Myriad Genetics Inc

NASDAQ:MYGN

Earnings Call Transcript 2019-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Myriad Genetics Second Quarter 2019 Financial Earnings Call. [Operator Instructions] This call is being recorded Tuesday, February 5, 2019.

And now I'd like to turn the conference over to Scott Gleason, Vice President, Investor Relations, Myriad Genetic Laboratories. Please go ahead.

[Scott Gleason, VP of IR]

Thanks, Scott. Good afternoon, and welcome to the Myriad Genetics fiscal second quarter 2019 earnings call. My name is Scott Gleason. I'm the SVP of Investor Relations and Corporate Strategy. During the call, we will review the financial results we released today, after which we'll host a question-and-answer session. If you have not had a chance to review the earnings release, it can be found in the Investor Relations section of our website at myriad.com.

Presenting for 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 myriad.com. The call is being recorded and will be archived in the Investor section of our website. In addition, there's a slide presentation pertaining to today's earnings call on the Investors section of our website and which will be filed following the call on 8-K.

Please note that some of the information presented today may contain projections or other forward-looking statements regarding future events and/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.

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

[Mark Capone, CEO, President]

Thanks, Scott. I will start today's call by providing business highlights from the second quarter, after which Bryan Riggsbee will provide details regarding our financial results and guidance, which will be followed by a question-and-answer session.

Revenue in the second quarter was in line with our expectations at $216.8 million, with adjusted earnings at the high end of our guidance at $0.38 per share. This represents revenue growth of 15% and adjusted earnings per share growth of 6%. On an organic basis, earnings per share would have been $0.46, excluding the $0.08 of dilution from Counsyl in the quarter, which represents a 28% increase over last year.

Of particular note this quarter, Hereditary Cancer returned the year-over-year revenue growth and the prenatal business saw an inflection in revenue even before the launch of the integrated sales force in January.

Now I would like to highlight our progress on our critical success factors starting with our objective to build a diversified portfolio upon a solid hereditary cancer foundation.

We delivered strong hereditary cancer results this quarter as year-over-year pricing headwinds abated and volume growth continued with total Hereditary Cancer revenue increasing 4% year-over-year and 9% sequentially.

As a reminder, we anticipate stable pricing in the fiscal year 2020, providing the opportunity for continued revenue growth with an increasing hereditary cancer test volumes. We continue to make significant companion diagnostic progress this quarter with BRACAnalysis CDx receiving FDA approval for first-line ovarian cancer patients being considered for elaborate. Given that this is a first-line indication with exceptional results, where 60% of patients remain disease-free at 3 years compared to only 27% with placebo, we're encouraged that the penetration of testing in ovarian cancer patients will increase from its current 50% level.

Furthermore, the company presented new Hispanic polygenic data for riskScore at the San Antonio Breast Cancer Symposium. This is an important advance because the Hispanic population now represents approximately 18% of the U.S. population. The validation study consisted of almost 9,000 women analyzed with a proprietary signature that was highly predictive of breast cancer risk with a p-value of 7.1 times 10 to the minus 19. We will continue to broaden the ethnic applicability of riskScore and believe we have the only polygenic risk assessment test supported by sufficient scientific rigor to provide accurate test results.

Our second critical success factor is to grow new product volume, which grew 79% year-over-year in the second quarter. The run rate in the quarter once again exceeded 1 million tests per year, with 75% of testing volume from new products.

GeneSight continued its strong growth trajectory with record volumes in the quarter and year-over-year volume growth of 22%.

Prenatal testing volume also continued to grow at double-digit rate setting a new volume record in the quarter. We were highly encouraged with the strong performance, particularly given the potential for distraction as we prepare for the integrated sales team launch in January, which is a testament to the leadership of the Womens Health Business Unit President, Alec Ford.

Our strategy to win in the prenatal market is threefold: providing a test differentiated through pioneering science, supporting our customers our trusted advisers with a field-based team that is more than double the size of our nearest competitor and offering a frictionless customer experience through our Myriad Complete Application.

We've been making significant progress on all 3 pillars of this strategy. In January, we tripled our prenatal sales force and are now accessing physicians accountable for more than 80% of the market potential for our Women's Health products.

If nearly targeted physicians, which only order 1 prenatal test per month, it would represent over $40 million in incremental revenue per year. This pillar is being led by Mark Aguillard, who has a remarkable 18-year track record of commercial success in the pharmaceutical and diagnostic industry. We also continue to differentiate our prenatal tests with scientific advances led by our outstanding Womens Health Chief Scientific Officer and Council founder, Eric Evans.

In the second quarter, we launched several product improvements for Prequel that will now allow us to detect trisomies with high accuracy even in patients below a 4% fetal fraction level. In the third quarter, we are launching another Prequel improvement making the test one of the only ones to include any authority detection for all 23 chromosome pairs, rather than a 3 chromosomes routinely assessed by other laboratories. This advance will increase the number of antibodies detected by approximately 30%. In addition, we are developing a new micro-deletion panel that we believe will be the most accurate on the market and leverages our substantial intellectual property developed from hereditary cancer testing. These are examples of ongoing innovations that we expect to bring to our prenatal products much like we have done in hereditary cancer testing to create competitive advantages relative to other laboratories.

Our third pillar of differentiation was launched in January, which is the Myriad Complete Application that simplifies workflow for physicians and patients. This application is an extension of our previous platform developed through the excellent work of Richie Carriker and the Counsyl technology team.

The application includes a broad suite of features, including patient education, individualized patient specific cost transparency, electronic results reporting and counseling tools that automate previous lead time intensive steps for the physician practice.

For example, the cost estimate feature of the Myriad Complete Application eliminates the need for doctors to discuss out-of-pocket costs and provides complete transparency to the patient before testing begins. Within 48 hours, patients are provided an estimate that takes into consideration their specific insurance plan and their current deductible status to provide a text message with their expected out-of-pocket costs.

Another feature of the Myriad Complete Application is the expanded carrier screening tandem reflex testing introduced during the second quarter. This creates automated alerts to ensure higher patient compliance from male carrier screening when a woman tests positive as a carrier for one of 4 sites genetic conditions. Physicians understand this represents the true clinical utility of the test, but they are often too busy to follow through on this additional testing. This will increase compliance rates and ensure couples are aware of the potential genetic risks to their child.

