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Edited Transcript of MYGN earnings conference call or presentation 4-Nov-19 9:30pm GMT

Q1 2020 Myriad Genetics Inc Earnings Call

Salt Lake City Nov 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Myriad Genetics Inc earnings conference call or presentation Monday, November 4, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark Christopher Capone

Myriad Genetics, Inc. - CEO, President & Director

* R. Bryan Riggsbee

Myriad Genetics, Inc. - Executive VP, CFO & Treasurer

* Scott Gleason

Myriad Genetics, Inc. - VP of IR

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Conference Call Participants

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* Adam Joseph Wieschhaus

Cowen and Company, LLC, Research Division - Associate

* Derik De Bruin

BofA Merrill Lynch, Research Division - MD of Equity Research

* Jack Meehan

Barclays Bank PLC, Research Division - VP & Senior Research Analyst

* Puneet Souda

SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst

* Tycho W. Peterson

JP Morgan Chase & Co, Research Division - Senior Analyst

* William Robert Quirk

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

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Presentation

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Operator [1]

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Greetings and welcome to the Myriad Genetics First Quarter 2020 Financial Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded Monday, November 4, 2019.

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

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Scott Gleason, Myriad Genetics, Inc. - VP of IR [2]

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Thanks, Grant. Good afternoon and welcome to Myriad Genetics Fiscal First Quarter 2020 Earnings Call. During the call, we will review the financial results we've released today, after which we'll host a question-and-answer session. If you've not had a chance to review our quarterly earnings release, it can be found on our website on 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, and a recording will be archived in the Investor section of our website. In addition, there is a slide presentation pertaining to today's earnings call on the Investor section of our website in which we filed following the call on Form 8-K. Please note that some of the information presented today may contain projections and other forward-looking statements regarding future events or the future financial performance of the company. These statements are based on management's current expectations and the actual events or results may differ materially and adversely from these expectations for a variety of reasons. We refer you to the documents the company files from time to time with the Securities and Exchange Commission, specifically the company's annual report on Form 10-K, its quarterly reports on Form 10-Q and its current reports on Form 8-K. These documents identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

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

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Mark Christopher Capone, Myriad Genetics, Inc. - CEO, President & Director [3]

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Thanks, Scott. I will start today's call by providing some commentary on our revenue shortfall in the first quarter where we delivered revenue of $186 million and adjusted EPS of $0.08 per share, which were significantly below our financial guidance for the quarter. We are very disappointed in these results as it is entirely inconsistent with our goal to provide achievable guidance while working aggressively to deliver an upside to that guidance.

I want to take this opportunity to provide some specific details on what led to this shortfall. The revenue miss was largely related to revenue adjustments associated with hereditary cancer testing, which included approximately an $8 million out-of-period adjustment. Excluding the out-of-period adjustment, revenue would have been $197.5 million. By way of background, reimbursement in the diagnostic industry is driven by 3 Cs: coverage, contracting and coding. This particular issue was not associated with coverage or contract pricing nor was it related to test volume. The root cause of this shortfall was driven by the deletion of the 81211 and 81213 codes beginning on January 1, 2019.

These 2 codes are the sequencing and large rearrangement codes used for BRCA testing, which had been included in our payer contracts since 2012. While 300 payer contracts account for about 85% of hereditary cancer revenue, there are more than 1,000 payers that are responsible for the remaining revenue. These are generally small payers that on average reimburse approximately 4 hereditary cancer tests per month. Some of these payers have contracts with Myriad, but many are too small to justify the administrative cost of implementing a contract.

The company obviously knew that these codes were going to be deleted and had taken steps to revise contracts with payers representing substantial majority of revenue. For small contracted payers, we notified them of the upcoming coding changes and our intent to crosswalk the new code to the historical contract pricing. Payers were given an opportunity to discuss any concerns with the company but as is typical, the vast majority declined given the relatively minor spend associated with hereditary cancer testing. For non-Contracted payers, the assumption was that these payers would crosswalk pricing to the Medicare clinical lab fee schedule for the new codes. These assumptions were consistent with our historical experience for other coding changes.

In the third fiscal quarter of fiscal 2019, we shifted to the active hereditary cancer codes with revenue accrual rates consistent with these assumptions. Given the low number of claims and longer processing times associated with these small payers, we did not begin adjudicating a significant number of claims until the fourth quarter.

At that time, we noticed that payments were not always consistent with our revenue accrual rate assumption. In fact, in some cases, claims were being denied entirely despite the fact that these payers had reimbursed claims for many years. This is not atypical. In fact we saw the same thing occur when the BRCA codes were changed from a code stack to the 81211 and 81213 codes. Historically, we were able to resolve these administrative issues within a few quarters. To reflect the lower cash collections in the fourth quarter, we took an out-of-period adjustment of approximately $7 million and made a reduction in our revenue accrual rates.

Our fiscal 2020 and first quarter guidance provided in August were based upon those same rates. However, as we evaluated cash collections at the end of September and through October, we noted that our collection rates were once again lower than anticipated. As a result, we took another out-of-period adjustment, this time, totaling approximately $11 million and lowered our revenue accrual rate again.

