Scott Gleason - Vice President-Investor Relations Mark C. Capone - President & Chief Executive Officer Bryan Riggsbee - Chief Financial Officer.

William R. Quirk - Piper Jaffray & Co (Broker) Adam Wieschhaus - Cowen & Co. LLC Joel Harrison Kaufman - Goldman Sachs & Co. Tim C. Evans - Wells Fargo Securities LLC Jack Meehan - Barclays Capital, Inc..

Ladies and gentlemen, thank you for standing by and welcome to the Myriad Genetics Third Quarter 2016 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, May 3, 2016.

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

Thank you, Cleona. Good afternoon and welcome to the Myriad Genetics fiscal third quarter earnings call. My name is Scott Gleason. I'm the VP of Investor Relations. During the call, we will review the financial results we released today, after which we will host a question-and-answer session.

If you have not had a chance to review the earnings release, it can be found on the Investor Relations section of our website at 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 and which will be filed upon the call on Form 8-K.

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

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

We refer you to the documents 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 and forward-looking statements. With that, I'd like now turn the call over to Mark..

Thanks, Scott. Good afternoon and thank you for joining our call today. I'm pleased to provide an overview of our fiscal third quarter results and a progress update on our five-year strategic plan.

In the third quarter we generated revenues of $190.5 million and adjusted earnings per share of $0.41, representing year-over-year top line growth of 6% and bottom line growth of 3%.

Importantly this quarter, we saw exceptionally strong growth for both Prolaris and Vectra DA and made encouraging progress on private reimbursement coverage for both of these important tests. Since these tests feature prominently in our five-year plans, we remain confident in our ability to achieve our long-term goals.

The company is providing fourth quarter revenue guidance of $186 million to $188 million and adjusted earnings per share of $0.36 to $0.38. As a result, the company is narrowing the range for its fiscal full year revenue guidance to total revenue of $753 million to $755 million and updating its adjusted earnings per share guidance to $1.63 to $1.65.

As a company, we continue to focus our efforts on executing upon our strategic imperatives, to expand the hereditary cancer market, diversify revenues by commercializing our 4in6 new product pipeline, and increasing our international contribution by investing in major markets with both reference and kit-based tests.

First, I would like to provide an update on our goal to transition and expand the hereditary cancer business.

During the third quarter, our hereditary cancer business generated revenues of $156.3 million which was consistent with our expectations for the quarter, given the reset of healthcare deductibles and the increased number of patients in high deductible plans.

This quarter, we did experience a small revenue impact from the new paperwork requirements required by the UnitedHealthcare preauthorization process introduced on January 1. These additional requirements led to a few extra days of processing time for United patient samples before we were able to release the test to the laboratory.

In the absence of these requirements, hereditary cancer revenue would have been flat in the quarter on a year-over-year basis.

Since the third quarter, we have seen no additional impact from the United preauthorization process as we now have a well-established process through our customer service team to handle the additional requirements and minimize provider impact.

This is the competitive differentiator for Myriad relative to other laboratories within the industry, who have not invested in the same level of customer support. For many years, we have routinely handled these types of preauthorization requirements, since they are required by virtually all payers, which is a typical for most other diagnostic tests.

Consequently, we are assuming sequential growth in Hereditary Cancer revenue in the fiscal fourth quarter. Myriad continues to demonstrate its scientific leadership in the field of hereditary cancer and variant classification.

At the American College of Medical Genetics and Genomics Meeting this year, we presented new data on our proprietary variant classification tools, demonstrating our ability to apply our Pheno algorithm in an expanded set of cancer risk genes.

The data showed that Pheno was greater than 99.5% accurate in upgrading and downgrading variants of uncertain significance to more definitive clinical classifications even in more moderate penetrant genes. This is a significant importance as we dramatically expand the number of identified variants in the myRisk genes.

We continue to identify over 50 new variants every day in the myRisk genes, and we believe that the size of our database will increase to approximately 90,000 variants by 2020.

Pheno is critical because it allows Myriad to definitively classify far more of these variants, which differentiates Myriad from other laboratories relying on public databases with demonstrated inaccuracies. Myriad also continues to expand the evidence supporting broad panel testing.

At the Society for Gynecological Oncology meeting in March, Myriad presented data, showing that myRisk Hereditary Cancer identified 60% more deleterious mutations, and 381 endometrial cancer patients. These mutations were associated with cancers where important risk management steps could be taken by the patient to prevent a recurrence.

We believe this data further highlights the importance of a broad pan-cancer approach, when evaluating patients for hereditary cancer risk. We also to – continue to aggressively pursue our efforts to broaden indications for hereditary cancer testing and drive deeper penetration within each individual market segment.

This quarter, we began promoting the expanded indications under the 2014 NCCN guidelines for colon and endometrial cancer based upon the fact that we had insurance plans representing over 50% of our revenue contracted under the new guidelines.

While we are in the very early stages of this process, we believe these new indications will be a growth driver for our business through fiscal year 2017. There were also important advancements in managing hereditary cancer patients.

NCCN updated its professional guidelines to include additional medical management options for patients with select gene mutations. Specifically NCCN now recommends consideration of a prophylactic mastectomy for PALB2 carriers and consideration of a nephrectomy for patients with deleterious mutations in BRIP1, RAD51C and RAD51D.

These changes further emphasize the importance of broad panel testing and the appropriate risk management steps that can be taken by patients with genes beyond BRCA1 and BRCA2. Additionally, Myriad continues to provide supporting data for guideline expansion in breast cancer.

The Dana-Farber study evaluating the mutation rates in an unselected breast cancer population was published in the Journal of Clinical Oncology during the third quarter. This study demonstrated that mutation rates in the myRisk genes remain consistent and above historical guideline thresholds until the age of 60.