Our frictionless experience for physicians is second only to test quality and deciding which laboratory to use. And we believe the Myriad Complete Application provides a substantial advantage relative to competitors. We have seen technology solutions revolutionize industries like ride-hailing and online shopping, and we believe technology advances in molecular diagnostics can significantly increase our penetration and market share.

While it is still early, we have seen encouraging sign that our strategy is working. Since launch, prenatal sales calls have increased 209% and hereditary cancer calls have increased 17% relative to the second quarter.

Additionally, we have seen over 740 new sites with more than 3,500 physicians enroll for Myriad Complete in the first few weeks of the expanded rollout.

Finally, we have a number of examples of previous myRisk customers adding or switching prenatal testing and previous prenatal customers switching to myRisk.

Overall, I'm highly encouraged about the prospects for growth in the prenatal business in the coming quarters.

Our third critical success factor is to increase new product reimbursement. We continue to pursue stronger medical guidelines from ACOG and other professional societies supporting average risk for noninvasive prenatal screening and expanded carrier screening.

As of the second quarter, 4 state Medicaid programs, including Florida, Minnesota, Ohio and Pennsylvania have added average risk coverage to their medical policies, representing an additional 18% of Medicaid lives. Also, since our last earnings call, 3 additional Blue Cross Blue Shield affiliate plans updated their medical policy to coverage average-risk testing.

With GeneSight, we achieved the major milestone in the quarter with the acceptance and publication of the guided study in the Journal of Psychiatric Research. On the Investor Call summarizing the complete dossier, we noted that additional analysis was completed for patients that were Medicare eligible based upon their age when they enrolled in the study. Despite the substantially smaller sample size, the results showed statistically significant improvements across all HAM-D17 endpoints at week 8. This data and other highly encouraging geriatric data will be disclosed at a manuscript that is being prepared for submission and publication.

We believe, these data provide additional compelling rationale to expand the Medicare LCD to include primary care physicians. The table on Slide 9 accumulates all of the HAM-D17 8-week endpoints from the guided study organized by study size. The guided study was designed to answer the question as to whether GeneSight can improve outcomes for treatment-resistant depressed patients.

The GeneSight GUIDED patients did numerically better than patients in an optimized active drug arm in all 15 endpoints, with 13 of those endpoints achieving statistical significance and the other 2 approaching significance. There was a preponderance of evidence demonstrating that the population of patients expected to benefit from GeneSight, which was a 70% of patients entering the study on yellow or red medications saw significant improvement in outcomes. And the patients that entered the study on red medications and were switched from those medications saw an unprecedented improvement in outcomes.

As APA guidelines note, the only acceptable outcome for treatment of depression is remission, and GeneSight has clearly demonstrated the ability to help physicians achieve this goal. Moreover, the GUIDED data show that these results were durable and continued to improve over the 24-week study period with remission doubling to 30%.

For patients, this is important because they want to get back to normal and stay that way. For psychiatrists, this is important because their Medicare mid-scores are increased by demonstrating remission for patients at the 6-month time frame. And payers recognize that durable outcomes lead to long-term health care savings.

Over the last year, we spent a significant amount of time educating payers and employers about the clinical evidence for GeneSight. The receptivity to the data has been very positive, with interest focused almost exclusively on remission and response data. Payers recognize that even when patients achieve response, the probability of relapse is extremely high.

In fact, in the 4,000-patient STAR*D study, patients who responded to treatment and experienced a 50% reduction in depressive symptoms still had relapse rates of more than 80%. Payers also understand that a treatment-resistant compressed patient cost to the health care system more than $20,000 per year. It is worth noting that this high level of payer interest occurred even before seeing the Optum Healthcare Saving study, which demonstrated first-year savings attributed to GeneSight of approximately $6,000 per year.

Employers with self-funded insurance plans have also been extremely interested in any solutions to help with the metal health care crisis in this country.

In the third quarter, we will be presenting GeneSight and our other personalized medicine solutions to 40 large U.S. employers representing more than 10 million in covered lives. We have already made significant progress in our GeneSight discussions with the 4th largest employer in the country, Kroger and we anticipate additional success in the near future.

Overall, we believe the GeneSight dossier is the most compelling in our history and have now submitted this dossier to commercial payers and state Medicaid programs representing over 200 million covered lives in the United States. A number of follow-up discussions and meetings are already underway. We remain optimistic about the upcoming tech assessments leading to broader coverage, which will then facilitate the expansion of our sales efforts into the larger primary care market. With EndoPredict, we saw major progress and professional guidelines with the test included in NCCN guidelines for the first time.

Our strategy for EndoPredict is to demonstrate that it is the only test capable of answering the 3 major clinical questions for breast cancer patients: what is myRisk of recurrence? Do I need chemotherapy? And is extended endocrine therapy beneficial? EndoPredict has already previously demonstrated, "market superiority" in predicting disease recurrence risk in the TransATAC study. At the San Antonio Breast Cancer Symposium meeting in December, we presented data that addressed the other 2 advantages of EndoPredict. First, a retrospective study with 3,746 women evaluated the benefit of chemotherapy on 10-year distant recurrence in women with estrogen-receptor positive HER-2 negative breast cancer. The study found that women with a high EndoPredict score who received chemotherapy saw statistically significant benefit with lower rates of 10-year distant recurrence compared to high-risk women who did not receive chemotherapy.

There was no corresponding benefit in chemotherapy for the low-risk women. An independent 373 patient study was presented that has [physicians] corroborate the ability of EndoPredict to predict the chemotherapy benefit. This was the first prospective study to ever evaluate chemo prediction in a high-risk cohort for any breast cancer recurrence test.

In a 3-year interim evaluation of the data, high-risk patients who received chemotherapy had a disease-free recurrence rate of 96.3% compared to 91.5% in the high-risk patients who did not receive chemotherapy.

