Greetings, and welcome to the Myriad Genetics Second Quarter 2020 Financial Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded today, Thursday, February 6, 2020.

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

Thanks, Dave. Good afternoon, and welcome to the Myriad Genetics fiscal second quarter 2020 earnings call. During the call, we will review the financial results we released today; after which, we will host the question-and-answer session. If you’ve not had a chance to review our quarterly earnings release, it can be found on our website at myriad.com.

Presenting for Myriad today will be Bryan Riggsbee, Chief Executive Officer. This call can be heard live via webcast at myriad.com. And a recording will be archived in the Investors Section of our website.

In addition, there is a slide presentation pertained to today’s earnings call on the Investors Section of our website, in which we filed following the call on Form 8-K.

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

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

We refer you to the documents the Company filed 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 Bryan..

Thank you, Scott, and thank you everyone for joining today’s call. Before we discuss our second quarter results, I want to spend a moment talking about today's other announcements. We announced this afternoon that Mark Capone has resigned as President and CEO and as a member the company's Board of Directors.

I have been appointed Interim President and CEO and will serve in this role as well as continue as CFO, while the Board conducts the search for Mark's replacement.

We have made numerous scientific and business advances during Mark's 17 years with the company that have contributed significantly to the health and transformation of patients life around the world. Mark played a pivotal role in guiding the company to where it is today, and on behalf of the company, I want to thank him for his leadership.

Ultimately as we position Myriad for its next phase of growth and value creation, the Board and Mark have mutually agreed that now it's the right time for a leadership transition.

I want to take this opportunity to emphasize that we remain confident in Myriad and the numerous growth drivers in front of us, and as interim CEO in an organization we are highly focused on positioning the business for sustained profitable growth.

We’ve a talented team and strong foundation that will drive us forward as we deliver on our value creation objective and execute on our critical success factors to position Myriad for the future. With that said, this call is about our second quarter earnings.

If you have questions related to the leadership transition, I will refer you to the press release we issued this afternoon for additional background. Now let me turn to the quarterly financial results.

In the fiscal second quarter, we generated revenue of $195 million and adjusted earnings per share of $0.23, which were well below our financial guidance for the quarter. We are disappointed with these results, which are inconsistent with our goal to provide achievable guidance.

I will now provide some additional color on the reasons for this shortfall in the quarter. In the fiscal second quarter, we saw lower than anticipated cash collections from our prenatal business.

Prenatal cash collections were negatively impacted by issues in billing operations that occurred during the transition of the homegrown Counsyl billing system to an industry standard system used by Myriad.

While the issues will be resolved this quarter, the disruption in cash collections necessitated a negative adjustment in the second quarter for prenatal revenues recognized in prior periods. In addition, we were required to lower the revenue accrual rates for prenatal tests performed in the second quarter to match the lower historical collection.

If we are successful at collecting in excess of these historical rates that will result in a positive out-of-period adjustment in future quarters. In total, these two adjustments represented about a $10 million impact to the second quarter prenatal revenue.

The remaining shortfall in the second quarter was related to lower than anticipated GeneSight cash collections from UnitedHealthcare, which I will discuss in more detail when I review our financial results.

In the last 18 months, the molecular testing industry have seen an unprecedented onslaught of payer activities that have significantly impacted our average selling price.

To put this in perspective, if average selling prices have remained the same as they were 18 months ago, revenues in the second quarter would have been $35 million higher with $0.35 per share of additional earnings. To be clear, these reductions in average selling price are largely unrelated to lower contract prices or ineligible patient.

Instead they are results of shifting preauthorization rules, inappropriate denials, new documentation requirements and fluctuation -- fluctuating coding directions. To address these challenges, we have made significant organizational changes, including establishing a new department which we’ve called revenue operations.

This organization has the responsive -- responsibility to develop new approaches and to coordinate resources across the enterprise to attack the highest priority opportunity.

For example, in the second quarter, we developed and deployed an early warning system powered by artificial intelligence to detect billing anomalies earlier, so we can act on them immediately. We've already seen some progress from this new organization, but anticipate more significant improvements in future quarters.

Clearly, the start of fiscal 2020 has not gone as expected. Nevertheless, we remain focused and optimistic about delivering material, near-term building blocks for future growth.

With GeneSight, we anticipate a final MolDX LCD in the third quarter that could lead to coverage for test ordered by primary care physicians who are responsible for 60% of antidepressant prescriptions. Also, we now have six major employers that cover GeneSight and our negotiations with an additional 21 employers.

Lastly, we continue to expect additional commercial coverage decision as we publish important new data to strengthen the dossier.

Given this optimism, we are slated to expand the GeneSight sales force by 40% to broaden our call points to high decile primary care physicians, which is combined with additional reimbursement, will return GeneSight to significant growth.

