale Partners LLC

William R. Quirk - Piper Jaffray & Co.

Jack Meehan - Barclays Capital, Inc.

Tim C. Evans - Wells Fargo Securities LLC

Tycho W. Peterson - JPMorgan Securities LLC


Ladies and gentlemen, thank you for standing by. Welcome to the Myriad Genetics Second Quarter 2017 Financial Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded Tuesday, February 7, 2017.

I would now like to turn the conference over to Scott Gleason, VP of Investor Relations at Myriad Genetics. Please go ahead, sir.

Scott Gleason - Myriad Genetics, Inc.

Thanks, Herman. Good afternoon, and welcome to the Myriad Genetics fiscal second quarter earnings call. My name is Scott Gleason. I'm the VP of Investor Relations. During the call, we will review the financial results we released today, after which we will host a question-and-answer session. If you have not had a chance to review the earnings release, it can be found on the Investor Relations section of our website at

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

Please note that some of the information presented today may contain projections or other forward-looking statements regarding future events, or the future financial performance of the company. These statements are based on management's current expectations, and the actual events or results may differ materially and adversely from these expectations for a variety of reasons.

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

With that, I'm now pleased to turn the call to Mark.

Mark C. Capone - Myriad Genetics, Inc.

Thanks, Scott. I would like to start today's call by providing the key highlights for the quarter, after which Bryan will provide a detailed overview of our financial results and guidance, and I will finish by providing additional details pertaining to the ongoing execution of our business strategy. Overall, the results for the second quarter exceeded our expectations reaching their highest level in the last three years, driven by a return to sequential growth in hereditary cancer revenue, and strong results from GeneSight. In fact, we exceeded expectations on both the top and bottom line, with revenue reporting at a $196.5 million and adjusted earnings per share of $0.26.

During the quarter we saw significant progress towards our three strategic imperatives that include; continued leadership in an expanding hereditary cancer market, diversifying our revenue with new products, and growing kit products in major international geographies. Importantly, hereditary cancer revenue grew 3% sequentially, with volume trends continuing to improve throughout the quarter. Of particular note is that the oncology market also experienced sequential volume growth, reversing a trend from the past 18 months.

We continue to have productive dialogue with payers, and similar to Blue Cross Blue Shield of California, we have positively resolved our negotiations with Highmark Blue Cross Blue Shield, and signed a contract for hereditary cancer testing. Our product diversification strategy continued to show encouraging signs of progress. This quarter non-hereditary cancer products and services comprised 67% of total volume and 27% of total revenue. Our Assurex Health acquisition continued to exceed our expectations with total volume up 61% year-over-year, and revenue growing 47% year-over-year. Importantly, Assurex anticipates completing enrollment in its large prospective clinical utility study well ahead of schedule, and we expect to see the data from the 1,200-patient study by the end of calendar 2017.

If fully reimbursed, the revenue from GeneSight this quarter is rapidly approaching our current hereditary cancer revenue, showing the potential for this product to be transformative to our growth trajectory. With Prolaris we saw an important development when the MolDX program issued a draft to LCD, which would expand coverage to favorable intermediate patients, making Prolaris the only product to have received proposed Medicare coverage for this patient population. In aggregate, this would expand the total reimbursed market by approximately 50%, and add an incremental 30,000 eligible patients every year in the United States.

On the companion diagnostic front, AstraZeneca announced positive data from the SOLO-2 study, while Lynparza showed a significant progression free survival benefit in germline BRCA positive ovarian patients, which further validates the value proposition of PARP inhibitors. Also we reached a major milestone by successfully submitting our PMA for myChoice HRD to the FDA to be reviewed in conjunction with niraparib. In addition, we made substantial progress with managed care coverage for EndoPredict during the quarter. Evidence Street, the Blue Cross Blue Shield Association Tech Assessment Committee issued a favorable recommendation for the test, that was followed by favorable coverage decisions from 19 payers, bringing total coverage to over 70 million patients.

Finally, the myPath Melanoma test received manuscript acceptance for the third clinical validation study and second clinical utility study, which now completes the reimbursement dossier, and is on track for payer submissions by the end of this fiscal year. As to our international business, revenue comprised 5% of total sales with EndoPredict on pace to hit our financial target of $8 million in revenue outside the United States this year after recent reimbursement wins in France and Germany. Additionally, we announced in November a new companion diagnostic collaboration with AstraZeneca in Japan to support the regulatory filing for Lynparza, and today announced an additional collaboration with AstraZeneca in Latin America. Overall, we made significant strides this quarter towards accomplishing our strategic goals.

With that, I will turn the call over to Bryan to provide a financial overview of the fiscal second quarter, and additional details surrounding our fiscal year 2017 financial guidance.

R. Bryan Riggsbee - Myriad Genetics, Inc.

Thanks, Mark. I'm pleased to provide an overview of our financial results for the fiscal second quarter of 2017, followed by additional detail on our updated fiscal year 2017 financial guidance. Second quarter total revenues were $196.5 million compared to $193.3 million in the same period in the prior year, an increase of 2%. We were pleased to return to growth on a year-over-year basis this quarter, and deliver our highest revenue quarter in the last three years. Hereditary cancer revenue in the quarter was $144 million and grew 3% sequentially. On a year-over-year basis, hereditary cancer revenue was down 13%, and this was driven by declines in both volume and average selling price per test with volume declines responsible for the majority of the decrease.

