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

Puneet Souda - Leerink Partners LLC William R. Quirk - Piper Jaffray & Co. Steve Beuchaw - Morgan Stanley & Co. LLC Dan Leonard - Deutsche Bank Securities, Inc. Sung Ji Nam - BTIG LLC.

Ladies and gentlemen, thank you for standing by. Welcome to the Myriad Genetics First Quarter 2019 Financial Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question-and-answer session. As a reminder, this conference is being recorded, Tuesday, November 6, 2018.

I would now like to turn the conference over to Scott Gleason, VP, Investor Relations for Myriad Genetic Laboratories. Please go ahead..

Thanks, Tina. Good afternoon, and welcome to the Myriad Genetics fiscal first quarter 2019 earnings call. My name is Scott Gleason, and I'm the SVP of Investor Relations and Corporate Strategy. During the call, we will review the financial results we've released today, after which we'll host a question-and-answer session.

If you've not had a chance to review the earnings release, it can be found in the Investor Relations section of our website at myriad.com. Presenting for Myriad today will be Mark Capone, President and Chief Executive Officer; and Bryan Riggsbee, Chief Financial Officer. This call can be heard live via webcast at myriad.com.

The call is being recorded and will be archived in the Investors section of our website. In addition, there's a slide presentation pertaining to today's earnings call on the Investors section of our website and which will be filed following the call on 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 documents the company files from time to time with the Securities and Exchange Commission, specifically the company's Annual Report on Form 10-K, its Quarterly Reports on Form 10-Q and its current reports on Form 8-K.

These documents identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. With that, I'm pleased to turn the call over to Mark..

Thanks, Scott. I would like to start today's call by providing an overview of our business highlights from the first quarter, after which Bryan Riggsbee will provide details regarding our financial results and guidance, and I will finish the call by providing a more detailed look at key accomplishments during the quarter.

Revenue in the first quarter met our expectations at $202.3 million and adjusted earnings per share significantly exceeded expectations at $0.43 per share. This represents revenue growth of 13% on a year-over-year basis and earnings growth of 48%.

On an organic basis, excluding the Counsyl acquisition, revenue grew 2% and earnings were $0.52 per share, which represents a 79% increase over last year.

As Bryan will discuss in the financial section of the call, late in the quarter we identified two issues that impacted revenue for GeneSight and prenatal testing, and as a result we have revised revenue guidance for fiscal 2019 to $855 million to $865 million.

We view these issues as transitory, and given the progress on profitability, earnings guidance for the fiscal year remains unchanged.

We continue to believe there are multiple potential upside drivers to this revised guidance as we realize synergies from the Counsyl acquisition, continue to grow new product volumes, and secure additional new product coverage decisions.

For the quarterly summary, I want to highlight progress on our critical success factors starting with our objective to maintain a strong hereditary cancer foundation. This quarter hereditary cancer revenue is relatively flat on a year-over-year basis, which exceeded our expectations given the unfavorable pricing comparable.

As a reminder, the pricing reductions in our long-term contracts were fully implemented in the second quarter of fiscal 2018. Therefore, given the strong hereditary cancer performance in the first quarter and with stable year-over-year pricing, we are well-positioned for year-over-year revenue growth.

riskScore was a key contributor in the quarter as we saw double-digit year-over-year volume growth in patients that qualify for hereditary cancer testing with less severe family histories. As a reminder, these patients comprise 60% of the market but only 10% of our historical hereditary cancer testing volume.

This quarter there were significant advancements in the BRACAnalysis CDx companion diagnostic portfolio. First, in metastatic breast cancer testing, we experienced strong volume growth and we received our second FDA approval for BRACAnalysis CDx in patients with metastatic breast cancer as a companion diagnostic for Pfizer's PARP inhibitor, TALZENNA.

Myriad signed a commercialization agreement with Pfizer to collaborate on promotion and we believe the entrance of Pfizer into the market could further accelerate testing in this patient population. In addition, we announced the research collaboration with Pfizer for neo-adjuvant triple negative breast cancer.

Finally, we filed a supplementary PMA for BRACAnalysis CDx for use in conjunction with AstraZeneca's LYNPARZA in first-line maintenance for ovarian cancer which now provides a strong clinical rationale for physicians to test patients upon diagnosis.

In total, the ovarian, metastatic breast cancer and triple negative breast cancer indications represent a potential for almost 100,000 companion diagnostic tests per year. Our second critical success factor is to grow new product volume, and we once again saw double-digit new product organic volume growth in the fiscal first quarter.

Including prenatal test, we perform greater than 250,000 total tests with 77% from new products, which represents another record level for diversification. GeneSight led the way with an impressive 28% year-over-year volume growth and once again set records with 15,500 total ordering physicians and 2,500 new ordering physicians.

Fully reimbursed at our targeted average selling price, this GeneSight volume would represent greater than $600 million in revenue. From a prenatal perspective, we saw good growth with test volumes increasing 16% relative to the first quarter of fiscal 2018.

The integration of the two organizations is progressing exceptionally well, and we remain optimistic about the opportunity for significant revenue and cost synergies in the second half of the year. Next, I would like to discuss our efforts to increase new product reimbursement.