We believe the prudent approach at this point is to assume that we will not be able to correct these administrative issues and our lowered revenue accrual rates are consistent with our actual cash collection rate. Having now adjudicated claims for 9 months after the coding change, cash collection rates from these small payers are predictable. However, we are aggressively pursuing approaches to increase our collection rates to levels that are appropriate for the services we are providing. As we execute on these initiatives, there may be opportunity for future positive out-of-period adjustments.

I think it is important to highlight that this is a coding issue and not related to contracting prices or volumes. In fact, the business fundamentals for our hereditary cancer business from a volume perspective have been exceptionally strong and exceeded our expectations for the quarter. Our hereditary cancer volumes are currently growing at double-digit rates in both the Oncology and Women's Health divisions, which represents the strongest growth rates we have seen since fiscal year 2014.

With that, I would like to turn the call over to Bryan to discuss our financial results for the quarter and our revised fiscal year 2020 guidance. And I will finish with a discussion about initiatives to deliver upside to this guidance.

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R. Bryan Riggsbee, Myriad Genetics, Inc. - Executive VP, CFO & Treasurer [4]

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

Hereditary cancer revenue in the quarter was $105 million versus $116 million in the first quarter of last year. Excluding the out-of-period adjustments and reduced revenue accrual rates, we would have seen the hereditary cancer revenue growth of 5%.

Moving onto GeneSight. Revenue in the quarter was $22.7 million. The sequential reduction in revenue was slightly higher than expected and was associated with first quarter seasonality and volume reductions due to the discontinuation of our GeneSight ADHD Analgesic test.

Revenue from prenatal testing was $23.5 million. And as anticipated, we did see a small decline in volume on a sequential basis due to seasonality. Vectra revenue in the first quarter was $11 million which was consistent with our expectations given summer seasonality.

Prolaris revenue in the first quarter was $6.5 million with double-digit sequential volume growth offset by a lower average selling price due to unfavorable mix.

EndoPredict revenues in the first quarter were $2.3 million and were relatively flat and consistent with our expectations.

Lastly, revenue associated with our pharmaceutical and clinical services business was $14.3 million and as anticipated, was down sequentially based upon the timing of pharmaceutical customer activity.

I would now like to discuss our financial metrics for the quarter. Adjusted gross margins were 73.3% and declined on a year-over-year basis. The out-of-period revenue adjustments drove 130 basis points of the decline and the remainder was due to lower test average selling prices as well as a lower revenue mix of higher margin hereditary cancer and GeneSight revenue.

Moving on to our operating expenses. We continue to focus on cost control and saw operating expenses decline approximately $3 million sequentially. Adjusted research and development expense was $19.1 million compared to $19.2 million last year.

Adjusted SG&A expense this quarter was $110.4 million compared to $99.6 million in the fiscal first quarter of last year.

Adjusted earnings per share were $0.08 for the quarter. This quarter we ended with $225 million outstanding on our credit facility and $194 million in cash and cash equivalents.

Now I'd like to discuss our revised fiscal year 2020 financial guidance. For fiscal year 2020, we are now guiding for revenue of $800 million to $810 million. This guidance accounts for the out-of-period adjustment of $11 million, the change in revenue accrual rates associated with our hereditary cancer business and lower GeneSight upside due to new UnitedHealthcare preauthorization requirements.

On an adjusted earnings per share basis, we are guiding to total adjusted earnings per share of $1 to $1.10, which reflects the lower revenue. Importantly, we expect our earnings run rate to increase significantly starting in the second quarter.

Now I would like to discuss the updated assumptions underlying our guidance. First, for hereditary cancer, we continue to expect strong volume as double-digit growth trends have persisted into the fiscal second quarter. These will be offset by the lower revenue accrual rates discussed earlier on the call. The net impact will result in a decline in year-over-year hereditary cancer revenue for the year.

For GeneSight, we are anticipating an increase in revenue beginning in the fiscal second quarter associated with the UnitedHealthcare coverage decision, which took effect on October 1 and continued volume growth. We have not yet factored in any primary care reimbursement for Medicare.

We are revising our GeneSight revenue outlook for the year due to the UnitedHealthcare preauthorization process that was formalized in September. The process will require additional administrative requirements, and as a result, we are assuming 30% of tests will not meet those administrative requirements. While we are aggressively working to reduce this noncompliance rate for the purpose of guidance, we have assumed it will remain constant for the entire fiscal year.

With the prenatal business, we continue to anticipate year-over-year test volume growth to be offset by the pricing reset we experienced in the second half of fiscal year 2019. We are not including any impact from potential guideline expansions for average risk, NIPS or expanded carrier screening.

For Vectra, Prolaris and EndoPredict, we continue to assume modest growth with stable prices.

Finally, we continue to assume a decline in our pharmaceutical and services business in fiscal year 2020 following an exceptionally strong year of clinical trial activity from Myriad RBM customers in fiscal year 2019.

Furthermore, the sale of the clinic, which we expect to close around the end of the calendar year, will represent approximately a $12 million revenue headwind in the second half of the fiscal year.

