Scott Gleason - Myriad Genetics, Inc. Mark C. Capone - Myriad Genetics, Inc. R. Bryan Riggsbee - Myriad Genetics, Inc..

Bill R. Quirk - Piper Jaffray & Co Doug A. Schenkel - Cowen & Co. LLC Tycho W. Peterson - JPMorgan Securities LLC Dan L. Leonard - Leerink Partners LLC Isaac Ro - Goldman Sachs & Co. Derik de Bruin - Bank of America Merrill Lynch Peter R. Lawson - Mizuho Securities USA, Inc..

Ladies and gentlemen, thank you for standing by. Welcome to the Myriad Genetics Fourth Quarter and Year End 2015 Financial Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded Tuesday, August 11, 2015.

I would now like to turn the conference over to Scott Gleason. Please go ahead..

Thanks, Edison. Good afternoon and welcome to the Myriad Genetics fourth quarter earnings call. My name is Scott Gleason and I am VP of Investor Relations. During the call, we will review the financial results we released today, after which we will host a question-and-answer session.

If you have not had a chance to review the earnings release, it can be found 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 Investors section of our website. In addition, there is a slide presentation pertaining to today's earnings call on the Investors section of our website.

Please note that some of the information presented today may contain projections or other forward-looking statements regarding future events, or the future financial performance of the company.

These statements are based on management's current expectations, and the actual events or results may differ materially and adversely from these expectations for a variety of reasons.

We refer you to the documents 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'll now turn the call over to Mark..

data publication, professional society guidelines and expanded payer coverage policies. At ASCO this year, we presented data showing that deleterious mutations occurred at frequency of approximately 9% in endometrial cancer patients tested with myRisk.

We believe these data further bolster the recent NCCN guidelines that recommend hereditary cancer testing for all endometrial cancer patients. This market represents an opportunity of approximately 50,000 patients per year in the United States and we currently test less than 2% of this population annually.

In addition, in April, the NCCN guidelines were updated to expand the indication for hereditary cancer testing in colon cancer patients to all patients with a 5% chance of testing positive. Based upon these guidelines and data, we are currently in discussions with payers about expanding coverage for both colon and endometrial cancer.

Furthermore, we have successfully completed three market expansion studies in breast cancer and one market expansion study in pancreatic cancer. We believe there is potential for NCCN to expand guidelines for breast cancer throughout fiscal 2016 and for pancreatic cancer in fiscal 2017.

Overall, we continue to believe these efforts to expand the oncology market will lead to significant opportunities for revenue growth over the coming years.

Our second strategic imperative is to diversify our product revenue beyond Hereditary Cancer, and I would like to provide updates from our fourth quarter on new products in our Oncology, Urology, Autoimmune and Dermatology business units.

First, in our Oncology business unit, we continue to make substantial progress toward our goal of becoming the global leader in companion diagnostics for DNA damaging agents.

Our first companion diagnostic is BRACAnalysis CDx, which is indicated as an aid in identifying ovarian cancer patients with deleterious or suspected deleterious germline BRCA variants eligible for treatment with Lynparza. As a reminder, we launched this product in the third quarter and saw 40% sequential increase in ovarian cancer patient testing.

As expected, this included a bolus of ovarian cancer patients that had been waiting for the drug approval.

Despite that bolus, we still saw a 3% sequential increase in ovarian cancer patient testing in the fourth quarter and continue to be very pleased with the launch of this test, which was the first laboratory-developed test ever approved by the FDA.

This quarter, we made several key presentations at ASCO relating to the ability of myChoice HRD to predict response to both platinum agents and PARP inhibitors.

The first study we presented was the GeparSixto data, which evaluated the ability of myChoice HRD status to predict response to carboplatin-containing chemotherapy in 193 patients with triple-negative breast cancer.

The highest response rate of 64% was seen in patients with high HRD scores who received both carboplatin and standard-of-care chemotherapy, which compared favorably to the 30% in the low HRD patient population.

In conjunction with our strategic partner, TESARO, we also presented data at ASCO around the ability of myChoice HRD to identify responders to TESARO's investigational therapeutic niraparib. In a study of 106 patients with advanced ovarian cancer, myChoice HRD identified 100% of responders to the drug.

Fiscal year 2016 will see a number of key milestones for our companion diagnostic franchise as we prepare for broader commercialization in fiscal 2017 and beyond. We are constructing FDA laboratories for both myChoice HRD and Tumor BRACAnalysis CDx and plan on submitting IDEs for both tests later in the fiscal year.

