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

Alexander D. Nowak - Piper Jaffray & Co. Amanda L. Murphy - William Blair & Co. LLC Doug Schenkel - Cowen & Co. LLC James Rutherford - Stephens, Inc. Joel Kaufman - Goldman Sachs & Co. LLC Tycho W. Peterson - JPMorgan Securities LLC Jack Meehan - Barclays Capital, Inc..

Ladies and gentlemen, thank you for standing by. Welcome to the Myriad Genetics Fourth Quarter 2017 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 8, 2017.

I will now turn the conference over to Scott Gleason, VP, Investor Relations. Please go ahead, sir..

Thank you. And good afternoon and welcome to Myriad Genetics fiscal fourth quarter 2017 earnings call. My name is Scott Gleason. I'm the Vice President 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've 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 from Myriad today will be Mark Capone, President and Chief Executive Officer; and Bryan Riggsbee, our 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 we'll be filed upon the call on Form 8-K.

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

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

We refer you to 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'm now pleased to turn the call over to Mark..

Thanks, Scott. I would like to start today's call by providing key highlights from fiscal year 2017, after which Bryan will provide an overview of our fourth quarter financial results and details on our fiscal year 2018 guidance and I will finish by providing additional details pertaining to the ongoing execution of our business strategy.

First, I would like to provide a summary of the fourth quarter results. We were highly encouraged with our fourth quarter performance having once again exceeded expectations on both the top and bottom line with total revenue of $200.5 million and adjusted earnings per share of $0.30.

Importantly, we were able to grow volumes sequentially for all of our products, including a third straight quarter of sequential volume growth for hereditary cancer testing.

In fact, this quarter, we saw the highest demand ever for hereditary cancer testing and a 6% year-over-year volume growth rate, which is a testament to the outstanding execution from all of our hereditary cancer commercial teams. Reflecting on fiscal 2017, this was one of the most transformational in our 26-year history.

We're focused on five critical success factors, which we believe will allow us to achieve our long-term strategic goal. I would like to review our progress in fiscal year 2017 on each of these critical success factors, beginning with our goal to stabilize hereditary cancer revenues.

It is interesting to note that our fiscal year 2017 hereditary cancer revenue of $569 million was nearly identical to the revenue in fiscal 2013, the year before the Supreme Court BRCA patent decision. After four years of intense competition, Myriad remains the world leader in hereditary cancer testing.

In fact, during this four-year timeframe, we have seen hereditary cancer testing volumes increase by 15%, which was offset by a price reduction of a similar magnitude. In fiscal 2017, we saw a consistent strengthening in hereditary cancer volumes.

During the second half of the year, hereditary cancer volume retuned to growth with the fourth quarter at a 6% year-over-year growth rate and the third consecutive quarter of sequential volume growth, which is virtually unprecedented.

Additionally, during fiscal 2017, we set a goal to exit the year with clear visibility and stable pricing for the hereditary cancer business. The results in that regard have exceeded our expectations, since we now have 86% of our revenue under long-term fixed price contracts.

While this will lead to lower average selling prices in fiscal 2018, which have been incorporated into our guidance, we expect stable pricing in the subsequent years of these contracts.

With volumes returning to year-over-year growth, expanded indications for use and predictable pricing, we remain very optimistic about the future for the hereditary cancer business. Next, I would like to discuss our critical success factor regarding new product volume growth.

We saw significant diversification of our business this year as we grew our new product volumes by 20% when normalized for full year results and we ended the year with greater than two-thirds of our volume from new products.

We completed the largest acquisition in our history and successfully integrated the Assurex business with revenues exceeding expectations and having achieved profitability in less than nine months.

GeneSight test volume grew 45% when normalized for a full year and is now our highest volume test at a run rate of over a quarter of a million tests per year and would represent revenue of $500 million per year if fully reimbursed.

In addition, we successfully completed the acquisition and integration of Sividon, which brought EndoPredict to Myriad, a second-generation test to guide treatment decisions for breast cancer patients that markedly outperform the first-generation test. EndoPredict volume grew 67% in fiscal 2017 and was launched in the U.S. market in the third quarter.

Also, Vectra DA returned to sequential volume growth in the last two quarters of the year and demonstrated that it was the most predictive disease activity measure for rheumatoid arthritis with more than three times the predictive power of standard of care measures.

Prolaris maintains its market leadership position as a prostate cancer prognostic, with volumes increasing 26%.

And myPath Melanoma completed validations, which demonstrated that the test is the most accurate diagnostic for differentiating benign lesions from melanoma with an extensive dossier submitted for reimbursement to Medicare and private payers. Finally, we made significant progress in our companion diagnostic programs.

We validated that myChoice HRD can identify patients with enhanced response to PARP inhibitors and validated BRACAnalysis CDx as a companion diagnostic with AstraZeneca's olaparib in a new 60,000 patient per year metastatic breast cancer market. Our next critical success factor is to expand reimbursement coverage for our new products.

For Prolaris, we increased reimbursement from 35% to 50% of the total addressable market as the first test to receive a Medicare LCD expansion for favorable intermediate patients. In addition, we saw an unprecedented ramp in coverage for EndoPredict, with over 120 million commercial lives covered.

And if we receive a favorable Medicare LCD, we'll attain reimbursement for greater than 75% of the total addressable market. Additionally we laid the foundation for expanded commercial coverage for GeneSight. First, we completed enrollment in our landmark 1,200 patient clinical utility study with results expected by the end of the calendar year.