For the fiscal second quarter, we are guiding to revenue of $210 million to $212 million and adjusted earnings per share of $0.30 to $0.32. We expect to see improvements in revenue associated with the removal of the $11 million out-of-period adjustment, sequential increases in hereditary cancer revenue driven by positive seasonality and higher GeneSight revenue given the UnitedHealthcare coverage decision.

While we are very disappointed with the start of fiscal year 2020, we are committed to offsetting these challenges with improved hereditary cancer collections, new product volume growth and new product reimbursement. As we exit this year, these initiatives can provide significant upside to our revised guidance.

With that, I would like to turn the call back over to Mark to talk about some of these initiatives.

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Mark Christopher Capone, Myriad Genetics, Inc. - CEO, President & Director [5]

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Thanks, Bryan. I would like to spend the remainder of the call discussing some of the developments we believe will provide a positive catalyst for the business as we transition through fiscal year 2020.

First, with GeneSight. In early August, we have a pivotal event with the addition of GeneSight's UnitedHealthcare's medical policy, which took effect on October 1. UnitedHealthcare is the largest private payer in the country and is highly respected so this coverage policy has been widely reviewed by other payers. We continue to have productive conversations with additional commercial payers and expect further positive medical policy decisions in the fiscal year.

Discussions with payers are being bolstered with additional publications, the first of which is the new analysis for the GUIDED study, which was published last week in the Journal of Clinical Psychiatry. This analysis was based upon the patient population in the GUIDED study intended to benefit from GeneSight, and includes the 787 patients at baseline who are on medications with predicted gene-drug interactions. The analysis showed that patients who had their treatment guided by GeneSight saw a 70% improvement in remission, a 42% improvement in response and a 23% improvement in symptoms, all of which were statistically significant.

Given this data, one very significant tech assessment organization has expressed interest in an off-cycle review of the GeneSight dossier. In the first quarter, there were 2 draft LCDs for Medicare covering pharmacogenomics testing. These LCDs are overlapping and quite complex and we refer you to the MolDX website for more details.

In summary, the first draft LCD is for combinatorial pharmacogenomics testing, which includes GeneSight coverage when ordered by a psychiatrist in patients with major depressive disorder. The second draft LCD applies to single, multiple and combinatorial pharmacogenomic tests but also includes tests ordered by primary care physicians and patients diagnosed with anxiety. In fact, the second draft LCD is similar to the UnitedHealthcare coverage policy in that regard. Our expectation is that these draft LCDs will be modified and finalized in the third fiscal quarter and will become effective in the fourth quarter. The potential impact from these revisions has not been included in guidance.

We also recently signed a master service agreement with a large pharmacy benefit manager. This is an innovative new approach, and we are not aware of a similar arrangement in the molecular diagnostic industry. Under the terms of the master service agreement, we will promote GeneSight to the PBMs' customers who can elect whether to opt into the agreement. In fact, a Fortune 50 employer has already signed a master service agreement.

Pharmacy benefit managers have been interested in both GeneSight and Vectra based upon the ability of these tests to lower both prescription drug costs and overall health care costs as part of a value-added service to their customers. We are currently engaged in discussions of the other pharmacy benefit managers for both products and expect that we could see further positive development in this channel during the fiscal year.

Based upon the positive momentum we are seeing with both commercial payers and Medicare, we are continuing our plan to expand a primary care sales force for GeneSight in the second half of fiscal 2020. Currently, we're anticipating the first wave of this expansion to total approximately 65 new sales territories with additions beginning in the fourth quarter. Our current guidance does not include the revenue or earnings impact from this expansion.

Finally, I would note that there have been no material developments in our interactions with the FDA on GeneSight, and we have not made any changes to our test offering. In the last quarter, there were a number of influential stakeholders that weighed in on the importance of providing pharmacogenomic test results with interpretations to physicians. This included physician statements from the Association for Molecular Pathology, the American Clinical Laboratory Association and a letter from key patient advocacy groups including the National Alliance on Mental Illness and the National Council for Behavioral Health, among others.

From a companion diagnostic perspective we have seen significant progress with both BRACAnalysis CDx and myChoice CDx. We are anticipating U.S. approvals with BRACAnalysis CDX in both pancreatic and castrate-resistant metastatic prostate cancer. We believe these approvals will create a greater clinical impetus to test patients with these 2 cancer types, which comprise approximately 90,000 [incident] patients in the United States per year. We currently anticipate FDA approval for BRACAnalysis CDX for pancreatic cancer before the end of the second quarter and approval for a prostate cancer in the second half of fiscal year 2020. The impact from these approvals have not been factored into our guidance.

In addition, we are expecting data from the OlympiAD adjuvant breast cancer study to be announced in the second half of fiscal 2020, which could lead to another approval in fiscal year '21. The incident patient population for this indication is 198,000 patients per year. If this indication is approved, it would essentially expand testing indications to all breast cancer patients.