We also plan to initiate multiple new trials with our strategic pharmaceutical company partners in new tumor types. Next, I would like to provide an update on our progress in our Urology franchise with Prolaris. From a volumes standpoint, Prolaris grew 10% sequentially this quarter, representing an annual run rate of 10,000 tests.

We are entering fiscal year 2016 with a great deal of momentum in our Urology business and are excited about the prospects of having Medicare coverage, which is typically a growth catalyst for new diagnostic products. We also are pursuing broader indications for Prolaris for all patient risk categories and expanded private payer coverage.

However, our guidance does not assume any additional reimbursement this fiscal year beyond very-low- and low-risk Medicare patients. Regarding Medicare, we received the final LCD for Prolaris from Palmetto in the MolDX program on January 15, 2015.

Subsequently, we were informed that for billing purposes, we would also require an LCD from Noridian and have been awaiting this final LCD.

We have now been informed by Noridian that because of the transition from ICD-9 to ICD-10 codes, all Medicare contractors have been instructed to refrain from posting any new LCDs until CMS has converted all previous LCDs to the ICD-10 format.

We've also been informed by Noridian that they are intending to have the Prolaris LCD in an ICD-10 format with an October 1, 2015, effective date. In addition, we have been provided Medicare pricing for Prolaris at the level we anticipated, which is consistent with our goal for an average selling price of over $3,000 per test.

For purposes of guidance, we are assuming reimbursement for Prolaris beginning on October 1, 2015. However, given the extended period of time since Palmetto's final LCD, we also will be seeking retroactive reimbursement. Given the uncertain reimbursement related to these legacy claims, we will not include them in our fiscal 2016 guidance.

During the fourth quarter, we presented important new data on our definitive active surveillance threshold for Prolaris at the American Urological Association meeting. We have received outstanding feedback from the urology community on the importance of having a defined cut-off to make a definitive decision for patients regarding active surveillance.

Patients below this active surveillance threshold have less than a 3% risk of 10-year prostate cancer-specific mortality, where patients above the threshold have an average mortality risk of approximately 20%.

Based on our commercial samples, 60% of patients would fall below this threshold and could confidently pursue active surveillance compared to the 15% to 20% that currently chooses this approach. Additionally, we presented the final data on our landmark PROCEDE 1000 study at AUA that incorporated results from 1,206 patients.

The final data showed a 48% change in treatment recommendations, in which 35% of patients saw a reduction in therapy and 13% saw an increase in therapy. These studies once again demonstrate the unique ability of Prolaris to stratify patients and drive significant changes in care.

Also during the quarter, we published the largest validation study conducted for a prostate cancer prognostic test. The study analyzed Prolaris' ability to predict prostate cancer-specific death in a biopsy cohort of 761 men.

The hazard ratio associated with the per-unit change in Prolaris test was 2.17 and was highly statistically significant with a P-value of 10 to the minus 20.

This data adds to multiple other studies showing Prolaris' ability to predict prostate cancer-specific mortality, which is the gold standard endpoint for men trying to make vital decisions surrounding their disease. A number of payers were awaiting this peer-reviewed publication, so it will be an important addition to our dossier.

Transitioning to our Autoimmune business, I am pleased to report that Vectra DA returned to strong growth this quarter with test volumes increasing 12% sequentially to approximately 40,000 tests.

We believe that this strong volume performance is a direct reflection of the outstanding leadership brought by our new President of Crescendo, Bernie Tobin, and his very talented team.

Many of the tactics we are utilizing to drive further penetration into the $600-million Medicare market includes several of the same tactics we successfully utilized in our Preventive Care business.

Bernie and his team are in the very early stages of implementing this new strategy, and we continue to see substantial growth opportunities since we are currently less than 5% penetrated in the Medicare market.

In addition, we are proceeding on the longer-term strategy to expand private payer coverage for Vectra DA which will increase the market potential from $600 million per year to $1.5 billion per year in the United States.

Not surprisingly, data requests from payers were diverse with needs along a continuum including data mining, retrospective studies and/or prospective studies. Data mining activities are already underway, and samples for retrospective analysis have been identified.

We also are currently engaged with both physician and payer stakeholders to assist in the design of our prospective clinical utility study, and we look to have a finalized protocol in the near-term. Because these activities will require some time, we have not included any additional reimbursement in our guidance for fiscal 2016.

However, we remain very confident that the strength of our existing data and the results of these additional studies will result in broad reimbursement coverage for Vectra DA. Transitioning to the Dermatology franchise, we continue to make excellent progress with our myPath Melanoma test that differentiates melanoma from benign skin lesions.

To date, 18% of the 1,200 practicing dermatopathologists in the country ordered a myPath Melanoma test. We have successfully completed our second validation study and have assembled an extensive dossier with all of the relevant data.