We also published health economic studies demonstrating first year savings of $2,500 and completed a number of payer demonstration projects with large national payers, including UnitedHealthcare, Humana and Anthem.

We advanced reimbursement with Vectra DA by increasing enrollment in the prospective clinical utility study, initiating a number of payer demonstration projects and providing strong evidence for inclusion in ACR guidelines this fall.

Lastly, we've added additional management capabilities during the year and are implementing a number of innovative new approaches to accelerate reimbursement, including the portfolio approaches used in many of our long-term contracts.

We believe the advances in reimbursement in 2017 have laid the foundation for accelerating commercial coverage decisions in fiscal 2018. Now I would like to discuss our critical success factor to expand our kit-based test outside of the United States. This year, EndoPredict revenue grew 69% year-over-year.

During the year, we received reimbursement approval in France, Quebec and an expanded number of German sites. And in fiscal 2018, we anticipate favorable decisions in the United Kingdom, additional Canadian provinces, and further expansion in German reimbursement sites.

Additionally, we have advanced our kit-based initiatives for Prolaris and myPath Melanoma in fiscal 2017 and plan to complete the validation of these products in fiscal 2018. Finally, I would like to discuss a new critical success factor to increase our operating income.

Having successfully realized millions of dollars in synergies through the Assurex integration, we are replicating that process across the rest of the organization. Consequently, in the fourth quarter, we initiated a program called Elevate 2020, with the goal of generating an additional $50 million in annual operating income before fiscal year 2020.

Bryan is the leader of this program and he will provide additional detail in his section. Overall, we made substantial stride this year to transform Myriad into a global, diversified, personalized medicine company. We are the world leader in hereditary cancer testing, with growing volumes and long-term predictable pricing.

And we're building new products on top of this solid foundation. From a diversification standpoint, greater than two-thirds of our volume are attributed to new products. And with increased reimbursement, we anticipate a significant inflection point in both revenue growth and profitability which will only be enhanced by our Elevate 2020 initiatives.

Overall, I am extremely proud of the Myriad team's accomplishments in 2017 and firmly believe that we will reach a tipping point in our transformation in fiscal 2018. I will now turn the call over to Bryan to provide a more detailed assessment of our financial results in the fourth quarter and additional commentary on our fiscal year 2018 guidance..

Thanks, Mark. I would like to start by providing a more in-depth overview of our fiscal fourth quarter financial results. Fourth quarter total revenues were $200.5 million compared to $186.5 million in the same period in the prior year, an increase of 8%. This represents our third straight quarter of delivering positive year-over-year revenue growth.

Hereditary cancer revenue in the quarter was $144.6 million and was down 5% on a year-over-year basis. Looking at the components of revenue, volume was up 6% on a year-over-year basis, while pricing and the Anthem out-of-network accounting change was responsible for an 11% decline.

We expect the Anthem impact to abate in the fiscal first quarter as we begin to consistently receive cash payments for Anthem claims. GeneSight revenue in the quarter was a new record at $25.5 million and grew 22% year-over-year.

With this product in the early stages of adoption and a largely untapped preventive care market, we see significant opportunity for continued GeneSight growth. Vectra DA revenue in the quarter was $10.3 million, with volume increasing sequentially for the second consecutive quarter.

It is important to note that Vectra DA revenue was detrimentally impacted by approximately $2 million this quarter as a result of a request from Medicare in June to temporarily delay the submission of claims as we worked on a revised LCD.

We have now resumed submitting claims to Medicare and expect to recognize this $2 million in Vectra DA revenue in our first quarter results. We are continuing our discussions with Medicare regarding a final LCD.

We believe the evidence supporting continued coverage for Vectra has only gotten stronger with important clinical utility data published in the fourth quarter building on top of the previous 35 publications. This quarter, we again had record Prolaris volumes and achieved greater than 10% market penetration.

Total Prolaris revenue was $2.9 million in the quarter. EndoPredict revenues in the quarter were $2 million and grew 18% year-over-year. This includes revenue from the U.S. launch. While still relatively small, we saw increases in U.S. volume throughout the quarter, which should drive increased revenue with broader insurance coverage.

Lastly, revenue associated with our pharmaceutical and clinical services business was $12.6 million and declined 1% year-over-year. As a reminder, revenue for our pharmaceutical and clinical services segment varied based upon the timing of pharmaceutical and clinical services contracts.

I now would like to discuss our financial metrics for the quarter. Gross margins were 78.8% in the fourth quarter compared to 78.6% during the fourth quarter of last year.

The increase in gross margins is primarily due to increased efficiencies in our hereditary cancer business and GeneSight laboratories, offset by pricing declines for hereditary cancer.

Additionally, gross margins would have improved even further on a year-over-year basis had the Anthem accounting change and Vectra DA revenue recognition delay not detrimentally impacted revenues in the quarter.

Moving on to our operating expenses, GAAP research and development expenses were $18.8 million in the fourth quarter compared to $19.5 million in the fiscal fourth quarter of last year.

The decline in research and development spending was due to the timing of clinical trials and prioritization of research and development projects, focused on expanding reimbursement coverage for pipeline test.