Additionally, with myChoice CDx, our proprietary test for assessing genomic instability, we received FDA approval for the test as a companion diagnostic in ovarian cancer patients being considered for niraparib PARP inhibitor therapy in accordance with the approved label. This is an important milestone after 10 years of development, and as a companion diagnostic, we can avoid the reimbursement challenges typical for this industry. We anticipate that the test will be covered by an existing NCD, and we will receive a proprietary code with reimbursement initially set at the list price of $4,040 per test. As a result, we would expect to begin generating revenue in the second quarter, although we have not included any revenue in our guidance.

We also recently filed for approval of myChoice CDx in Japan for potential use in ovarian cancer, which comprises approximately 9,000 patients per year.

In addition, there were multiple data presentations this year at the European Society of Medical Oncology Annual Meeting for PARP inhibitors in first line ovarian cancer. 2 of the 3 studies showed no statistically significant clinical benefit in the myChoice CDx negative patient population. We are currently in discussions with our pharmaceutical partners and regulators to ascertain the role of myChoice CDx as a companion diagnostic for these drugs on a global basis. We are also working on a study with a pharmaceutical partner using myChoice CDx in metastatic breast cancer patients, with results expected in calendar year 2020.

With our prenatal business, we have made good progress on our strategy to broaden testing to the entire OB/GYN markets and have added over 4,000 net new ordering physicians compared to a year ago. We also received acceptance for publication for a 58,000-patient study, showing that Prequel achieved high accuracy with an industry low test failure rate of 0.1% in a general population of pregnant women including women with a high body mass index. In fact, the no-call rate for SNP-based NIPS tests can have failure rates up to 24% in obese patients, which led the American College of Medical Genetics and Genomics to recommend against using NIPS tests in patients with significant obesity. However, the sequencing based approach used with Prequel has demonstrated no call rates of 1 in 1,000. We believe this data will be a very important differentiator in the market where no call rates are very frustrating and lead to more invasive procedures.

For Vectra, we plan to launch an expanded test report with data on risk of radiographic progression in cardiovascular risk after the upcoming American College of Rheumatology meeting. The cardiovascular data showed that Vectra significantly outperformed traditional risk, cardiovascular measures in patients with rheumatoid arthritis. Our market research shows rheumatologists see substantial clinical utility in these 2 additional indications for Vectra. We also expect to -- updated American College of Rheumatology, BendCare and United Rheumatology guidelines this fiscal year.

Moving on to Prolaris. This quarter we submitted a reconsideration request to Medicare for unfavorable intermediate and high-risk patients based upon data demonstrating that Prolaris is a better predictor of risk than traditional pathological methodology. If successful, this would expand the reimbursed market by approximately 33,000 men per year. We also published an important clinical utility study requested by payers. The study was from a low risk registry that evaluated 664 men with low Prolaris scores, of which 82% selected active surveillance as their initial treatment. Of those selecting active surveillance, only 0.4% experienced disease progression.

Furthermore, 91.2% of men remained on active surveillance at year 1 and 65.2% of men remained on active surveillance at year 4, showing the durability of the clinical decision for patients.

Finally, I would like to highlight progress with myPath Melanoma. We completed the first phase of the expanded launch and 8 salespeople are now promoting the product to approximately 35% of the targeted market. We also received ADLT status with the initial reimbursement at $1,950 per test. At this reimbursement level, the total addressable market expands to more than $0.5 billion in the U.S. While we are starting from a small base, we are optimistic the test will contribute to revenue in the second half of the fiscal year, although this expectation has not been incorporated into guidance.

In conclusion, between laboratory benefit manager programs and the recent hereditary cancer coding changes, we have faced substantial headwinds that have reduced revenues by almost $100 million per year with a corresponding reduction in earnings. Nonetheless, we believe that our portfolio provides substantial untapped potential and fully expect our efforts to increase volumes and reimbursement will offset these headwinds and provide significant future growth.

With that, I will turn the call over to Scott for the Q&A portion of the call.

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Scott Gleason, Myriad Genetics, Inc. - VP of IR [6]

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Thanks, Mark. As a reminder, during today's call, we use certain non-GAAP financial measures. Our reconciliation of the GAAP financial 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 to begin the Q&A session. (Operator Instructions) Operator, we are now ready for the Q&A portion of the call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Tycho Peterson with JPMorgan.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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I want to start with the guidance. You missed the quarter by [EUR 16 million]. You are lowering by $65 million. Can you just talk to -- is the remaining $50 million all lower collection rates in hereditary cancer because if so, obviously that implies greater hereditary declines.

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R. Bryan Riggsbee, Myriad Genetics, Inc. - Executive VP, CFO & Treasurer [3]

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Yes. Thanks, Tycho. This is Bryan. Just a couple of comments on the way we look at the quarter. We didn't provide a breakdown but there are a few things you need to think about. First is the $11 million of out-of-period is a part of it, but we also talked about how we lowered our accrual rate during the quarter that was the -- that was -- and how we would have grown hereditary at 5% rate, if not for that. So that's a large -- that's the predominant share in terms of the overall. And then there's the change in our assumption with respect to United and there are -- and the fact that 30% of the samples wouldn't meet the administrative criteria.

