Myriad Genetics' (MYGN) Presents at Morgan Stanley Healthcare Broker Conference - (Transcript)

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

Myriad Genetics, Inc. (NASDAQ:MYGN) Morgan Stanley Healthcare Broker Conference Call September 12, 2017 10:35 AM ET

Executives

Mark Capone - CEO, President and Director

Analysts

Stephen Beuchaw - Morgan Stanley

Stephen Beuchaw

Good morning, everyone and thanks for being here. I'm Steve Beuchaw. I'm Morgan Stanley's life science tools and diagnostics analyst. It's a pleasure again this year to have Myriad with us.

Before I get into the discussion with Mark, though, I want to remind everyone that all the pertinent disclosures for this conversation are available at morganstanley.com/researchdisclosures. I'd like to thank Mark Capone for joining us, as well as Scott and Bryan, who are in the audience. I think we might take just a few minutes here for Mark to introduce the discussion.

Mark Capone

Sure and thanks again, Steve and Morgan Stanley. Once again, an excellent conference. We're delighted to be here. I thought I would just give a brief overview of the company and the transformation that we're on as a company. And then, of course, Steve, we can open it up for questions.

As a company, historically we've been focused on hereditary cancer testing. That's the foundation of the company. And up until fiscal year '13, that was - 99% of all of our volume was in the hereditary cancer business. One of our strategic goals has been to stabilize hereditary cancer revenues. Interesting to note that in fiscal year '17 our revenues were identical to what they were in fiscal year '13. Fiscal year '13 was the year before the Supreme Court made a decision to overturn the BRCA1 and 2 patents. So after 4 years of intense competition we saw revenues were still the same. That was attributed to a 15% volume increase and 15% pricing decline.

As we look to the future of hereditary cancer, we were pleased to see the volume return to growth last quarter with 6% year-over-year volume growth and acceleration throughout the fourth fiscal quarter. And in addition to that, we just launched last week a product called riskScore which we think has the potential to even further accelerate growth in the preventive care segment which is the largest segment of the hereditary cancer market.

The last part of that market is stabilizing pricing. We've now signed 86% of our hereditary cancer revenue under long term pricing contracts. Those are generally 3-year contracts with fixed pricing, an agreement that cannot be terminated. So that should give us nice pricing visibility through fiscal year '19 into fiscal '20.

The second part of the strategy has been diversification beyond that hereditary cancer business. Two-thirds of our volume in fiscal year '17 was now attributed to those new products. That volume is growing 20% on a year-over-year basis. So we actually have seen very nice diversification efforts. We're continuing to grow that volume as we look into the future and we're also seeking additional reimbursement for that as well.

It's interesting to note that in fiscal year '17, if in fact we were fully reimbursed for the new product volumes that we ran during the year, we would have actually had earnings per share of $4 per share in fiscal year '17. And in reality we put up a little over $1 per share in earnings. So I think it gives you some sense of the earnings potential of the company and what we're working towards as we get full reimbursement for all of those new products.

So we're excited about the future. We think we've got many opportunities for operating leverage in the future and additional growth and that's what we're focused on delivering here as a management team.

Question-and-Answer Session

Q - Stephen Beuchaw

You covered a lot of ground there, Mark. I'd just like to really go through a few of the points that you raised in more detail. Maybe we'll go in reverse chronology. So let's start with the announcement that you made last week. You did something that I think a number of folks in the genetic space had speculated maybe even ten years ago - something that we could do, right - which was look at a very broad swath of genetic variation and try to evaluate a person's risk for cancer; in this case it's a very specific set of cancers, out over time. What is it that you've done that's given you the ability to do something that people have thought about but hadn't really pulled off over those years?

Mark Capone

So the launch of riskScore, I think, is very important and particularly for the preventive care segment. And we'll talk about what we've been able to leverage. Historically, what we tested were a known set of genes that have been attributed to hereditary cancer. In the myRisk product those are 28 different genes, all of which have very good evidence that a mutation in 1 of those genes will lead to a high risk of a patient developing breast cancer, up to 87% chance for patients that are positive for BRCA1 and 2 mutations. But when you look at patients that have some sort of family history of breast cancer, only about 10% of those patients will test positive for a mutation in one of those 28 genes. It's been known that there were a number of other factors that potentially could increase the risk for a patient getting breast cancer during her lifetime, but nobody had been able to assemble all of that information into a risk score predictor that could clearly identify those risks for cancer and that's what Myriad's been able to do with the launch of riskScore.