GAAP SG&A expense this quarter was $122.1 million compared to $91.3 million in the fourth quarter of last year and the increase was entirely due to the Assurex acquisition. On a non-GAAP basis, our adjusted research and development expense was $18.6 million compared to $19.4 million last year and declined 4% year-over-year.

Adjusted SG&A expense this quarter was $111.4 million compared to $88.1 million in the fourth quarter of fiscal year 2016. Excluding the impact from the Assurex acquisition, total non-GAAP operating expenses would have been relatively flat year-over-year.

Adjusted operating income was $28 million in the fourth quarter and declined 27% relative to the fourth quarter of last year. The decline in adjusted operating income is based primarily on lower hereditary cancer revenue and the mix of our volume to our products that are not yet fully reimbursed.

I am also pleased to announce that we achieved breakeven for Assurex in the fourth quarter, which was six months ahead of our original expectations. This was due to our rigorous integration efforts, where we achieved substantial synergies and revenues significantly above expectations.

Adjusted earnings per share were $0.30 for the fourth quarter compared to $0.36 in the fourth quarter of last year. Our fully diluted share count was relatively flat sequentially with 68.8 million shares outstanding. We continue to prioritize debt repayment as a near-term use of cash.

This quarter, we used cash to reduce the balance of our credit facility by $68 million and plan to use excess free cash flow to reduce the balance further in coming quarters, as we plan to make significant milestone payments over the next 12 months associated with the Assurex acquisition of up to $185 million.

Total debt at the end of the fourth quarter was $99 million. Our cash and cash equivalent balance at the end of the fourth quarter was $199 million, which decreased from $226 million at the end of the fourth quarter last year, based upon the magnitude of our debt repayment.

We continue to generate meaningful free cash flow with non-GAAP free cash flow in the quarter of approximately $37 million. As anticipated from a balance sheet perspective, our receivable balances declined dramatically in the quarter based upon resolution of the payer system issue we highlighted last quarter.

Our receivables declined by approximately $9 million to $106 million, representing a days sales outstanding total of 48 days, which is consistent with historical norms. I would now like to discuss our fiscal year 2018 financial guidance and some of the key underlying assumption.

We're guiding the total revenues of $750 million to $770 million and adjusted earnings per share of $1 to $1.05. This guidance reflects both revenues and adjusted earnings that are relatively flat with fiscal year 2017.

From an overall perspective, we are anticipating declines in our hereditary cancer revenue to be largely offset by new product growth in fiscal year 2018. We expect hereditary cancer revenues to be down 9% in fiscal 2018 with a 3% increase in volume and a 12% decrease in price.

From a hereditary cancer perspective, we saw a 6% increase in volume in the fourth quarter with a continued acceleration throughout the quarter. Despite the continued strengthening in sample volumes, our guidance assumes a volume growth of 3% in fiscal 2018.

In our hereditary cancer business, we made significant strides in the fourth quarter to provide long-term pricing visibility and stability. During the quarter, we signed long-term contracts with a significant number of payers, including UnitedHealthcare, most of which incorporated multiple portfolio products.

We also took the opportunity to renew several contracts with large payers to provide better visibility over the next several years. We now have 86% of our revenue under long-term fixed price contracts with prices that continue to reflect a premium for Myriad quality, which lower downstream cost for insurers.

Based upon the number of these renewed contracts, we believe pricing in subsequent fiscal years will be relatively stable compared to the fiscal 2018 price. For GeneSight, Vectra DA, Prolaris and EndoPredict revenues, we are assuming double-digit volume growth for all of these tests, given recent trends and underpenetrated market opportunities.

For EndoPredict in the U.S. market, given our limited experience, we're assuming very modest penetration. Additionally, as we have in past years, we're only assuming known reimbursement for all products. Lastly, we are assuming our pharmaceutical and clinical services business remains relatively flat on a year-over-year basis.

Next, I would like to discuss our earnings per share guidance. As Mark previously mentioned, we have been in the planning process and are now in the execution phase on a significant company-wide initiative called Elevate 2020, which is focused on increasing operating profit by at least $50 million by fiscal year 2020.

Now that we have completed the Assurex, Sividon and Crescendo acquisitions, we have identified several areas where we can become more efficient as an organization through leveraging centralized resources, implementing new technology solutions, executing strategic sourcing agreements and focusing on laboratory efficiency.

To-date, we have identified over $17 million of cost savings that will be realized in this fiscal year and an additional $24 million in annualized savings, which would take effect during fiscal year 2019.

Note that, some of the expenses associated with these projects will be excluded from our non-GAAP financials since they are non-recurring in nature.

Our Elevate 2020 initiatives are well underway with several projects implemented in the fiscal fourth quarter that will generate greater than $3 million in quarterly incremental operating income starting in the fiscal first quarter. I would like to share a few specific examples of these projects.

First, we launched a new digital integration strategy with digital ordering and reporting. This has greatly simplified the data entry process for customer service leading to increased efficiency and a reduced test cancellation rate for missing information, which will lead to increased revenue and lower cost.

In addition to our customer-facing systems, we made significant progress on laboratory efficiencies by introducing a new optimization step to our myRisk process that will significantly reduce reagent usage. Additionally, Assurex transition testing platform is leading to a meaningful reduction in reagent and personnel costs.

From an informatics standpoint, we're consolidating data centers and software vendor contracts. And, lastly, we have eliminated some redundant positions and expect to see additional head count reductions through attrition.