We believe this study presents a compelling argument that guidelines should be expanded to address a broader population of patients with breast cancer. Finally, we've also seen progress in the area of hereditary, pancreatic, and prostate cancer.

NCCN recently expanded testing criteria for patients with prostate cancer and pancreatic cancer for those who meet select risk criteria.

For prostate cancer, the patients must have a Gleason score of greater than 7 and a family history of breast or ovarian cancer; and for pancreatic cancer, the patient must have a family history of breast or ovarian cancer.

Between these two new indications, there are approximately 25,000 patients in the United States per year with prostate and pancreatic cancer that now meet NCCN guidelines for testing.

In pancreatic cancer, we believe all patients are appropriate candidates for hereditary cancer testing and have initiated a study that will evaluate the mutation rates in unselected pancreatic cancer patients, which we believe will be supportive of even broader testing criteria.

Transitioning to reimbursement, we continue to make progress with managed care contracts and now have 62% of our hereditary cancer revenue under long-term contracts.

As I previously mentioned, we continue to believe we will exit fiscal year 2016 having contracted with the bulk of payers that have expressed the interest in evaluating the hereditary cancer testing coverage.

Transitioning now to our second strategic imperative, I would like to provide updates on our diversification efforts resulting from our 4in6 Pipeline strategy. As a reminder, our five-year goal is to develop an additional six pipeline products beyond hereditary cancer, each with annual total revenues of more than $50 million.

These pipeline products include Vectra DA, Prolaris, myPath Melanoma, our Companion diagnostics, EndoPredict, and myPlan Lung Cancer.

In aggregate, our pipeline test represent market opportunities of greater than $20 billion in global market potential and our assumptions underlying our five-year plan imply relatively low penetration rates into the total addressable market.

What is important to note is that the current reimbursed market opportunity for these new products already exceeds $1 billion, and we are working aggressively to expand reimbursement further. First, I would like to discuss Vectra DA, which has a global total addressable market of $3 billion and a current reimburse market of $600 million in the U.S.

Vectra DA volume accelerated significantly in the third quarter, growing 18% year-on-year to approximately 42,500 tests. Vectra DA revenue in the quarter was $12.3 million, which represents a 17% year-over-year growth rate.

The difference between volume growth and revenue growth during the quarter was related to the CPT code transition that occurred beginning January 1, 2016, to the Vectra DA specific code.

As is typical for the industry, coding changes create challenges for private payers, as systems must be revised to associate medical policy decisions and pricing contracts with the newly established code.

We expect to continue to see a gap between volume and revenue growth over the next few quarters, as we work with private payers to implement these changes. We believe the acceleration in volume growth is a direct result of the revised strategy and improved execution implemented by the talented Crescendo team over the past year.

Specifically, the growth this quarter can be attributed to efforts to drive broader utilization and deeper penetration into physician offices through practice integration, improved sales execution and the LabCorp collaboration. In January, we completed the training for the practice integration program with the entire Crescendo sales team.

The purpose of practice integration is to introduce sales initiatives among select accounts that integrate Vectra DA testing into a standardized practice workflow tailored for each account. For example, the Vectra DA test is most useful to patients and physicians when it is available in advance of the routine quarterly patient visit.

The practice integration program identifies specific processes in a physician office and tailors interventions to ensure that the test result is always available for the patient visit. This arms the physician with timely actionable information when it has the highest utility as a patient and physician discuss potential therapy changes.

On the payer side, I am pleased to announce that we have signed our first two private insurance contracts for Vectra DA in the third quarter, representing approximately 2 million covered lives.

While these are small regional players, I believe it is indicative of the depth and persuasiveness of the increasingly robust data, outlining Vectra DA's ability to help physicians optimize therapy for RA patients.

These same data are being incorporating into active discussions with a broad range of payers and we are optimistic that other payers will come to similar conclusions over time. Additionally, we are making good progress with our prospective clinical utility study and have started patient enrollment.

This prospective study will evaluate biologic use and clinical endpoints in patients managed with Vectra DA versus patients managed with traditional clinical approaches.

We believe that this study will take approximately two years to complete, and then, that it is adequately powered to demonstrate equivalent clinical outcomes with improved health economics.

Overall, I'm very excited to see the positive volume and reimbursement trends at Crescendo because in combination they represent the most significant leading indicators for future revenue growth. If current Vector DA volumes were fully reimbursed at the Medicare rate, our annual revenue run rate for this business would be approaching $100 million.

So there is significant opportunity to generate leverage as we drive deeper market penetration and broaden reimbursement coverage. Next, I would like to provide an update on our urology business unit and Prolaris. Prolaris has a global total addressable market of $1.5 billion and a current reimburse market of $228 million in the United States.

In the third quarter, we again saw exceptionally strong growth in Prolaris orders, which were up 90% year-on-year and 21% on a sequential basis to approximately 4,300 tests ordered. Additionally, we grew our ordering physician base in the quarter by 17% sequentially.

Thanks to the outstanding effort of the entire urology business unit, we believe that Prolaris has become the market leading prognostic test. This is because urologists are finding that Prolaris is more informative than competitive offerings, in a much larger percentage of patients, based on a few critical differentiators.

First, Prolaris is the only prostate cancer prognostic that has been validated against all NCCN recommended endpoints, including the most informative endpoint of 10-year mortality. Second, Prolaris provides a definitive active surveillance threshold, which safely classifies approximately 60% of patients as they're eligible for active surveillance.