GeneSight revenue in the quarter exceeded our expectations coming in a $21.7 million and grew 47% year-over-year. GeneSight volume for the second quarter was 57,000 tests, which was up 61% year-over-year. This quarter, GeneSight exceeded hereditary cancer to become our highest volume test. Vectra DA volume in the quarter was approximately 37,000 tests, which represented a 3% decline year-over-year. Vectra DA revenue in the first quarter was $10.7 million, which was down 5% year-over-year. This quarter Vectra DA volume was detrimentally impacted by two factors; first, some sales force realignment related to the addition of new territories and the promotions of four key personnel to broadening implementation of practice integration program; and second, the negative impact of the AMPLE study.

Now, that we have stabilized the sales team, and have the opportunity to provide the correct analysis of the AMPLE data to our customers, we expect to see Vectra volumes and revenue grow on a sequential basis in the fiscal third quarter. This is evidenced by the fact that Vectra DA volumes in December and January grew 10% relative to October and November. Long-term we have confidence that Vectra DA can grow double-digits on a year-over-year basis, and are implementing strategies to drive increased growth with lower costs. Prolaris revenue in the quarter was $3.1 million. Prolaris test volumes grew 33% year-over-year with total test orders coming in at over 4,700 tests. EndoPredict revenues in the quarter were $1.6 million and grew 73% year-over-year.

We continue to see the potential for significantly increased product traction with increased reimbursement in Europe and the upcoming launch in the United States. Lastly, revenue associated with our pharmaceutical and clinical services business was $12.6 million and was up 18% year-over-year. Revenue associated with our Myriad RBM franchise was exceptionally strong in the quarter, given the timing of some large pharmaceutical contracts. I now would like to discuss our financial metrics for the quarter. Gross margins were 77.4% in the second quarter compared to 79% during the second quarter of last year.

The year-over-year decline was primarily attributable to product mix with more revenue from lower margin segments, such as pharmaceutical and clinical services, and our new products that are not yet fully reimbursed. Moving on to operating expenses; GAAP research and development expenses were $18.6 million in the second quarter compared to $16.7 million in the fiscal second quarter of last year. Almost all of the increase on a year-over-year basis is attributable to the Assurex Health acquisition. GAAP SG&A expense this quarter was $120.3 million compared to $90.8 million in the second quarter of last year, which was almost exclusively driven by operating expenses associated with Assurex Health, and an increase in non-GAAP charges of $7.8 million associated with the acquisition. GAAP operating income in the second quarter was $13.2 million.

On a non-GAAP basis, our adjusted research and development expense was $18.5 million compared to $16.6 million last year, and grew 11% year-over-year. Excluding incremental R&D spend from the Assurex acquisition, our R&D expense was flat on a year-over-year basis. Adjusted SG&A expense this quarter was $110 million compared to $87.7 million in the second quarter of fiscal year 2016. Excluding the impact from the Assurex acquisition, total non-GAAP operating expenses were essentially flat year-over-year. We believe this is demonstrative of our focus on managing cost and leveraging our existing infrastructure.

Adjusted operating income was $23.6 million in the second quarter and declined 51% relative to the second quarter of last year. The decline in adjusted operating income is based primarily on lower hereditary cancer revenue, the mix of our volume for products that are not yet fully reimbursed and dilution associated with the recent Assurex acquisition. As in the last two quarters, we recognized the tax impact associated with a revaluation of our stock-based compensation expense due to the adoption of the new accounting standard ASU 2016-09. The benefit for the second quarter was $600,000, which we exclude from our adjusted earnings per share.

Adjusted earnings per share were $0.26 for the second quarter, compared to $0.45 in the second quarter of last year. Adjusted earnings per share included approximately $0.06 of dilution this quarter related to the Assurex Health acquisition including interest expense. Our fully diluted share count decreased sequentially by approximately 1.3 million shares to 68.2 million shares outstanding. This reduction was driven primarily by our share repurchase program. During the quarter, we used approximately $10 million to repurchase 600,000 shares of Myriad common stock at an average price of $17.10 per share.

From a debt perspective we refinanced our 12-month term loan facility with a five-year revolving $300 million credit facility this quarter. The interest rate on the revolving credit facility depends upon our leverage ratio, and the current interest rate is LIBOR plus 175 basis points. We currently have $205 million drawn down on the existing facility, and plan to reduce the balance in the second half of the fiscal year.

Our cash and cash equivalent balance at the end of the second quarter was approximately $218 million, which increased from our cash balance of $201 million at the end of the first quarter. We continue to generate meaningful free cash flow with non-GAAP free cash flow in the quarter of approximately $30 million.

I would now like to discuss our fiscal year 2017 financial guidance. We are narrowing our guidance for the full fiscal year within the previous ranges. We are now forecasting revenue of $745 million to $755 million, and earnings per share of $1 to $1.05.

Let me discuss some of the underlying trends supporting our guidance beginning with hereditary cancer. We saw continued improvement in the trajectory of hereditary cancer sample volumes in the second quarter, and these positive trends represented upside to guidance. However, we are anticipating a modest negative volume and average selling price impact from the recent Anthem out-of-network decision. In addition, as we transition to an out-of-network provider, our accounting policy is to move from accrual to cash-based accounting for these plans, until collections experience is established to support appropriate accruals.

Given collection cycles, we will see a delay in revenue recognition with the Anthem regional plans. Of course, the impact from this revenue recognition transition will mitigate in 2018, and will reverse in the future when we transition back to accrual accounting. In total, we are anticipating approximately a $10 million negative impact to hereditary cancer revenue in the second half of fiscal year 2017 from these Anthem plans, mostly due to changes in revenue recognition. Given the fact that the expenses for this delayed revenue will occur in fiscal 2017, we are now guiding to adjusted EPS at the lower end of our previous range.