The forward-looking hereditary cancer guidance now reflects the signing of a new 4-year fixed price contract with UnitedHealthcare for our entire portfolio of products effective January 1.

The terms of the contract are consistent with our goal to maintain a solid hereditary cancer foundation, as we anticipate UnitedHealthcare's hereditary cancer volume growth will offset the hereditary cancer pricing reduction in the first year of the contract.

Following the signing of the UnitedHealthcare contract, we will have renewed contracts with the vast majority of commercial lives, providing future pricing visibility.

In the prenatal business, we continue to grow the number of ordering physicians and have seen positive improvements in sample volumes after publication of data highlighting the improved sensitivity of our prenatal test.

Vectra testing volume has accelerated since the test was included in American College of Rheumatology publication, stating that the test was one of several disease activity measures that met a minimum standard for regular clinic use.

Prolaris volume continue to increase and we have presented data to Medicare supporting coverage of an additional 25% of prostate cancer patients. We’ve also received multiple companion -- recent companion diagnostic approvals and expect more in the near-term including approvals for our proprietary myChoice CDx product.

Lastly, we're in the beginning stages of commercialization for myPath Melanoma, after obtaining a Medicare LCD that provides access to reimburse annual market of more than $100 million.

Given these opportunities, we're highly confident that progress with our new products will more than offset the earnings impact from the events in the past two quarters. Now I'd like to discuss the details around our financial results. Hereditary cancer revenue in the quarter was $117.7 million versus $104.5 million in the first quarter.

We saw mid single-digit growth in hereditary cancer volume on a year-over-year basis in the second quarter. Moving onto GeneSight, revenue in the quarter was $22.5 million. While we had anticipated sequential revenue growth from the UnitedHealthcare coverage decision, cash collections were lower than anticipated for two reasons.

First, a higher percentage of samples were denied compared to the 30% we had been assuming. As you would expect, we are aggressively working to improve this situation. With about 17,000 ordering physicians, this is a significant task that we continue to make progress.

Second, we saw a higher patient pay portion than expected, which lowered our average selling price because collections for patient out-of-pocket costs and lab industry are historically lower and take longer than what is typically seen from the insurance company.

Prenatal revenue in the quarter was $16.4 million compared to $23.5 million in the first quarter. As I noted earlier, the billing transition disruption accounted for approximately $10 million impact in out-of-period adjustments and lower revenue accrual rates.

Vectra revenue in the quarter -- second quarter was $10.3 million and in line with expectations. Prolaris revenue in the first quarter -- in the second quarter was $6.8 million with double-digit sequential volume growth offset by a lower average selling price due to unfavorable mix.

Given the shifting mix in the Prolaris business, the expansion of Medicare LCD to all prostate cancer patients would have a material impact on the business. EndoPredict revenues in the first quarter were $2.6 million. We saw increases in test volume and revenue in both U.S and international markets.

Lastly, revenue associated with our pharmaceutical and clinical services business was $14 million due to lower than anticipated revenue for Myriad RBM based upon the timing of clinical trial samples from our pharmaceutical partners. I would now like to discuss our financial metrics for the quarter.

Adjusted gross margins were 74.8% and declined a 150 basis points on a year-over-year basis. The out-of-period revenue adjustments were 50 basis points of the decline and the remainder was due to lower test average selling prices for hereditary cancer in our prenatal test.

Moving on to operating expenses, we continue to focus on cost control and saw operating expenses decline approximately $2 million sequentially following a $3 million sequential decline last quarter. Adjusted research and development expense was $17.2 million compared to $18.8 million last year.

Adjusted SG&A expense this quarter was $110.3 million compared to $108.8 million in the fiscal second quarter of last year. Adjusted earnings per share were $0.23 for the second quarter. This quarter we ended the 200 -- with $225 million outstanding on our credit facility and $191 million in cash and cash equivalents.

Now I would like to discuss our revised fiscal year 2020 financial guidance. For fiscal year 2020, we're now guiding to a revenue of $735 million.

This guidance accounts for the change in revenue accrual rates associated with our hereditary cancer and prenatal businesses, lower GeneSight revenue due to the UnitedHealthcare preauthorization requirements, and the impact of the approximately $16 million out-of-period adjustments for hereditary cancer and prenatal testing taken in the first two quarters.

On an adjusted earnings per share basis, we are guiding to total adjusted earnings per share of $0.45, which reflects the lower revenue in approximately $0.16 of negative impact due to the adjust -- out-of-period adjustments to hereditary cancer and prenatal revenue. Now I would like to discuss the updated assumptions underlying our guidance.