We've now assembled a set of markers across the entire genome, any one of which has slight increases in the risk for breast cancer and we've combined that with a family history model called Tyrer-Cuzick. And the combination of those have been shown to be highly statistically significant at predicting the risk for breast cancer. So now when a patient gets tested with myRisk, they will get a complimentary riskScore as well for those patients that are negative for mutations which means 100% of patients will walk out of that doctor's office with a clear understanding as to exactly what their risks are for developing breast cancer during her lifetime. So instead of 10% knowing her - those risks, 100% of patients will know those risks.

And from our perspective, that has 2 strategic benefits. First, it widens what is already a significant competitive moat for hereditary cancer testing. And the second thing it does is provide incremental value to the test such that we believe doctors will begin to use it for a broader set of patients than they've historically used it for in the preventive care market. One other point on that - that market is 15 million patients a year are eligible for hereditary cancer testing in the preventive care market. Only 4% of those patients have been tested. And 1 of the big reasons we've not seen higher penetrations in that market is this fact, that doctors can't give definitive risks for the vast majority of patients. All of that changed last week with the launch of riskScore.

Stephen Beuchaw

So as I've talked to doctors and to other labs over the last week or so about this initiative, what I hear is that it's very important to understand the range of potential outcomes for any particular patient. So let's say - let's take a hypothetical patient that might have tested negative for myRisk. So they might have walked away from that test thinking, hey, you know, I'm okay. Now that we have this new tool, what's hypothetically the range of potential risk scores that might come out from that test that you wouldn't have seen before, again for that patient who would have been negative on myRisk?

Mark Capone

Yes, I think that's a great question, Steve. Because if that is a narrow distribution, of course, the relative value of riskScore would be low. The reality is it's actually quite a broad distribution. And I can give you the actual ranges. This data will be published here in the coming months. When you actually look at patients testing negative for myRisk, the range of risks with riskScore can be anywhere from 4% up to 60% risk for a patient - a lifetime risk of breast cancer. So in fact, there are patients that test negative with myRisk whose residual risk with riskScore is very close to what it is for a BRCA mutation. And there are also patients that are down at the very low end of risk, where their risks for lifetime risk may only be 4%. And given that broad range of risks, 4% to 60%, that's the value of riskScore. Because now you can definitively place a patient on that continuum and the medical management changes, obviously, very dramatically from that 60% down to that 4% level. And so that's the value of riskScore. It's always been known that that distribution was probably wide. There was just no tool by which a doctor could actually place them on the continuum. And again, that's changed with the launch of riskScore last week.

Stephen Beuchaw

So I want to touch on 1 other thing that's a relatively new development and it's your discussion back in August about an effort to take cost out of the business. Sorry to do this to you with your CFO still out in the audience, but you've taken steps to drive margins, drive efficiencies in the business, with a program you call Elevate 2020. Can you talk us through how you came up with the targets and how you aim to execute on that initiative?

Mark Capone

Yes. Elevate 2020 is an opportunity that Bryan is leading which, our goal is to increase the operating profit by $50 million through a combination of projects that either increase revenue or decrease costs. And Bryan's done a really - an excellent job in the integration of Assurex. And we were able, through those integration efforts, to take a company that was not profitable last September - in 9 months' time we were able to actually turn the company profitable. And so, there were a lot of learnings we had from those efforts that we then wanted to apply across the entire company. And that's the efforts that Bryan is leading. The target was something Bryan came up with after significant evaluations of our cost profiles across the entire company.

This is everything from laboratory operations - so we've identified a number of laboratory operations where we believe we can drive additional efficiency in either reductions in labor, reductions in reagent cost. We've also identified opportunities - one, for example, we announced last quarter called our digital integration strategy, where customers can now link to Myriad through digital means. What that does is decrease the cancellation rates that we see which will have a positive revenue impact. At the same time, it reduces our costs for processing all of the preauthorizations that are required for our tests. And so it has a double impact on both the revenue and on the cost savings. We've also seen good opportunities as we've bought multiple companies to combine things like human resources, finance, accounting - all of those areas that multiple individual companies had invested in, but now we can aggregate in a single organization in Salt Lake City. So it's really the combination of all those initiatives. We feel very comfortable with the $50 million target.