Moving on to GeneSight with Assurex Health, we continue to expect upside from GeneSight relative to our initial forecast. Additionally, we expect to see operating losses in the second half of the year lessen as we grow revenue and continue to execute on cost reduction and synergy plans. As an example, by the end of the second quarter, we had completed two-thirds of the 60 identified projects to integrate the operations of Assurex into Myriad, and we expect to complete all integration projects by the end of the third quarter. We are currently ahead of schedule from both a growth and synergy perspective, and believe Assurex could reach breakeven on a monthly basis towards the end of this fiscal year compared to our prior guidance for the first half of fiscal year 2018.

For Prolaris, we are trending in line with our expectation. We do not anticipate the recent favorable intermediate LCD from Medicare impacting our fiscal year 2017 revenue, given the timeframe it will take to become effective.

Vectra is currently trending below our expectations for the year, but we anticipate a return to sequential growth in the back half of fiscal year 2017. Our guidance reflects our expectation to have continued Medicare reimbursement, given the strength of the data supporting the clinical validity and clinical utility of the test.

We are not currently modeling any U.S. revenue from EndoPredict in our guidance, and consequently, any revenue we receive would be incremental to our plan. Additionally, we are expecting lower revenue in the back half of the year for our pharmaceutical and clinical services division.

For the fiscal third quarter, we are guiding to revenues of $188 million to $190 million, and adjusted earnings per share of $0.23 to $0.25. This guidance incorporates the typical seasonality we see in hereditary cancer revenues, the anticipated impact of the Anthem out-of-network decisions, and current performance trends for Assurex Health.

Overall, we were glad to see a return to sequential growth in the fiscal second quarter, and we expect to grow from a revenue perspective in the second half of fiscal year 2017. Importantly, we have reached a milestone where two-thirds of our volume is now non-hereditary cancer, and the revenue of fully reimbursed would be greater than hereditary cancer. As we garner broader reimbursement and increasingly leverage our sales infrastructure investments going forward, we will be positioned for significantly improved profitability.

With that, I am pleased to turn the call over to Mark to provide a more detailed business update.

Mark C. Capone - Myriad Genetics, Inc.

Thanks, Bryan. I'm happy to provide some additional details about the execution of our business strategy. Our hereditary cancer business demonstrated sequential growth in both our preventive care and our oncology markets. The oncology growth was particularly noteworthy since we had not seen sequential growth in that segment for 18 months. This was attributed to three primary factors. First, we signed preferred provider agreements with organizations that represent over 70% of community oncologists. This agreement emerged after extensive technical assessments by these organizations, and underscores our best-in-class quality and research commitment. As a result, in the second quarter, we experienced double-digit sequential growth among oncologists in these physician networks.

Second, from a sales force perspective, we saw increased productivity within our hereditary cancer sales teams, with the highest field territory count in our oncology team in the past year. Finally, we saw positive order trends from our disease-specific panels that we launched in the fall for genetic specialists who wish to tailor their gene selection. This was evidenced by the fact that monthly test volume from genetic specialists was up 24% from the start of the year. On a managed care front, similar to our positive resolution with Blue Cross Blue Shield of California, we signed an agreement with Highmark Blue Shield to remain as an in-network provider.

We continue to demonstrate that myRisk provides substantial additional value relative to the lower quality hereditary cancer tests and approach contracting with that perspective. In the few cases where we have not reached agreement, we continue as an out-of-network provider, billing less charges, and retaining more than 80% of the volume. It is important to note that as an out-of-network provider, insurance payments are typically 60% to 80% of bill charges. Regardless of our network status, physicians and patients continue to demand the highest quality test that provides crucial information for generations of family members.

Transitioning to our diversification efforts, I would like to provide some additional details on our progress. As I previously stated, greater than two-thirds of our volume in the second quarter was in non-hereditary cancer tests, and 27% of revenue was attributed to non-hereditary cancer products. While volume has grown substantially, we continue to make steady progress on reimbursement. To date, the average selling price for a composite of our new products is about 30% of our targeted average selling price. If these new products were fully reimbursed this quarter, the run rate would have exceeded $600 million in annual revenue, which is still only a fraction of their $16 billion global market potential.

Increasing average selling price remains one of our top priorities, and we have shifted or added significant resources towards this end in the past six months. The product leading the gains this quarter was GeneSight, and we are excited with both the revenue and volume growth. Importantly, we anticipate completing enrollment ahead of schedule this month and our landmark clinical utility study in collaboration with numerous leading academic institutions, many of whom are members of the national network of depression centers including Johns Hopkins University, University of Pennsylvania and University of Michigan. The study will evaluate approximately 1,200 patients comparing GeneSight versus treatment as usual with a primary endpoint measuring the change in depressive symptoms or HAM-D17 scores, as well as several other important secondary endpoints.

The study also will provide data on patients with anxiety, which represents another significant market opportunity. We believe this data will be instrumental in driving expanded coverage for GeneSight given the size as a prospective study. Additionally, we completed a payer demonstration project with a third-party analyst using UnitedHealth Optum dataset, which demonstrated substantial cost savings associated with the use of GeneSight. We plan to publish this data in a leading managed care journal in the near future. In addition, we initiated demonstration projects with other leading payers, including Humana and Anthem's HealthCore subsidiary to help support future coverage determinations for the test.

Moreover, we presented an additional health economic study at the Neuroscience Education Institute Conference in November. The study compared the total cost for patients diagnosed with depression whose medications were congruent versus incongruent with a GeneSight test report. The results show that medication cost savings were $6,747 per member per year when clinicians follow the GeneSight test recommendations. These health economic studies are instrumental in driving expanded coverage for this important test. As evidenced this quarter, we signed contracts with two small commercial payers for GeneSight and several Medicare advantage plans.