First, for hereditary cancer, we're forecasting single-digit year-over-year volume growth in the second half of the fiscal year. We are not assuming any positive impact from the recent pancreatic cancer approval, the anticipated prostate cancer companion diagnostic approval or the recent Japanese hereditary cancer approval.

Based upon our hereditary cancer contract renewal and the impact of PAMA on Medicare and Medicaid revenues, we are expecting a modest decline in hereditary cancer pricing in the second half of fiscal year 2020, which has been incorporated into our guidance.

For GeneSight, we are anticipating continued volume growth, but have not yet factored in any primary care reimbursement from Medicare or any additional coverage decisions from commercial payers, employers or pharmacy benefit managers.

For the prenatal business, we expect continued volume growth, but have not factored in any improvement in revenue accrual rates due to improved cash collections. For Vectra, Prolaris and EndoPredict, we are assuming revenue consistent with current trends.

Finally, we are assuming approximately $16 million in lower revenue in the pharmaceutical and clinical services business in the second half of the year due the sale of the German clinic and a decline in other revenue based upon lower pharmaceutical research milestone pay.

We would note that this revised guidance does not include several events that we believe could materially impact revenue and earnings as we transition into fiscal 2021. First, an expansion of the GeneSight Medicare LCD to primary care would add approximately $30 million annually and $0.30 in earnings at current volume.

Second, a Medicare LCD expansion for Prolaris to unfavorable intermediate and high risk patients would add about $19 million annually and $0.19 per share in earnings. Third, improved collections for prenatal and GeneSight test could add $20 million annually and $0.20 per share in earnings.

Finally, the expansion of the sales team for GeneSight could add over $15 million annually in additional sales in fiscal 2021 and be neutral to earnings with an additional revenue and earnings impact in fiscal '22.

Combined, these events would be more than offset -- would more than offset the financial headwinds we have faced in the first half of fiscal 2020. For the fiscal third quarter, we are guiding to revenue of $172 million and adjusted earnings per share of $0.02.

We are expecting a $10 million sequential decline in hereditary cancer revenue due to seasonality and PAMA, a $9 million sequential decline from the sale of the clinic and lower pharmaceutical research milestone, a modest negative impact to hereditary cancer revenue based upon our renewed payer contracts and relatively flat new product revenue as increased prenatal revenue will be offset by negative seasonality in the rest of the portfolio.

While we are very disappointed in the financial results in the first two quarters, I am confident that our guidance fully reflects this rebase business and puts us in a position to meet or exceed expectations in the second half of the fiscal year.

In response to these challenges, we have made some significant organizational changes to ensure clear accountability for delivering upside through increased cash collection. We are also evaluating additional initiatives focused on maximizing profitable revenue growth.

Before I discuss some of the business highlights from the quarter, I would like to discuss a significant opportunity before the company. In the United States alone the total addressable market for our nine new products is $15 billion in annual revenue, with a current reimburse addressable market over $5 billion per year.

Because every product in the portfolio has at least Medicare coverage. Our priorities are penetrating these currently reimbursed market and gaining additional coverage decision. I would like to spend the remainder of the call discussing some of the near-term building blocks that will start to cap into this potential. First, with GeneSight.

We had several important publications in the fiscal second quarter, which continues to strengthen the reimbursement LCA. The first publication was a precision medicine analysis of the guided study which was published in the Journal of Clinical Psychiatry.

This analysis was based upon the patient population and the guided study intended to benefit from GeneSight and includes the 787 patients at baseline who are on medications with predicted gene drug interactions.

The analysis show that patients who had their treatment guided by GeneSight saw a 70% improvement in remission, 42% improvement in response and a 23% improvement in symptoms, all of which were statistically significant. Additionally, we published a new analysis of the guided clinical trial using the six item HAM-D6 in BMC psychiatry.

The key finding of the study was that there were statistically significant improvement in all three clinical endpoints, remission, response and symptom.

Between GeneSight guided care and treatment as usual at week eight, using the HAM-D6 scale, the HAM-D6 scale is a subset of the HAM-D17 scale and has been shown to be a better measure of core depressive symptoms than the HAM-D17 scale.

For example, questions such as have you had trouble sleeping, which could be associated with conditions other than depression are excluded from the HAM-D6 score. As a result, it is increasingly being incorporated as an endpoint in contemporary pharmaceutical study.

We believe this data along with the precision medicine analysis, the red switching data and the original guided study publication create a compelling clinical picture that GeneSight is clearly improving patient outcomes. Additionally, we continue to make progress with employer plans, especially following our recent pharmacy benefit manager agreement.

We currently have six major employers that will cover GeneSight and 21 other employers engaged in discussions, including customers of the pharmacy benefit manager that signed a GeneSight Master Service agreement.