For GeneSight, we are anticipating acceptance of the landmark GUIDED publication by the end of the fiscal second quarter. While we had anticipated this publication earlier, it was delayed because the manuscript was withdrawn and submitted to a second journal.

At the end of the review process, the first journal notified the company that as a condition of publication, the proprietary GeneSight algorithm would need to be disclosed.

Solely based upon the desire to protect our intellectual property, the manuscript was withdrawn and submitted to another journal, and we are anticipating acceptance in the second quarter.

On the day of manuscript acceptance, the GeneSight dossier will be sent to technical assessment organizations associated with payers representing 60% of commercial lives. We believe the GeneSight dossier is the strongest in our 27-year history.

According to standard operating procedures, these technical assessments will be performed sometime within the next 12 months, but we are requesting expedited technical assessments given the strong impact to patient care and the significant cost savings for both payers and their customers.

In addition, upon acceptance, we will send a reconsideration request to Medicare supported by the GUIDED and IMPACT studies to expand access to primary care physicians. This quarter we received a draft local coverage determination from Noridian for the myPath Melanoma test.

If finalized, myPath Melanoma could begin generating revenue in the fourth quarter of fiscal 2019. We estimate that 600,000 skin biopsies are performed for Medicare patients each year and approximately 15% of these are indeterminate based upon histopathology alone.

We also received coverage from seven commercial payers and are optimistic about expanded commercial coverage if positive NCCN Guidelines are issued in fiscal 2019. With Prolaris, we recently received a favorable reimbursement medical coverage decision from Blue Shield of California, which adds 4 million incremental covered commercial lives.

In aggregate, we now have coverage for 56% of prostate cancer patients. Moving on to our international business, the restructuring efforts are on track and laboratory developed tests will be transitioned to Salt Lake City by the end of calendar year 2018. In addition, we are in late-stage discussions with a potential buyer for the German clinic.

From a product perspective, we are anticipating a final guidance document from the National Institute for Health and Care Excellence, or NICE, in the United Kingdom by the end of calendar year 2018 for EndoPredict.

Additionally, we have seen meaningful success with our companion diagnostic launch of BRACAnalysis CDx in Japan for metastatic breast cancer and have filed a separate regulatory application for BRACAnalysis in hereditary breast and ovarian cancer.

If approved, Myriad's BRACAnalysis test would be the only approved hereditary cancer test in the Japanese market. The companion diagnostic indication in Japan is currently 15,000 patients per year and the hereditary cancer testing market represents 3.3 million patients.

Finally, I'm pleased to announce the Elevate 2020 program has already exceeded our $50 million annual profit goal with organic quarterly expenses declining greater than $16 million since we initiated the program.

This is a remarkable achievement after only five quarters and has led to a 550-basis-point improvement on organic adjusted operating margins. The incremental cost savings in the first quarter were mostly attributed to the laboratory process improvements initiated in the fourth quarter of fiscal 2018.

Additionally, throughout fiscal 2019, we have multiple additional projects, including Counsyl synergies, which will continue to materially improve our cost structure.

In summary, we are making excellent progress on our strategic plan to transform the company, and I'm confident that we will exit fiscal 2019 with significant momentum despite the transitory issues that surfaced in the first quarter.

Our hereditary cancer foundation is strong, and we are positioned to return to year-over-year growth with prospects bolstered by significant new companion diagnostic opportunities and expanded testing guidelines.

In addition, we are positioned to materially advance reimbursement for GeneSight, Prolaris, and myPath Melanoma by the end of the fiscal year. Also, we expect the full integration of Counsyl to provide significant revenue and cost synergies in the second half of this fiscal year.

And finally, our Elevate 2020 program has exceeded all the expectations with important additional projects slated for the implementation this year. Now, I would like to turn the call over to Bryan..

Thanks, Mark. I would like to start by providing a more in-depth overview of our fiscal first quarter financial results. First quarter total revenues of $202.3 million were up 13%, compared to the $178.8 million we reported in the same period in the prior year.

As a reminder, our financial results for fiscal year 2018 have been adjusted to reflect the impact of ASC 606 accounting on our historical revenues. Hereditary cancer revenue in the quarter of $116.3 million was relatively flat, compared to $117 million in the first quarter of fiscal year 2018.

Notably, pricing has been stable on a sequential basis for four consecutive quarters and volume has grown on a year-over-year basis for seven consecutive quarters. GeneSight revenue in the quarter was $29.3 million and grew 2% year over year.

Volume in the quarter was strong and was up 28% year over year and down only 2% sequentially in our seasonally weakest quarter. Once again, this quarter we saw record ordering physicians continuing the strong trends that we experienced following the presentation of the GUIDED data at the American Psychiatric Association Meeting last May.

Despite the strong volume growth, revenue growth lagged in the quarter predominantly due to a change in Medicare documentation requirements. Late in August, we implemented changes requested by Medicare to obtain additional documentation and physician attestation related to DSM-5 criteria on the test request form.