Lastly, we are taking an important next step by initiating a small pilot program to distribute GeneSight with our preventive care sales team in the third quarter. This pilot will test sales strategies, and begin to position the company for a broader sales launch as we expand reimbursement coverage in the preventive care market. As a reminder, there are approximately 16,000 high-volume primary care physicians, that represents a market larger than the 14,000 high-volume psychiatrists, we currently call upon.

Moving onto Vectra DA, this quarter's results were impacted by sales force realignment, as well as the AMPLE study that was published in the fall, using an unconventional analysis. After obtaining the raw data files from the study, we were able to perform an accurate analysis, which was eventually published by Dr. Curtis et al in a letter to the editor, late in the second quarter. Dr. Curtis has showed that inappropriate analysis, Vectra DA would was highly statistically significant in predicting the risk of radiographic progression with a P value of 0.003 or better. This is remarkably consistent with three other publications, which showed very similar results. Armed with this correct analysis, our sales teams have been very effective at addressing physician questions and are seeing ordering patterns return to typical trends with a sequential increase in the third quarter.

Unfortunately, the MolDX program under Palmetto issued a draft non-coverage LCD, prior to reviewing the appropriate analysis published by Dr. Curtis. The draft LCD was discussed by Medicare at the February 6 CAC Meeting and is now subject to a 45-day public comment period. When Medicare covered Vectra DA in 2013, it was based upon eight supporting publications. In the past three years, 26 additional publications have been generated, making Vectra DA one of the most studied molecular diagnostics in the industry. We plan to vigorously engage with Medicare to review the analytical flaws in the AMPLE study and to highlight the substantial additional data published since the initial coverage decision.

In aggregate, Vectra DA has now been utilized on over 300,000 patients, and by 75% of rheumatologists, making it one of the most widely requested personalized medicine tests. Also, it was recently included in United Rheumatology professional guidelines, that represent 10% of all rheumatologists in the country. And in patient guidelines by an advocacy group named Creaky Joints. As a result, the groundswell of support for Vectra DA is substantial, and we would expect a robust public response during the comment period. Payers that have seen the appropriate AMPLE analysis have been supportive, and as evidenced, we initiated our first payer demonstration project with an independent practice association in Southern California. This project will evaluate the impact of Vectra DA on patient outcomes and healthcare costs in a real world setting, which we believe can catalyze payer coverage.

We also have two additional demonstration projects in the final stages of contracting with significant payers and health benefit managers. And the evidence for Vectra DA continues to mount with the publication of an important clinical utility study in Arthritis and Rheumatology. This 157-patient study evaluated the ability of Vectra DA to predict response to biologic or non-biologic therapy in methotrexate incomplete responders. In the study, patients with a lower Vectra DA score was statistically significantly more likely to respond to triple therapy relative to a biologic, and patients with high Vectra DA scores were statistically significantly more likely to respond to a biologic than triple therapy. This ability of Vectra DA to predict which patients will respond better to non-biologic DMARD combination therapy or to a biologic therapy, represents an important finding that can help physicians to stratify management of their patients, and can guide payers to optimize biologic use.

Moving to Prolaris, we saw encouraging progress towards expanded reimbursement with a draft LCD from Palmetto, covering the test for favorable intermediate patients. If approved, Prolaris would be the only prostate cancer prognostic test approved in this patient population. Favorable intermediate patients comprise approximately 25% of the prostate cancer patient population, and given Medicare represents about 60% of prostate cancer patients, this LCD would expand coverage to approximately 30,000 additional patients or 15% of prostate cancer patients. Given that we currently have coverage for about 35% of prostate cancer patients, this would increase our coverage to approximately 50% of patients in the United States.

Additionally, in the third quarter, our urology team will begin selling hereditary cancer testing to urologists. The recent expansion of guidelines by NCCN now leads the coverage for patients with a Gleason score of 7 or greater and a family history of cancer. This represents yet one more example of the four and six strategy, whereby products can be distributed by multiple sales channels and generate future operating leverage.

Next, I would like to discuss our progress within EndoPredict. This quarter, we received a favorable technical assessment for EndoPredict from the Blue Cross Blue Shield association tech assessment organization Evidence Street. This decision along with similar decisions from other insurance providers has translated into 19 insurance plans, announcing favorable coverage determinations for the test. And we now have $70 million covered lives in the United States. It is important to note that we have also submitted our dossier to Medicare for EndoPredict reimbursement.

It is unprecedented in our experience to see this level of payer coverage and interest prior to a diagnostic launch. And we are encouraged about the potential for U.S. revenue from this test to be a growth driver in fiscal 2018. Given the progress on reimbursement, we are planning on launching EndoPredict in the second half of this fiscal year, and will distribute the product utilizing our existing oncology sales team. The Myriad team is the largest molecular diagnostic sales team in the oncology market, and has called on medical oncologists and surgeons for over 20 years. With the addition of EndoPredict, our oncology sales team will present physicians treating breast cancer patients with best-in-class molecular diagnostic tests for risk assessment, recurrence prediction, and treatment selection. This represents an unprecedented range of clinical solutions in the hands of one sales team, and our oncology team is excited about this opportunity.

We continue to receive significant interest from physicians following the TransATAC study, where EndoPredict demonstrated that it had four times the prognostic power of the market leading first-generation test. Additionally, physicians like the lack of a confusing intermediate result, and the fact that EndoPredict can identify a larger subset of patients who can safely forego chemotherapy. We believe all of these advantages, our formidable sales and marketing team and an aggressive contracting strategy position Myriad to be successful in this market.

Finally, based upon the strong supporting clinical data, the Integrated Oncology Network or ION recently made EndoPredict the preferred test for their physicians. As a reminder, the Integrated Oncology Network is the largest physician service organization specializing in community oncology, and represents approximately 50% of community oncologists.