We also continue to have productive dialogue with multiple large national payers, an important technical assessment organization that are evaluating the reimbursement LCA. Based upon our current and anticipated reimbursement progress, we're now advancing our GeneSight sales force expansion plans this fiscal year.

We are anticipating the first wave will expand the sales force by 40% with 65 new sales territories with additions beginning in the fourth quarter. Our fiscal 2020 revenue guidance does not reflect the impact of these additions as any benefits will mostly occur starting in fiscal 2021.

Finally, I would note that consistent with last quarter, there have been no material developments in our interactions with the FDA on GeneSight, and there have been no changes to the test report.

Recently the rest of the website has been updated to provide a list of more than 300 clinical references that have formed the basis for the GeneSight test report. In the hereditary cancer market, we continue to differentiate our product with ongoing development of the riskScore test.

At the San Antonio Breast Cancer symposium this year, we introduced some pioneering science demonstrating the ability of risk for to personalize risk predictions for women who test positive for genetic mutation. For example, before being modified with riskScore, a patient with a PALB2 mutation would be informed that she had a risk of up to 50%.

However, when the result is modified using riskScore, the patients risk can be anywhere from 26% to79%. In fact, the high-end of the range of patients risk would be similar to BRCA1 or BRCA2 mutation with the potential for significantly different medical management.

We plan to introduce this new tool into our test report in calendar year 2020, which we believe will be a significant competitive differentiator. From a companion diagnostic perspective, this quarter we saw significant progress with both BRACAnalysis CDx and myChoice CDx. First we received FDA approval for BRACAnalysis CDx in pancreatic cancer.

Every year in the United States approximately 50,000 people are diagnosed with pancreatic cancer and we believe less than 5% are tested for hereditary cancer mutation.

An AstraZeneca study, Lynparza almost doubled the time to disease progression when compared to placebo creating a highly compelling clinical argument for testing given the limited treatment options for pancreatic cancer patients.

In January, we submitted our application for BRACAnalysis CDx in castrate resistant metastatic prostate cancer from the FDA with anticipated FDA approval in the second half of the fiscal year.

In addition, we are expecting data from the OlympiA adjuvant breast cancer study to be announced in the second half of fiscal 2020, which could lead to another approval in fiscal 2021. The incident patient population for this indication is 198,000 patients per year.

If this indication is approved, it would expand testing indications to the vast majority of breast cancer patients. Additionally, myChoice CDx, our proprietary test for assessing genomic instability received FDA approval as the companion diagnostic in our ovarian cancer patients being considered for niraparib treatment in the fourth-line setting.

We also received ADLT status for the test with an initial price under PAMA of $4,040. Based upon this initial approval, we saw myChoice CDx volume increase 80% during the quarter relative to the run rate for the LDT version of the test in the fiscal first quarter.

Importantly, this fall at the European Society of Medical Oncology meeting, several of our pharmaceutical partners presented data on PARP in first-line ovarian cancer, then included a myChoice CDx analysis. We are currently in discussions with our commercial partners and the FDA on the role of myChoice CDx in this indication.

For example, in the POLO study recently published in the New England Journal of Medicine, myChoice CDx negative patient saw no statistically significant improvement in progression free survival, where the myChoice CDx positive group saw a highly statistically significant improvement in progression free survival similar to the BRCA positive population.

As a result of the studies, we recently filed an sPMA with the FDA for myChoice CDx in this first line ovarian cancer setting. Also, we are pursuing myChoice CDx in PARP inhibitor indications in Europe, Japan and China and have already filed with myChoice CDx in Japan last quarter.

Our prenatal products had two important publications in the fiscal second quarter, which we believe will help differentiate our test versus competitors. First, we published data from 58,000 patients study showing Prequel is more sensitive than other technologies in low fetal fraction samples with an industry leading one in one 1,000 no call rates.

This rate is typically in the 5% range for our array-based test and can lead to invasive and expensive follow on procedures such as in amniocentesis.

Second, we published a patients study showing that Prequel achieved high accuracy with an industry low test failure rate of .1% and general population of pregnant women including women with a high body mass index. In fact, the no call rates for SNP-based NIPS tests can be up to 24% in high BMI patients, which constitute up to half of all pregnancies.

This data led the American College of Medical Genetics and Genomics to recommend against using NIPS in patients with significant obesity. We believe our new data will be a very important differentiator in the market where no call rates are very frustrating and lead to more invasive procedures.

Lastly, we continue to make progress on three initiatives to improve guidelines and reimbursement with average risk pregnancies and microdeletions for NIPS and expand carrier screening.

For Vectra, we achieved an important milestone in the quarter as the test was included in an American College of Rheumatology publication stating that the test was one of several disease activity measures that met a minimum standard for regular clinic use.