Lastly, Prolaris has been validated in all risk categories, providing urologists with a single source for their entire patient population. As a result, Prolaris revenue this quarter was $5.2 million, which included approximately $2 million of retrospective claim revenue paid by Medicare.

The retrospective Medicare reimbursement we recognized in the quarter represents all of the retrospective claims that will be paid by Medicare, and consequently going forward, Prolaris revenue will match actual reimbursed revenue in the period.

We also made significant progress on reimbursement this quarter with private payers having signed multiple additional private health plans that now in aggregate represent approximately 28 million covered lives or 16% of all private payer covered lives.

When combined with the current Medicare reimbursement, Prolaris reimbursement is 36% of the total addressable market. Additionally, as a result of the updated NCCN guidelines for prostate cancer prognostic products, we have submitted our dossier to Medicare to request coverage for favorable intermediate risk patients.

The addition of the favorable intermediate category would expand the eligible Medicare population from 50% of patients to 75% of patients. The review progress is ongoing and we will provide updates as they develop. In summary, we are very pleased with the recent Prolaris trends.

At current testing volume, if fully reimbursed at the Medicare rate, Prolaris would generate over $40 million of revenue per year. Just like with Vectra DA, we see tremendous opportunity to drive financial leverage as we broaden adoption and increase payer coverage.

At the upcoming American Urological Association Meeting, Myriad will have several important data presentations. The first study, which pertains to Prolaris, is a meta-analysis of 440 patients with a Gleason score less than or equal to 6.

The data show that Prolaris is the best predictor of the most meaningful oncologic outcomes of survival and recurrence in low-risk disease, when combined with standard pathological analysis.

In this study, patients with high Prolaris scores have three times the risk of 10-year disease-specific mortality and almost eight times the risk of biochemical recurrence compared to patients with low Prolaris scores. Additionally, Myriad will present our second validation study for myPlan Renal Cancer at the AUA Meeting.

The study evaluated the ability of myPlan Renal Cancer to predict key oncologic outcomes in patients with surgically resected renal cell carcinoma. In the study, patients with a high myPlan renal score had eight times the risk of five-year disease-specific mortality relative to patients with a low score.

MyPlan Renal Cancer represents the global market opportunity of approximately $300 million and provides the opportunity to leverage our urology commercial team. Transitioning to the dermatology business unit, our third new product with significant potential is myPath Melanoma, which has a global total addressable market of $600 million.

We continue to see increased utilization of our myPath Melanoma test by dermatopathologists with 28% of U.S. dermatopathologists having ordered the test, compared to 25% in the second quarter. Our commercial focus remains on securing reimbursement coverage for myPath Melanoma.

To this point, I'm pleased to announce that our second validation study, which was recently presented at the United States and Canada Academy of Pathology Meeting has been submitted for publication to a major dermatology journal, and we anticipate acceptance in the fourth quarter.

As a reminder, in our second validation study, myPath Melanoma demonstrated greater than 90% diagnostic accuracy in differentiating melanoma from benign nevi in a study of 736 patients. I'm also pleased to announce that we expect our clinical utility study to be published in the fourth quarter.

Lastly, we have successfully completed our third validation study, which evaluated lesions against known clinical outcome data after an average of over six years of follow-up. We plan to submit the study for publication this quarter and the data will be presented at the American Society of Dermatopathology meeting this fall.

When this final study is published, our reimbursement dossier will be complete, and include an analytical validation study, three clinical validity studies, a clinical utility study, and a health economic study.

We believe the strength of the data supporting myPath Melanoma is exceptional, and our goal is to seek reimbursement coverage for this important test during fiscal 2017. As a reminder, we also have plans to add myPath Melanoma to our suite of kit products providing additional significant value to pathology laboratories around the globe.

Our next group of products with significant potential are Myriad's pioneering companion diagnostic tests, which identify potential responders to platinum agents and PARP inhibitors. This suite of tests has the total global addressable market of $6 billion, if all indications currently in clinical studies are eventually approved.

During the quarter, we announced two significant companion diagnostic research agreements. The first agreement was with TESARO and Merck to evaluate potential biomarkers to predict responders in investigational combination drug therapy using TESARO's PARP inhibitor niraparib and Merck's anit-PD1 therapy KEYTRUDA.

Under the terms of the collaboration the companies will use Myriad's myChoice HRD, a new tumor test in both ovarian cancer and triple negative breast cancer to identify potential responders. Myriad also signed a research collaboration with AbbVie in non-small cell lung cancer.

Similar to the Merck and TESARO deal, AbbVie is utilizing myChoice HRD and our new tumor test to help identify potential responders to veliparib, AbbVie's investigational PARP inhibitor.

There are approximately 190,000 new cases of non-small cell lung cancer diagnosed every year in the United States, so this is an important area of potential market expansion for our companion diagnostic program.

We also continue to await the results of the NOVA study from our pharmaceutical partner TESARO, which will be the first time myChoice HRD is used in a prospective clinical study with a PARP inhibitor. TESARO has publicly communicated that they expect this data to be available in our fiscal fourth quarter.

If successful, we believe this data will be a major validation of myChoice HRD and likely spur other pharmaceutical partners to more broadly consider myChoice HRD for their development programs.

Additionally, if we are able to achieve FDA approval for the test in concert with TESARO's drug, this will open up a significant new market opportunity for Myriad.

Unlike BRACAnalysis CDx, which primarily cannibalizes our legacy hereditary cancer testing, myChoice HRD would be entirely additive, because ovarian cancer patients will first receive a tumor test, and then reflects to an hereditary cancer test.

Furthermore, we believe the proprietary nature of myChoice HRD will provide global exclusivity and differentiation from any potential competitor of laboratory. Finally, our myChoice HRD early access launch for use with platinum agents continues to be successful.