Next, I would like to discuss our progress with myPath Melanoma. We have now completed our reimbursement dossier as our third clinical validation study and our second clinical utility study have been accepted for publication. Our third clinical validation demonstrated that myPath Melanoma was able to differentiate melanoma from benign skin lesions with a 95% diagnostic accuracy in 182 patients with known outcomes. Our second clinical utility evaluated changes in real world patient management based upon the myPath Melanoma test results. In this study, there was a 71% change in patient management from pre-test recommendations and an 81% reduction in biopsy site re-excisions for patients with a benign test result. As a result of these publications, we remain on track to submit this dossier to Medicare and private payers by the end of fiscal year 2017.

On the companion diagnostic front, AstraZeneca announced this quarter that it had met its primary endpoint in the SOLO-2 clinical study, which evaluated Lynparza in recurrent ovarian cancer patients that were identified with BRACAnalysis CDx. We believe this is yet another validation of the scientific thesis supporting the use of PARP inhibitors in patients that have a defective homologous repair pathway within their tumors.

In the second quarter, we completed our PMA submission for myChoice HRD. This represented a major undertaking given the complexity of the test and further demonstrates Myriad's regulatory capabilities which set it apart from any other company in the personalized medicine industry.

Over the next 12 months, we expect pivotal data from 10 additional studies to be announced. The indications where we expect to see data include HER2-negative metastatic breast cancer, triple negative breast cancer, ovarian cancer, and pancreatic cancer. In aggregate, these indications represent 380,000 patients per year and over $1 billion of revenue potential.

Our last strategic imperative is expanding our contribution from international markets. This quarter, international revenue comprised 5% of total revenue, and much of the growth was attributed to EndoPredict. EndoPredict generated $1.6 million in revenue this quarter and grew 78% year-over-year. The majority of the growth in EndoPredict is attributed to the recent reimbursement coverage decision in France, where we now have a growing number of sites actively using the test.

We expect German reimbursement to increase in the last half of this fiscal year as various sites implement the ASV requirements required for billing. We also submitted our reimbursement dossiers to NICE in the UK in the second quarter, which positions us for a reimbursement decision in calendar year 2018.

Finally in Canada, the Molecular Oncology Testing Advisory Committee recently issued a report recommending EndoPredict for breast cancer prognostic testing. We recently initiated a collaboration with a local lab in Ontario to generate data on the tests, which will allow us to secure reimbursement in Ontario, and are initiating a similar process in Quebec. Combined, these two territories comprise 60% of Canadian patients or 15,000 patients per year.

Our international team also signed two significant companion diagnostic agreements with AstraZeneca. The first agreement is in Japan, where under the agreement, Myriad will submit its BRACAnalysis CDx test for approval by Japan's Pharmaceuticals and Medical Devices Agency or PMDA in parallel with the PMDA review of AstraZeneca's novel PARP inhibitor olaparib. This agreement comes with minimum contract commitments for testing. Additionally, Myriad signed an agreement with AstraZeneca to perform tumor BRACAnalysis across six Latin America countries.

We believe these partnerships are representative of the potential for companion diagnostics outside the United States, especially as our proprietary myChoice HRD becomes the gold standard companion diagnostic for PARP inhibitors.

In conclusion, the dedicated team at Myriad is transforming our company into a larger and more diversified personalized medicine company that provides exceptional patient care. And we believe the notable results in the second quarter are a reflection of that commitment. We continue to see exceptional opportunity for personalized medicine, to achieve the dual aims of improved patient outcomes, while lowering overall healthcare costs. With a best-in-class portfolio of rapidly growing, innovative products, and steady progress towards broader reimbursement, we believe we are positioned to deliver outstanding value to our shareholders.

With that, I will turn the call back over to Scott.

Scott Gleason - Myriad Genetics, Inc.

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

Now we are ready for the Q&A session. In order to ensure broad participation in today's Q&A session, we are asking participants to please ask only one question and one follow up. Operator, we are now ready for the Q&A portion of the call.

Question-and-Answer Session


Thank you, sir. Our first question comes from the line of Amanda Murphy from William Blair. Please go ahead.

Amanda L. Murphy - William Blair & Co. LLC

Hi. Good afternoon. Mark, a question for you just on the sales force, just I guess thinking about the changes in the business (38:20) shifting from hereditary cancer to some of the other business lines that are growing, how are you thinking about – or I guess, maybe just first, can you maybe speak to the sentiment of the sales force? Just I know in some cases there is not the ability to cross sell necessarily and (38:40), so maybe just starting with that. And then just thinking about incentivizing going forward, how are you guys thinking about providing incentives particularly given that, again, there's not necessarily always cross-selling opportunities?

Mark C. Capone - Myriad Genetics, Inc.

Yeah. Thanks, Amanda. So I've assumed probably you're speaking specifically towards the oncology team. As I mentioned, they are very energized at this point. I think there is a number of reasons why. First obviously, results in the second quarter were excellent, we are very pleased to see an 18-month trend reverse in the second quarter. I think, it's a result of some excellent strategic work and tactical work on the part of our entire oncology business unit. And of course that has everybody excited to see that kind of results from the efforts that were put in by the entire team.

In addition to that, they've now got a couple of exceptional products to launch. EndoPredict is of course coming, and our companion diagnostic portfolio, they feel very excited about BRACAnalysis CDx, the potential for expanding indications for BRACAnalysis CDx, and myChoice HRD and the data that's going to come in the next 12 months. So that type of world-class portfolio of products is very unique for a salesperson to have three world-class products at one time. And so they're very excited about that. I think, as evidence of that, we've got the sales force a full – the full territory counts are higher than they've been in at least 12 months. And so the team, at this point, I think is quite excited.