As a reminder, Vectra is also listed in the Bendcare and United Rheumatology guidelines, which represent more than 20% of rheumatologists. Additionally, at the American College of Rheumatology meeting, new data was presented on the ability of Vectra to predict risk of radiographic progression and cardiovascular risk.

We believe these additional indications add significant clinical value to Vectra by helping a physician understand and communicate the broader impact from unmanaged inflammation. We plan to add these additional indications to the Vectra test report in calendar year 2020 after our publication of the data.

Finally, this quarter Blue Cross Blue Shield Wellmark announced a favorable coverage for Prolaris adding approximately 2 million additional covered lives. We're also in discussions with MolDX regarding a coverage expansion request for unfavorable intermediate and high risk patients and expect a decision by the end of the fiscal year.

If this Medicare decision is favorable, it would provide Prolaris coverage for an additional 50,000 patients per year. In conclusion, while the industry and Myriad have faced some significant headwinds over the past 18 months, we remain optimistic about the outlook for the company.

Our new products have substantial untapped potential in the currently reimbursed market and even greater upside with expanded reimbursement coverage.

And we continue to build these new product opportunities on top of a hereditary cancer foundation with growing test volume and future pricing stability afforded by the successful renewal of our long-term contract. With that, I'm pleased to turn the call back over to Scott for our Q&A session..

Thanks, Bryan. 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 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 ask participants please ask only question and one follow-up. Operator, we are now ready for the Q&A portion of the call..

Thank you very much. [Operator Instructions] First question comes from the line of Bill Quirk, Piper Jaffray. Your line is open..

Great. Thanks. Good afternoon, everyone. So, Bryan, I appreciate that the company doesn’t necessarily want to talk about the leadership transaction or change rather, excuse me, that you just announced. But given the state of affairs here with some challenges with respect to reimbursement and hitting guidance and such.

Can you help us -- could you give -- shed a little bit of light here in terms of what led to the change and how the board is thinking about the timetable here to nominate or rather to replace Mark with a -- I guess with the formal CEO. Thanks..

Sure. Thanks, Bill for the question. Really I will just refer you back to the press release. It was really just a -- as Mark in the Board looked at the next phase of value creation and growth for Myriad.

There was just a mutual agreement that now is the right time for us a leadership transition and really that’s all that we are going to have to comment on that at this point..

Okay, got it. And then when we think about the guidance for the back half of the year, Bryan, is there any -- does that assume that the current environment that you are operating under with respect to pre-ops [ph] and collection challenges in such that that effectively stays the same.

Does that suggest any improvements or for that matter any worsening in the environment?.

Sure. Yes, for the back half of the year what we’ve assumed is just status quo the same level of reimbursement rates that we're seeing now. I think there will be some modest improvement as we go through the year and the initiatives have -- start to have an impact on our cash collection rates.

But as you know those things intend to take more time than you like, but we're focused on the execution now of our initiatives. And so we're looking at a positive impact going forward. But for purposes of guidance, what we’ve built in is status quo..

Understood. All right. Thank you..

Thanks..

Next question comes from Doug Schenkel, Cowen. Your line is open..

Doug?.

Doug Schenkel?.

Okay.

Sorry, can you hear me now?.

Can hear you now..

Okay. So maybe first with a cleanup question and then with a bigger picture question.

Can you just talk about revenue recognition practices going forward and what changes given a series of contra revenue developments across a couple of your businesses over the last few quarters?.

Yes, sure. I think we talked about it to some extent on the -- during the formal script in terms of some of the improvements that we’ve made in order to help for earlier identification of changes in collection trends where we are seeing payers or patients or others pay at lesser rates than they have historically.

So I think as we think about changes that we're making going forward, that that's really what’s going to have the biggest impact and make it more accurate and get us to the point where as this was the case in the current quarter for hereditary cancer is an example, we had a positive out-of-period adjustment as we had put in place some of the corrective measures to address the code switch change that we had that sort of bled over to the first part of the fiscal year.

So I think really that’s what we’re focused on now is sort of early warning and early detection..

Okay..

Did I answer it? Was there more to the question?.

That -- yes, that helps..

Sure. Okay..

So for the bigger picture question. The bigger picture question, it clearly was time for a change.

Does the change at CEO go far enough? I know this is pretty direct Bryan and I don't mean to be rude, but I think it's fair to ask why investors should trust the broader management team and really largely the same Board of Directors that has been at the helm for the past decade.

And why should investors trust this management team and this Board to make the right decisions after a decade plus of making so many wrong ones? What comes next in terms of leadership change? Not just with the management, but also at the Board level and on what timeline should we expect to hear more..