Importantly, there were no changes to the LCD itself, but merely the documentation supporting the indications for use. While we are actively working with physicians to meet these new requirements, we are assuming it would take a few quarters to achieve compliance. Until then, samples without this documentation will not be submitted for reimbursement.

Additionally, we have seen some reduction in average selling price as our volume mix continues to shift towards commercial and Medicaid patients, which comprise 88% of the market and are not yet contracted or fully reimbursed. Revenue from prenatal testing was $18.1 million in the quarter with 16% volume growth year over year.

As a reminder, our prenatal revenue only reflects two months and excludes the Reliant hereditary cancer test which is included in the company's overall hereditary cancer revenue. For the full quarter, total Counsyl revenue was approximately $30 million, which was relatively flat on a year-over-year basis.

While prenatal volume growth was in-line with our expectations, we saw lower than expected revenue due primarily to the UnitedHealthcare out of network status. As a reminder, prenatal testing was placed out of network in late July so the impact on reimbursement was not apparent until the bulk of claims were adjudicated in September.

Vectra revenue in the fourth quarter was $13 million, compared to $14 million in the fiscal first quarter of last year. Revenue growth was moderated due to a program focused on reducing the number of test negatively impacting gross margins.

As a result of this initiative, lab operation improvements and restructuring, our Myriad Autoimmune business unit is now meaningfully profitable. Prolaris revenue in the fiscal first quarter was $6.2 million and was up 59% relative to the fiscal first quarter of 2018.

Prolaris volumes continue to grow at a double-digit rate and revenue growth was aided by recent commercial coverage decisions and Medicare's coverage of favorable intermediate patients, which occurred in the fiscal first quarter of last year. EndoPredict revenues in the first quarter were $2.4 million, growing 33% year over year.

Growth in EndoPredict revenue in the quarter was reflective of increasing adoption and reimbursement in the U.S. market, as well as growth from international markets. Lastly, revenue associated with our pharmaceutical and clinical services business was $13.3 million and grew 17% year over year.

Once again, we saw a continued strength at our Myriad RBM business unit with robust clinical trial activity from our pharmaceutical partners. I would now like to discuss our financial metrics for the quarter. Adjusted gross margins were 77.1%, compared to 76.1% in the fiscal first quarter of last year.

On an organic basis, excluding Counsyl, our gross margins increased meaningfully year over year due to initiatives in our DNA, RNA and protein laboratories that reduced reagent costs. We expect continued efficiency improvements as we anticipate completion of the Vectra and International laboratory relocation by the end of the fiscal second quarter.

Moving on to our operating expenses, on an adjusted basis, our research and development expense was $19.2 million, compared to $16.8 million last year. The year-over-year increase in adjusted research and development expense was entirely attributable to the Counsyl acquisition.

Adjusted SG&A expense this quarter was $99.6 million, compared to $91.6 million in the first quarter of fiscal year 2018. On an organic basis, total expenses including cost of goods sold declined greater than $12 million per year year-over-year despite double-digit test volume growth.

This decline reflects the significant success of our Elevate 2020 program. Adjusted earnings per share were $0.43 for the first quarter, compared to $0.29 in the first quarter of last year, an increase of 48%. Counsyl dilution in the quarter was $0.09 per share which was slightly higher than anticipated due to lower than expected prenatal revenue.

As a reminder, given the timing of the acquisition, we did not see any meaningful cost synergies in the quarter. Excluding the impact of Counsyl, organic earnings increased 79% to $0.52, and as Counsyl transitions to profitability in the second half of fiscal year 2019, we will see a significant inflection in our earnings power.

Our fully diluted share count increased sequentially to 77 million shares outstanding. We will continue to prioritize debt repayment as a near-term use of cash. We ended this quarter with $258 million outstanding on our credit facility following the Counsyl acquisition.

Our cash and cash equivalent balance at the end of the first quarter was $192 million, which compared to $211 million at the end of the fourth quarter. Now I would like to discuss our fiscal year 2019 financial guidance.

We are revising our revenue guidance range for fiscal year 2019 to $855 million to $865 million and maintaining our adjusted earnings per share guidance of $1.70 to $1.75. Our change in revenue guidance for the fiscal year is based on two factors.

First, the impact of the GeneSight Medicare documentation changes which we are assuming will reduce the percentage of samples, meeting reimbursement requirements throughout the rest of this fiscal year.

While our teams are working hard to minimize the impact, we have based our guidance upon what we know today with revisions to guidance made after demonstrated success. Second, with prenatal testing, we are adjusting revenue expectations based upon a more complete understanding of the impact from the UnitedHealthcare out of network status.

For guidance, we are assuming that we remain out of network for this fiscal year despite our positive ongoing dialogue. We continue to see several sources of revenue upside in the remainder of the fiscal year. First, additional GeneSight commercial coverage or an expanded Medicare LCD has the potential to drive a significant inflection in revenue.

Also, our revised guidance does not assume Counsyl revenue synergies in the second half of fiscal year 2019 despite the fact that we are tripling the size of the sales force. It also does not assume a return to in-network status with UnitedHealthcare for our prenatal tests.