So those were the factors that gets you to that number.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [4]

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All right. And then for the follow up on GeneSight, I understand you're not -- there's not really an update related to the FDA. But is there kind of a time line here that we should be thinking about? And overall, GeneSight was also light relative to our expectations, so I guess what kind of gives you the confidence in the pickup? Obviously you have the benefit as United contract but...

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Mark Christopher Capone, Myriad Genetics, Inc. - CEO, President & Director [5]

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Yes. Thanks, Tycho. Really nothing more to add for the FDA. Obviously, we noted mid-August that we had submitted a document to the FDA but it's been 3 months since then, and as I noted, there's really been no material development since then, and we continue with the report that we have. So there's no time line or anything that we could supply, other than to note that the initial discussion was back in August, mid-August.

For GeneSight for the quarter, we noted that it was slightly below our expectations for the quarter and that was related to the volume reduction that we noted for the ADHD and the analgesic -- moving those, taking those products off the market. We had anticipated a sequential reduction due to that. And seasonality, we saw slightly higher volume declines in the first quarter than we had initially expected but the uptick from here is obviously going to be related to the fact that we continue to see volumes growing from that rebase level and we also obviously have UnitedHealthcare with higher reimbursement.

So those 2 should contribute to the GeneSight growth throughout the rest of the year.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [6]

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And the next question comes from the line of Puneet Souda with SVP (sic) [SVB] Leerink.

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Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [7]

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So first of all, my question is around 300 payer contracts that you said account for 85% of revenue in hereditary. Are any of those getting included here in the lowered guide and -- or only the 1,000 or so that you mentioned that are smaller payers?

And sort of what gives you the confidence that contracts that are coming up for renewal won't seek a lower pricing for hereditary given these changes?

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Mark Christopher Capone, Myriad Genetics, Inc. - CEO, President & Director [8]

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Yes. Thanks, Puneet. So the 300 contracts obviously, that's the vast majority of revenue, and we obviously have a very good handle on what's in those contracts and those contract prices and that was all taken into consideration when we provided the guide for this year.

Just to reflect on that, if you remember, we had noted for the year that we did expect a low single-digit price reduction in fiscal year '20 due to those contracts but that would be offset by a low single-digit growth rate. So that was the assumption we had going into that and that reflects obviously the good visibility we have on those contract prices.

I'll note, of course, that our volume was actually tracking significantly above that guide in that we had double-digit volume growth for the quarter. In fact, we have not seen this strong of a hereditary cancer perspective from a volume standpoint since almost 5 years ago. So that was actually outpacing what we had for the guide.

So those are the things we knew. Obviously, the part that impacted this was the 1,000-plus very small payers average for hereditary cancer tests a month. So they're very small volume. And in those cases, we didn't have that same type of visibility because as I mentioned, we had just informed them that we would crosswalk over to the new one but we hadn't sat down and negotiated with those payers and a number of those are even noncontracted payers that we don't have. So we didn't have nearly that -- the visibility in that subset of payers and that's where this -- the issue surfaced is we had made assumptions about how we thought that pricing would evolve and obviously, that assumption turned out to be incorrect.

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Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [9]

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Okay. And then benefit managers have had a significant impact this year. Could you give us a view into any other tests that potentially could be impacted here beyond GeneSight? And I hear your comments on the unique opportunity you have with the large master agreement that you're establishing but maybe can you provide me sort of what that means? And if it could result in any benefit in the near term?

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Mark Christopher Capone, Myriad Genetics, Inc. - CEO, President & Director [10]

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Yes. Thanks, Puneet. So we'll divide that up in the lab benefit managers and then we can talk about pharmacy benefit managers. From a lab benefit manager perspective, the impact we saw last year was with both GeneSight and Foresight. As we noted, we had seen a step down in both of those through the year and -- but since that time, we've seen pricing for both of those stabilize on a sequential basis. So we see the lab benefit manager has already rebased the pricing on that and we don't see additional impacts from that as we go forward.

From a pharmacy benefit manager perspective, obviously, that's a new development that we've been working on as we've looked at alternative payer options for coverage, and we are excited about this first foray into pharmacy benefit managers. In this particular case this was for GeneSight a master service agreement. We already have a Fortune 50 company that signed on, and we will, of course, be talking to a number of other customers for this large pharmacy benefit manager as we move forward.

In addition, we're also talking to pharmacy benefit managers about Vectra. Vectra offers some really unique value propositions as you know, one of the highest costs for a pharmacy benefit manager is the entire biologic category. In fact, it can be in the top 2 for all of our payers. And so tools that can help them for that rapidly growing, very expensive category, are ones that they're actually quite interested in.

So we continue some positive discussions with Vectra as well as GeneSight with pharmacy benefit managers.

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Operator [11]

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And the next question comes from the line of Bill Quirk with Piper Jaffray.

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William Robert Quirk, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [12]

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A couple of questions. Staying on hereditary cancer here for a moment. Bryan, I appreciate that the business would have been up about 5%, if you didn't have to make any of the revenue adjustments. If -- could you give us kind of what that number would have been at the prevailing rate? In other words, eliminating kind of the catch-ups that you had from previous quarters? And what would have hereditary cancer been at your new current accrual rates?