These results approach statistical significance with a p-value of 0.06, which is expected to improve over the remaining 2 years of the study. Lastly, a study was presented which evaluated the distant recurrence rates in 1,702 women who received 5 years of endocrine therapy alone and were followed for 15 years. This study showed a fourfold risk of recurrence in the 5- to 15-year time frame for women with a high EndoPredict score. This is the first breast cancer recurrence test to demonstrate the ability to identify which women do not require extended endocrine therapy.

Transitioning to myPath Melanoma, we anticipate a final decision on the draft LCD in the near term, which could become effective in the fourth quarter of this fiscal year.

As a reminder, the Medicare opportunity represents approximately a 100,000 patients per year with uncertain melanoma diagnosis based upon histopathology that would be eligible for myPath Melanoma.

Moving on to our international business. This quarter, we received a favorable recommendation from NICE in the United Kingdom for EndoPredict. This opens up a new market of approximately 25,000 patients per year. We also completed our submissions in Japan for BRACAnalysis CDx as a companion diagnostic in first-line ovarian cancer with olaparib. Coupled with the metastatic breast cancer indication, there are approximately 22,000 patients in Japan every year eligible for companion diagnostic testing.

We currently anticipate approval of the ovarian cancer indication before the end of the fiscal year. In the second quarter, we also submitted our application to the Japanese Ministry of Health, Labour, and Welfare for BRACAnalysis in hereditary cancer patients. The application seeks approval for women with breast cancer, ovarian cancer or asymptomatic patients with a family history of breast cancer or ovarian cancer.

We believe approximately 3 million women in Japan will be candidates for this test and Myriad will have the only approved test.

Finally, I would like to provide an up date on our Elevate 2020 program. This quarter, our organic total expenses declined by greater than $15 million and our organic adjusted operating margins increased by 460 basis points relative to the start of the Elevate 2020 program.

At the end of the fiscal second quarter, we completed the Vectra and international laboratory transitions to our Salt Lake City headquarters, which will result in additional cost savings in the third quarter when we also expect to see additional Counsyl integration synergies.

We continue to believe we are on track for Counsyl to become accretive by the end of this fiscal year. We also expect additional cost reductions in cost of goods in the second half of the year with multiple programs slated for implementation in the third quarter.

Overall, under Bryan's leadership, the Elevate 2020 program has surpassed all expectations and substantially improved the profitability of the business.

In summary, we remain very encouraged with the execution of our strategic plan to transform the company, and I'm confident that we will exit fiscal year 2019 with significant momentum.

The fundamental supporting our Heraldry Cancer business are strong as it returned to revenue growth this quarter in an underpenetrated market with expanding indications. Our Womens Health business Unit strengthened this quarter and is on the cusp of substantial revenue synergies as we tripled the number of sales representatives selling these tests.

With GeneSight, we have completed a compelling dossier and are well positioned for coverage decisions that will lead the transformational revenue and earnings growth.

And finally, we continue to execute on our Elevate 2020 program to improve profitability with meaningful additional programs to be implemented in the second half of this fiscal year.

Now I would like to turn the call over to Bryan to discuss our financial results and guidance in more detail.

[Bryan Riggsbee, Executive VP, CFO & Treasurer]

Thanks, Mark. I would like to start by providing a more in-depth overview of our fiscal second quarter financial results.

Second quarter total revenues of $216.8 million were up 15% compared to the $187.9 million reported in the same period in the prior year. As a reminder, our financial results for fiscal year 2018 have been adjusted to reflect the impact of ASC 606 accounting on our historical revenues.

Hereditary Cancer revenue in the quarter of $126.7 million was up 4% compared to $122.2 million in the second quarter of fiscal year 2018. Notably, pricing has been stable on a sequential basis for 5 consecutive quarters, and volume has grown on a year-over-year basis for 8 consecutive quarters.

GeneSight in the quarter -- revenue in the quarter was $24 million and declined 24% year-over-year. Volume in the quarter remained strong growing 22% year-over-year and 3% on a sequential basis. Once again, this quarter, we set new records for total volume and ordering physicians with over 16,000 ordering doctors in the quarter.

Despite strong demand trends, GeneSight revenue declined in the quarter for 2 reasons: first, we continued to work through the new documentation requirements implemented by Medicare in September. And while compliance rates have increased meaningfully, we were impacted for the entire quarter as opposed to 1 month in the fiscal first quarter.

Second, GeneSight experienced $4.2 million revenue adjustment in the quarter. For GeneSight, we accrue revenue based upon anticipating cash collections over an 8-month time frame. Due to recently implemented industry-wide laboratory benefit manager programs, actual cash collections fell behind those anticipated levels. Consistent with ASC 606 requirements, these adjustments must be made to revenue. Absent these out-of-period adjustments, the GeneSight revenue for the quarter would have exceeded $28 million, with a corresponding increase in earnings.

Our revenue accruals attributed to the second quarter GeneSight test volumes have been modified to reflect these new pair dynamics. Revenue from prenatal testing was $31.2 million in the quarter driven by strong double-digit year-over-year volume growth. On a sequential basis, total prenatal revenue increased to 12%.

Vectra revenue in the second quarter was $11.8 million compared to $11.1 million in the fiscal second quarter of last year, representing 6% year-over-year growth. As a reminder, we continue to focus on reducing the number of test negatively impacting gross margins in the absence of broader reimbursement coverage. Prolaris revenue in the fiscal second quarter was $6.1 million and increased 45% relative to the fiscal second quarter of 2018.

We are continuing to pursue broader commercial coverage and are currently conducting studies to support expanding coverage beyond low and favorable intermediate patients. Fully reimbursed, our current Prolaris volumes would represent greater than $60 million in annualized revenue.

EndoPredict revenues in the second quarter were $2.2 million, growing 10% year-over-year. Growth in EndoPredict revenue in the quarter was reflective of increasing adoption in reimbursement in the U.S. market as well as growth from international markets.

Lastly, revenue associated with our pharmaceutical and clinical services business was $13.8 million and declined 7% year-over-year. The decline is due to the fact that fiscal second quarter of last year was exceptionally strong and the timing of pharmaceutical orders is variable. I would now like to discuss our financial metrics for the quarter.