Sure. Well, yes it's a pretty direct question, Doug. What I will do that sort of formula -- help you with the answer is, I think really where we're focused right now is riding the ship in terms of hitting the numbers that we put out there. So really having an execution and accountability mindset. So first and foremost, focusing on that.

I think beyond that, this is a business where the path from conception to commercial launch to reimbursement to broader utilization is a long path and so you I think as we talked about you see in some of the FY '21 positives that we have on the horizon.

I think we are just on the cusp of really realizing, especially for GeneSight, Prolaris, myPath Melanoma, myChoice CDx with the recent payer coverage. I think it's just part of the cycle and as much as we would like for it to go more quickly, I think the reality is just that these things take longer than anyone would like.

But I think -- in terms of the management team and the Board, we are all aligned around the strategy that we’ve laid out and we believe that the best path to returning to growth is to accelerate and that's why we talked about on the call the commercial launching of the sales force expansion for GeneSight.

I think now we are at the point where we really just need to step on the gas relative to delivering on some of the revenue and -- that we’ve talked about historically and I think that will largely alleviate the concerns that you raised..

And next question comes from the line of Tycho Peterson with J.P. Morgan. Your line is open..

Hey, thanks. I want to start with the Counsyl and what's going on in the prenatal side. I know you’re setting the billing issues. We’ve heard just anecdotally, there's been a lot of turnover there, a lot of maybe retention issues.

Can you speak to how the integrations gone? Obviously, you originally guided for it to be $0.20 accretive this year, that's not going to happen. But talk to how that integration has gone overall and you do have competitors like Invitae out there with $99 patient pay NIPT test now. So why is pricing not an problem for that business too..

Sure. Thanks, Tyco. I think as we look at the integration of the Counsyl business, first and foremost, I think obviously there have been some challenges there, the one that comes to mind obviously is the billing operations issues that we've had to deal with here in the current quarter.

I think relative to the sales force, what we’ve talked about is the fact that we're focused on broadening the base and so as you think about a broader approach towards the Ob/Gyn market probably less focused on the IVF clinics and some of these other large volume clinics, which is probably where some of the folks that you are talking about are primarily focused.

And we’ve actually seen relatively -- we’ve actually seen nice increase in volumes. We -- in the current month, in January, we actually had a record -- a couple of record days relative to the volumes for those businesses. So I don't think the issue is really driving further penetration and driving volume.

I think at this point we’ve some operational issues relative to billing and collections, but we're still excited about the business and believe that we positioned it for long-term sustainable growth..

And Tycho, one thing I would just highlight, I think when you referenced the $99 price, that’s a patient cash pay price. It really matters in terms of the market and where pricing is, is where you’re contracting. And we’ve actually seen a lot of stability on the commercial side of the contracting.

And I think when we look at where pricing can go, there's a number of upside drivers when we start thinking about large rearrangements, you start thinking about average risk testing, ECS and guidelines. And then also just executing on a lot of the cash collection initiatives that Bryan referenced earlier in the call.

And so we actually see pricing trending up from current levels as we move forward here..

All right. And then in terms of follow-up, first on operating margins. Bryan, you emphasized the goal to protect earnings. If you -- I go back to 2016, you’re supposed to earn $4 this year. Now we’re talking about $0.45. So can you talk about steps operationally, you are taking and will take going forward to try to protect margins ….

Yes..

… and including potential restructurings?.

Sure. Yes. I think the couple of comments that I would have there. One is, obviously, the biggest driver and we’ve always said this for improving operating margins is reimbursement for our product that has a significant impact on our operating margin percentage.

I think as we look at our cost initiatives, and we talked about this during our prepared remarks, over the last two quarters, we've seen roughly $5 million and lower operating expense.

So we are very focused on managing the business, continuing to drive out costs both through our Elevate 2020 program, which has been very successful as well as the integration of Counsyl where we continue to integrate that business and yield cost savings.

So those are going to be the primary drivers as we think about how we are going to improve operating margin. It's going to be focused on getting better -- higher reimbursement and then also at the same time managing our cost profile..

Right. If I could just ask one last quick one on GeneSight. Just so we’re clear, you're not factoring in other pre-auth with any other payers going forward, like you have with United. Is that fair to say that, or is that an issue with your other discussions? And then, secondly, there have been new drugs approved SPRAVATO, the nasal spray.

How do you incorporate that into it, given that it wasn’t incorporated in the original trial?.

Well, first, what I would say relative to -- and we haven’t provided FY '21 guidance. We’ve provided FY '20 guidance for GeneSight and its based on the payers that we have and the pre-auth programs that they have. So we haven’t added any new impact of any pre-auth programs, and then on the nasal spray question ….