Our progress to-date has been significant and we have identified additional projects that we believe will have an even greater impact on revenue growth and our cost structure in the future.

As we move below the operating line, our interest expense will likely increase in the middle of the year as we fund up to $185 million in potential milestone payments related to Assurex. Additionally, from a tax rate perspective, we would currently expect our non-GAAP tax rate to be approximately 23% compared to the GAAP tax rate of 38%.

This is because the non-cash amortization associated with our recent acquisitions increases the non-GAAP operating income with no corresponding increase in taxes payable. There are a number of potential catalysts for fiscal 2018 that could materially improve our financial performance.

First, as I previously mentioned, our guidance only assumes 3% volume growth for hereditary cancer. As we noted, we ended the year with 6% growth and strengthening trends. We also are planning to launch some exciting new developments in the hereditary cancer market during the first half of this fiscal year.

To the extent these trends and initiatives contribute to higher volume growth, it could lead to upside to our guidance. Secondly, our guidance does not assume any impact from new companion diagnostic indications such as the HER2-negative metastatic breast cancer approval for olaparib from AstraZeneca.

Recognize that both the drug and the diagnostic have previously been reviewed and approved by the FDA and the clinical data presented by AstraZeneca was strong. So we believe there is a strong probability of approval in fiscal 2018. As a reminder, there are 125,000 metastatic breast cancer survivors, who will be candidates for this test upon approval.

So, even modest penetration of this market could lead to a significant inflection in our revenue trends. Also, we are not forecasting any additional reimbursement despite the fact we believe we are making significant progress with commercial payers.

As noted, our largest commercial payer contract with GeneSight would increase revenues by $40 million and earnings per share by $0.40. Additionally, as I previously mentioned our guidance assumes very modest adoption for EndoPredict in the U.S. More significant market share would lead to meaningful upside to forecast.

Finally, we are not including any revenue from myPath Melanoma this fiscal year. As a reminder, we submitted our dossier to Medicare and private insurers in the fiscal third quarter of 2017 and have already received positive initial feedback from multiple payers.

Looking at the first quarter, we are forecasting revenue of $181 million to $183 million and non-GAAP earnings per share of $0.19 to $0.21. The sequential decline in revenue and profitability is driven by hereditary cancer pricing changes under the new contracts and summer seasonality, offset by new product growth and cost reduction initiatives.

The first quarter guidance assumes no favorable intermediate revenue from Prolaris, since there was an administrative delay in the posting of the final Noridian LCD, which has an effective date of September 25.

While we plan on submitting claims as of the effective date of the Palmetto LCD on July 13, our guidance only assumes payment from claims starting on September 25.

In conclusion, we believe that we are going to exit fiscal 2018 poised for a multi-year period of growth with increasing hereditary cancer volumes, stable hereditary cancer pricing, and a growing portfolio of new products with improved prospects for commercial payer coverage. With that, I would like to turn the call over to Mark..

Thanks, Bryan. I would now like to provide some additional details on important clinical data and our performance for the fourth quarter, beginning with hereditary cancer. Our strong hereditary cancer performance was attributed to multiple factors. First, our sales organization was relatively stable with turnover 40% below historical levels.

This continuity led to increased productivity, with total volume per sales representative increasing 5% sequentially in the fourth quarter. Additionally, we saw continued benefits from our preferred provider agreements with US Oncology and ION, with these accounts meaningfully outpacing growth in the overall oncology segment.

Also, our disease-specific panels helped us gain market share with customers in the academic and genetic segments of the business. Among customers who ordered a disease-specific panel, volume was up 40% year-over-year and we regained several large accounts and major cancer centers.

Finally, as Bryan mentioned, this quarter in selected large accounts, we launched a new digital integration strategy that will simplify and deepen our integration with these customers. The first application is a digital ordering and reporting process, which has been very favorably received and likened to an Amazon-like experience.

Additionally, we continue our efforts to expand indications for use for hereditary cancer testing. At ASCO this year, we presented the results of a 2,000 patient study with myRisk Hereditary Cancer where 242 of the patients had pathogenic mutations.

Importantly, 50% of the patients with mutations did not meet current criteria for hereditary cancer testing and 34% had mutations in genes not indicated by family history.

We believe this study adds further credence to the growing body of evidence demonstrating that current testing criteria are too restrictive to identify all patients with hereditary cancers and should be expanded. And as a final note on the hereditary cancer market, we're planning to launch an exciting new product in the first half of the fiscal year.

It will represent the fourth major epic in hereditary cancer testing and we look forward to providing more details in the coming months. Moving on to GeneSight, adjusted for a full year, we saw revenues up 34% and volume up 45%. Most importantly, we saw continued signs of strong future growth based upon physician adoption trends.

We increased ordering physicians by 55% this past year to over 17,000 total doctors. We also continue to see success with our preventive care pilot, with our top reps now achieving an annual fully reimbursed run rate of $1 million per year per territory in GeneSight sales.

As these new doctors increase utilization, it should drive significant volume growth in the coming years. Next, I would like to discuss Vectra DA. This quarter, we again saw sequential volume growth which increased new patient starts, providing positive momentum entering fiscal year 2018.

In fiscal 2017, we continued to broaden the base of physician customers, with 72% of rheumatologists ordering a test. At the recent EULAR meeting, Myriad presented two very important clinical utility studies for Vectra DA.