Adjusted gross margins were 76.3% compared to 76.5% in the fiscal second quarter of last year. On an organic basis, excluding Counsyl, our gross margins increased meaningfully due to our laboratory cost-reduction initiatives we implemented at the start of the fiscal year. However, this benefit was offset by the addition of the lower gross margin prenatal business.

Moving on to our operating expenses. On an adjusted basis, our research and development expense was $18.9 million compared to $15.4 million last year. The increase in R&D expenses entirely attributable to the addition of Counsyl. Adjusted SG&A expense this quarter was $109.1 million compared to $91.3 million in the second quarter of fiscal year 2018.

On an organic basis, total expenses, including cost of goods sold, declined $9.6 million year-over-year despite near double-digit test volume growth. This decline reflects the significant success of our Elevate 2020 program.

Looking to the second half of the fiscal year, we expect to continue downward trend in the total expenses as we recognize meaningful cost synergies from the Counsyl acquisition and see the benefit of the crescendo and international laboratory moves to our Salt Lake City headquarters. Adjusted earnings per share were $0.38 for the second quarter compared to $0.36 in the second quarter of last year, an increase of 6%.

Counsyl dilution in the quarter was $0.08 per share, which represents a 40% increase in monthly dilution compared to the first quarter. We expect significantly more meaningful cost reductions in the second half of the fiscal year, which will result in Counsyl being accretive by the end of the year. Excluding the impact of Counsyl, organic earnings increased 28% to $0.46 per share. And as Counsyl transitions to profitability by the end of fiscal year 2019, we will see a significant inflection in our earnings power.

Our fully diluted share count declined sequentially to 76.5 million shares outstanding, which was attributable to the $50 million accelerated stock repurchase program we implemented in late November. Under this program, we repurchased approximately 1.6 million shares of Myriad stock at an average price of $31.20. We will continue to execute on our capital deployment priorities by first investing in internal R&D, prioritizing strategic M&A, debt repayment and finally, share repurchases. However, we believe the valuation dislocation in the stock in the fiscal second quarter presented a highly attractive opportunity to generate a strong return on invested capital and retire more than half of the shares we issued as part of the Counsyl acquisition.

This quarter, we ended with $273 million outstanding on our credit facility and $195 million in cash and cash equivalents.

Free cash flow per share in the quarter was $0.49, representing the continued our strong cash generation of the business. On an annualized basis, this represents our free cash flow yield of approximately 7%.

Now I would like to discuss our fiscal year 2019 financial guidance and key assumptions. We are maintaining our financial guidance for the fiscal year with revenue of $855 million to $865 million and adjusted earnings per share of $1.70 to $1.75. From a hereditary cancer perspective, we expect to see continued stable pricing with typical seasonality leading to a sequential decline in revenue in the fiscal third quarter and then an increase in revenue in the fiscal fourth quarter.

For GeneSight, we are anticipating a meaningful rebound in revenue in the second half of fiscal year 2019 based upon continued double-digit volume growth and increase in compliance with the new Medicare documentation requirements. Our guidance does not assume any incremental reimbursement for GeneSight from GeneSight coverage decisions in the second half of fiscal year 2019.

With the prenatal business, we are assuming modest growth in the second half of the fiscal year compared to the first half of the fiscal year. If we see an impact from the expanded sales force, the Myriad Complete application or favorable UnitedHealthcare network decision, then it will represent upside to our guidance.

We are assuming modest volume growth relative to the first half of the fiscal year for Vectra, Prolaris and EndoPredict. We are not assuming any incremental reimbursement for these tests nor are we attributing any benefit to the potential for a positive Medicare LCD from myPath Melanoma in the second half of the fiscal year.

For our pharmaceutical and clinical services business, the clinic sale has been delayed, and we now expect the sale to close in the second half of the fiscal year. Outside of the clinic, we are resuming pharmaceutical and clinical services revenue consistent with the first half of fiscal year 2019.

From an earnings perspective, we are anticipating a significant cost synergies from the Counsyl acquisition coupled with the impact of incremental Elevate 2020 programs, such as the laboratory moves, an increase revenue will lead to increased earnings power in the second half of the fiscal year.

Now I would like to discuss our fiscal third quarter 2019 financial guidance. For the fiscal third quarter, we are guiding towards revenue $216 million to $218 million and an adjusted earnings per share of $0.42 to $0.44. We are assuming revenue will be impacted by typical negative seasonality for Hereditary Cancer offset by positive trends for GeneSight and our prenatal business.

On the bottom line, we believe Counsyl cost synergies will lead to a sequential growth in earnings. Overall, we remain highly optimistic about the long-term financial prospects for the company. With an organic adjusted earnings per share run rate of approximately $2 per share in the first half of fiscal year and a number of potential transformational growth opportunities for the business, including incremental GeneSight reimbursement and growth in our prenatal business, we believe we are well positioned to achieve our strategic goals.

With that, I will turn the call back over to Mark for closing remarks.

[Mark Capone, CEO, President]

Thanks, Bryan. Before we start the Q&A section, I would like to make a few comments about the passing of our founder, Pete Meldrum. We appreciate the many investors that passed along their condolences to the family. Pete was a true visionary who's pioneering efforts launched the personalized medicine era over 27 years ago. In 1992, when the company was founded, we were still 10 years away from publication of the first human genome. Phones still hung on walls and CNN was a bold new adventure and continuous news media. Despite the current state of technology, Pete envisioned the future with a power of genetic information will transform the practice of medicine and dramatically improve the lives of patients.

And what turned out to be my last conversation with Pete, we talked about our progress from this humble beginning. He was incredibly pleased and proud to learn that in this fiscal year alone, we would be providing high-quality test results backed by scientific rigor to more than 1 million patients.

For Pete, patients always came first, which remains our most important core value to this day. I feel truly blessed to have worked with Pete, to call him a friend and to continue his remarkable legacy. I know that millions of additional patients will be helped by a Myriad test in the future as a result of his leadership. To our past, present and future investors, we appreciate your support and acknowledge that as we succeed in achieving Pete's visions to help patients through pioneering molecular diagnostics, you will succeed as well.

I would now like to turn the call back over to Scott.

[Scott Gleason, VP of IR]

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

Now we're ready to begin the Q&A session. (Operator Instructions) Operator, we're now ready for the Q&A portion of the call.