During fiscal 2016, we will begin discussing the dossier with payers and we'll pursue the final publications for our clinical validation and clinical utility studies. Lastly, I would like to discuss our progress in the third strategic imperative to expand our international contribution.

International revenue during the quarter accounted for approximately 4% of total revenue, including the recently completed clinic acquisition in Germany.

We are excited by the prospect of having an MVZ designation, and are beginning to contract physician networks which could have a positive impact on international revenue in the second half of this fiscal year.

As in the U.S., we are seeing rapidly increasingly demand for myRisk, with myRisk comprising 32% of our international hereditary cancer revenue.

We expect this number to increase significantly throughout fiscal 2016 as more clinical data is published and as institutional laboratories recognize the substantial complexity associated with sequencing and interpreting these panels with a turnaround time requirement that is consistent with legacy products.

Additionally, we continue to see growing interest in our breast cancer prognostic chip, EndoPredict. International laboratories desire a kit-based solution because it allows the test to be run in their internal laboratories and enables institutional reimbursement.

In the fourth quarter we had seven additional instrument placements, bringing our global installed base to 40 systems. Additionally, our international companion diagnostic business is awaiting reimbursement for Lynparza in most of the major European markets, which should lead the utilization of our tumor BRACAnalysis CDx test.

AstraZeneca is continuing to negotiate with European payers, and as these decisions are made, we would expect to see physicians seek out our CE-approved test that can identify the largest potential responder group for Lynparza. Lastly, I would like to provide some perspective on fiscal 2016 guidance.

Both Bryan and I are very committed to achieving the financial and operational targets we provide to investors. At the same time, we operate in an industry that is known to have less predictable reimbursement.

Therefore, our goal is to provide transparent guidance with clarity around the underlying base case assumptions and commentary around the upside opportunities and downside risks. As I have previously stated, our fiscal 2016 guidance will only include known reimbursement.

However, investors should recognize that we have hundreds of employees dedicated to projects focused on potential upsides, but their uncertainty makes inclusion in guidance inappropriate.

To that point, Bryan will provide a more detailed look at our guidance later in the call, but we are guiding to fiscal year 2016 revenues of $750 million to $770 million and earnings per share of $1.60 to $1.65. This guidance implies top-line growth of 4% to 6% and bottom-line growth of 10% to 13%.

In closing, I am exceptionally honored and excited to take the reins as CEO of this truly unique company and lead its outstanding employees. We see tremendous opportunity for the growth of personalized medicine on a global basis, and Myriad is uniquely positioned to lead this revolution in patient care.

During my tenure as CEO, I plan to continue the aggressive company transformation that we started five years ago when I assumed the role of President of Myriad Genetic Laboratories. We have made excellent progress and I believe the fruits of these strategies and investments are beginning to emerge.

Executing on our three strategic imperatives – to transition and expand our hereditary cancer markets, to diversify our product portfolio, and to expand our international contribution offer – ample opportunity for future growth.

I am looking forward to having a more in-depth discussion on our five-year plan at our upcoming Investor Day on September 14 at the NASDAQ MarketSite in New York City, and I hope you will join me and the rest of our talented executive team.

Now I would like to turn the call over to Bryan to provide a detailed overview of our financial results and fiscal year 2016 guidance..

Thanks, Mark. I am pleased to provide an overview of our financial results for the fourth quarter. Fourth quarter total revenues were $189.9 million compared to $188.8 million in the same period in the prior year.

Importantly, we returned to growth this quarter with revenue increasing 1% year-over-year and 5% on a sequential basis, and looking forward, we believe we are in excellent position to grow on a year-over-year basis throughout each quarter of fiscal year 2016.

Hereditary Cancer revenue was $164 million this quarter and was down 3% year-over-year, but increased 3% on a sequential basis. As Mark mentioned, we ended the quarter with 72% of incoming samples being ordered as myRisk, and for the full quarter, myRisk comprised 62% of total hereditary cancer revenue.

We were exceptionally pleased to see strong sequential and year-over-year growth at Crescendo this quarter, with total revenue growing 12% sequentially to $11.8 million, compared to $10.5 million in the previous quarter. As Mark noted earlier, total test volumes increased to just under 40,000 and grew 12% sequentially as well.

Revenue associated with our Pharmaceutical and Clinical Services business was $11 million and was up 88% year-over-year and 58% sequentially. Our recent German clinic acquisition accounted for a little under $5 million in the quarter compared to approximately $2 million in the previous quarter.

Gross margins continued to improve in the fourth quarter and were 80.3% compared to 79.4% during the third quarter. The primary driver of improved gross margin this quarter was improved efficiencies in our myRisk laboratory which was offset by some lower gross margin clinic revenue.