At the recent Society of Gynecological Oncologists' Meeting in March, we presented data showing them myChoice HRD predicted progression-free survival and overall survival in platinum-treated ovarian cancer patients.

Importantly, the diagnostic accuracy for the Myriad combined approach, which utilizes all three proprietary technologies, were shown to be superior to any individual technology alone. Hess trying to copy Myriad's earlier LOH discoveries will not be sufficient for identifying the most appropriate responders.

It also underscores the importance of Myriad's innovative and proprietary approaches to applying genomic tools with breakthroughs in assay design, unique laboratory processes, and wholesale new approaches to bioinformatics.

Since this data was presented, we have seen a surge of interest in thought leaders who wished to participate in our early access launch and now have 14 sites that are beginning to run the test on the clinical patients.

Before I discuss our international business, I would like to provide an update on our six business units, which is in the neuroscience market. Our first potential commercial product in this market will be myPath Bipolar. myPath Bipolar is an 18-protein biomarker-based assay that differentiates bipolar disease from major depression.

In a 150-patient initial study, myPath Bipolar was able to differentiate bipolar disease from major depression with an area under the curve of 96%. We are actively enrolling patients in our prospective clinical study and plan to complete enrollment of approximately 300 patients by the end of the next fiscal year.

We believe the total addressable market opportunity for this product is greater than $5 billion annually and we'll provide additional updates as we move forward. Lastly, I would like to discuss our progress with our international business.

International product revenue in the third quarter grew 40% year-over-year, which was the fastest quarterly rate we have seen this year, and increased to just under 5% of total revenue in the quarter. We continue to work toward our goal of 10% of revenue being generated from international markets by fiscal year 2020.

This quarter, we made good progress in our international markets with the breast cancer prognostic product EndoPredict. As a reminder, EndoPredict is a second generation breast cancer prognostic with three distinct advantages.

First, it was shown to be a superior prognostic test in a recent head-to-head study against the leading first-generation product for no negative and no positive patients. Second, there is no confounding intermediate category to frustrate patients and providers due to the discriminating power of the test.

And third, the test can be run by local laboratories with results analyzed by proprietary cloud-based algorithm, which offers customers the opportunity to sharing the economics of test. Today, there is limited reimbursement for EndoPredict in Europe, but we are making rapid progress to expand coverage for this important test.

The French government recently approved provisional reimbursement for EndoPredict with reimbursement rate of approximately $2,000, which opens up a market of approximately 25,000 patients per year. We believe EndoPredict is excellently positioned for success in this market, given its three compelling differentiators.

In Germany, the GBA published the final recommendations for breast cancer prognostic reimbursement in late calendar 2015. And we are awaiting a final decision on ASV reimbursement, which we believe will happen this calendar year.

This will provide coverage for patients tested at major ASV approved breast cancer centers, which represents a potential 30,000 patients per year. We haved a significant account base within Germany and broader reimbursement coverage would be a material driver of growth for EndoPredict.

Finally, in Canada and United Kingdom, we planned to submit our dossiers for EndoPredict reimbursement by the end of this calendar year. And in Italy, we are actively competitive for tender awards.

In aggregate, these markets, along with Switzerland, whether it's already brought reimbursement, represent a total addressable market opportunity of over $250 million per year. We're also continuing to make progress with our kit-based development initiative for Prolaris, through our collaboration with Thermo Fisher Scientific.

We have now completed the feasibility portion of our development and are moving into the analytical validation phase for the product. We are on track that product development completed during fiscal 2017.

Overall, we believe our revised international strategy, based on kits and proprietary companion diagnostics, will become a significant driver of revenue growth going forward. In summary, we continue to make outstanding progress on executing our five-year plan to transform Myriad into a diversified global leader in personalized medicine.

This quarter, we made important strides with our pipeline test, demonstrating our ability as a company to both drive testing demand and secured reimbursement. As these products continue to gain traction, they will drive significant long-term financial leverage for the company.

Now, I would like to turn the call over to Bryan to provide a detailed overview of our financial results and an update on our fiscal year 2016 financial outlook..

Thanks, Mark. I am pleased to provide an overview of our financial results for the third quarter. Third quarter total revenues were $190.5 million, compared to $184.4 million in the same period in the prior year.

Importantly, we delivered our fourth straight quarter with year-over-year growth with revenue increasing 6% compared to the same quarter in the previous year. Hereditary cancer revenue was $156.3 million in the third quarter and was down 2% year-over-year.

As Mark mentioned, we did see a small impact in the quarter from UnitedHealthcare, based upon additional processing time for these samples, but did not believe this impact will repeat in future quarters. Consistent with this expectation, we do expect hereditary cancer revenue to grow on a sequential basis in the fourth quarter.

Vectra DA revenue in the third quarter was $12.3 million and was up 17% year-over-year. However, volume was up 18% year-over-year and 11% sequentially. This represents the highest rate of quarter-over-quarter volume growth since we acquired the company.

As Mark mentioned, the gap between volume and revenue growth was attributable to the transition to a product-specific CPT code, which requires revisions to our private payer contract and will take a few quarters to implement.

Prolaris revenue was $5.2 million in the third quarter and contained approximately $2 million in retrospective payment for past claims by Medicare. This was another record quarter for Prolaris test orders with total volume coming in at almost 4,300 tests, which was up 90% year-over-year and 21% sequentially.

Revenue associated with our pharmaceutical and clinical services business was $13.1 million and was up 87% year-over-year. Last year's third quarter only contained one month of clinic revenue compared to a full quarter this year, so much of the growth was driven by the lapping of this comparison.