[Operator]

[Operator Instructions] And we've a question from the line of Steve Beuchaw with Morgan Stanley.

[Steve Beuchaw, Morgan Stanley]

I want to focus first on GeneSight just so that we can hopefully understand as much as possible about what's going on on the ground there and maybe a multi-parter. So first, is it correct to say that in the outlook for 3Q, there's an assumption that there's no impact from the policy impacts from the LBMs that required the $4 million mark in the quarter? Do we have a view that the LBM impact is now fully baked in?

[Mark Capone, CEO, President]

Thanks, Steve. Yes, we have modified our revenue accrual to reflect all the knowledge we have about the laboratory benefit manager programs, and so that's all being taken into consideration for the accrual rates that we're using in the second quarter, so your statement is correct.

[Steve Beuchaw, Morgan Stanley]

And then probably more importantly, you flagged that there was increasing compliance with some of the new documentation requirements in the quarter. Can you talk a little -- in a little bit more detail way about how those are trending? And then just to be clear, does that mean that you're also seeing an uptick through the quarter in terms of the collection rates there? And are you expecting any outlook for 3Q for that to continue?

[Mark Capone, CEO, President]

Yes. Thanks, Steve. As we noted, we did see progress through the quarter with the compliance rates for Medicare. And we've got, as we mentioned now, 16,000 physicians that are ordering GeneSight, so there's a lot of physicians and a lot of new physicians that we have to continue to educate on these requirements for Medicare. So we made nice progress, continued to ramp compliance up through the quarter and that's something we would expect to continue in the third quarter to continue to make progress with compliance with those Medicare requirements.

[Steve Beuchaw, Morgan Stanley]

And then sorry, just to be a little clear, can you speak to not just the compliance, but the collection rates and how those are trending? Is that in line with the compliance rates? Or is there some other confounder in there?

[Mark Capone, CEO, President]

No. I mean, collection rates as long as the samples, we only submit samples for reimbursement to Medicare that meet those compliance requirements. And so there is no issue with collection. I mean, the government is good on anything that meets compliance. So there's no issue with collection from a Medicare perspective.

[Operator]

Our next question is from Doug Schenkel with Cowen & Company.

[Doug Schenkel, Cowen & Company]

So maybe just to follow-up on Steve's questions. Maybe the cut to the chase, your guidance on GeneSight is a little bit ambiguous and there's clearly -- there were a lot of moving parts last quarter and now, you've layered on another one with the lab benefit manager program dynamic. So again, cutting to the chase, your guidance was and I quote, we're anticipating a meaningful rebound in revenue in the second half of fiscal year '19 based on double-digit volume growth and an increase in compliance with new Medicare documentation requirements. Do you expect a rebound relative to the first half? Or you're going to grow year-over-year in the second half?

[Mark Capone, CEO, President]

Well, I'll start and then Bryan can chime in. But we do expect -- as we saw in the first half, we obviously had very nice year-over-year volume growth, 28% in the first quarter, 22% in the second quarter. We continue to expect to see very nice volume growth throughout the second half of the year. So that's the answer to that question. Bryan, you want to jump in on?

[Bryan Riggsbee, Executive VP, CFO & Treasurer]

Yes, I would just add. I think the easy way to think about it might be to use the clean number for the second quarter, which is a $28 million number. That reflects current patient collection trend as well as the impact where we are relative to the Medicare compliance rate. So to me, it would be meaningful rebound relative to the first half, but to start for the -- that your starting point $28 million would probably a good number to start with.

[Doug Schenkel, Cowen & Company]

So take the $29.3 million from Q1, $28 million that you just talk about, Bryan, add those together, I'd assume that there's going to be meaningfully more than that in the second half just to be clear? Because volume growth we all get, I'm asking about revenue just to be clear?

[Bryan Riggsbee, Executive VP, CFO & Treasurer]

Yes. Sure. No, I think, -- again, I think, the way I would think about it because you do have a lot of moving parts in there when you think about the impact of the Medicare documentation change only a portion of the first quarter. I would probably more focus on the $28 million because that's a good number relative to the impact of the LBMs as well as to the current compliance rate for the Medicare LCD.

[Doug Schenkel, Cowen & Company]

Okay. And another recent controversy is CMS seemingly moving to apply the NGS NCD the germline test, such as myRisk. Clearly, there's a lot of debate in the community, meaning the clinical community about the appropriateness of this change, but the final outcome definitely remains unclear as we sit here today.

So for Myriad specifically, recognizing those questions whether the supplies to you given that you use CE sequencing for at least a part of myRisk that remains even more unclear. So can you just provide us with your view, how your treating this development in guidance and comment on whether or not any commercial payers have indicated that they are contemplating following on (inaudible)?

[Mark Capone, CEO, President]

Yes. So let's start with the commercial payer part first. I think it's -- I appreciate the question because there's been some confusion. I want to be very clear. There is 0 chance, and I mean, absolute 0 chance, that commercial payers would in any way preclude early-stage breast cancer patients from getting hereditary cancer testing. First of all, remember hereditary cancer is already in the -- BRCA testing is in the USPSTF requirements.

It must be offered to patients that no patient out-of-pocket cost. It has been in NCCN Guidelines regardless of cancer stage for a decade or more. And so there is no chance that commercial payers would in any way try to remove that benefit from patients. That's just not going to happen. Now from a Medicare perspective, as you know, the industry as a whole was quite surprised by these.

Obviously, you're well aware Doug, the NCD as originally approved -- was approved, it was really viewed as a somatic tumor test, whereas the germline tests were all done on an LCD at a local contractor basis. So the fact that you took what was to everybody in the industry a somatic test and merged that into the germline test that's where we end up today with next-generation sequencing only applying for patients that are late stage for breast cancer.

Obviously, that's under significant discussion from the entire industry. To your point, what is true though is that Sanger sequencing can still be used for all stage breast cancer patients that meet Medicare eligibility. That's early-stage, that's late stage. And as you also mentioned, we, of course, have Sanger sequencing capability. BRACAnalysis is the only FDA-approved product from the FDA and it is based on Sanger sequencing and BART technology.