Furthermore, positive trends in hereditary cancer testing and significant companion diagnostic opportunities in the U.S. and Japan for metastatic breast cancer and first-line maintenance ovarian cancer provide potential revenue upside.

Additionally, improved reimbursement for our prenatal test with expanded average risk coverage for NIPS or incremental reimbursement for expanded carrier screening are potential upside drivers. Finally, any incremental coverage decisions for Vectra, Prolaris, EndoPredict, and myPath Melanoma would represent upside to our current revenue projections.

From an earnings perspective, it is important to note that every million dollars in incremental revenue roughly translates to an additional $0.01 in adjusted earnings per share. With the excellent progress of the Elevate 2020 program, we are well-positioned to meet our earnings per share guidance for the fiscal year despite lower revenue guidance.

It is interesting to note that on an organic basis, the business generated an adjusted earnings per share run rate of $2.08 in our seasonally weakest quarter. With the improvements we expect throughout the year, we are highly encouraged about the profitability of this business as we exit fiscal 2019.

Now, I would like to discuss our fiscal second quarter 2019 financial guidance. For the fiscal second quarter, we are guiding towards revenue of $216 million to $218 million and adjusted earnings per share of $0.36 to $0.38. Now I would like to discuss the key assumptions related to our second quarter financial guidance.

First, from a hereditary cancer perspective, we expect favorable seasonality coupled with stable pricing to lead to sequential hereditary cancer growth in this fiscal second quarter.

With GeneSight, we are once again assuming strong year-over-year volume growth and are anticipating that the document changes requested by Medicare and unfavorable volume mix will continue to impact revenue. For prenatal testing, we are assuming the current revenue run rate continues into the fiscal second quarter.

Finally, for Vectra, Prolaris, and EndoPredict, we are assuming sequential revenue growth and are anticipating our pharmaceutical and clinical services business will be down sequentially. On the bottom line, we expect the tax rate in the fiscal second quarter to be meaningfully higher and continue to anticipate a full-year non-GAAP tax rate of 17%.

Furthermore, we will have an additional month of Counsyl dilution in the fiscal second quarter. Overall, we remain highly optimistic about the long-term financial prospects for the company.

With an organic adjusted earnings per share run rate of $2.08 per share and a number of potential revenue upsides to the business that generates the substantial operating leverage, we are well-positioned to achieve our strategic goals. With that, I will turn the call back over to Mark to provide key business highlights..

Thanks, Bryan. Now I would like to provide additional details on key accomplishments in the first quarter. In the hereditary cancer business, we recently published a study in obstetrics and gynecology that evaluated almost 4,000 women presenting at OB/GYN offices in 15 practices across 2 states.

Patients were evaluated using NCCN Guidelines to determine if they met criteria for hereditary cancer testing. Importantly, 24% of the patients who provided family history information met criteria for hereditary cancer testing. Applying this to the U.S.

population would establish a preventive care market of $70 billion, over 3 times the size of previous market estimates. Given the robustness of the study, it is likely that previous estimates regarding market size have seriously underestimated the true population.

What is encouraging is that the criteria used in this study are already in NCCN Guidelines and in payer coverage policies. So our opportunity is to drive additional penetration into what now appears to be a much larger market. Additionally, we added our 2019 to myRisk with the addition of HOXB13.

This gene plays an important role in hereditary prostate cancer and conveys up to a 52% lifetime risk for the disease. From a medical management perspective, men who test positive for a variant in the HOXB13 gene should receive more frequent in the earlier PSA screening relative to the general population.

Finally, as we continue to differentiate our testing methodology from other laboratories, we had an important study published in The Journal of the American Medical Association. The study assessed Myriad's Variant Classification Program by evaluating over 1.45 million patients who were tested over a 10-year period.

The study found that approximately 25% of all variants of unknown significance were definitively classified in this timeframe and the results were provided to patients on amended reports.

Overall, 60,000 additional patients received definitive answers concerning their cancer risks and importantly 9% of these amended reports resulted in an upgrade of the variant to deleterious.

In an environment where most laboratories practice a one-and-done approach, this study demonstrates the value of Myriad's unique lifetime commitment to patients in myVision classification program particularly for large gene panels where 35% of patients have an uncertain variant.

Moving on to GeneSight, as many of you are aware, the FDA issued a notice for pharmacogenomic testing last week cautioning providers and patients about tests with claims that are not clinically validated. We strongly agree with this position as unlike GeneSight, most companies have not published clinical outcomes data supporting their tests.

Studies have shown that pharmacogenomic tests are not interchangeable. As an example, a recent study published in the May issue of The Pharmacogenomics Journal compared four commercial pharmacogenomics tests for major depressive disorder and found that 19% of the time the test had conflicting clinical recommendations.

The FDA has maintained their position to exercise enforcement discretion over LDTs subject to congressional legislation.

Myriad continues to support additional oversight of LDs through legislation to ensure a consistent level of clinical evidence for approved or clear tests, and we believe that GeneSight is the only pharmacogenomic test supported by level 1 evidence which demonstrates improved patient outcomes.

As a reminder, GeneSight has completed four clinical studies including the 1,200-patient prospective blinded and randomized GUIDED study that was conducted consistent with the FDA's guidance on clinical trials for depression.