Moving on to our operating expenses, research and development expenses were $18.7 million in the fourth quarter and declined 7% relative to the fourth quarter of last year. Our research and development spend in the fourth quarter of last year was exceptionally high, based on the timing of clinical trials and myRisk development costs.

GAAP SG&A expense this quarter was $97.5 million and increased 16% relative to last year. The increase in SG&A this quarter is attributable primarily to one-time executive transition costs of approximately $8.3 million in the quarter and the impact of having a full quarter of clinic expenses.

As a reminder, the clinic has a relatively neutral impact on our overall profitability. Adjusted operating income was $48.2 million in the fourth quarter and declined 14% relative to the fourth quarter of last year.

The decline in operating income is the result of higher investments across our portfolio of products and some declines in profitability associated with the transition to myRisk in our Hereditary Cancer franchise.

Adjusted net income was $29.4 million and adjusted earnings per share were $0.41 for the quarter, compared to $37.2 million and $0.48 per share, respectively, in the fourth quarter of last year.

Our fully diluted share count decreased sequentially to 72.4 million shares from 73.9 million shares in the prior quarter, driven by our share repurchase program.

During the quarter, we used approximately $45 million to repurchase 1.3 million shares of Myriad common stock, which was relatively in line with our free cash flow generation during the quarter. As of the end of the fourth quarter, we had approximately $155 million remaining on our approved share repurchase authorization.

I would now like to provide a more detailed look at our updated fiscal year 2016 financial guidance. As Mark mentioned, we are guiding to revenue of $750 million to $770 million and adjusted earnings per share of $1.60 to $1.65. Let me walk through the assumptions that underlie our guidance.

First, looking at our Hereditary Cancer business, we are assuming our market losses this year are equivalent to market growth, implying that Hereditary Cancer is flat on a year-over-year basis. To the extent that market growth exceeds market losses or vice-versa, this would represent upside or downside to our forecast.

Also, in Hereditary Cancer, we are not assuming any impact from expanded coverage for colon and endometrial cancer patients based upon the recent NCCN guideline expansion. We also are not assuming any additional Prolaris reimbursement beyond very-low- and low-risk patients for Medicare.

So any additional coverage for Prolaris, Vectra DA, myPath Melanoma or myPlan Lung Cancer would represent upside to our guidance. Moving on to product-specific guidance, we are guiding to Vectra DA revenues of $50 million to $55 million, implying 14% to 26% year-over-year growth, which assumes only existing reimbursement.

For Prolaris, we are guiding to revenue of $10 million to $12 million, which assumes only Medicare coverage for low- and very-low-risk patient populations beginning in the second quarter. Finally, for our Pharmaceutical and Clinical Services segment we are guiding to full-year revenue of approximately $40 million.

From a profitability standpoint, we would expect to see continued gross margin improvement throughout the year based upon increased efficiencies in our myRisk laboratory and Medicare reimbursement for Prolaris.

From an operating margin standpoint we are targeting adjusted operating margins, which exclude approximately $14 million in amortization of intangible assets tied to the acquisitions of Crescendo Bioscience and Myriad RBM, to be approximately 25% to 26% of revenue.

We are assuming a 40% effective tax rate for the year and our guidance does not assume the impact of additional share repurchases, which is equivalent to a fully diluted share count for the full year of approximately 72 million shares.

Moving on to our first quarter; we typically see seasonality in this quarter due to the summer vacation season with both our Hereditary Cancer franchise and with Vectra DA. Additionally, as we mentioned earlier on the call, we are not expecting to recognize Prolaris revenue until the second fiscal quarter.

Due to this typical seasonality, we are guiding to first quarter revenues of approximately $176 million to $178 million and first quarter earnings per share of approximately $0.34 to $0.36. This degree of seasonality is identical to what we saw in the first quarter of fiscal 2015.

Our goal with guidance is to provide transparency into our assumptions for the different components of our business throughout the fiscal year 2016 that will allow investors to clearly measure our progress throughout the year.

We look forward to providing a broader update on the five-year financial outlook for the company and our strategic positioning within the global personalized medicine market at our upcoming Investor Day on September 14.

There is tremendous opportunity as health care fundamentally changes to reflect the advancements of the genomics age, and we strongly believe Myriad will play a leading role in driving that transition. With that, I would now like to turn the call back over to Scott..

Thanks, Bryan. As a reminder, during today's call we use certain non-GAAP financial measures. A reconciliation of the GAAP financial results to non-GAAP financial results and a reconciliation of GAAP to non-GAAP financial guidance can be found under the Investor Relations section of our website. Now we are ready to begin the Q-and-A session.