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Mark Christopher Capone, Myriad Genetics, Inc. - CEO, President & Director [13]

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Yes. Thanks, Bill, for the question. I don't think we -- I think our commentary around where the hereditary business would have been is that it would have been up 5% year-over-year, ex the impact of the out-of-period adjustments and the change in our accrual rate. So I think that will be the comment -- only commentary I would add on that. I don't think we gave a specific number in terms of -- go ahead.

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William Robert Quirk, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [14]

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Okay. Maybe I'll take it off-line then. And then could you go into a little detail about what helps drive the double-digit growth in hereditary? As Mark pointed out, that is certainly the strongest kind of organic volume number that you've had in several years.

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Mark Christopher Capone, Myriad Genetics, Inc. - CEO, President & Director [15]

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Yes. Thanks, Bill. I really -- I think one of the things we've been very pleased with is Nicole Lambert, and -- she is a President of our oncology team, and we've really been able to see the oncology team make some very significant stride in particular segments of the oncology market. So I think that's caused some of the inflection we've seen.

I think the other thing on women's health side, if you remember one of the reasons that we had done the acquisition prenatal is that we thought being able to offer a complete portfolio of high value added genetics to the OB/GYN market has some intrinsic value as a one-stop shop, I think we're seeing the benefit of being able to provide that more comprehensive solution with a really outstanding application that was developed by the Counsyl team called the Myriad -- what's now called the Myriad Complete application. So I think that one-stop shopping with that application has allowed us to continue to demonstrate some real strength in the preventive care, the OB/GYN segment.

And the last thing I would point to is there remains very significant interest in riskScore as a differentiator between Myriad and others in the preventive care space. The fact that every patient can get an understanding of her risks for breast cancer as opposed to just the less than 10,%, they get a positive mutation result. I think that continues to be seen as a significant value. Myriad's the only one with a highly validated test in that regard. And so we continue to see significant interest from the OB/GYN side.

So I think those combinations, unfortunately, of course, [masked] by the revenue accrual rate adjustments but, in the absence of that, actually very pleased with what we're seeing in the hereditary business.

I would note on a go-forward basis, I gave a litany of potential upsides that are going to happen this year that BRACAnalysis CDx approvals for prostate and pancreatic cancer, that's a very significant development. We're also talking about other companion diagnostic opportunities in adjuvant breast cancer. That's big because as we mentioned, if that was to come to pass, then virtually all breast cancer patients are indicated for hereditary cancer testing. We also are anticipating expanded NCCN guidelines for a broader number of breast cancer patients and potentially the addition of PALB2 as a gene that's potentially promoted to the same level of importance of BRCA1 and BRCA2.

So I think there's a whole series of things that are very highly probable to occur this fiscal year that are obviously not included in that current double-digit year-over-year growth that gives us encouraging signs that there are still going to be very nice volume growth opportunities in the hereditary cancer market as we look out to the rest of the fiscal year and into fiscal year '21.

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Operator [16]

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And the next question comes from the line of Derik De Bruin with Bank of America.

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Derik De Bruin, BofA Merrill Lynch, Research Division - MD of Equity Research [17]

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Mark, I'm just sort of struck by the fact that when I go back and look at your last Analyst Day in 2015, I know it's ancient history, but your worst-case revenues that you were modeling at that time, which didn't include Counsyl, which didn't include GeneSight, were about $1.35 billion and sort of pulling of that data would give you an assessment for about $600-ish million in terms of your 2020 numbers. It's a big delta from where you thought you were going to be in terms of where you are right now. And that's with some fairly conservative assumptions back then.

I'm just sort of struck as -- [the question I'm going at] is like it's more of the visibility into some of these lines going forward. It just seems like everything seems to be falling short and it's -- how do we sort of gain confidence that these things are going to pick up when they just haven't over the last 5 years?

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Mark Christopher Capone, Myriad Genetics, Inc. - CEO, President & Director [18]

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Thanks, Derik. You were a little hard to hear. I think I caught all that. I think you were referencing our 2015 Analyst Day. So yes, certainly 5 years is a long time to reflect on what's happened. I think if you go back to some of the assumptions that we made that time, I think there's probably a couple of things where -- that were inconsistent with those assumptions.

The first thing I would argue is that the hereditary cancer business held up much better than many analysts had anticipated. So I think we deserve some credit for really seeing hereditary cancer business. Our volume, despite all the competition, has actually grown since that time frame. We've obviously seen compression in prices, which we had anticipated at that point, and certainly probably a little higher than we thought. I don't think we anticipated that there might be a competitor in the space that would be willing to price significantly below cost that -- and amount losses of over $0.5 billion. So I would argue we probably didn't anticipate that type of business model.