The GUIDED study compared the GeneSight arm to an active drug arm and demonstrated a 50% improvement in symptoms and 30% improvement in response rates, both of which were highly statistically significant, and a 14% improvement in symptoms, which was approaching statistical significance.

These results were even more remarkable given the fact that 43% of patients entering the GeneSight arm on a red medication remained on a red medication during the study. An additional analysis compared the 57% of patients that switched to the 43% of patients that did not.

And it was shown that patients switching from red medications experienced a 153% increase in remission, a 71% increase in response, and a 59% improvement in symptoms, and all of these results were highly statistically significant.

In fact, modeling has shown that had the 43% of patients also switched from red medications, all endpoints improved and were statistically significant. During the quarter, we published the Optum health economic study.

This study is highly credible because it used real-world Optum claims data from the largest commercial insurer in the United States, UnitedHealthcare.

Results showed that in patients with any psychiatric condition, the GeneSight arm had first year cost savings of $5,505 and the results were highly statistically significant after adjusting for pretest differences between the two arms.

When evaluating the subset of patients with major depressive disorder, patients who received GeneSight had first year total cost savings of $6,050 which were highly statistically significant.

As with the Medco and Union Healthcare Services (sic) [Union Health Services] study, there was a significant reduction in total medication spend with the largest savings coming from healthcare service utilization.

With a $2,000 test price, this translates to a 17-week payback for commercial insurers and even a shorter payback for self-insured plans because these savings exclude productivity improvements. Moving to the prenatal business, I would like to provide some additional detail on our integration efforts.

Obviously, the integration of the commercial teams is extremely important because unlike previous acquisitions, we are integrating two existing commercial teams. After substantial analysis, we have established a new organizational structure and integrated sales territory footprints.

We are currently cross-training the entire sales team on Foresight, Prelude, and myRisk, and expect implementation of this integrated sales team to begin in January. This team will represent the industry's largest women's health sales team and is more than double the size of the nearest competitor.

We are also making good progress integrating myRisk into the outstanding technology platform developed by Counsyl which seamlessly integrates the entire testing workflow for physicians and patients.

In conjunction with this effort, we will no longer offer the Reliant hereditary cancer test in order to provide physicians with the industry-leading myRisk hereditary cancer test. Physicians are genuinely excited to finally access a comprehensive suite of the highest quality genetic tests and what is recognized as the best technology platform.

Overall, we believe these initiatives put us in a strong position to see an inflection in the prenatal business in the second half of fiscal year 2019. We have also made progress on increasing reimbursement for prenatal tests. We were pleased to see Medicare proposed pricing for the expanded carrier screening CPT code 81412 of $2,448.

While Medicare is not a relevant payer in the prenatal market, this code establishes the benchmark for reimbursement as we look to broaden expanded carrier screening into medical policy for both commercial payers and state Medicaid programs.

To increase coverage for ECS with commercial plans, we recently published a clinical utility study with Foresight in Genetics in Medicine. The study evaluated changes in pregnancy management for at-risk couples based upon the 175 clinically actionable medical conditions in the Foresight test.

Of the 389 couples evaluated in the study, 77% planned or pursued actions to avoid having an affected offspring. Of those couples who were screened prior to pregnancy, 35% of the pregnancies were achieved through in vitro fertilization with pre-implantation genetic testing.

Among those couples who were pregnant at the time of screening, 37% elected prenatal diagnostic testing for the pregnancy. These results will be important for guideline committees such as ACOG to promote broader endorsement for expanded carrier screening.

Furthermore, we recently saw a positive technical assessment from Evidence Street for average risk non-invasive prenatal screening. Evidence Street is the technical assessment body used by most Blue Cross Blue Shield plans for coverage decisions.

Since the announcement from Evidence Street, we have already seen two major Blue Cross Blue Shield plans change their medical policy and are working to change medical policy at the remaining plans. As a reminder, Blue Cross Blue Shield plans represent about 40% of commercial covered lives.

Additionally, the industry continues to expect the near-term endorsement for average risk patients from the American College of Gynecology. We believe this would lead to broad coverage for average risk populations from the remaining commercial insurers and state Medicaid programs.

For Prelude, broad average risk coverage policies would lead to a 25% increase in fully reimbursed samples. Next, I would like to discuss our progress with Vectra. First, we published the results of a study demonstrating that minimally important difference in scores for Vectra in clinical rheumatology.

This is an important component of our new patient management tool and is similar to other products such as myRisk Hereditary Cancer, Prolaris and GeneSight. We also presented data at the American College of Rheumatology Annual Meeting, demonstrating the ability of Vectra to track treatment response in patients with rheumatoid arthritis.

In this study, Vectra was able to predict response to tofacitinib and track response to rituximab with both results being statistically significant. This is important data for rheumatologists utilizing Vectra as a monitoring tool for patients.

This quarter, we also received the favorable guideline recommendation from Vectra from Bendcare, a national organization of 160 rheumatologists in the United States.