So for us, none of this has changed what we've been doing. We continue to do what we always have been. And there was no change from a Myriad perspective. There will be no change from a commercial perspective, but we, along with the rest of the industry, are very actively engaged in making sure the confusion from the merger of the LCD and the NCD gets resolved.

[Operator]

Our next question is from the line of Patrick Donnelly with Goldman Sachs.

[Patrick Donnelly, Goldman Sachs]

Maybe just on the Counsyl side, any update on the conversations with United there? I know last quarter you pointed to the long-standing relationship you guys have with them, hoping for a quick resolution on the dispute. Maybe just update us where we stand thoughts going forward?

[Mark Capone, CEO, President]

Yes. Thanks, Patrick. We continue to be in productive conversations with United. As you mentioned, we do have decades-plus long relationship with United. And so we continue to have productive conversations with them about the benefits to the members of getting our prenatal tests back in network.

[Patrick Donnelly, Goldman Sachs]

Okay. And then maybe on GeneSight. The guidance that you came out, can you just update us on your conversations with payers following that? What's the feedback then? Has there been any change since publication? The data itself was new, but the fact that it actually got out there and got published was significant. So I'm just wondering what the conversation has been like progress there?

[Mark Capone, CEO, President]

Yes. Thanks, Patrick. And so I think, one of the updates we noted in here is that, we had -- within a day or 2 of publication, we had sent the dossier off to payers representing more than 60 million lives. That's now increased quite a bit over the last week or two, so it's now more than 200 million lives. Now we're in possession of that complete dossier.

And of course, a number of them had already asked us to expedite or mailing of that dossier to them to be done immediately after publication. Since that time, there are lots of activity going on. We have weekly update meetings on all that activity. So there's a number of conversations that are underway, meetings being scheduled.

All the signs of activity that we would hope to see at this early stage and now, that we've got the complete dossier, that's available. So I think, we are pleased with the activity we are seeing. Obviously, there's still work to be done in order to garner those coverage decisions.

About all the preliminary leading indicators are what we would hope to see, and of course, the data as they had seen before, so there were no necessarily surprises in the data. I think only new pieces of data that are available for some of them are first, the Optum data, many of them have not seen the $6,000-year savings.

So that's a positive surprise in the dossier. The green exclusion data where we remove the patients that were not expected to benefit from GeneSight, that stated, that will be incremental to those payers as well. So that's where things sit right now.

[Operator]

We've a question from Puneet Souda with SVB Leerink Partners.

[Puneet Souda, SVB Leerink Partners]

So I was trying to understand, can you elaborate a little bit on where do you stand with the patient pay for GeneSight now? And how much of -- how much is that of the mix for GeneSight? And where is that number trending? And is that number getting impacted or changed due to the compliance issues that you're seeing in the marketplace right now?

[Mark Capone, CEO, President]

Well, I think for the patient pay perspective, nothing has really changed markedly in that at all. It continues to be what it has historically. First from a Medicare perspective, as you recognize, which is a significant part of revenue, there is no patient pay associated with that because that's completely covered by Medicare, and so none of that has changed.

I think the compliance for Medicare where it impacts is whether or not we submit the test for reimbursement at all. But if we do submit it for reimbursement because it meets the compliance requirements of Medicare, then there's no patient pay. From a commercial perspective, again, nothing has really changed there. I don't think we see any different kinds of trends from a patient pay perspective.

[Puneet Souda, SVB Leerink Partners]

Okay. And could you elaborate a bit on the GeneSight sales force size right now? And what's your plan there? And just along the lines of extension into the primary care population, how are you thinking about timing and expansion there? And also in terms of the -- if you could provide us any metric or anything that's useful that gives us a sense of details these reps are doing that is giving you a confidence that into the second half we should see more improvement here, and I'm sure these guys are also helping you with the compliance process?

[Mark Capone, CEO, President]

Yes. So I'll try to pick up all those, Puneet. We have about 170 people in the field right now that are calling largely on psychiatrists. And we pretty much focused on that market and have not penetrated much of the primary care market at all. The key gating factor for us to move into the primary care market will be some level of increased reimbursement. So as you see us announce those coverage decisions, we'll do an assessment as to when we believe we cross over a threshold that it makes sense to expand into primary care.

Obviously, we're looking to Medicare to expand into primary care and then some of the commercial payers as well. What we have done already is to put these together the expansion plan, so those are already baked. That will include an expansion ultimately of an additional 60 to 80 salespeople that we will need to get to the high-volume primary care physicians that we can't currently access.

In addition to that, we put plans in place for a direct-to-consumer awareness campaign that we will be ready to rollout on a regional or national basis depending on exactly how coverage decisions roll in. So those plans have already been put together as well.

So we wanted to get everything ready to go so that as soon as these coverage decisions role in, we're ready to begin the move into that primary care market, which, as you know, is 60-plus percent of all the antidepressant prescriptions are in that market, and so it represents a very significant opportunity for growth.

[Operator]

Our next question is from Bill Quirk with Piper Jaffray.

[Bill Quirk, Piper Jaffray]

So first question is just on the Hereditary Cancer business. Mark, I've asked this before, but are you at a point now where you can talk about the impact of riskScore as having on those volumes? Certainly, it appears that since you introduced that, that's kind of coincided a lot of the volume improvement there?

[Mark Capone, CEO, President]

Yes, thanks, Bill. We certainly have seen a significant benefit from riskScore in the Womens Health market or what we used to term the preventive market. There's no question that being able to deliver a definitive risk to every women that's being tested in that segment of the market, has been impactful for penetration.

And so it's really led to very nice volume growth that we've seen in the Womens Health [ph] market, and it really is a key differentiator that we've been able to offer. I think by now offering and moving to offer results for women of Hispanic ancestry, that's an important pivot as well as we noted now that's 18% of the population and prior to this, we were only able to offer to women of European descent. And so this will be one more layer on top of that, Bill, as we move into the future.

So I think, when you combine riskScore with myRisk and the prenatal test and you package all of that together, offer through the Myriad Complete application, that's why I think we are so enthusiastic about what we can see in this Womens Health market as we continue into the future.