However, our Myriad-RBM business had an exceptionally strong quarter as well with year-over-year revenue growth of 50%. This is attributable to the timing of some large contracts with our pharmaceutical partners, including the use of an innovative true culture technology that is rapidly being integrated into immuno-oncology trials.

We would expect Myriad-RBM to return to a more normalized run rate beginning in the fourth quarter. Now, I would like to discuss our financial metrics for the quarter. Gross margins were 79% in the third quarter compared to 79.8% during the third quarter of last year.

This decline was mostly attributable to changing product mix with pharmaceutical and clinical services revenue comprising approximately 7% of our revenue this quarter compared to only 4% last year. Pharmaceutical and clinical services is a lower-margin business, so the decline was expected.

Additionally, we did see a decline in our international gross margins this quarter, based upon increased EndoPredict sales. EndoPredict is a lower margin business, given our distribution arrangement with Sividon. Importantly, Hereditary Cancer margins improved both sequentially and on a year-over-year basis in the third quarter.

Moving on to our operating expenses, GAAP research and development expenses were $17.2 million in the third quarter and grew 3% relative to the second quarter of last year. GAAP SG&A expense this quarter was $90.5 million and declined 1% relative to last year, with GAAP operating income being $42.6 million, an increase of 19% year-over-year.

On a non-GAAP basis, our adjusted research and development expense was $17.1 million compared to $16 million last year, which is 7% growth.

We will begin to experience marginally higher research and development expenses going forward, as we initiate multiple prospective studies including Vectra DA and our stage one development programs, one of which is the myPath Bipolar Validation Study.

We continue to be excited about the potential for these products and believe these investments are critical to achieving our long-term growth goals. Adjusted SG&A this quarter was $87.4 million, an increase 7% relative to last year.

This increase was primarily attributable to higher sales and marketing expenses as we look to drive growth with our pipeline products as well as this year's third quarter having a full quarter of expenses tied to the German clinic.

Adjusted operating income was $45.8 million in the third quarter and declined 1% relative to the third quarter of last year.

The slight decrease is primarily based on our product mix in the third quarter being more weighted to our pharmaceutical and clinical services revenue and higher operating expenses as we continue to invest for future growth with our product pipeline.

This quarter we received a large one-time tax benefit of approximately $6 million associated with changes in our tax valuation allowances. Most of the benefit is related to reserves the company booked on R&D tax credit. As the statute of limitations has now expired on the related tax years, we have released these reserves.

We excluded these benefit for purposes of our adjusted earnings in the quarter. Adjusted net income was $29.8 million and adjusted earnings per share were $0.41 for the third quarter compared to $29.3 million and $0.40 respectively in the third quarter of last year.

Our fully diluted share count decreased sequentially by approximately 400,000 shares to 73.5 million shares outstanding. This reduction was driven by our share repurchase program offset by options exercised.

During the quarter, we used – we utilized approximately $45 million to repurchase 1.2 million shares of Myriad common stock at an average price of $36.99 per share. As of the end of the third quarter, we had approximately $47 million remaining on our approved share repurchase authorization.

For fiscal year 2016 to date, our free cash flow has equaled $107 million and our share repurchases totaled $108 million which is consistent with our stated goal to closely match these two metrics.

Our cash and cash equivalent balance at the end of the third quarter was $286 million, which was equivalent with our cash balance at the end of the second quarter. Now I would like to provide an update on our fiscal year 2016 financial guidance.

As Mark mentioned, the company is providing fourth quarter revenue guidance of $186 million to $188 million and adjusted earnings per share of $0.36 to $0.38.

As a result, the company is nearing the range for its fiscal full year revenue guidance to total revenue of $753 million to $755 million and updating its adjusted earnings per share guidance to 1.63 to $1.65. Let me discuss our assumptions underlying our fourth quarter guidance beginning with hereditary cancer.

Typically, we see sequential revenue growth in the fourth quarter as we move beyond co-pay and deductible resets which occur in the seasonally weak fiscal third quarter.

Additionally, we do not expect an ongoing negative impact from the new UnitedHealthcare preauthorization process in the fourth quarter as turnaround times for United samples should remain consistent with current levels.

Despite our expectation for continued strong Prolaris volume growth, we are modeling revenue down on a sequential basis, based on the one-time Medicare retrospective payment which occurred in the fiscal third quarter of approximately $2 million. Additionally, we expect sequential volume growth in Vector DA volumes in the fourth quarter.

The revenue growth may lag, as we continue to work through payer contracts with the new Vector CPT code.

Finally, we expect pharmaceutical and clinical services revenues to decline to a more normalized run rate in the fourth quarter as the third quarter benefited from the timing of some large contracts with pharmaceutical partners, which will not repeat this quarter. Looking at how we are tracking on the bottom-line.

We believe our full-year operating margins will be a little under 25%. From a tax rate perspective, we continue to expect a GAAP tax rate of a little under 40% for the quarter. Overall, we continue to make significant progress in advancing our product pipeline and building a larger, more diversified molecular diagnostic company.

The growth in new products such as Vector DA and Prolaris and our ability to begin to expand private reimbursement coverage are positive indicators for the future. The progress we are making with these products also positions the company well to deliver upon our five-year goals.

We believe the achievement of these goals will drive substantial shareholder value for our investors as we garner leverage from the investments we have made in our product pipeline and international expansion over the last several years. With that, I'm now pleased 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 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&A session.

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

Thank you. One moment, please, for the first question. Our first question comes from the line of Bill Quirk of Piper Jaffray. Please proceed with your question..