Each of our sales teams, to your point, they're going to have opportunities for multiple products. We just talked about oncology with three products. With urology, now they'll be launching a second product, which is exciting as well, because the numbers of men with Gleason Score 7 or above are 100,000 men a year that have that, and if they have family histories, they're eligible for testing. So our urology team is excited about now having a second product in their bag. As you look at preventive care, we're beginning to a pilot program that put a second product in their bag with GeneSight.

So I think across the board, you're seeing the four and six (41:06) strategy come together with multiple products in people's bags. We look carefully at how we incent those sales teams for each of those products. I think the team, our sales team, our sales management team has got quite a bit of experience in multiple product selling. And so we're always careful to ensure that we're going to incentive behavior ultimately that's going to try drive the revenue and profitability that we need to see in the business. So I think we're pleased with the types of incentive plans that they have in place. So I think overall our sales teams are really in good shape.

Amanda L. Murphy - William Blair & Co. LLC

Okay. Got it. And then I just had a follow up on, again, I guess on the oncology side. So you mentioned, obviously, you had the sequential growth. Can you help us just frame out, obviously, you typically have a bump in sequential volumes in this quarter. So what you normally see there, and then relative, I guess, to the benefit of things like some of the agreements that you've signed with the various oncology groups?

Mark C. Capone - Myriad Genetics, Inc.

Yeah. I think, one of the things that we had not seen actually was a sequential increase in oncology, if you actually look back over the last 18 months. So I think, that actually was unique that we did in fact see this sequential increase.

And the other reason that's the case is that generally the sequential increase we do see from Q1 to Q2 is primarily associated with patients that are exhausting cafeteria plans and things like that. That's really not as applicable in the oncology market, because unfortunately many of these patients have exhausted their obligations for out-of-pocket cost long before you approach our second quarter. And so I think, that was actually out of the norm for what we would have typically seen in oncology. In preventive care, we have historically seen an increase sequentially, the types of increases we see really depend on each year, and frankly sometimes we see unique things like celebrity publicity that hit in our second quarter. So ranges of anywhere from 0% to 6% types of sequential increases are things we might have seen in the past. So I think the sequential increase we saw in preventive care was pretty typical for us.

Amanda L. Murphy - William Blair & Co. LLC

Okay. Thanks very much.

Mark C. Capone - Myriad Genetics, Inc.

Thank you, Amada.


Our next question comes from the line of Sung Ji Nam from Avondale Partners. Please go ahead.

Sung Ji Nam - Avondale Partners LLC

Hi. Thanks for taking the question. Mark, I was wondering for your companion diagnostic program other than niraparib, how many of the eight additional pivotal studies that are expected later this year involves myChoice HRD? And related to that, and based on your experiences with Lynparza, are you seeing the cannibalization of the BRACAnalysis CDx from other non-FDA approved tests? And then also given there is another FDA-approved test out there for a PARP inhibitor, how do you see that potentially impacting your position for CDx? Thanks.

Mark C. Capone - Myriad Genetics, Inc.

All right. Thanks, Sung Ji. I'll see if I can remember all of those. So as you look out, we have not publicly disclosed the exact nature of each of our companion diagnostic products with our collaborators on their request. And so I can't give you definitive details unless the pharmaceutical company has made that public. And so I'd refer you to some of those. We're collaborating with all of the PARP inhibitors with the exception of one Clovis. And so we have active programs with all of them, and some of them have announced their plans and strategies with myChoice HRD, some have not. And I've also mentioned in fact that some are utilizing myChoice HRD Plus, which includes over 100 additional genes measured in tumor. And again, we haven't necessarily disclosed all of those relationships with those pharmaceutical partners. But certainly over the next year, we're going to see a number of other read-outs with myChoice HRD as a companion diagnostic.

I think your second question was cannibalization we might see from non-FDA tests for patients being considered for PARP inhibitors. It's difficult to say, obviously companies aren't disclosing their results, and certainly don't disclose those by patients with indications. The other reason that it's complicated or difficult to see is because at least today all of the patients that are approved for PARP inhibitors, ovarian cancer patients, are patients that would otherwise qualify for a germline hereditary cancer test.

And so in general, when we started down this path, we had never expected BRACAnalysis CDx for ovarian cancer to necessarily add to the market as a whole, because those patients were already indicated for hereditary cancer testing. There probably are some instances where physicians are using a non-FDA approved test, but of course those companies, there the company should not be promoting BRACAnalysis for use as a companion for PARP inhibitor if they have not gotten that approved by the FDA, but they can promote it for use as an hereditary cancer test.

And lastly, there is of course another FDA approved test for PARP inhibitors. It's essentially a test to look at the tumor BRCA status. One of the things that's important to note is that myChoice HRD submission that we have in front of the FDA has two components to it. It's a tumor BRCA result, as well as the HRD score. We think our test will be the best test at identifying patients that have tumor BRCA mutations, given our extensive experience, our capability of classifying variants, and those variant classification programs that are previously been reviewed by the FDA. And so we will be able to provide physicians with a tumor BRCA result once the myChoice HRD product is approved. So hopefully that got all your questions, Sung Ji.

Sung Ji Nam - Avondale Partners LLC

Thank you so much.


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

William R. Quirk - Piper Jaffray & Co.

Great. Thanks. Good afternoon, everyone. First question, Mark, just wanted to ask about the CPT coding meeting that's coming up here later on this week. There's obviously some language about adjusting some codes and such, and would just be curious to hear your take on that. I think certainly there are some that think this might be a bit of a kind of headline risk relative to the hereditary cancer business. Thanks.

Mark C. Capone - Myriad Genetics, Inc.