As noted in the press release, Bendcare made this decision because, "we believe that Vectra's ability to objectively assess disease activity and predict radiographic joint damage progression provides unique important information beyond traditional measures of disease activity." As a reminder, we previously received United Rheumatology guidelines for Vectra that represents approximately 450 rheumatologists.

So these two organizations combined provide guidelines for 17% of rheumatologists in the United States. Finally, I would note that Medicare has now formally removed the draft non-coverage LCD from their website relating to Vectra. Lastly, myPath Melanoma received the favorable local coverage determination from Noridian in the quarter.

A Contractor Advisory Committee Meeting on October 2 went well with several dermatopathologists providing positive inputs supporting the clinical importance of the test. Based upon historical time frames for similar local coverage determinations, we would anticipate a final coverage decision by the fourth quarter of this fiscal year.

As a reminder, we believe the market opportunity for myPath Melanoma in the United States is approximately $450 million based upon an assumed $1,500 average selling price and 300,000 indeterminate melanoma biopsies performed every year.

Given the concentrated number of dermatopathologists in the country, we believe a sales team of less than 20 people could address this market. I'm also pleased to announce that the American Academy of Dermatology has issued positive guidelines supporting the use of myPath Melanoma in equivocal or indeterminate lesions.

In fact, myPath Melanoma is the only gene expression profiling test cited in the guidelines. This is another significant step forward as we work to broaden reimbursement coverage for the test. In summary, despite the transitory issues in the first quarter, I remain highly encouraged by the prospects for Myriad in fiscal 2019 and beyond.

Our hereditary cancer foundation is solid, new products are growing at double-digit growth rates, our profitability has improved substantially, and increased reimbursement would drive a market inflection on our financial performance.

And with the substantial and increasing cash flow from the business, we will continue to acquire high-quality assets that will further accelerate growth. Most importantly, our talented Myriad team is energized, focused, and committed to delivering results for our patients and our shareholders.

Now, I would like to turn the call over to Scott for the Q&A portion of the call..

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

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

Thank you. Our first question comes from the line of Puneet Souda with Leerink Partners. Please go ahead..

Yeah. Hi, Mark. Thanks for taking the question.

So, first one obviously on the LCD and in terms of the Medicare pricing, I'm just trying to understand sort of what – on GeneSight, what triggered this in the first place and why did Medicare had to sort of review this documentation? What are the steps you're taking on blocking and tackling and with the physician practices to address this in the near term? And just trying to understand, does this change any further discussions with commercial payers? And should we think about Medicare pricing of $2,000 as being reviewed longer term or addressed longer term here? Thanks..

Okay. So I hopefully captured all of those, Puneet. So let me jump into a couple of those. First, from the standpoint of the LCD, as noted by Bryan, it's important to note that there was actually nothing changed in the LCD. The LCD has always laid out a series of criteria that are required in order for a sample to be reimbursed.

We've had – in the past we provided documentation to support that indication for use. Medicare decided that they would like some additional documentation consistent with the current criteria.

Now that's not totally unexpected, I suppose, in that – excuse me – if you're looking to make that test available in the primary care market, this is the type of data that you would like to collect from primary care physicians that are ordering the test.

And so it's probably a good step to take that now so that when we launch into the primary care setting, that we will not have to retrain all of those physicians to provide that additional documentation.

So from an implementation standpoint, of course, one of the things that we have is an electronic portal that captures a lot of this documentation and information from physicians. So we are updating that portal so that physicians can use that to supply the information electronically.

Obviously we have to go into these practices which we visit frequently and remind them that there is this additional documentation that has to be provided. That just takes frequency in order to ensure that we have high levels of compliance.

So between sales force visits, electronic portals, calls from customer service, all of those things are things that we're doing just to ensure we continue to increase compliance.

From a commercial standpoint, we don't see this having really any impact on – as we secure coverage decisions, if commercial payers have some level of documentation they might require, we think it would be pretty much in-line with what Medicare has asked for.

And so again we think all the processes we're putting in place and the updates we're making to that will serve us well for any commercial coverage decisions. And then from a pricing standpoint for Medicare, none of this changes any of that pricing. That's consistent with the target price that we've talked about the $2,000 ASP.

I think it's also important as a reminder that we also have contracts signed with 25% of covered lives in the United States with commercial payers, and all of those contracts are also at that targeted ASP. And so none of that would, of course, be affected by any documentation that's required to support the coverage decision.

So hopefully that touches on all of your questions, Puneet..

Yeah, absolutely. Thanks. And then just one briefly on GeneSight publication requirement.

Does that change the quality or maybe the impact factor of the journal that you were pursuing in the first place versus what's being pursued now, and sort of what confidence do you have that the journal will not require another disclosure or some form of disclosure of GeneSight algorithm? Thanks..

Yeah, thanks, Puneet. The second journal we submitted to is still a very high-quality journal. So we feel very good about the journal selection that the authors have made. I think from the perspective of Myriad and the company perspective, really the only requirement is that we just get this published in a peer-reviewed journal article.

That's really all the tech assessment committees are interested in is that they need to be able to have a citation. They evaluate the data on its own merits and they have people well capable of doing so. And so we just need to get it published in any peer-reviewed journal, and that's, of course, what we're working towards.