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

Our first question comes from the line of Bill Quirk with Piper Jaffray. Please proceed..

Great. Thanks. Good afternoon, everybody. I guess first question for me is regarding myRisk reimbursement. No specific mention of kind of expansion of covered lives or anything like that, Mark. So I was curious, maybe you can fill in some of the blanks there on the reimbursement coverage progression in the quarter. And then I've got a follow-up as well.

Thanks..

Good. Thanks, Bill. Yeah, we continue to make progress on myRisk reimbursement. Just as a reminder for everybody on the call, our strategy has been to try to sign long-term contracts, typically three-year contracts, for myRisk so that we can have some additional pricing visibility for a longer period of time, which benefits both us and the payers.

We do continue to make progress along that path, and in fact, at Investor Day on September 14, we'll actually quantify that progress for you.

But as a reminder, what we had said a couple calls ago is with the Blue Cross Blue Shield Association agreement that we signed, were we able to get all of the affiliates to sign on to that agreement, we would achieve 75% of our private pay revenue as covered.

And so we continue to progress towards that, and like I say, I will provide a quantitative update for you at Investor Day..

Okay, great. And then just as a somewhat related follow-up around reimbursement, you mentioned that you were going to consider pursuing some back-payment for Prolaris regarding CMS.

And so I'm just curious, Mark, if you're successful, what sort of numbers are we talking about?.

Well, I don't think we're prepared to quantify that, Bill, just obviously given some of the uncertainty around reimbursement and legacy claims. I do think we've given you some information on this call that you can reflect upon.

We did say that we did 10,000 tests this year, and we've obviously previously given out data on the percentage of tests that are Medicare and the percentage of tests that are in the low-risk category.

So I think that can give you some sense at least of the magnitude of legacy claims that we would look towards from the final date that Palmetto posted the LCD, which was January 15.

But again, it would probably be way too early to speculate on the eventual resolution of those claims, but certainly we think it's appropriate to submit those and appeal those..

Very good. Thank you..

The next question comes from the line of Doug Schenkel with Cowen & Company. Please proceed..

Hey. Good afternoon, guys. Thanks for taking the questions. I'm going to ask a, I guess, one intertwined multipart question on commercial reach and related to it, capital deployment.

So the first part is, I believe you guys have identified six commercial channels for your products, of which three are at national coverage status – women's health, rheumatology and oncology.

Is this right? And how should we think about the capacity for each of these channels to handle additional products? Any specific metrics you can provide, like revenue per rep in these built-out channels and what the capacity could be would be helpful. And I guess the follow-up is the transition to capital deployment.

You guys have spent a lot of money over the last year on share repurchases. Your guidance assumes a flat share count.

I'm just wondering if that's how you guys want us to think about things, in the same way you have the last couple of years, or is there a change here? Because if you're – I guess what I'm wondering is should we expect you to be spending more money or deploying more capital pursuant to products that you could bring in to funnel through these channels? Thank you..

Thanks, Doug, I appreciate the question. I'll handle the first one and then I'll have Bryan talk about the capital deployment piece. So you're correct, we have identified six different business units, and the three that you mentioned are – oncology is fully fleshed out in order to get coverage for that entire market, as is the rheumatology team.

For the Preventive Care piece, our – we currently have capacity to cover about 50% of the OB/GYN market, so there still remains opportunity to continue to look to expand that sales team in the future.

And by reference that's one of the reasons why when I mentioned that we see about 20% of samples coming from non-targeted physicians, a big source of that is actually those OB/GYNs and primary care physicians that we don't currently call on.

To your question as to capacity for those three, we have sufficient capacity with those channels to sell all of the products that are currently in our development pipeline, and so I think that's one of the things we see in the future is the ability to generate some significant operating leverage by deploying more products into those channels.

And in fact, we will provide some significant additional granularity on this when we go into our September 14. Now to the other three areas; at neuroscience, we don't have any sales team deployed yet. For our dermatology team, for our dermatopathology channel, we still have opportunity to continue to expand that group.

There's only eight salespeople for that team, and so you could probably triple the size of that team eventually as we get reimbursement. And for our urology team, we currently have about 40 field salespeople.

There still is an opportunity to continue to expand that team to get broader coverage, but again, all of those decisions will hinge on reimbursement so that we ensure that we're generating some operating leverage with those expanded sales teams. So that's the quick rundown on our channels and we will provide a little more detail in September.

Bryan, would you – why don't you talk about deployment?.

Yeah. Sure. Thanks, Doug. With respect to capital deployment, we'll be providing some more detail at our Investor Day, generally speaking. However, we have been purchasing shares back at a rate that exceeded our free cash flow for some time.