Great. Thanks, and good afternoon, everybody. I guess the first question I had in terms of both the Vectra as well as the Prolaris volumes, I'm assuming you're going to continue to expect those up sequentially; there's no reason to think that you'd see any slowdown on either one of them.

This is of course outside of the $2 million CMS payment?.

Yeah, thanks, Bill. We do continue to expect to see strong growth in volume for both Vectra and Prolaris. Obviously, this quarter was particularly strong, and we've seen that trend for Prolaris now for a number of quarters in a row. So we are anticipating continued volume growth but we're still in the early stages for those products.

A lot of opportunity to penetrate those markets deeper and so we continue to expect strong growth and throughout the entire five year strategic plan, we had planned on that as well..

Okay, and then just staying on Prolaris as a follow-up, competitive dynamics have changed recently here with a third company coming into the space kind of roughly within the same indication as yourselves.

Just curious kind of how you – looking at the competitive dynamic, Mark, any changes at all from a sales approach or anything like that?.

Yeah, thanks, Bill. We had seen another entrant into this. This was a company that previously had really been testing only patients post-prostatectomy. They did release some preliminary data on a biopsy test. The last data I saw was on a very small subset of patients – I think there was 57 patients in that study.

And so, I think it's probably pretty early to discern whether or not the volume of data we will see from that company and the biopsy application is going to be able to successfully compete with Prolaris which has over 12 studies, 4,000-plus patients, and also correlated to the most important endpoint, which is prostate cancer-specific mortality.

So I think there is a – there'll be a lot other work I think for that company to begin to try to amass that level of data. So I don't think we've seen a significant shift in those dynamics, but those are things, of course, we'll continue to watch.

But we've been very pleased with how Prolaris has performed in the market and the fact that we believe it is now the market leader as a prostate cancer prognostic test..

Got it. Thank you very much..

Thank you. Our next question comes from the line of Doug Schenkel of Cowen & Co. Please proceed with your question..

Hi, there. This is Adam Wieschhaus actually on for Doug. Thanks for taking my questions. My first one was you mentioned you're beginning to address the endometrial and colon indications.

Can you comment further on the sales strategy that you have in mind to address these new indications?.

Yeah. Thanks for the question. The – I think from an endometrial cancer standpoint, there is two physician channels that really generally see those patients diagnosed with endometrial cancer. First and foremost is gynecological oncologist.

That's a call point that we already call on because of the ovarian cancer indications that we have, either for hereditary cancer or for BRACAnalysis CDx and use of PARP inhibitors.

And so they also see a number of women within the endometrial cancers, and so it's very easy for our sales team to now include that as another hereditary cancer indication for that same call point. In addition, endometrial cancers are seen by Ob/Gyns. And once again, we obviously have a very extensive commercial team calling on Ob/Gyns.

So it's also quite easy for them to insert that discussion into the indications that we're previously appropriate for hereditary cancer testing.

On a calling cancer side, again, we're largely calling on all of the call points already, that make sense for those, that would either be medical oncologists or GIs and we do have active sales calls on both of those physician groups.

And so, once again, it's really about us just broadening what their understanding is for red flags for hereditary cancer. That being said, any time we approach a new market, there is substantial educational requirements.

And so, while we're encouraged by this additional market opportunity, we do recognize that it will take some time to begin to develop that in these call points. That's why in my commentary I noted that we would expect to begin to see the impact of some of this in fiscal 2017..

Okay. Great. Thanks. Follow-up question was on Vectra DA, I was just, a little bit, a little curious, if you could provide a little bit more color on what drove the strong volume growth in the quarter, it was due to deepening the practice integration or maybe reaching you physicians or perhaps the recent LabCorp agreement lease signed? Thank you..

Yeah. I think both of those contributed the LabCorp agreement get to at one portion of our strategy, which is broadening access to the test. As you're aware, only that 50% of rheumatologists order the test.

And so, and for those that they don't order the test, the majority of those is attributed to the fact that they did not have access to patient service centers. And so that's what the LabCorp collaboration allowed us to integrate with LabCorp and have access. And so a portion of the increase was certainly attributed to that broader access.

And then the practice integration program is driving increased frequency in physician practices. For physicians that use Vectra, generally, they only use Vectra on about 9% of the appropriate patients, and so there's ample opportunity to drive deeper in those. So equally those contributed to the growth that we saw in this quarter.

And I think, what's important is that the practice integration program really was only in its pilot phase, and now that we've rolled that out across the nation in the third quarter, we're expecting beginning Q4, but then probably even more so in fiscal 2017, to see the impact from that broader practice integration program. So both are important.

Both have contributed significantly to the 18% volume growth that we saw in the quarter..

Okay. Great. Thank you..

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

Hi. This is (46:57) for Amanda. I'm just wondering, if you could perhaps speak to the dynamics that drove the guidance range narrowing, and maybe what changed there. And then maybe the one piece of that is in hereditary cancer segment. What it would have looked like, if you'd exclude companion diagnostics? Thanks..

Yeah. This is Bryan. I'll take the question. I think the dynamics that went into our guidance, as we laid out on the last call with respect to some of the puts and takes with respect to Prolaris back pay, the Vectra CPT code change, and then also the United impact that we saw on the current quarter was a factor in that.

I think those were the things that we looked at. When we look at our business on a sequential basis, and we see growth in the hereditary cancer business, I think that's what would be expected in our fiscal fourth quarter.

From a companion diagnostics perspective, as we've always said, ovarian cancer patients, which were the initial indication for BRAC CDx, were always within guidelines and therefore, we believe that was just a cannibalization of our existing business..

Thanks. That's helpful. I guess only one question, right? Thank you. Appreciate it..

Operator, are we still connected?.