But I think absent that, I would argue that hereditary market probably held up better than some would have projected. I think if you look at the industry writ large and including our assumptions, really the biggest gap is the lack of reimbursement. I think reimbursement has proven to be much more difficult than we would have expected when we put some of those thoughts out as far as how the markets would evolve. I think there's a number of reasons why you've heard us on many conference calls over the last 5 years talk about some of the obstacles we're facing. And in fact in the last 18 months, you've seen us pivot to try to use some unique and different approaches to gain reimbursement and the pharmacy benefit manager progress, I mentioned already today, is an example of how we think we're going to have to try to go at reimbursement in a very different approach than what we might have historically. So I think that's probably one of the areas that's the biggest difference.

I think the other if you had looked at what we thought would play out would be a much bigger companion diagnostic opportunity, particularly with myChoice CDx. As you well know, the initial data that came out on the clinical study was equivocal and ultimately the FDA chose to approve ovarian cancer in all-comers as opposed to the use of myChoice CDx as a companion diagnostic. That's a big difference between what we had anticipated when we had the plan put together that myChoice CDx would actually become a bigger part of the portfolio.

Now fast-forward, and instead of getting approval with -- as we expected with the initial indication, we of course just got approval now with a number of indications that are coming. First-line ovarian cancer has a possibility of a companion diagnostic indication, metastatic breast cancer, we should get a readout here relatively soon. So I think my choice has been significantly delayed but we're starting to see signs that it actually can become a part of the portfolio.

So I think our biggest challenge still remains how do we drive reimbursement and much faster, much deeper in the industry as a whole and Myriad in particular? I don't think we've solved that question yet, but I think we're still coming at this with some other ways that we think actually provides an alternative approach to that. But reflecting on the last 5 years, I think that's been the biggest challenge.

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Operator [19]

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And the next question comes from the line of Doug Schenkel with Cowen and company.

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Adam Joseph Wieschhaus, Cowen and Company, LLC, Research Division - Associate [20]

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This is Adam Wieschhaus on for Doug. Can you provide any more color on the unexpected United preauthorized requirement and is addressing this issue just a matter of educating providers and having to implement new ordering procedures or do you think it would potentially cause a structural decrease in the percentage of tests eligible for reimbursement because of the more stringent requirement? And does it typically take 3 quarters to address these types of issues as your guidance implies?

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Mark Christopher Capone, Myriad Genetics, Inc. - CEO, President & Director [21]

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Yes. Thanks, Adam. I think that there's 3 components for this, as we mentioned, this is details that we were notified of as we started to approach October 1 and details in September. What I would say is, it's similar to the types of things we've had to do with Medicare and so we need a prior documentation of diagnosis, documentation of failed medications. The other thing that's required is that physicians register through the portal -- ordering portal, so that they can actually place -- receive prior authorizations through that ordering portal.

So I think it's a combination of all 3 of those things having to be done successfully that causes us to assume 30% are not going to make their way through that -- through those hurdles. Now we've obviously got experience doing this particularly on Medicare and the team will work aggressively. But we think it's prudent to assume that we're going to have that type of failure rate throughout the year. Obviously, we like to overachieve on our guidance. And so giving that as the team makes progress, that gives us an opportunity for potentially [upside to] guidance based on lower failure rates. We just think that's the prudent way to approach this.

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Adam Joseph Wieschhaus, Cowen and Company, LLC, Research Division - Associate [22]

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Okay. And thanks for the second quarter guidance. Can you provide an update for how should we should think about the cadence of revenue over the back half of the year? Previously you expected the fourth fiscal quarter to be materially above fiscal quarters 1, 2, 3. Do you still think that will be the case based on the development today?

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R. Bryan Riggsbee, Myriad Genetics, Inc. - Executive VP, CFO & Treasurer [23]

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Yes. Thanks, Adam. Yes, just, I guess, we had some commentary in the script regarding our expected profile for the remainder of the year. Obviously given where we are, we would expect to trend up from both a revenue and earnings perspective as we move through the back half of the year. So we would expect the back half earnings to be significantly higher than the front half.

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Mark Christopher Capone, Myriad Genetics, Inc. - CEO, President & Director [24]

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The only other thing I might add obviously not in guidance but as you look at the potential upside drivers slide, the last slide in the presentation, it lays out a number of things that are anticipated to happen in this fiscal year. And so as you think about the fourth quarter, things like expanded Medicare coverage for primary care, for example, or anxiety, that's not in our fourth quarter guidance, but given the timing that we reflected on this call where we would anticipate the LCD being [affected] in the fourth quarter, you potentially could see upside on that. MyPath Melanoma, we expect revenue to kick in by then. MyChoice CDx, we expect revenue to kick in by then. The changes in NCCN guidelines for hereditary cancer, they have the opportunity to be affected by then, the pancreatic cancer approval for BRACAnalysis CDx.

So there are a number of the initiatives that are listed on that, that potentially could become affected for the fourth quarter. So as we start to think about the financial momentum as we transition into next year, although those numbers are not in guidance, those are some of the things that we're anticipating as we reflect on what that fourth quarter could look like and how that could ultimately affect some of our guidance for fiscal '21. I just think that sheet's important because all of the things on there are very high probabilities and therefore, it -- there are opportunities to cause some inflections through the year.

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Operator [25]

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And the next question comes from the line of Jack Meehan with Barclays.