I think for purposes of 2016, what you should model or expect is to see share repurchases more in line with free cash flow. From a guidance perspective, we've never assumed and don't assume in this guidance to have any share repurchase, so that's why we've not included it..

Our next question comes from the line of Amanda Murphy with William Blair. Please proceed..

Hey, guys. How are you? This is actually Anthony (39:45) in for Amanda.

Just first question, in regard to the Q1 2016 guidance and I guess 2016 guidance in general, how – for Prolaris you're expecting the reimbursement to begin in Q2, I guess what's the confidence level with that target, that being Q2, just given the lack of visibility into the LCD finalization timeline?.

Yeah, thanks, Anthony. Obviously, the journey for Prolaris has been a long one. We are in constant communication with both Noridian and with Palmetto on the MolDX program. So I think the first thing to recognize that all of these delays from the Palmetto posting on January 15 of the final LCD have really been administrative in nature.

Noridian had explained that for billing purposes they were going to have to process another LCD, and so that led to one delay.

And this latest delay is a direction from CMS in Baltimore that they wanted to wait until all of the LCDs, the existing LCDs, were converted to ICD-10 codes because there was a substantial amount of work in order to do that and they didn't want to add to the workload by piling on new LCDs, so again, yet another administrative delay.

What's important if you look at underneath the comments that we received during all of the public comment period and in fact, the MolDX program summarized many of those comments on a recent document that was posted on their website, have all been very favorable to Prolaris, and in fact, have been very favorable about Prolaris' ability to predict risk across all risk categories, not just necessarily low-risk.

So we know that the commentary has been very favorable and because of that and because of the direct communications we've had that in fact the final LCD would be posted in ICD-10 format, it would be effective October 1, and that it will be identical to the draft LCDs.

I think those are the things that give us the confidence to include Prolaris in our guidance beginning on October 1..

That's perfect. Yeah. Thank you. And then as a follow-up, I guess with the Pharma and Clinical Services revenue, it seemed like quite a step up.

I guess, like what are the assumptions regarding the Pharma and Clinical Services revenue in 2016?.

Yeah, I would – for Pharma and Clinical Service, the increase in the current quarter was entirely driven by the acquisition of the clinic. I think that business has been relatively steady over the last couple of years and I think included in our guidance we had $40 million on one of the slides that showed for the Pharma and Clinical Services.

That would be how I would think about it for next year. But the primary driver in the current quarter was the full quarter of the clinic revenue..

Excellent. Thank you, guys..

Our next question comes from the line of Tycho Peterson with JPMorgan. Please proceed..

Hey. Thanks. A couple quick ones. Just on the Hereditary Cancer guidance, you called for flat.

Can you maybe just talk what's embedded in that for share versus price from your perspective?.

Yeah. Thanks, Tycho. A couple things as we think about Hereditary Cancer guidance for fiscal 2016. Obviously, the three parameters at play here are what's happening in market growth, what's occurring in share and price. So let me touch on the three of those so that you can get some insight into our thinking there.

First, from a market growth perspective, one of the things that we saw in 2015 was a year-over-year market growth that was lower than what we had historically seen for the hereditary cancer market. Now, that's not a surprise because the baseline was 2014 which was impacted by some significant tailwinds associated with celebrity publicity.

So it probably isn't a total surprise that we saw year-over-year growth in the market, at least to the best that we can determine, slowed in 2015.

Now, long term, we continue to believe that this market is underpenetrated, that there is substantial opportunity for growth, but given the year-over-year lower growth in 2015, we thought it was prudent to take that into consideration in our 2016 guidance and contemplate at least in this guidance some market growth lower than what we would have historically seen or what we would hopefully see even further into the future.

The second part, as it relates to share, as you can see from our slides and commentary, that we have, to the best of our ability, seen shares stabilize over the last half of the year, but despite that, again, we believe it's prudent to assume that we will have some incremental market share decline throughout fiscal 2016, and so our guidance contemplates some additional share decline throughout the year.

Lastly, from a pricing perspective, we can't obviously get into details of pricing in a competitive market. Maybe a couple of things I can point to that you can reflect upon. First is that in fiscal 2015 you saw that – throughout the year we saw increasing gross margins and that was without any additional reimbursement in the rest of our portfolio.

And so that gives you some, I think, understanding of pricing stability throughout that transition with myRisk. The second thing I'll point to is that our guidance implies an operating margin of 25% to 26% in fiscal 2016, and that's up over 200 basis points compared to fiscal 2015.

So again, I think that points to some understanding of pricing stability that has been factored into our guidance numbers. And that becomes more apparent as we negotiate long-term contracts and fix in pricing for a longer period of time.