Bryan's already leading 16 projects that will deliver $17 million in savings in fiscal year '17. We've identified another 18 projects that will deliver an incremental $24 million in savings in fiscal '19. And there's a whole host of other projects that we're in the middle of evaluating and we remain confident that ultimately they'll deliver that $50 million - at least $50 million increase in operating profit.

Stephen Beuchaw

One last recent development that I'd love to get your thoughts on and it's the recent Konica Minolta transaction. For a number of years - maybe just a couple of years - it was out in the market, a 2-horse race, some would say in certain parts of the market, between Myriad and Ambry. Now Ambry recently was sold to Konica Minolta, a private company to a non-U.S. company. What did that transaction tell you about the market and how it's evolving?

Mark Capone

Yes. I think it was - I don't know that it was one that was predicted by many or any, if you will. So obviously the combination of Konica, a Japanese copier company, a southern California genomics company - it wasn't one that probably was on our radar screen. I think what it probably underscores is that this is a rapidly growing market; this is a market that has significant opportunities as we look to technology advances, as patients and doctors become more willing to use genetic information to modify the way that patients' care is delivered. And so I think it just underscores that opportunity. Obviously it puts a comparable out there as well. So you've got a business that was substantially smaller than Myriad's business that was valued at $800 million. Our business is 2 1/2 times the size of that business.

So from an hereditary cancer standpoint, I think it also puts a comparable out there for a business as large as Myriad. So I think the difference is, Myriad's business is actually growing. Where, that comparable, you've actually seen that business in decline over the last year. So I think that's the other thing that investors can look at. Any time you have a comparable, it's useful to have. But from our perspective, I think it just underscores how much opportunity remains in this market when we've only penetrated the oncology segment of hereditary cancer 15%; we've only penetrated preventive care market 4%. Just an enormous growth opportunity as we look into the future.

Stephen Beuchaw

I think about the genetic testing space, of course, with you guys being a bit of an outlier as this scale player. Plenty of other labs - someone estimated at our conference this week that there are more than 100 genetic testing labs outside hospitals in the U.S. right now. We expect to see more consolidation there. Does the Konica deal tell us there might be more big deals in the space or does this remain something of a smaller lab phenomenon?

Mark Capone

I think in general it's probably hard to do a readthrough necessarily. I think what is true about this industry that we're in is that you have a large number of smaller players, generally 1-product companies, that exist in this laboratory-developed test space and particularly in personalized medicine. I think there still remains an opportunity for some consolidation to continue in this industry. And obviously we've been on the consolidating end as we've acquired companies like Assurex; we acquired companies like Sividon and Crescendo. We continue to think those opportunities exist as we bring those companies together. And particularly now that we've built out all 6 of the commercial channels we have, if we do another acquisition into those commercial channels it's going to provide an opportunity for synergies right off the bat in the acquisition and those are things that we will continue to look for as consolidation potentially exists in what is still a relatively young industry.

Stephen Beuchaw

So perfect transition. Let's talk about Assurex and how that's evolving. Assurex has delivered a lot of volume growth for you. Now there are a couple of catalysts coming up that we're thinking about as possibly driving more revenue, right? There are a couple of pilot programs and there's a clinical trial coming up. Can you give us an update on what you think evolves there over the next year or so and how that could contribute?

Mark Capone

Yes. Just to bring everybody up to speed on Assurex, the run rate for GeneSight which is their primary product, was over $100 million in our fourth quarter. And so, right now, the reimbursement for that product is largely with Medicare. We've just begun seeking private payer reimbursement. Because the company was relatively small, there was not much investment in private payer reimbursement and Myriad has much more extensive resources and capabilities in that area. And so, over the last few quarters, we've begun taking the same dossier that Medicare used to approve coverage for GeneSight - we've now taken that to private payers and are in the middle of discussions with those private payers. There are 3 large or 3 clinical validation studies that were done that showed GeneSight was very significant at predicting patients that could differentially respond to antidepressants; and in addition to that, some very strong health economic data.