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Jack Meehan, Barclays Bank PLC, Research Division - VP & Senior Research Analyst [26]

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So I had a few follow-up questions on hereditary cancer testing. First, on October 17, MolDX had a new test panel alert, which defined multigene orders regardless of testing methodology. So I was wondering if that applied to myRisk. Maybe why are you confident you're going to be able to continue billing 81162 versus 81432? And I appreciate all the coding details you've already given but I'm just curious is there -- do you see any risk that 81162 could also be deleted and you would have to migrate over to 81432?

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Mark Christopher Capone, Myriad Genetics, Inc. - CEO, President & Director [27]

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Yes. Thanks, Jack. The -- I think actually when you look at the articles that, that -- I think that conversation has actually been superseded by the NCD update that occurred last week. I know you are aware of that. I think that's probably the bigger question right now in hereditary cancer space. And for those who aren't as familiar, there was an NCD that was issued some time ago, which was initially interpreted by the industry to be for somatic testing and not germline. CMS noted that they now apply that to germline testing and in fact, made some clarifications on that last week as well. What's important about that is what this notes is that if you're using next-generation sequencing technology for breast and ovarian cancer -- -hereditary breast and ovarian cancer testing, that in order to bill Medicare you need to have FDA approval. And that's what's being proposed in the current draft that is now open for public comment.

Now as a reminder, Myriad actually has Sanger sequencing technology, and it is FDA approved. And in fact the only germline test that is FDA approved is Myriad Sanger sequencing technology, which falls outside of the confines of that NCD. And so I think that's really the question right now is, how is that NCD going to ultimately resolve? And for Myriad, of course, we still have a testing option, which is Sanger sequencing with our FDA-approved test.

So I think the articles -- because they're only really applicable if you're using next-generation sequencing because it's the only cost-effective way to do multigene testing, I think that's really going to get superseded by whatever resolution ultimately occurs with that NCD.

And as far as the code is concerned, I think it's important that there will always be BRACAnalysis-only testing. That's what 81162 is. So it's not like those codes were phased out. The 81211 and 81213 codes, which were developed over time, because large rearrangements didn't even exist for BRCA until later on in the game. Those didn't get eliminated, or those didn't get superseded by all multigene panels, it's just a new BRCA 81162. There will always be a need for a BRCA testing code. In fact, as I mentioned, the only FDA approved test is a BRCA1 and BRCA2 test. And for all the companion diagnostic indications I mentioned earlier on the call, you're going to need to have an option to be able to code just BRCA testing for those companion diagnostics.

So I don't see a future without 81162. I think that's going to be required for the FDA approved tests and there certainly are applications where doctors will only want to order BRCA testing. The other reason that's important is if you actually look at NCCN guidelines today, the only genes that are recommended for hereditary breast and ovarian cancer are BRCA1 and BRCA2. And so as NCCN maintains that stature, you're going to need to have an ability to run and code for a test that is consistent with those NCCN guidelines.

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Jack Meehan, Barclays Bank PLC, Research Division - VP & Senior Research Analyst [28]

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Great. And as a follow up on GeneSight. First, which of the 2 Medicare policies do you think applies to you? I assumed it was the combinatorial one since that was the one you commented on at the open meeting.

And then just for Bryan, what does your new guidance call for in terms of revenue for GeneSight for the year?

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Mark Christopher Capone, Myriad Genetics, Inc. - CEO, President & Director [29]

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Yes. Jack, I think as we mentioned, obviously, there's some overlap between these LCDs, both LCDs mentioned combinatorial. The first one is very similar to the current GeneSight LCD and that is combinatorial only. There is one other test included. But the second LCD that includes primary care physicians and expands to other indications like anxiety, also includes combinatorial pharmacogenomics. So as written today, combinatorial tests are covered by both LCDs, hence some of the overlap. We'll have to see how this resolves itself as we go through the common period.

I will note one of the curiosities in this is that if you look at the second LCD, which is -- covers primary care and combinatorial, the reference noted in that LCD to justify the expansion into primary care is the fact that there was a clinical study done that demonstrated that primary care physicians can actually have as good or better outcomes associated with pharmacogenomic testing as psychiatrists. It doesn't include the footnote for that study, which in and of itself is unusual, and I'm sure that will get corrected. But you recall the study that actually produced that result is the IMPACT study that was done with GeneSight.

So the fact that, that study is not referenced in the first LCD, which explicitly covers the test that generated the data is quite unusual. And so I think that's something again, you've got an opportunity to potentially see and modify as we move into the future.

From the standpoint of -- I know you had asked Bryan I think from a [set point of] guidance we didn't specifically -- we don't provide product specific commentary on GeneSight. I think obviously we're going to see sequential growth as I mentioned from both a volume and a United Healthcare reimbursement perspective. And so that's why we are anticipating continued GeneSight growth throughout the fiscal year.

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Operator [30]

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And that does conclude today's Q&A session. I will now turn the conference back to Mr. Gleason.

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Scott Gleason, Myriad Genetics, Inc. - VP of IR [31]

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

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Operator [32]

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And that does conclude today's conference. We thank you for your participation, and ask that you please disconnect your line.