Yeah, thanks, Bill. Yeah, there is obviously a CPT coding committee coming up, a couple of different codes are under discussion. I think the one that probably has got the most discussion is a code 81432, which is the sequencing code that some companies are using. For us, this is really not much of an event. The codes that we use are all things that we negotiate and include in all of our private payer contracts, and have discussions with Medicare as well. 81432 is not a code we use, it's not in our contract, it's not one that we would plan to use. Remember, these contracts are three-year contracts. And all the coding is already contained in those contracts, and 81432 is not a part of any of those contracts.

So for us, we don't use it, we're not planning to use it. So I think, the discussions this week are probably not really salient for us as a company. One other thing I would note, that four companies that do use that, they also build its corresponding ductal code 81433. And for those who didn't see that, recently Medicare modified the pricing for that combination of both the sequencing and the ductal code now is being reimbursed at about $1,550. So that's the price, if you will, for those two codes combined. But again, this is not one that we use or have incorporated into any contracts.

William R. Quirk - Piper Jaffray & Co.

Got it. And I appreciate the color. Thanks, Mark, and we did see that additional coding change. Just as a follow up, just thinking a little bit about EndoPredict, obviously it's continuing to perform pretty well outside the U.S. I'm curious about your comments still around Germany and expansion reimbursement there. Can you elaborate a little bit, there obviously was a document that came out, not that long ago, talking about a lot of their current tests and then chemotherapy benefit tests. And quite candidly, I think, there were some expectations of a coverage expansion. If they were certainly they weren't included in at least that document. So could you elaborate on that? Thanks.

Mark C. Capone - Myriad Genetics, Inc.

Yeah. Thanks, Bill. You're referring to there is an organization that assesses new technologies in Germany, much like NICE for those who are familiar with that in the UK that assesses different technologies in whether or not their view is whether they should be reimbursed. And what came out of that, is that their recommendation was that none of the prognostic tests be reimbursed. Now, that being said, the GBA, which is the organization that actually makes the coverage decisions, is not obligated to follow that, and in fact in many cases has chosen in the past not to follow that. So there has been a decision that in fact it would be appropriate for prognostic testing, and I think the groundswell supported by oncologists throughout Germany is very broad for reimbursing for these prognostic tests.

And the GBA has said it's appropriate for cases where those tests are being billed by an ASV, which is a specialized breast cancer center in Germany. Most patients in Germany, I think 75%, are seen by these specialized ASVs. And so for those institutions, they have to establish themselves as an ASV for this testing, and when they do so, they should be reimbursed for EndoPredict testing. And so that's a little more color on my commentary that these particular cancer centers are in the process of filing and getting the paperwork done to be designated as an ASV, and then will be able to secure reimbursement. So we're expecting that to begin to happen in the latter half of this fiscal year. I know it's complicated. Hopefully that makes sense.

William R. Quirk - Piper Jaffray & Co.

It does. Thank you.


Our next question comes from the line of Jack Meehan from Barclays. Please proceed with your question.

Jack Meehan - Barclays Capital, Inc.

Hi. Thanks. Good afternoon, guys. I wanted to follow up and ask about EndoPredict here in the U.S., just a little bit more visibility on the launch timeline, what you are waiting for for that to begin, and then your thoughts on the Medicare dossier process for that.

Mark C. Capone - Myriad Genetics, Inc.

Yeah. Thanks, Jack. As we noted in our commentary that we continue to expect launch of EndoPredict in the United States by the end of this fiscal year. Obviously, we're in February, so that doesn't give us many months left. So you'll see it in the coming months here. We haven't purposely provided a lot of additional detail as to the nature of that. Obviously, this is a competitive market and we think it wise to not necessarily provide additional details, but we will be selling it through our oncology sales team and to customers that they know quite well. And so we're excited to be able to provide that with some really nice head-to-head data for our customers to compare some of the alternatives that are in the market.

From a Medicare perspective, we have submitted that. Of course there is no statutory requirement as to how long it might take Medicare to review that dossier and decide whether to post a draft LCD. That would be the next step that we would expect to see. If in fact they're favorable towards that dossier, we would see a draft LCD and that would go through the public comment period that it has historically gone through. So there will be a 90-day process, if you will, at least 90 days after in fact the draft LCD is posted before that were to become finalized.

I would also note that Medicare had actually posted a draft LCD for EndoPredict previously, and it had been incorporated with some other tests into a singular draft LCD. That was subsequently withdrawn because of the nature, the fact that there were multiple tests that were contained on that LCD, but I do think at least reflects on the fact that they were favorably inclined to a draft LCD in the past six months. So we're hopeful that's an indication, and we'll obviously pursue this aggressively.

Jack Meehan - Barclays Capital, Inc.

Great. That's helpful. And then, Bryan, one on the income statement. I was just wondering, is there anything notable in the bad debt line this quarter? I'm not sure if it's just the new products or out-of-network revenue or some abnormal claims coming through, but just any thoughts on that would be great. Thanks.

R. Bryan Riggsbee - Myriad Genetics, Inc.

Yeah. Thanks, Jack. Yes. I would say nothing to highlight. We look at that on a multiyear basis and I think when you look at it historically it's fluctuated up and down over time. So I don't think there is really anything that I would highlight in the current quarter.


Thank you. Our next question comes from the line of Tim Evans from Wells Fargo. Please go ahead.

Tim C. Evans - Wells Fargo Securities LLC

Thanks. Earlier in the year after you bought Assurex, I think you were planning on revenue of about $50 million for the year, and it looks like it could be closer to $70 million if we're taking this quarter's numbers as kind of a run rate. Can you talk about what's created that upside for you? And then, given that your guidance is unchanged at the midpoint, is the offset there the Anthem revenue? Thanks.

Mark C. Capone - Myriad Genetics, Inc.