Next – we are still connected. You're ready for the next question? It comes from the line of Isaac Ro from Goldman Sachs. Please proceed with your question..

Thanks for the question, it's actually Joel in for Isaac.

Just driving further into the comments regarding the impact from UNH in the quarter, just any more detail on what gives you confidence that this is only a temporary hiccup rather than ongoing headwind? And then, may be are you taking any proactive steps with other payers to prevent this dynamic from playing out in the future?.

Thanks, Joel. As we look at the impact – again, first, it's important to note that virtually every payer has some preauthorization requirements and, in fact, some of those preauthorization requirements are very similar to United.

So this has really been the trend in the industry for at least a decade, because everybody – all payers want to make sure that only appropriate patients are being tested. And so we long ago put in very extensive quality control measures to ensure that only appropriate patients were getting tested.

And in fact, we've published data on the extent of our quality systems and how effective they are at ensuring only patients generally that meet NCCN criteria are being tested. So for us this is really nothing new. We built up the processes and the relationships with our physicians in order to comply with all these preauthorization requirement.

Now we do understand for many other laboratories, this is very unique and cumbersome and I know for some of them that it has posed some challenges, but in our view this is just the requirements for engaging in hereditary cancer testing.

So as we looked at United, obviously, we can look at the work in process for United, how many samples are awaiting release. And we have lots of historical data and current data on that.

And so based on those trends and what we've seen through the third quarter as we began to implement this processes – that's why we're very comfortable saying that we aren't anticipating any additional impact from the United process in the fourth quarter, because we've already adjusted all of our processes accordingly.

As far as your other question about proactive steps, again, because most payers already include some sort of preauthorization requirements, these aren't necessarily unique.

And so we're always engaging with discussions with our payers and always are offering any information that they may want about the appropriateness of the patients that are tested under their plan. So I mentioned we published on that, we can and do provide payer specific day if they would like to look at that.

And so there is a variety of things we can do to continue to ensure that we are only appropriate – testing appropriate patients. And so we don't believe that other payers are necessarily going to invoke all this additional paperwork because it's cumbersome for them as well.

But in the event that another payer were to decide that they wanted some additional paperwork, it's not something unusual, and we'll be prepared to provide any other paperwork that we might need..

Thanks. And then, just following Palmetto's April ruling on the NGS-based hereditary panels.

Just given the large delta versus your average reimbursement, how do you think about payer pushback to Myriad's reimbursement as contracts are renegotiated over the next several years?.

Yeah, thanks. I think the code you're mentioning, I can't remember the number, because we actually don't use that code. That's not when we currently use nor is it one we would expect to use in the future.

So I think in this case that doesn't necessarily apply to us, the codes that we used are ones that we've discussed and agreed upon with all payers, including both public and private payers, and those are the codes that we build.

I think it's important to note that for pubic payers, the pricing on our codes is going to be set by the PAMA legislation and that's in the future, that's weighted median private payer rates, which given our market shares, we would anticipate those to be our rates. And so that's how we would expect public rates to be set in the future.

And to the extent that, private payers look at those rates, those are going to be those median private Myriad rates in the future as well. So that's how we would expect this to continue to unfold in the future.

I will make a note, we've had some questions about PAMA and for those who aren't aware this might be useful information that the PAMA regulations are in their final form. They are actually in the hands of OMB, that's the last step before the PAMA regulations become final, and so typically R&D would review those sometime in 30 days to 60 days.

And so a relatively soon, we would expect to see those final panel regulations, and that will dictate, whether in fact the pricing, the panel prices are in a fact on January 2017 or there is some speculation that may become effective in January 2018.

The last comment, I would make is regardless of which scenario occurs that to January 2017 or January 2018, the prices that will be used to set those are going to be prices that are already dictated by our long-term contracts, because even if it's January 18 those contract prices will be determined in all likelihood in January of 2017 to June of 2017 or maybe even some March of 2017.

So all of those are going to be recovered by our current long range contracts. So we have good visibility as to what the panel prices will be, that will set the public prices and those will be the visible public prices that payers will ultimately see, when those contracts are come up for renewal in 2018 and 2019..

Great. Thank you..

Thank you. Our next question comes from the line of Tim Evans of Wells Fargo. Please proceed with your question..

Thank you. I kind of, I wanted to follow on that similar statement of that last question there. Understanding that there's going to be a point in which you go through a renegotiation process with the private payers on your hereditary testing.

I guess, I wonder, how you feel about your positioning there, and if there is pressure on that the CMS rates, could that been influence the private rates, which then come back and influence the CMS rates again, after PAMA, it's kind of a complicated situation there.

But what I'm trying to get it is, how you feel about your negotiating position when it comes time to kind of renew those three-year contracts that you have right now?.

Yeah. Thanks, Tim. Well, as you know, as we negotiated these contracts over the last three years, there's been a variety of laboratories out there, advertising a very wide, wide range of prices, even in the panel markets.

And we've been very effective at sitting down with payers and talking about the value that myRisk provides relative to other alternatives that are out there. Again you have to remember from their perspective that a wrong answer in this industry, in this particularly application is extraordinarily expensive to a payer.

A false positive means that a patient is going to undergo very expensive interventions that are unnecessary, and a false negative means that a patient that could have prevented a cancer may very well end up getting a cancer.

And this isn't just for the patient, this is an impact that's felt across the entire family because, generations will live with those wrong answers.

And it's been those very effective arguments that we've been able to make that – here's the value that a highly accurate test provides to you and your plan; here's what Myriad does that is very different on getting both the sequencing accurate and the interpretation of that sequencing and we've been able to very clearly differentiate the performance of our product relative to others that are out there that prepared to provide these similar results.