Obviously, we didn't expect that last-minute request from the first journal, so you can never be certain that there might not be something else requested like that, but we have experience with this journal. And so our belief is that a request such as that from this journal would be highly unlikely.

It's also highly unlikely for that request to be made for any of our tests. It has happened before with other tests, but it's really highly, highly unusual. So our belief is – and we're not expecting a similar request to be made in this particular case..

Okay. Thank you. That's helpful. Thanks, Mark..

Our next question comes from the line of Bill Quirk with Piper Jaffray. Please go ahead..

Great. Thanks. Good afternoon, everybody. Mark, just staying on the GeneSight topic, you mentioned in both the release and in your prepared comments that you expect to have the article accepted in the second quarter.

Should we then assume that we would see publication in the third or the fourth quarter, just recognizing that we're not working with perfect calendar here, but just trying to get a sense or a little tighter sense, I guess, as to when we might see the publication itself?.

Yeah. Thanks, Bill. So, two different timelines for publication, the first is when it goes online and then the second is, of course, in print. Online generally happens relatively quickly. It depends a little bit on each journal. Oftentimes print then is delayed by weeks beyond the online. So, online typically is pretty quick.

The reason we focused on accepted is because we have secured agreements from commercial payers and from Medicare that they don't want to wait for publication, be it online or in print. They want the journal or the article immediately upon acceptance.

And so that's why we focused on that because that's really what people have asked for is to deliver that immediately.

And so that becomes, I think, the critical timeline for us upon acceptance then the clock will start for tech assessment bodies, as well as Medicare because as I mentioned, same day, they are going to get the entire dossier with that accepted manuscript..

Okay. That's a helpful clarification. Thank you. And then shifting gears, two more questions. Hereditary cancer continues to show some nice resurgence here.

Can you help quantify for us kind of how riskScore is kind of changing that whole competitive dynamic? And then secondly, just on getting back in network with Counsyl for United, I recognize you took it out of your guidance but you have a pretty longstanding relationship with that organization.

So I was just hoping for some additional color around those negotiations, any sort of timetable, et cetera? Thanks, Mark..

Hi. Thanks, Bill. Yeah, riskScore is obviously a very important differentiator. Instead of 10% of women walking out of an OB-GYN's office with definitive understanding of her risks, with that, 100% of women can walk out with a clear understanding of risks. That's a really important differentiator relative to what anybody else can offer in this space.

One of the reasons that's so important is the preventive care market, as you know, Bill, is a very large market with the most recent study. It actually looks a lot larger than previous estimates.

But one of the things that has prevented deeper penetration into that preventive care market is the fact that women don't always walk out with a definitive answer. And as a result, physicians have historically leaned towards patients with much higher risk profiles before they'll go through the process of ordering the test.

We've seen that begin to change with riskScore. As we noted, a 60% of the eligible population actually has relatively low family history levels but they only represented about 10% of the testing.

Again, showing that doctors have historically leaned towards patients with much higher family histories, that's beginning to change and we saw very nice double-digit growth in those patients with those lower levels of family history. So we think we're still in the early days of that. We continue to work to get that published.

That validation study is still working its way through the manuscript process, so we think there's still a lot of room to continue to differentiate that. From the standpoint of Counsyl or the prenatal test and United, you're right, we do have a very long-standing relationship with UnitedHealthcare for many decades.

That's been a very productive relationship. The decision to move to out of network status was, of course, made by management that's no longer had at the company.

And so we're in positive discussions with UnitedHealthcare right now about how we could potentially add the tests to our current agreement with United so that we can make sure their members continue to have the benefit of these tests as an in-network's benefit because particularly you want to combine that now with the hereditary cancer testing and have that all in one place.

So members very much would like that, and so that's why we're in those discussions with United and we're having positive discussions with them..

Great. Thank you very much..

Our next question comes from the line of Steve Beuchaw with Morgan Stanley. Please go ahead..

Hi. Good afternoon, and thanks for the time here. First, one more actually coming back to the GeneSight point. I just want to be really specific.

In the commentary where you're talking about rolling out software and talking about the timelines here, are you suggesting that the change here, as it relates to documentation, should have no impact on the volume of tests ordered? Said another way, if you were to look retrospectively, do you think that this change on documentation would have any impact on the percentage of tests that are billable and it's exclusively just an administrative change, or is there something about this documentation change that might change the way that docs think about ordering the test?.

Yeah. Thanks, Steve. A good question and important clarification. As we noted, we really didn't see impact from a volume perspective in the first quarter. We're up 28% year over year. So we continue to see very nice volume. And this doesn't change the patients that physicians would typically order the product for.

And so we don't really see any impact from that. It really is just a function of providing the documentation to support that. And unless that documentation is there, we can't submit the sample to Medicare for reimbursement. So it hasn't really affected utilization. It hasn't affected the patients that the test is ordered for.

It's just this transitory issue on what we can submit based on having a full complement of documentation..

Okay. Perfect. And then I want to follow-up on your prepared remarks, Mark, about the communication last week from the FDA to consumers about pharmacogenomics. I wonder if you've had any chance to dialogue with the FDA since that time.