Yeah. Let me talk about the first and then I'll have Bryan elaborate on some of the guidance numbers. I think one of the things we noted, Tim, when we acquired them is, any time you do an acquisition, obviously there needs to be integration activities that can sometimes cause disruption, and we noted when we did the acquisition that our guidance was predicated on an expectation that there might be some disruption as we pursued integration activities. I think the integration teams from both companies have been outstanding. And I think we clearly have not seen that disruption, and in fact, I don't think the Assurex team has missed a beat. And so I think that's part of what you're seeing in this, is that a team that was growing the business extremely well, and a trend that's just continued subsequent to the acquisition and during the integration. Bryan, you want to talk about guidance?

R. Bryan Riggsbee - Myriad Genetics, Inc.

Yeah. And Tim, I would say, relative to the guidance, I think you hit on the right point, which is that when you look at the $10 million that we talked about in the back half of the year related to Anthem, I think that's really offset by the upside that we've seen in Assurex relative to where we were at the start of the year. So, I think that would be the primary thing I would point to.

Tim C. Evans - Wells Fargo Securities LLC

Okay. And just in broad brush strokes, how would you characterize your confidence in having the Vectra non-coverage decision reversed?

Mark C. Capone - Myriad Genetics, Inc.

Yeah. Thanks, Tim. We're very confident in the AMPLE analysis that we've done, and we're actually happy to provide it to any of you that may be interested in the actual underlying data that led to the chart that we showed in the prepared slides. I think if you look at that slide that shows the AMPLE analysis correctly done compared to the other three studies, you can see that – which frankly isn't always the case in any industry in healthcare – you can see the data is very consistent with what we've seen in every other published study, that shows Vectra does in fact predict radiographic progression. We know what the flaw was in the AMPLE analysis. It's very easy to see it, and we can show you a table where it's quite clear. And so we feel very confident that AMPLE, analyzed appropriately, is very consistent with what we've seen in every other study.

In addition to that, we think there's been ample publications, pardon the pun, since Medicare made its original decision. 26 additional publications in three years is pretty remarkable, and many of those were clinical utility studies that shows that, Vectra can help decide what to do with methotrexate incomplete responders. It can help decision-making around tapering. Also some data that shows compared to the traditional measures of disease activity, for example, DAS28-CRP, if you were to look at a study like the Lyden (59:35) study, what you can see is that, in instances with DAS28-CRP is actually showing low levels of disease activity, we actually see about 25% of the time Vectra has picked up underlying disease activity that was not detected, and in fact, those patients that did not have a Vectra score ended up with a significant incidence of radiographic progression. So again, demonstrating the utility for 25% of the patients, you would have actually missed that, the new reversible bone damage, because you didn't have the benefit of Vectra that could look underneath the surface at some of the disease activity with a more sensitive measure.

So I think, when you look at the totality of evidence, we're very confident in what Vectra can do, and the data that we've been able to demonstrate. It's also been very encouraging for us to see the groundswell support for many patients, many doctors, this has become a very integral part of their practice. Some patients view this as like their HbA1c for diabetes whereby they rely on that data to ultimately give them hope to keep them on track with all of their aspects with healthcare. And so we've certainly seen hundreds of people that have expressed interest in ensuring that this continues to be accessible to patients. You never know the outcomes of these, but I think we feel very confident in the data and the support that we have going into the public comment period.

Tim C. Evans - Wells Fargo Securities LLC

Okay. Thank you.


Our last question comes from the line of Tycho Peterson from JPMorgan. Please go ahead.

Tycho W. Peterson - JPMorgan Securities LLC

Hey, thanks. Mark, on that last point on Vectra DA, when will you have the payer demonstration project complete, does that happen during the 45-day public comment period? And what gives you confidence that Vectra returns to growth in the back half of the year, is that just a function of the sales force turnover kind of stabilizing, and the AMPLE study no longer having an impact?

Mark C. Capone - Myriad Genetics, Inc.

Thanks, Tycho. That demonstration project that we mentioned will not complete during this public comment period. I think that study will be a little longer study. And so that's going to play out over the coming months. So it's not going to add to the 36 publications that we already have during that timeframe. From a growth perspective, I think one of the things that was important for us to look at is, what did the trends look like after we were able to discuss the data from AMPLE, and as we mentioned, we did in fact see when you saw December and January data compared to October-November data, you actually saw a nice uptick in demand, and that was demonstrative of the impact that our sales teams were having. So I think it's the fact that the sales force realignment has been completed, it's the fact that we've got really good messaging out there, and a talented team that's out there being able to give physicians continued confidence, and it's looking at the trends that we've seen in the last couple of months. I think those things together have us confident that we're going to return to sequential growth in the second half.

Tycho W. Peterson - JPMorgan Securities LLC

And then one follow up, can you comment on your view on timelines for coverage decisions on GeneSight? You talked about the demonstration project in United, Humana and Anthem. When could we start to get some coverage decisions?

Mark C. Capone - Myriad Genetics, Inc.

Yeah. Thanks, Tycho. As you know, having covering the industry for a while, predicting these things is difficult. What I can say is that the health economic data that we discussed is recent data, and the fact that we've been able to generate that data in United Healthcare's database, as well as Humana and Anthem's databases, and those analyses are either done at this point are very close to that. That speaks loudly to the insurance carriers because these are their own members, and we can demonstrate cost savings in their own plans. And so we think that was very impactful on that data is either available now or will be available quite shortly. And so obviously you could imagine we're aggressively having those discussions about not only the utility of the data but the health economic impact in their own members, and that will continue to be a high priority for us.

Tycho W. Peterson - JPMorgan Securities LLC

Thank you.

Scott Gleason - Myriad Genetics, Inc.

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


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.

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