So I think those are really the puts and takes on the three parameters – market growth, market share and market price, and why we're guiding to Hereditary Cancer revenues that are about 1% growth year-over-year for fiscal 2016..

And then maybe just if I could ask one follow-up, it seems like the emphasis on the value of variant databases is growing and there's been maybe more public backlash over the public database.

Can you, A, comment on whether you think that's been the case? And should we expect any follow-on studies for you guys highlighting the accuracy of your data compared to what's in the public database? Because the gap seems to be widening a little bit..

Yeah. I think there is certainly increased recognition that the data that is in the public databases is one that needs to be approached with caution.

I think people recognize those databases were all originally put together for research purposes, which as you know, Tycho, is a very different application than for clinical purposes, where a patient is going to make some very significant medical management decisions and, therefore, requires a very high level of accuracy.

So I think the appreciation is growing that there are some concerns.

I think the recent Vale (48:03) publication that came out just in the last few months where Myriad did 25,000 patients sequentially and we assessed the variant classification that we would have using our database relative to what was available in the public databases, and I think that pointed out the magnitude of the issues that exist for public databases.

For example, over 30% of the variants that we identified weren't in any public database and another thing that was important, that for deleterious mutations, which are obviously the ones you want to make sure are right, for those deleterious mutations that appeared in all five of the databases that we surveyed in that study, there was only 3% of those that were shown to be deleterious in all five databases.

So I think as data such as these become available, people recognize that there is some caution associated with that. I think to your last point, because Myriad is doing so much volume in myRisk, we're actually seeing our variant database grow substantially relative to just what it was before, and so the gap is widening.

And in fact, in September, we'll provide some additional data updates on exactly where our variant database stands at this point. But we are uncovering quite a few variants. We're classifying quite a few variants, and we're continuing that extensive research that we've always done on classification of variants..

Okay. Thank you..

The next question comes from the line of Dan Leonard with Leerink Partners. Please proceed..

Thank you. Just a follow-up question on reimbursement.

I was wondering if you can comment on the reimbursement levels for the companion diagnostic BRACAnalysis as compared to the traditional BRACAnalysis and your assumptions around that going forward?.

Yeah. Thanks, Dan. BRACAnalysis CDx reimbursement right now is identical to the contractor rate we have for the BRACAnalysis germ-line product. So at this point, there are no differences.

I know historically that FDA-approved diagnostics, in some cases, have received some pricing premium associated with those, and those are conversations that we will continue to have with payers. But despite that, I think from a standpoint of guidance, we would be expecting BRACAnalysis CDx to continue at the same pricing as BRACAnalysis germ-line.

So we're not assuming any premium associated with that in our fiscal 2016 guidance..

Okay. Thank you..

Our next question comes from the line of Isaac Ro with Goldman Sachs. Please proceed..

Hey. Good afternoon. Thanks, guys. Another question on Hereditary Cancer, but it was really more on the cost side.

Just given that the academic and genetic counselors are kind of considered thought leaders in their communities, I'm just trying to think about how you plan to keep them from influencing PCPs to switch to lower-cost providers, just generally speaking, your thoughts on how you defend and grow the PCP side of the business..

Yeah. Thanks, Isaac. One thing I'll note, I know it was in the script, but worth noting again, that actually in this quarter for the first time in some time, we actually saw the percentage of revenue from the Genetics segment increase from 7% to 8%.

And again, by reference, when before we had the advent of competition, the Genetics segment was responsible for about 15% of our revenue. So we actually were able to see some progress in that segment over this past quarter. I think the – as you point out, Isaac, the Community segment is really a fundamentally different segment than that for Genetics.

I think in the Genetics segment, we have outstanding health care providers that are clearly experts in the field and feel very capable of assessing different types of panels and have done that with different laboratories. I think in the Community setting, it's really a very different market.

In that particular market, you need extensive education for those healthcare providers and they really rely on the extensive field force that we have, with both the sales team, with our genetic counselors that we have in the field, with our medical staff that we have in the field and here in the home office.

And so the level of support required for that group is dramatically different, and that's one of the key differentiators that we've been able to provide as opposed to other competitors that just don't have those relationships and that deep expertise that we've developed over the years.

So I think the key thing for that segment in order to continue to grow that, as we've seen a really nice growth in the Preventive Care segment, is to continue that – those educational efforts.

As I mentioned earlier, we only cover now about 50% of the OB/GYNs and a smaller fraction of the primary care physician base, and so one of the key opportunities will be continue to expand our educational efforts to a broader set of those physicians as we move forward.