[Bill Quirk, Piper Jaffray]

Okay, understood. And then two quick ones for me. First is, you mentioned, microdeletion in terms of a pipeline product for the Counsyl business, love some additional details are on timing there? And then just a quick, Bryan, modeling question.

So you reiterated guidance, but, obviously, we've had a few puts and takes with GeneSight. Should we assume that the overall GeneSight number for the year is going to be down relative to the initial expectations that's being made up for and things like hereditary cancer?

[Mark Capone, CEO, President]

So Bryan, you want to take the guidance question first?

[Bryan Riggsbee, Executive VP, CFO & Treasurer]

Yes, sure. I think we provided commentary with respect to how we would expect GeneSight to perform in the back half of the year. We didn't give initial guidance at the beginning of the year for that. So we'll leave that one there. I think what I would say in terms of the back half of the year, we continue to be very pleased with our Hereditary Cancer business and the way that business has performed.

And then with the tripling of the sales team for Counsyl, we would expect to see some improvement in that in the business performance for the prenatal products as we move into the back half of the year.

[Mark Capone, CEO, President]

And then from a microdeletion standpoint, Bill, we're -- for competitive reasons, we're not really disclosing exact timing on where we are in the microdeletion. We, obviously, are launching two other important scientific differentiators for Prequel this quarter.

And so we're working on that aggressively. We're not ready to announce quite yet the timing on microdeletions, but I think we are excited about what we can offer there and particularly as you combine some of the intellectual property we have from that couple of million patients we've tested in hereditary cancer and how that can contribute to some of that. We're excited to bring that innovation into the market.

[Operator]

Our next question is from Tycho Peterson with JPMorgan.

[Tycho Peterson, JPMorgan]

Mark, can you breakdown what the organic hereditary number was ex-Counsyl? And hey, I'll start with that.

[Mark Capone, CEO, President]

Yes, thanks, Tycho. I mean, the Counsyl number was -- is relatively small from a Hereditary Cancer perspective. And so it's not very material in the total. And so really this is largely just organic growth that we're seeing in hereditary cancer market.

[Tycho Peterson, JPMorgan]

Okay. And then going back to kind of the billing question, Doug's question earlier slightly different angle. Given that the MolDX website shows they cover myRisk. And I mean, is it clear that it's not under tech assessment anymore? And can you maybe just talk on why you still have confidence in 81162 given that it isn't under tech assessment?

[Mark Capone, CEO, President]

Well, I think right now probably the bigger question is the one Doug posed, which the whole industry is trying to deal with and that is next-generation sequencing period regardless of what the test is. And I think at this point, that's still obviously being assessed by the industry as a whole. So I think, that's really where the current conversation is.

And we're just going to have to see where that results. We've already made comments a year or so ago on how we've approached the billing for hereditary cancer testing and nothing has really changed from that perspective. Of course, the only thing was the uncertainty around next-generation sequencing and where that fits. So I think, we're just going to have to see how this resolves itself as the industry engages.

[Operator]

We have a question from Jack Meehan with Barclays.

[Jack Meehan, Barclays]

My first question is as you're approaching Medicare related to a potential change in the LCD for GeneSight, I was just hoping if you can confirm who the relevant contractors that you're approaching? Is it CGS, the contractor for Ohio or Palmetto, who they follow for the MolDX program?

[Mark Capone, CEO, President]

Well, I think there's -- we have conversations with everybody. In fact, often times we're talking to Medicare contractors even outside of necessarily the jurisdictions where we are just because they may have ultimate influence on gap-fill arrangements and things like that not that that's actually going on with GeneSight at this point.

So we have broad conversations. We have conversations with CGS. We have conversations with MolDX. As you know, Jack, there's a number of programs that look to tech assessment from MolDX program, and so we certainly engage with them on not only GeneSight, but a number of our products because they are viewed as a opinion leaders when it comes to tech assessment for molecular diagnostics. So we're in discussions with everybody.

[Jack Meehan, Barclays]

And then, Bryan, I was hoping if you could bridge me on the competitor for hereditary cancer testing revenue number from the second quarter of 2018. Last year, you reported $126.9 million of revenue. I know there was $1.3 million adjustment related to the changes around the weakness in control and then there was another $8 million for bad debt. So I had in my model baseline of $117.6 million, but the press release says $122.2 million. So if you can just bridge me on the changes there, that will be helpful?

[Bryan Riggsbee, Executive VP, CFO & Treasurer]

Yes, we can take that off-line, Jack. I think the short answer would just be that the numbers that are in the press release are the restated numbers for ASC 606 and reflect all the adjustments that we made at the end of last year, but we can take that one off-line.

[Operator]

We have a question from Derik De Bruin with Bank of America Merrill Lynch.

[Derik De Bruin, Bank of America Merrill Lynch]

So a couple of questions. First of all, can you break out the CDx -- the BRACAnalysis CDx component of hereditary cancer in the quarter? And just wondering what your sort of expectations are for that for the year? How's that been trending?

[Mark Capone, CEO, President]

Yes, thanks, Derik. The -- I mean, the CDx is trending up. We don't separate it from the hereditary cancer testing. Frankly, it gets difficult to do that because there's actually a lot of overlap in indications. CDx is indicated for ovarian cancer patients, but BRACAnalysis is indicated for ovarian cancer patients and myRisk is used for ovarian cancer patients. So it's not very instructive actually to necessarily break those out. And that's why we don't do that.

So we keep them all lumped together. But it's certainly true to say that the CDx does continue to ramp up. And with some of these additional approvals that we're seeing for ovarian cancer, companion diagnostic for metastatic breast cancer, companion diagnostic and for approvals in Japan from a companion diagnostic standpoint, that's something we expect to continue to grow as we move here into future quarters.

[Derik De Bruin, Bank of America Merrill Lynch]

And are the CDx reimbursed and paid for at a higher rate than the other -- than the myRisk and the other ones?

[Mark Capone, CEO, President]

CDx is generally reimbursed at the same rates as what we see in hereditary cancer side of the business.

[Operator]

We have a question from Dan Leonard with Deutsche Bank.