The first study was a meta-analysis evaluating the ability of Vectra DA to predict radiographic progression, which included six cohorts incorporating over 800 patients. Vectra DA predicted radiographic progression in all six cohorts, including both AMPLE cohorts.

It was also shown to have more than three times the predictive power of current standard of care disease activity measures such as DAS28-CRP and CRP. Additionally, Myriad presented a clinical utility study evaluating the ability of Vectra DA to predict which patients could benefit from biologic tapering.

In a study of 146 patients, relapse rates were 24% in patients with a low Vectra DA score and a negative ACPA, compared to 79% in patients with high Vectra DA scores and a positive ACPA. The study found that in this entire cohort of patients, average biologic use was reduced by 20%.

Considering the fact that biologics account for 10% of all pharmacy spend in the United States and have potential long-term side effects, a test that can identify patients that would be appropriate for biologic tapering is exciting to both physicians and payers. Next, I would like to discuss our progress with Prolaris.

Prolaris volumes grew every quarter this fiscal year, ending with record volumes in the fourth quarter. We expanded ordering physicians again this year with 32% of urologists ordering a Prolaris test.

At the American Urological Association Annual Meeting, we presented a large study of 767 patients evaluating the ability of Prolaris test to predict metastatic disease. The study found that patients with a low Prolaris score had a 10-year risk of metastases of less than 1% versus 25% for patients with a high Prolaris score.

Based upon the strength of this data, along with other data on metastases, we have now added the risk of metastases to our Prolaris report. Next, I would like to provide an update on the launch of BRACAnalysis CDx in conjunction with olaparib in HER2-negative metastatic breast cancer.

AstraZeneca recently indicated that they plan to submit their application to the FDA in the second half of calendar year 2017. We are working on the completion of our PMA supplement for BRACAnalysis CDx and we'll plan on submitting in conjunction with AstraZeneca.

As a reminder, if BRACAnalysis CDx is approved for this indication, we believe that 125,000 metastatic breast cancer patients would need testing immediately. And that 60,000 patients per year would require testing on an ongoing basis.

Because there are limited treatment alternatives for metastatic breast cancer, we believe the approval of a new therapeutic option will encourage many of these patients to seek out testing and access to olaparib. Overall, I'm highly encouraged with our progress in fiscal 2017 and the momentum we have headed into fiscal 2018.

Hereditary cancer volumes are at record levels with strong growth and predictable, long-term pricing. Our new products now comprise two-thirds of our volume with an aggregate growth rate of over 20% in large and underpenetrated markets.

These new products already have Medicare coverage and we believe we are on the cusp of receiving broader private payer reimbursement. And our kit-based international strategy is proving very successful with line-of-sight to near-term profitability.

We believe we are clearly on track to meet our long-term strategic goals and to remain a diversified global leader in personalized medicine. With that, I'm pleased to turn the call back over to Scott for Q&A..

Thanks, Mark. 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 our 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 our call..

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

Great. Good afternoon, everyone. This is Alex Nowak on for Bill today. So just the first question on Vectra DA.

So now that you're resubmitting revenue to Medicare for payment, should we assume that the current draft LCD will be eventually deleted and that Vectra DA Medicare revenues are safe from being cut?.

Thanks, Alex. Yes, you're correct. We have started to resubmit claims to Medicare. We're still in discussions with Medicare about what a revised LCD might look like for Vectra DA and so those discussions are ongoing. I think what I can say is we remain very confident that the data supporting Vectra DA very much supports continued coverage.

We had 35 publications. We added two more very important clinical utility studies at the EULAR presentation just a few months ago and we outlined the details of that.

I think what was particularly striking is the fact that it's got three times the predictive power of any other disease activity measure, which underscores why 72% of rheumatologists in this country ordered the test this past year. So that level of adoption by physicians is outstanding. It underscores just how important this is.

And we know that there was a groundswell of support for continued coverage that was submitted to Medicare during the public comment period. So we're very confident in the product, in the data that supports the product and we continue to have productive conversations with Medicare about what a revised LCD might look like..

Okay. That's helpful. And then does your guidance assume a change in Medicare rates under PAMA? Just because I thought PAMA would bump up BRCA payments, so that might suggest that the private payer rates are coming down a little bit more than 12% next year. If you just walk me through that that would be great..

Yeah. Hey, Alex. This is Bryan. We haven't said – what we would expect is that PAMA would not negatively impact our rates. We haven't said what the impact would be. We would expect to provide more information on that when the CLFS comes out later in the year..

Okay. Thank you..

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

Hi. Thank you. So Just a quick question on the contracting for hereditary cancer. So, sounds like you've done a lot of work there sort of resetting pricing and resetting contacts.

Is there a sense – can you give us a sense of how much of the business now has been renewed, if you will, so kind of what's left? And then, obviously, you talked about stability. Should we think about that in terms of a three year timeframe, like you did previously? Thanks..

Yeah. Thanks, Amanda. Yeah. So, 86% are now under long-term fixed price contracts. Again, those are generally three year contracts to your point. That's what we've historically done and we continue to do as we renewed the – those contracts generally can only be terminated for cause.

And so it gives both of us long-term visibility on what that pricing would look like for a three year timeframe.