Yes. Tycho, I mean when you look at some of the newer drugs on the pharmacogenetic side, some of them are more in the acute-care settings where remember most of our patients are making selections on kind of longer term therapies. And so in a lot of cases, those aren’t necessarily relevant..

All right. Thank you..

Next question comes from the line of Sung Ji Nam with BTIG. Your line is open..

Hi. Thanks for taking the question. Sorry, I missed it, but was there an incremental out-of-period adjustment for hereditary cancer since the last quarter? And if so, what’s driving that.

And are you making any progress in terms of payer collections around the non-contracted payers that you talked about last quarter?.

Yes. So, Sung Ji, thanks for the question. I think when you see the Q, it will have the out-of-period -- the total out-of-period which is less than what the prenatal was. Prenatal was around $5 million.

And so the balance is largely a positive out-of-period that we had for hereditary cancer and large part probably driven by some of what you referenced, which is are we contracting with some of these small payers, we continue to focus on that initiative and we hope to continue to have positive adjustments we're able to update those contracts and capture that revenue.

But it was positive in the quarter..

Okay. And then you talked about the higher percent of samples denied from UnitedHealth. And I was wondering what’s driving that? Thank you. What drove that, I guess, actually..

Sure. Yes, I mean, I think right now we're focused on understanding all the drivers further for what’s not making it through the United pre-auth screen. What we’ve said -- we just said it was higher than what we had modeled, which was 30%. We are not going to get into the specifics, because it's a range of issues that we’re dealing with there.

But when we talked about the revenue operations team, I mean, just to take that a little bit further, part of that is a dedicated enterprise wide pre-auth team that’s focused on reducing the number that don't make it through that process.

So we hope to make improvement over time, but what we’ve seen in the current quarter since launch is just level -- are just levels that are higher than what we had expected..

And Sung Ji, one other things we talked about on the call was that some of the payers have preauthorization portals where the physician has to actually go in and do the preauthorization and be a registered user in that portal. And so one of the things that we obviously have to work through is getting physicians signed up.

When you think about psychiatry, these aren’t physicians that tend to order a lot of diagnostic test. And so that’s been a major undertaking for the team is to get out there and getting physicians enrolled in those preauthorization portals..

Okay. Thank you..

Next question comes from Derik de Bruin with Bank of America. Your line is open..

Hi. This is Ivy Ma on for Derik today. Thank you for taking my questions. First one, so I appreciate the color on those items you talked about as potential upside drivers. I wanted to see what’s the probability of those items? Basically, can you unpack those then or rank order them in terms of likelihood of those happenings? Thanks..

Yes. Ivy, I think the first two that we referenced. Obviously, the Medicare LCD for GeneSight that could expand into primary care. We expect resolution on that here in the third quarter, and so the OB have relatively near-term resolution on that initiative.

Additionally we talked about what’s the Prolaris LCDs for expanding into high risk and non-favorable intermediate patient. That’s something that we would expect this fiscal year. So those are relatively near-term events that we should get resolution on.

The other piece of which is mainly the collections and improvements and collections for the hereditary cancer business and the prenatal business. That’s obviously a big focus of the business going forward here. We are actively working on implementing the number of initiatives.

As Bryan stated, our guidance doesn’t anticipate any improvement based upon the number of programs that we are implementing. But that’s something that is actively ongoing right now..

And lastly, Ivy, just the last one on that list was the sales force expansion. One of the things that we are moving aggressively on is our initiatives that are focused on delivering revenue acceleration on the top line. And so we will be hiring those reps. We said we would be doing the hiring in Q4 and we expected to have a fiscal year 2021 impact..

Got it. Thank you. And then one on GeneSight. You said there was a fixed pricing arrangement with United. So wanted to see if you could comment on what that ASP is or the rough range, given the current commercial coverage? Thank you..

Yes. We didn’t -- we are not going to give the ASP in the contract. But, yes, we said on the call and in our press release that we had signed a new long-term fixed price contract with UnitedHealth for our portfolio of product..

All right..

Ivy, I think we described the agreement is very favorable. The one comment we did make around hereditary cancer is that felt the volume growth in year one in the contract could lead to offset the pricing headwinds that we would face associated with that new contract..

Great. That’s helpful.

And then on GeneSight volumes, it sounds like the primary care decision is pretty much in the bag, but I wanted to see what kind of GeneSight volume trends would you characterize with or without the primary care for the rest of the year?.

Yes. Ivy, I mean, obviously the Medicare decision hasn’t come yet. And so we’ve had positive dialogue and discussions with Medicare, but that decision will come, we’ve said this quarter. I think when you look at the primary care market, what we've said historically is that about 60% of the patients are in that channel.