And so we would expect that differentiation to actually just continue to expand. As I mentioned, our variant database is growing exponentially, our advantages there are actually becoming more pronounced. And so many of the arguments that we've made in the past, I think actually are being accentuated.

The other thing that's important to note is in the midst of this, you also have the FDA that has expressed interest in regulation, and that's either going to occur through FDA regulation or legislation either one of those scenarios winds up with the FDA evaluating each of these high-risk tests to ensure that all the appropriate claims are being made.

Obviously, we have experience with that. We're the only laboratory-developed test to be ever approved by the FDA. They've seen all of our variant processes and we're obviously comfortable in that approval. And so you need to begin to look at that as a reality in the kinds of timeframe that you're asking.

And the last I'll reemphasize that when it comes to what payers will see, on the panel prices they will see will be the Myriad pricing, because we'll be the median for the codes that we use and that's essentially what payers are going to continue to see as the public payer pricing.

So I think when you put all that together it's not that different from what we faced over the past three years, and I think we have and will continue to be very successful at differentiating our product and offering the highest value product..

Okay.

And if I may sneak one more in for Bryan, can you help us think about how you want to prioritize capital deployment going forward? I mean, you don't typically include share repurchases in your forward earnings guidance and should we really be modeling those going forward? You throw off a lot of free cash, I'm just trying to get at how should we be modeling your use of free cash at this point?.

Yeah, thanks. I think we continue to stick to the capital deployment strategy that we laid out previously with respect to prioritizing R&D first, M&A second, and then share repurchase, and our stated goal has been to match free cash flow to share repurchases. But to your point, we don't include share repurchases in our guidance.

So, I guess, that's all I can really say about that. It's just that – again we state that we're going to – we plan to match free cash flow to share repurchases. If you want to build that in, that's up to you..

All right.

And is there anything more you can say about any changes to M&A landscape? Has there been any increase in the stuff in your funnel given recent valuations recently anything like that?.

I wouldn't characterize it any differently than what it has been in the past, but it's a market with a lot of companies out there with a negative burn rate, burning cash.

In terms of the market dynamics, certainly, what's happened recently I think has probably put a lot more of those potentially in play, but I wouldn't characterize it is as different than what we've seen in the past..

Got you. Thanks for the color..

No problem..

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

Hi. Thanks. Good afternoon. I want to start with Prolaris and the 28 million new lives under contract.

Can you give any additional granularity on that? Is it just low-risk patients? Any intermediate? Was it structured with any pay-for-value around it? And then finally, is this commercial lives or does it include any MA as well?.

Yeah. Thanks, Jack. These contracts are all commercial lives and not Medicare Advantage lives. We generally include those when we talk about the Medicare segment because the coverage decisions made by Medicare are obviously enforced in Medicare Advantage. So these 28 million were actually in the commercial side.

Some of these are low-risk, some or all patients. We're not going to probably provide that level of granularity nor necessarily payer information per se.

But – and some of these could have a value component to those, so there were multiple payers in here and so, each of those contracts as you might imagine are a little payer specific, but overall, it was really some very nice progress from our managed care team just in the last three months..

Okay. And that's helpful. Another on Prolaris.

Just getting back to the sustainability of the test order rate, I think, I just looked back over the last eight quarters, I think – is it roughly 20% sequential growth just over that period? Have you thought about expanding the sales force yet or just trying to dive deeper into the urologist pool? Do you think now is the right time to do that? And how much – how sustainable do you think that level of growth is for the next year or two without having to expand the sales force further at this point?.

Yeah. Great question, Jack. Obviously, we only cover a portion of the urologists with the sales team we currently have out there. We have about 40 sales people out there.

And so in order to deepen that penetration, it is something that we are evaluating now to see when it would be appropriate to add additional sales people into that channel so that we can deepen penetration. Given the level of reimbursement, we're starting to obtain, we think it is an appropriate consideration.

And so we're going through that process as we speak and as we prepare for our fiscal 2017 budget. Obviously at that point as we give fiscal 2017 guidance, we can provide some additional color on what that the long-term or what that the fiscal 2017 outlook is for Prolaris. We've been very pleased with the growth rates that we've seen.

You did see in our five-year plans that we had over 30% compounded annual growth rates for Prolaris. So you can see at least from the five-year plans that we made public that we do believe there's opportunity for continued and sustainable significant growth over the next five years..

Great. And that is the nice segue into my final quick question. Can you just, I know you're not giving the 2017 guidance today. But maybe just the framework that you plan to use in August, just because some things like additional Prolaris coverage or Vectra coverage we don't know today.

And then also some of the FDA decisions with your companion diagnostic partnerships. We don't know today, but I should probably assume there is some level of growth next year. How are you going to put that together, when you get to August? Thanks..

Yeah. Thanks, Jack. Good question. I think we're going to stay with the philosophy that we used this year. As everyone on the call is well aware, predicting reimbursement is difficult to do in this environment globally.

And so, as we look to provide guidance for fiscal 2017, we'll stay with the same approach we used, which is that we'll only factor in known reimbursement for the guidance.

And then we'll characterize as we did last year what our upsides and potential downsides to whatever that guidance is that we might provide which of course upsides then would be additional reimbursement that we don't have line of sight to. So, we think that's the only reasonable way to address that uncertainty.

But at least, we can quantify the magnitude of what some of those upsides could be were reimbursement to potentially come for other products through fiscal year 2017..

And that is our last and final question. We will now turn the conference over back to Mr. Gleason. Please continue..

Thanks, Cleona. This concludes our earnings call. A replay will be available via webcast on our website for one week. Thanks for everyone 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..