The other thing is we continue to do things like protocol integration that Bernie Tobin is using with Crescendo that allow us to penetrate deeper into physician offices, because in many cases, while they are testing patients, they're only a fraction of the appropriate patients. So I think it continues to be those types of things.

The last thing we have done is some extensive direct-to-patient efforts with social media and other interactive media. That has proven to be very effective at driving patients to inquire with their physicians about opportunities for hereditary cancer testing.

We continue to invest heavily in that area and think that area offers continued promise to drive both depth and breadth into those – that Preventive Care channel..

That's helpful. Maybe just a follow-up on that same topic, will there be a point where you guys might be willing to talk a little bit about how you guys achieve incremental margins or unit economics that are favorable to the company in the context of getting these educational procedures done? It seems like sort of a more expensive procedure..

Yeah. Thanks, Isaac. In fact, Bryan will spend some time on that at Investor Day on September 14. We'll actually break out our view of margins over the next five years and what we think that might look like. So I do think you'll see some additional granularity there that will answer that specifically..

Got it. Thanks very much. I appreciate it..

The next question comes from the line of Derik de Bruin from Bank of America. Please proceed..

Hi. Good afternoon. So a couple of questions. Where are you including CDx in the model? And I'm just curious on this because if it's in Hereditary Cancer, wouldn't that be sort of adding to the revenue growth in Hereditary Cancer? And then I'm just curious.

What is your assumption for the overall hereditary cancer growth market?.

Yeah. Thanks, Derik. Good question. We've chosen to include BRACAnalysis CDx in the Hereditary Cancer line, as you suspected. The reason is because the BRACAnalysis product has the same indications for use as BRACAnalysis CDx for all ovarian cancer patients and trying to actually divide that out would probably create more confusion that it would help.

And so because of the overlap of indications, we have chosen to include BRACAnalysis CDx in the Hereditary Cancer line item. Now, as we reflect upon 2016 guidance, of course that assumption would reflect the guidance we gave of $638 million to $649 million for Hereditary Cancer revenues.

One of the things that we had to take into consideration, and as we outlined on the call, while we did see a very large bolus of incremental ovarian cancer patients going from Q2 to Q3, we saw a 3% increase from Q3 to Q4. And so that's the type of sequential increase that reflected upon our thoughts for guidance for Hereditary Cancer in fiscal 2016..

And the assumption for the growth rate of the market?.

Yeah, sorry. And as far as growth rate, we won't provide an actual number. I think the qualitative commentary I gave, Derik, should give you some reflection. Historically, we've always said this market has grown at 10%.

Obviously, the growth rate was lower than that, in our view, in fiscal 2015, and so we've factored that lower growth rate into fiscal 2016, but I don't think we feel comfortable providing an exact numerical assumption..

I mean I guess I'm just a little confused because I thought myRisk was supposed to help accelerate the market growth..

I think right now certainly what myRisk has been doing is really converting the existing market, the existing legacy market over to myRisk. What we have said all along is that we expect that the additional indications that myRisk will foster will allow us to grow that market faster.

As we pointed out in one slide, we're just in the early stages of contracting with payers for those additional indications and we have not factored that into guidance for 2016.

When those additional indications are contracted with payers, then you're right, that will potentially expand our penetration into what is now a larger market, but those were not things we assumed for fiscal 2016 guidance..

Okay. Thank you..

The next question comes from the line of Peter Lawson with Mizuho. Please proceed..

Hi. Just wondering if you'd give us any way of breaking out how much of volume is coming from clinical trials for the BRACAnalysis.

And then just as an unrelated follow-up, the contribution for 2015 guidance from Europe?.

Yeah. Thanks, Peter. We – obviously, the clinical trial volume is confidential. That's something that our partners – we don't have liberty to disclose and so that's something that we won't necessarily make public. We obviously are engaged in a number of clinical trials with partners for a variety of PARP inhibitor indications.

We're excited about those, those are things that are continuing in fiscal 2016, and so you're right that those sample volumes are reflected in our numbers, but we haven't disclosed either those volumes or the cost – or the price associated with those tests.

And sorry, your second question, Peter, on fiscal 2016?.

Just the contribution from Europe?.

Oh, international contribution. Yeah, we – we're not providing specific guidance on the international market. I think for the first time we did provide at least a run rate, so you know that 4% of revenue in fiscal 2015 Q4 was provided by the international market. We are going to give some additional color on our strategy in the international market.

Gary King will provide that in September, and so you will get an update on where we see the business evolving for the international market, but we aren't giving specific guidance for the international segment..

Great. Thank you so much..

And that is all the time we have for questions. I'll turn it over to you now, Mr. Gleason, for closing remarks..

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

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