And if you have any view on how and if there might be some path to clarification from the FDA with regard to their intent in that statement? Thanks..

Yeah. Thanks, Steve. Obviously, we've seen this once before with the last approval from 23andMe with hereditary cancer, testing for BRCA, the three Ashkenazi Jewish mutations. And so we have some perspective on what led to that, and this is in a consistent vein relative to what we've seen historically.

I think what the FDA is trying to do is make sure that there is a path for consumers that want to pursue that more consumer-type testing, that there is a path for consumers to pursue that.

At the same time, they were very clear the last time and this time that those consumer tests are not clinical tests and they should not be used for clinical decision-making. And so that's consistent this time and last time.

And so that's I think the perspective that we have on this as we've had communications with the FDA a number of times over the years about that. I think the other thing – the color I can add, of course, is we've had a chance to interact with physicians since then to get any perspective from them on questions they may have.

A couple of things I would note. First, the awareness generally was relatively low about this. Second, we really haven't seen any impact in their utilization of the tests since then. In fact, we had a record week last week for GeneSight orders. Third, the ones that were aware of this, were confused about what exactly the 23andMe clearance meant.

And I would say the confusion was similar to what we saw with the BRCA testing that the language from the FDA regarding its use was confusing to practitioners.

The last thing I would note though is that they were well-aware that there's a pretty significant difference between GeneSight, which is a combinatorial pharmacogenomic test that has clear clinical evidence demonstrating improved patient outcomes, that that difference is pretty stark when you compare it to the single gene approach that one might see in the more recreational genomic testing that you might get from 23andMe.

So that's really been the take on that. And I think it's useful to view it in light of hereditary cancer. The last thing I would note is when BRCA testing was put in place, we also saw no impact to the business. As you see, we've grown seven quarters in a row year over year.

And in addition, what we did see are patients coming to physicians with the test with questions and the physicians then ordering a clinical test from Myriad to make sure that they had the most accurate test results upon which to base their medical management.

I think it's interesting to note in this case we have 23 million patients out there with depression.

If this were to do the same thing, which is to raise awareness amongst those patients, that there are alternatives, if in fact those medications are not working and that then causes those patients to pursue conversations with their physicians and those physicians order a test that is demonstrated to improve patient outcomes, that actually could be a very substantial tailwind for GeneSight given the fact that there are 23 million patients with depression in this country.

So I think we can look to history to help guide us on what might happen here, but recognize the patient population here is probably tenfold what it was the last time..

Much appreciated..

Our next question comes from the line of Dan Leonard with Deutsche Bank. Please go ahead..

Thank you.

First question, I was hoping you could bridge the change in revenue guidance between how much was GeneSight and how much was Counsyl?.

Yeah. Thanks, Dan. I think that as we look at the $25 million, so we didn't break out and provide product specific guidance. But I would say it was somewhere around half and half in terms of the breakdown..

Okay.

And, Bryan, one final clarification on GeneSight, the $29 million interest dollars in the quarter, does that represent the revenue run rate or is the revenue run rate actually lower since the Medicare documentation requirements didn't come until late in the quarter? How would you view the current revenue run rate of GeneSight?.

Yeah. I would say you're correct in terms of as it came on through the quarter you would expect to see some additional impact going forward that's part of how we got to the lower revenue guide for the year..

Okay..

I think the two things that are happening, remember, is you've got two things that obviously the impact will be for the full second quarter, but at the same time we're, of course, increasing compliance rates as physicians start to provide the additional documentation. So there's some offsets to those Dan as we think about this.

Obviously there is an impact to the year but I think you're going to obviously expect that we're going to continue to increase compliance throughout the year..

Noted. Thank you..

And our next question comes from the line of Sung Ji Nam with BTIG. Please go ahead..

Hi. Thanks for taking the question. I just have one question, Mark. On GeneSight, you are starting to see some large hospitals health networks offering or even talking about offering genetic testing more broadly including pharmacogenomics.

And so I was curious as to how do you see that trend, I guess, going forward? And then also how would Myriad's GeneSight fit in that environment? Thank you..

Yeah. Thanks, Sung Ji. We've really had very productive conversations particularly with self-funded employer groups, like Myriad, for example, is self-funded from a health insurance standpoint. One of the reasons is because the productivity gains that they are able to realize are significant.

For most self-funded employers, mental health issues are extraordinarily expensive from a productivity perspective. And so if you can offer a tool that's been demonstrated to provide better patient outcomes, they're very interested. We noted in previous discussions that with Kroger we had made some progress with Vectra and that they're covering that.

And we're in discussions with a number of additional self-funded companies on GeneSight, and there's a very significant interest in that. So you should look for additional success in that approach as we continue throughout the year..

Sung Ji, are you still there?.

Sung Ji Nam, your line is open, maybe you're on mute..

Oh, sorry about that. I'm all set. Thank you..

So is there another question?.

And there are no more questions at this time..

All right. Thank you. 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, this does conclude today's conference call. We thank you for your participation and ask that you please disconnect your lines..