So, we think we've – the remaining 14%, as you know, in many cases, there are smaller regional payers that are not interested in going through the extensive analysis that's required in order to assess the hereditary cancer testing landscape. So, we never expected that to be 100%.

In fact, we are quite pleased to get to 86%, which is as high as we've ever seen. So, our managed care team has done great work over the past quarter to drive to that level of long-term stability and reimbursement. And I think part of that was also the leverage we're able to now provide within a complete portfolio of products.

And so we took the opportunity for payers that were quite interested in contracting for EndoPredict and some of our newer products to have a fulsome discussion about the entire portfolio, which is why we've been so successful now in driving that up to 86% of our hereditary cancer revenues under long-term contract..

Right. Okay. Yeah. So, I was going to ask you about the portfolio piece too, but just to be clear. So the 86% now has a duration in aggregate of the three years. In other words, you've renewed most of the business in this quarter.

Is that the right way to think about it?.

Well, I wouldn't say that we're going to give details on exactly when those are. Some of those contracts were already in place and we're going to extend into the future. Some obviously were renewed for full three year term.

So, I think, as Bryan phrased this, this gives us a very clear visibility on what pricing will be certainly in fiscal 2018 and fiscal 2019 as we move forward. And then contracts are going to roll off at different times.

So everything wasn't signed up at once, but you can tell obviously we made significant progress on a number of new contracts in the fourth quarter..

Right. And then on the portfolio side, just as a last question. I just wanted to get a sense, so obviously you had the United that was public in terms of the pricing that you set up for the rest of the business. So just in your conversations with these payers, I am just curious how they're thinking about the newer assays in terms of coverage.

Obviously, that's a distinct decision versus the pricing. But do you get a sense of whether you might have something imminent here in terms of the portfolio and coverage with additional private payers? Obviously, you mentioned Prolaris, but just more broadly..

Yeah, a good question, Amanda. I think it is important. There is a distinction between coverage and contracting. So the data we've given is based on the contracting side which means we've agreed on the codes that we will use. We've agreed on the prices which is important because both steps of this have to be done to ensure reimbursement.

I think on the coverage side, we continue to believe we're making very good progress. I think payers obviously were particularly impressed with EndoPredict, which is why we are anticipating with a favorable LCD that we'll see coverage to over 75% of the addressable market. So we've really made substantial progress there.

Prolaris is at 50% covered and we're continuing to look to drive Vectra from 40% above. So I think for all the products, we think we've got ongoing productive dialogue on increased coverage for these. And we're encouraged that, in 2018, we're hopeful to show some additional signs of progress with coverage for some of these products..

Okay. Thanks very much..

Our next question comes from the line of Doug Schenkel with Cowen. Please go ahead..

Okay. Good afternoon, guys, and thank you for taking my questions. Thanks for all the detail on HCT. Just a few follow-ups. First, how much share loss is factored into your HCT guidance? We don't have a lot, but mathematically we're coming up with something like 3 points of share loss.

I guess the second follow-up is kind of building off of Amanda's first question. We were thinking that the next major payer contracts come up for renewal in calendar 2019. I just want to see if we're thinking about that right.

And then third, based on the pricing commentary you prepared in your prepared remarks, it seems that you're expecting HCT revenue will return to growth again in fiscal 2019.

Is that also the right way to think about things?.

Thanks, Doug. Let me tackle one or two of those and then I'll pass them on to Bryan. From a share loss standpoint, I think, we're all in a similar situation. It's really difficult to know what exactly market volumes are doing. We do have some sporadic reporting by other laboratories of volumes, but certainly not comprehensive reporting.

And we also know many of those laboratories – they are actually testing patients that don't meet hereditary cancer eligibility criteria. And they oftentimes won't even breakout the volumes that meet criteria from those that don't. As we define the market, there are only patients that meet hereditary cancer criteria typically as defined by NCCN.

And so, it really makes discerning what's going on in the market difficult. I think all we can say is based on the trends and what we've seen that we built in a 3% hereditary cancer volume increase in fiscal 2018. Obviously, that's coming off of a quarter with a 6% volume increase.

And, in fact, as Bryan mentioned, we saw volumes strengthening throughout the fourth quarter. So, we're comfortable with our projections of 3% and how that manifests itself in market share, I think, would be difficult to say. Bryan, you want to talk about pricing fiscal 2019 and....

Yeah. Sure. I mean just to take those couple of questions. First, we haven't really given out specific information around what contracts come up when, so, to the question around the next set being in 2019.

And then to the question around hereditary cancer in fiscal year 2019, while we're encouraged with where we ended the current year and certainly we made great progress in terms of signing up payers under long-term contracts, I don't think we'd be ready to speak to extrapolating current demand trends forward and providing any sort of outlook in terms of FY 2019.

I think what we can say is that we feel good about the guidance that we've put out relative to where demand trend currently is. And I think that's all we can really comment on in terms of it's really focused on FY 2018 and the stability there..

Okay. Fair enough. And if I could ask one more. A few months ago, you noted that you completed a payer demonstration project with United for GeneSight and I think you noted you had two pending projects with Humana and Anthem at that time.

Are there any updates on progress there and can we expect a publication or release of that data at some point over the next few quarters? And I guess, most importantly, are these studies in themselves combined with data that's already out there? Do they have the potential to be enough to move you into coverage and contract with more of these payers?.