And that's the dossier that is now being presented to private payers. So in the advent that we were able to see private payer coverage from that dossier, it would have a very meaningful impact on the revenue and earnings for the company. By way of example, in fiscal year '17, if GeneSight was fully reimbursed by all private payers, we would have generated over $500 million in revenue just from GeneSight. So that's ultimately what we're working towards with private payer reimbursement. Now in the event that we're unable to secure private payer reimbursement with the dossier that exists, we're actively working on bolstering that in the short term with additional data. One of the things Steve mentioned which is a large prospective clinical study that should read out by the end of this calendar year - so before December - will read out on a 1,200-patient clinical study that's been designed using those 3 previous studies that I mentioned.

And so it's the same design format and that's why we're very encouraged and confident in the large, prospective study that should read out in the next few months. In addition to that, we're conducting demonstration projects with some of the large payers where we've been able to actually stratify patients that are in their groups. For example, Optum has worked with us on UnitedHealth patients and we've been able to stratify those patients into the patients that have been guided by GeneSight versus those that have not and have been able to show that the cost savings in United's own population is very significant by using GeneSight. So we think you take a strong dossier with additional prospective data and these demonstration projects that we're conducting in multiple large payers - we think it's a very strong dossier in totality that ultimately is going to lead to private pay reimbursement. And again, I'll remind you that all the costs for this are actually already in the income statement. So as we get additional reimbursement for these tests, all of that is going to flow down to the operating line.

Stephen Beuchaw

Do these initiatives for GeneSight - do they drive more growth in the primary care channel or more in the specialist channel?

Mark Capone

Yes, good question. Right now, the sales force we've deployed is almost solely calling on the psychiatry market. We have not launched in a broad way into the primary care market yet because we're waiting on reimbursement. This is a once-in-a-lifetime test, so we want to make sure we're conducting those tests when we have favorable reimbursement. And so the volume right now is largely being driven out of psychiatry. It's important to note that the primary care market is actually larger than the psychiatry market. So when we secure private pay reimbursement, we're going to introduce this into our primary care sales team. That team is about 250 salespeople. And so, there will not be increased operating expenses when we launch into that channel. Again, we're going to be able to just experience - any revenue increase is going to drop immediately to the operating income line on the launch into primary care.

We have conducted some preliminary pilot programs in primary care and it's been very, very successful. What we've shown in that pilot is that our average territory, if fully reimbursed, would generate over $600,000 per year in revenue. And again, we have 250 of those salespeople actually out there waiting to launch this as soon as we secure reimbursement. So that will be another growth accelerator once we launch in primary care.

Stephen Beuchaw

I'll open it up to the audience for any questions before we get into the home stretch here with Mark. We have one up front. Actually, we have one on the side and one up front.

Unidentified Analyst

Forgive me; I'm a little new to the story, but what percent of your revenue uses next-gen sequencing versus other forms of sequencing and how do you see that evolving going forward?

Mark Capone

So for most of our hereditary cancer testing we use next-gen sequencing at some point in the process. Many of our other tests are actually using different technologies. And so, we have ten products that are being commercialized at this point. Most of the next-gen sequencing is done in the hereditary cancer test. Now hereditary cancer process actually has 23 major technology platforms that are utilized in order to ensure that we produce a perfect answer. So while next-gen sequencing is one of those technology platforms, in order to ensure you have accuracy we actually use a number of other technology platforms, different sequencing technologies; long-range PCR; different larger arrangement technologies. So next-gen sequencing is just one component in that entire process.

Unidentified Analyst

Will you talk about your degree of optimism for expansion of your business beyond the U.S.?

Mark Capone

So we've - one of our critical success factors is expanding in the international market. Right now the international market constitute about 6% of our revenue and typically for a business such as ours you would expect 50% of revenues to come from international market. So there's still a tremendous opportunity for growth outside of the U.S. market. Right now our strategy has been to focus on direct sales in the 5 largest European countries and Canada. And then we use distributors in all the other large jurisdictions. And those jurisdictions would be transferred over to direct sales once we see line of sight to profitable business in those other jurisdictions. So we remain interested in those and we're in the early stages. Our primary approach in international markets, unlike the United States, is to use kit-based products as opposed to reference laboratory tests. Outside the U.S., the reference laboratory testing model is relatively rare. And that's because the laboratories are owned by institutions that are generally reimbursed by governments in other countries and they're reticent to let samples outside of their institutions.