And we'd really be focusing initially on high-volume ordering physicians. We have doctor lists with about 15,000 physicians that comprise the larger -- more than half of that total volume. And so that would be the initial focus of the sales force expansion. The other piece of it is that we also have data on reimbursement levels on a nationwide basis.

And so the targeted launch that we will be doing would really look at reimbursement levels and we'd be putting those reps into territories where there's the most favorable reimbursement on a nationwide basis, and obviously the Medicare LCD would be very helpful on that front..

Great. Thank you..

Next question comes from Puneet Souda with SVB Leerink. Your line is open..

Yes. Hi, thanks. Bryan, first question, when do you think the Counsyl billing transition is going to be resolved and where do you think you land in terms of ASP after all that is completed..

Thanks, Puneet. We've largely completed the transition to the new -- to our in-house billing systems. So that’s done. I think at this point where we’re focused on is the rev ops team is focused on improving that process. We had some process issues as we went through that transition.

So I think relative to ASP we haven’t given our product specific ASP, but I think we would expect obviously given the impact what we saw in the current quarter is that you would see them higher than where they are currently and what is factored into our guidance..

Okay. And then I know you -- prior call you had mentioned about 300 payers contract that account for 85% of revenue in hereditary.

And could you update us -- did you see the worsening ASP there, or worsening ASP in the -- among the smaller payers and where do you expect that -- those group to trend through the year?.

Yes. I think -- and again, as you look at the -- as we look at Q2, we actually saw a positive adjustment in the current quarter really driven by the contracting process that we've done with this large group of payers, when would expect -- we would expect that to continue through the back half of the year.

But again, they're very small individually, and so it takes a lot in order to make a difference. But I think our general feeling is that, we should see that improvements play out over time, which is what we’ve communicated previously..

Okay. Thank you..

Thank you..

Next question comes from the line of Jack Meehan with Barclays. Your line is open..

Thanks. And first one to wish Mark good luck, learned a lot from our interactions. Want to start with hereditary cancer testing. So you referenced that volumes were growing in the mid single-digits, but revenue declined in the high single digits. So that would imply price was down in the double-digits and talked about some of the adjustments there.

So as we look forward, the United -- new United contract, what's a reasonable expectation for pricing in 2021? Can it be down in the double digits again..

Thanks, Jack, for the question. I know what we’ve talked about relative to hereditary cancer and the sequential change there from Q2 to Q3 was the impact of seasonality, the impact of PAMA, that was about $10 million. When we think about the United contract the reference that we made.

Was it a few million of our total change was related to the renewed contracts that we had. And then the other data point that we gave was that the volume growth in hereditary would offset the pricing in year one. So our expectation would be -- and that’s -- that contract is retro to January 1.

So what you will see in Q3 will be representative from an ASP perspective of -- kind of where the impact of -- we will incorporate the impact of the United renewal..

And what we said on the call, Jack, is that we didn’t anticipate anything else from a contracting standpoint. And as we go through this year, that would materially impact the pricing when we look at next year..

Is there any reason why the hereditary volumes would accelerate under the new UnitedHealth contract?.

Yes, I mean, I think when you look at the contract, the contract obviously doesn’t really impact volume. We are in network provider with UnitedHealthcare. That status will remain the same. And so I don't see anything in the -- that would change the volume outlook relative to our current volume.

And when we look at next year, we talked about a variety of factors. We’ve a series of new companion diagnostic approvals that are coming in the back half of the year here. One of those could be very significant, which is the OlympiA data that we talked about.

From Astraseneca, that would be in adjuvant breast cancer indication, which is a very large indication and could expand testing in the breast cancer space pretty dramatically. But the contract itself wouldn't have an impact on our volume..

Okay. And then one follow-up on GeneSight. Just as we await the finalization of the LCD this quarter. Is there any risk that GeneSight $2,100 price could get reduced. And then similarly, are you planning to pursue your own CPT code for the test. Thanks..

Yes. Jack, when we look at the pricing, remember this is a coverage decision. It has nothing to do with actual pricing. We have a contract price through our local Medicare administrative contractor for GeneSight. And so there's been no indication that there's any type of pricing change on the horizon.

When we -- can you remind maybe second question, I’m sorry..

Are you playing the procedure on CPT code for the test..

Yes, we haven’t talked about our strategy around CPT code for GeneSight. We’ve obviously thought about that internally. There's a series of things to think about there, but we haven’t publicly discussed that..

Jack Meehan:.

And gentlemen, there are no further questions at present time. Please continue with your presentation or closing remarks. Thank you..

All right. Thanks. Dave. This concludes our earnings call. A replay will be available via webcast and our website for one week. Thanks again for joining us this afternoon..

And that does conclude the conference call for today. We thank you very much for your participation and ask you please disconnect your lines..