Yeah. Thanks, Doug. We have continued to make progress on that. And I can speak – specifically, we've already talked about the United that we've done in conjunction with Optum and mentioned that the top line results for that project were actually very favorable.

They were also very much in line with the data that we published from a health economics standpoint from the Medco data. So, all the data lined up very consistently that there is significant first year savings by using GeneSight. That is in the process. The manuscripts are very close to being submitted for publication.

And so, to your question, yeah, we would expect those manuscripts to be published sometime in the next two quarters, depending, of course, on reviewers and how long they take. But we're highly encouraged with that. Now we don't have to wait for those to be published to review those with United.

And that's what we're in the process of doing is showing them that in their own patient population just the health economic benefit of GeneSight. We're highly encouraged with that.

We're not going to wait for the results of the clinical study before we continue to have reviews with each of these payers on those demonstration projects, the others being Anthem and Humana. We're going to charge forward with the data we have because we think all the data is available and sufficient for coverage.

The other thing I would note – and Amanda referenced this as well – is that, of course, we did put GeneSight in contract with United. And so we've agreed on codes and pricing with United. So, we've made that positive step forward as well. So, stay tuned and you will see that publication sometime in the next couple quarters..

Okay. Thanks again..

Our next question comes from the line of Drew Jones with Stephens. Please go ahead..

Hey. Good afternoon. This is James Rutherford in for Drew. Appreciate all the color you gave around guidance assumption. So, just one question for me in the interest of time.

Can you give any detail around your level of spending on GeneSight and Vectra prospective trials both in fiscal 2017 and kind of what you expect in fiscal 2018, please?.

Yeah. I think, in general, we haven't commented on specific studies. But I think what's fair to say is that the cost associated with the ongoing Vectra prospective study is reflected in our fiscal year 2017 R&D spend. And we wouldn't expect any real difference in fiscal 2018. From a GeneSight perspective, we've obviously completed a very large RCT.

And the spend, of course, will ramp down once we've fully wrapped up that study, which we expect to be fully completed by the end of this calendar year. And so, there will be some benefit in reduced spend from a GeneSight perspective. Now that being said, there are other studies that, of course, we're starting, Prolaris.

We're doing a registry study for favorable intermediate. And then we'll look to Vectra to see if we do additional registry studies for Vectra as well. So, I think from a total R&D perspective, we would anticipate savings we might have from the GeneSight study to be invested in the reimbursement studies that are ongoing for other projects..

Okay. Great. Thank you. That's helpful..

Our next question comes from the line of Joel Kaufman with Goldman Sachs. Please proceed with your question..

Hi, guys. Thanks for the question. First one on myPath, just can you help us understand the catalyst set in terms of the reimbursement signpost that you guys laid out? And then, potentially, just give us an update on what the payer mix looks like in terms of the patient population you're targeting, commercial versus Medicare.

And then maybe how the reimbursement process for myPath may differ from some of the other assays that you're trying to bring through and getting reimbursement on?.

Yeah. Thanks, Joel. So, obviously, we have submitted a pretty expensive dossier. We think this is one of the most complete dossiers that we were able to submit and the data looks extraordinary. I think everybody can refer back to all the publications on that, diagnostic accuracy of over 92% in a very difficult diagnostic situation.

This is unique in that it's the first diagnostic that we have. Other tests we have are either answering the first question risks for cancer or prognosis or treatment decisions. So this is the first time that we'll actually be bringing a diagnostic through the reimbursement process. And we do think there are differences when you use a diagnostic.

I think it's well accepted that if you don't get the diagnosis accurate, there is nothing good that can happen downstream either for the patient or for the cost in the healthcare system. So, I think it's widely accepted that accurate diagnosis is critical. And, therefore, from a clinical utility standpoint, we think the bar is going to be lower.

So, we've got initial feedback from payers that looks positive. I think they've been very impressed with the data set. And, of course, we're working through the Medicare and the commercial side at the same time.

We haven't factored any of that into our guidance, so that would all be upside to our guidance if we're able to secure any Medicare or private payer reimbursement. But, of course, we're pursuing it very aggressively at this point..

Great. Thanks. And then just one just back on hereditary cancer. Understand it's tough to have visibility on what the underlying market growth rate of that business is.

But when we think about the outlook, I think 3% volume for your business, what are you factoring in in the market growth rate when you think about your outlook for 2018?.

Well, I think really, as we look at it, it's really based on the volume trends that we see going on in our current business.

Hard to tease out what share and what market growth would look like, but we've got, obviously, very good visibility as to what's going on in our particular physicians, what their ordering patterns are, the ability that we have to gain back share in certain accounts that we can very clearly see.

And it's really the amalgamation of all of those factors that allow us to look at what we believe we're very comfortable with is a 3% volume growth for this year. Obviously, we're coming off a quarter with a volume growth significantly higher than that and trends in the quarter that were also positive.

And so, that gives us comfort that 3% for our growth from a volume perspective is reasonable. The other thing I would add on is that we still are in a market that's highly under-penetrated. We've got a preventive care market, that's the rapid growing market that has less than 10% penetration.

And so, you've got very large underpenetrated markets with ample opportunity for growth. And as the market leader, we think, we're well-positioned to participate in that growth..

Thanks. Very helpful..

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

Hey. Thanks.

First on GeneSight, just I know you had the question on the pilot programs earlier, but if we think about the trial, the data coming out, if we see results that's similar to what we've seen in previous trials, is that enough, I think, based on your payer conversations?.