They would like to run those samples typically in their own laboratories. And so we've converted our RNA products into kit products that can all run on a single instrument and that instrument will reside in those laboratories in these other institutions. The first product is EndoPredict. EndoPredict is a breast cancer prognostic test and that test is doing very well in the international market. We saw over 50% growth in that product last year internationally. And then the next products that will be launched in RNA kit form will be Prolaris and then myPath Melanoma, as 2 other RNA kits that will run on those same instrument platforms. So continues to be a focus of ours in a very targeted way in targeted countries and in product formats that we believe will be - will most lend themselves to rapid adoption.

Stephen Beuchaw

So I want to come back to one of the topics that you brought up earlier in the conversation. I think historically it was the topic that sort of dominated the conversation and that's hereditary cancer testing. You pointed out on the August call, when you talked about the 2018 outlook, the fiscal '18 outlook and the outlook for longer term, that you - and you sounded to me more enthusiastic or comfortable around the outlook for pricing. Volume, you flagged plus 6% positive development. Pricing, same story. What I'd like to understand is how you think about the medium term pricing outlook. You're the market leader. You have a remarkable database; some unique capabilities. Your pricing at this point, though, is still materially above many of your competitors. So where do you think that asymptotes and why is 2019 the year where pricing really stabilizes?

Mark Capone

So one of the important things we want to do for investors is to provide that forward visibility on pricing. Obviously that's always been a question. And that's why we signed 86% of our revenue under long term pricing agreements, generally 3 years in nature. And they're fixed price and they can't be terminated which gives us that visibility into fiscal year '20. So what we did say is that signing those agreements would lead to a 12% pricing decline in fiscal year '18, but in fiscal '19 and into fiscal '20 that would give us stable pricing and visibility during that time frame. So it gives us the ability then to predict what that would look like. Now obviously, if we're growing volumes and we've got stable pricing, it gives us an opportunity to begin to look at hereditary cancer as at least stable, if not potentially growing as well. Now when you look out into 2020, our belief is that pricing is going to find a stable, rational floor. Three components to what that rational floor would look like. The first is the cost associated with producing a high-quality test.

Certainly in the last 4 years there have been laboratories that have been trying to take shortcuts to try to lower their costs and offer a lower-price product. We don't think that's sustainable because you can see it and you see evidence here just in the last month, of mistakes that are being made by laboratories that are cutting corners. Ultimately, this is an application that demands perfection. And so, when women are going to remove healthy breasts, healthy ovaries, healthy endometrium as a result of getting a test result, they're only going to rely on tests that they believe are perfect. And so, some of the short cuts that have led to these mistakes are not going to be things that we believe in the long term will be tolerated by customers, by patients and even the FDA has expressed severe trepidation. So I think you're going to see costs that will have to be consistent with a high-quality test in order for a test to remain on the market. The second thing is, in a commodity diagnostic industry you see at least a 20% operating margin.

We would expect in this industry that you would - or in this particular application you would see at least that 20% operating margin when it reaches a stable point. And then lastly, Myriad, to Steve's point, has been able to enjoy a premium relative to that pricing because of the additional quality that we offer. One of the things we like to point out to payers is what is the value for Myriad quality and for that perfection that we seek in testing? It turns out in this application false positives, false negatives, VUSs, uncertain results are very expensive to a payer. And we're able to model that. We're able to demonstrate that to the payer. For example, a couple of recent studies showed that in 26% to 27% of the time, other laboratories are getting different answers than Myriad and in 10% of the time that is going to lead to wrong medical management. Well, when those mistakes are $100,000 mistakes, those are things that, when you model that for a payer, they begin to appreciate that the premium that we enjoy is one that we've earned, because ultimately it's going to save the payer money. And we continue to believe that we will see that premium into the future in 2020 and beyond as we look at pricing. So our belief is, it's going to find a rational level. That rational level is not dissimilar to where our pricing contracts are today. And so, as we look to 2020 and beyond, we think we're going to see pricing that is relatively similar.

Stephen Beuchaw

Well, with that, we've just about run out of time, so we'll tie it up here. And again, thank you all for joining us.

Mark Capone

Thanks, Steve.