[Dan Leonard, Deutsche Bank]

I just want to make sure I understand the impact of the lab benefit management programs on GeneSight. So I guess, first off, what's really new there? A lot of benefit management programs have been around for a little while, so what is new that you found this quarter? And why would the presence of lab benefit management programs only impact GeneSight versus other places in your portfolio?

[Mark Capone, CEO, President]

Yes, I'll take the second question first. We actually did see some impact to Vectra, for example, that actually goes back a couple of years when Vectra got it's own code established. And we saw some impact there when that occurred with Vectra. I think for the other products in the portfolio, they are under contract and have coverage decisions.

And so as a result of that, there's -- that's really been fully baked into all the trend lines. I think GeneSight is the one that does not have a specific code necessarily. And so as a result of that, I mean -- and of course, those don't have [ph] contracts yet and so as a result of that, I think, in the latest wave of lab benefit manager programs, that we're particularly focused on things like pre-authorizations and things like that.

I think that's where GeneSight is impacted because of the pharmacogenomic codes that are more broadly used. And so I think that's why we've seen that. I think another thing to note is that adjustment that was made in this quarter, was as a result of revenues that have been accrued in three total quarters for GeneSight.

So this $4 million wasn't attributed to 1 quarters' worth of samples, it was actually attributable to three quarters worth of samples. And that's because, as Bryan mentioned, we -- the -- our ASC 606 approach for GeneSight is to look at what we anticipate collecting over an 8-month time frame because collections are slower because it's not in contract and it's not covered.

And so as a result of that, we have to wait until we have fully adjudicated all of those claims before we can make a definitive adjustment to revenue. And we do multiple appeals for any of these particular cases where the claim has been denied. That takes quite some time to go through multiple different levels of appeal before we have a final adjudication.

So while they've been implementing lab benefit manager programs over the last 3, 6 months or so, for all of that to reconcile, it just took a little time before we could definitively make a call from a revenue adjustment perspective.

[Dan Leonard, Deutsche Bank]

That makes sense. And then my follow-up, I guess, is presumably the flat benefit management programs are flagging this and denial rates are higher for GeneSight. Is that the correct interpretation, one? And then secondly, do you foresee any potential knock-on impacts from -- if there are higher denial rates and patients are getting balance billed at higher numbers and maybe complaining to their physicians?

[Mark Capone, CEO, President]

I think from a patient perspective, because of the cost transparency programs that I mentioned through the call, I don't see that as an issue, Dan. We're very clear with patients what their out-of-pocket costs are going to be. And we have detailed systems in place to make sure that there's no surprises from a patient perspective.

So I don't see any impact from that perspective. I think from the standpoint of denials, what actually happens is, oftentimes it really hits on the back-end when we're trying to bill for these services and collect and you run the test, but you're getting denied on the back end.

And yes, so it's not in the front end, it's more on the back end. And of course, that's where we need to move into appeal mode to demonstrate the benefit of this. I think from our perspective, what's important is that we continue to see really strong growth in that 22% year-over-year volume growth.

Doctors continue to see significant benefits in GeneSight, so they're continuing to order in record numbers. So all of that hasn't really impacted the demand for the product. And our goal is to get coverage decisions and get these in contract so that all of this is a thing of the past.

[Operator]

And we have a question from Sung Ji Nam with BTIG.

[Sung Ji Nam, BTIG]

Mark, for GeneSight, it sounds like you guys are off to a strong start in terms of engaging the tech assessment side. Was curious as to if you might be able to put some time frame around how long that will take? Or do you think it's still largely uncharted territory at this point?

[Mark Capone, CEO, President]

It's hard to predict timing, Sung Ji, and thanks for the question, and we never tried to do that and just because much of that is not necessarily in our control. What we can frame for investors is we know over the next 12 months, all of the tech assessment committees are going to be reviewing the dossier. We've got it in their hands as quick as humanly possible. And we are asking for accelerated reviews given the impact that it can have from not only a patient perspective, but impacting their bottom line. And so we are working really as diligently as we can to try to accelerate some of those.

The other thing that's new, and I know you've picked up on before, is our focus on the employer side, that has multiple benefits: first, employers can choose to cover something that are self-funded much like we have here at Myriad; and secondly, that certainly sends a signal to payers that they have customers, very important customers, because the payers we're going to interact within the next quarter are very, very large well-known payers.

And so when those customers make it known that they are interested in these types of personalized medicine products, it certainly influences the willingness of payers to look at how aggressively they want to pursue tech assessment. So I think, we're approaching it from every angle. I just -- I would be hesitant to reflect and propose timing on when we might begin to see coverage decisions.

[Sung Ji Nam, BTIG]

Okay. And then I guess, just related to the self-funded employer growth, I'm kind of surprised that you guys were able to assemble such a large group. Maybe could you give us a little more color in terms of what the strategy there might be? How knowledgeable are these -- the large employers there about pharmacogenetic testing in general? And then is this something like the one -- are these meetings one-on-one meetings? Or I'm just trying to get a better sense of kind of your strategy over the year?

[Mark Capone, CEO, President]

Yes, I think these employers are largely going to be starting from scratch in their understanding of Pharmacoeconomics and, frankly, personalized medicine writ large. So I think there's a lot of groundwork for us to put in place. Now that being said, we saw Kroger actually respond relatively quickly given the pressing need to find ways to treat patients with mental health disease.

And so I think we are starting at least from that perspective with a very strong understanding that on their top 2 or 3 things for an HR department to address, addressing mental health disease is in that top 3

And so the need is there, desire to learn is there. But I do think we're going to be starting from a low base. And it's mix of one-on-one meetings. There's some group meetings. And so even in the group meetings, the idea, obviously, is then to transition those to one-on-one meetings once we generate interest. And so this will be a big quarter for us.

I think the biggest quarter we've ever had in approaching employer groups. And we're hopeful that it's going to transition into opportunities to work directly with some of those self-funded very large employers.

[Operator]

And there are no further questions at this time.

[Scott Gleason, VP of IR]

Thanks, Scott. This concludes our earnings call. A replay will be available via website on our webcast for 1 week. Thanks, again, for joining us this afternoon.

[Operator]

Ladies and gentlemen, this does conclude the webinar for today. We thank you for your participation and ask that you please disconnect your line.