Yeah. Thanks, Tycho. We most definitely believe it would be. This is a very large study. It's 1,200 patient study, which is the largest that's certainly ever been done from a diagnostic perspective and also very large even when you compare it to the size of pharmaceutical studies.

So all indications are with a positive read-out from this study that we think we're very well-positioned with clinical validity, clinical utility data and very strong health economic data. We think it's a complete package. I think payers are very interested. So we've already been having quite a bit of dialogue with them already.

And even in the absence of this data, there is quite a bit of interest because it's well recognized by payers that particularly for the treatment-resistant depressed patients, that it's really shooting darts at trying to figure out what is appropriate. And they know doctors are going to order additional drugs.

So this isn't a question from that perspective. It's just making sure it's the right one. The other reason payers have been so interested in this is you have to look at most payers, their biggest book of business are actually self-employed or self-funded employers.

And for employers, the treatment-resist depressed patients are very expensive, not only from a healthcare perspective, but from a loss productivity perspective.

And so, it's very important for them to be able to go to their prospective clients and offer something unique and being able to offer this as a way to help manage what to employers is a very expensive healthcare situation is something that they find very intriguing.

And so, we've gotten quite a bit of interest on how we might be able to build programs together to then allow them to offer those program to employers. So with this data, I think, we're very confident that we'll be well-positioned for broad coverage..

And then on the cost initiatives, $50 million in incremental operating profit is not an insignificant target. Obviously, you're building out the pipeline. You've got pressures on the hereditary side.

I guess can you get us comfortable with the notion that this doesn't necessarily impact the revenue line with some of these cost cuts?.

Yeah. Thanks, Tycho. This is Bryan. First of all, I think, that one of the unique opportunities that Myriad has is, given our acquisitions over the last several years, we've got a lot of opportunity for further synergies across the portfolio. So we're looking at redundant functions and contracting, as I talked about in the prepared remarks.

So, I think, we have a – based on – we set the goal, I would say, based on something that we thought was achievable with some stretch in it, but we certainly think that it's possible. And the other comment I would make is that it's an operating profit improvement initiative.

And so we're focused not only on things that are going to help with our cost structure, but also things that are going to help drive additional revenue. We talked about some of that with respect to our digital strategy.

And so, I think, it's having that balance between cost and revenue growth that's really going to make this successful and reduce the risk that it will have a negative impact on the top line..

All right. And then just last one for Mark on Prolaris. It was down year-over-year. You've got the expansion into intermediate patients.

Can you maybe just touch on those dynamics and why it was down year-over-year?.

Yeah. Thanks, Tycho. As I mentioned on the comments, we actually saw record volume for Prolaris. So it was, in fact, up on a year-over-year basis and a sequential basis for volume. We did see a bit of a mix change in the fourth quarter which is why from a revenue perspective you saw a slight sequential down.

I think, as we talked to physicians, they've all been made aware of the fact that favorable intermediate is going to be covered by Medicare. And so we saw quite a bit of interest from physicians at beginning to get favorable intermediate positions in the queue to be tested.

And so, obviously, with the delay in the Noridian LCD until September 25, we're not able to recognize the revenue for that mix change. But that's really the dynamic that we saw. Overall, we continue to be pleased with the interest level we're seeing in our position in the market.

And we know positioning for when we get reimbursement hereafter, September 25, we're going to be well-positioned to show very nice revenue growth throughout the second quarter, third quarter and fourth quarter of fiscal 2018..

All right. Thanks..

We have time for one last question. It will come from Jack Meehan with Barclays. Please go ahead..

Hi. Thanks. Good afternoon. I just want to make sure I understood the pricing change in the quarter the right way and what that's contributing to 2018.

So, if I look at how pricing moved down 11% in the quarter versus prior quarters, how much of that was related – just the quarterly change related to some of the Anthem decisions like California? And just within the guidance, how much of a drag is that that's embedded in the down 12% for 2018?.

Hey, Jack. This is Bryan. There are moving parts during the quarter, especially as you think about the long-term contracts that we've implemented through the year and the impact of that year-over-year as well as the Anthem accounting change. We haven't really broken those out.

I think the best thing that we could do in order to help you as you start to think about next year was just to give you the numbers in terms of what we see from a volume and price perspective next year..

Okay. And just one follow-up on EndoPredict. I know it's early in launch, but you talked about some of the good volume metrics there.

Maybe just – is there any way to quantify what you're not getting paid for yet, what's contracted but you're not generating revenue on or maybe said another way, at full reimbursement what the revenue contribution could have been in the U.S.?.

Yeah. I think from an EndoPredict standpoint, to be clear, most of the volume is clearly coming from the international markets. And that's with our kit-based strategy. I think we're very early on in the U.S. market from an adoption perspective. And so you're not seeing a big portion of the volume coming from the U.S. yet.

So, there is really not a lot of revenue per se potential in the fourth quarter. Now, as we mentioned in the prepared comments, we're seeing volumes ramp and continue to ramp. And because we are anticipating a favorable LCD, we should be at over 75% coverage for EndoPredict.

So the samples that we are getting in that growing volume, over 75% of those in the U.S. are going to be reimbursed. And so that's going to, at least from a profitability standpoint, be very favorable for the volumes we generate here in the U.S..

Thanks, Mark..

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..