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Myriad Genetics (MYGN) Mark C. Capone on Q4 2016 Results - Earnings Call Transcript

Myriad Genetics, Inc. (NASDAQ:MYGN)

Q4 2016 Earnings Call

August 09, 2016 4:30 pm ET


Scott Gleason - Vice President, Investor Relations

Mark C. Capone - President, Chief Executive Officer & Director

R. Bryan Riggsbee - Chief Financial Officer


Tycho W. Peterson - JPMorgan Securities LLC

Amanda L. Murphy - William Blair & Co. LLC

William R. Quirk - Piper Jaffray & Co.

Jack Meehan - Barclays Capital, Inc.

Tim C. Evans - Wells Fargo Securities LLC

Isaac Ro - Goldman Sachs & Co.


Ladies and gentlemen, thank you for standing by and welcome to the Myriad Genetics Fourth Quarter and Year End 2016 Financial Earnings Conference Call. As a reminder, this conference is being recorded today, Tuesday, August 9, 2016. I would now like to turn the conference over to Mr. Scott Gleason, Vice President of Investor Relations with Myriad Genetics. Please go ahead, sir.

Scott Gleason - Vice President, Investor Relations

Thank you. Good afternoon and welcome to the Myriad Genetics fiscal fourth quarter earnings call. My name is Scott Gleason, and I'm the VP of Investor Relations. During the call, we will review the financial results we released today, after which we will host a question-and-answer session. If you have not had a chance to review the earnings release, it can be found on the Investor Relations section of our website at

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 The call is being recorded and will be archived in the Investors section of our website. In addition, there will be a slide presentation pertaining to today's earnings call on the Investors section of our website and which has been 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 document 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 am now pleased turn the call over to Mark.

Mark C. Capone - President, Chief Executive Officer & Director

Thanks, Scott. Good afternoon and thank you for joining the call today. I would like to start by providing a summary of the substantial progress we made throughout fiscal 2016 on the execution of our five-year strategic plan that was introduced at the beginning of the fiscal year. Following this overview, Bryan will review our financial performance in the fourth quarter and our financial guidance for fiscal year 2017, which includes the recently announced acquisition of Assurex Health. Finally, I will conclude with commentary around our initiatives to drive growth and future shareholder value consistent with the objectives in our five-year plan.

Importantly, Myriad returned to growth in its fiscal 2016 with revenues up 4% year over year to $754 million. We also demonstrated financial leverage with pro forma adjusted earnings per share growing 14% year over year to $1.63. Both our revenue and earnings performance in fiscal 2016 were consistent with our expectations. And with the addition of two exciting new acquisitions, we remain on track to achieve our strategic goals.

Hereditary cancer revenues for the year were $632 million, which was relatively flat when compared to fiscal 2015. Through fiscal year 2016, we implemented a number of initiatives to maintain our leadership in this franchise. We signed long-term managed care contracts representing 65% of our revenue that provides future pricing visibility. We completed the conversion to myRisk among our targeted physicians and have made gene panel standard of care within the marketplace.

With this transition, we have more than doubled our Variant Classification database and introduced innovative new algorithmic methodologies for Variant Classification that will ensure Myriad's tests remain the gold standard for accuracy for years to come. And we made significant progress on broadening the indications for hereditary cancer testing that will ultimately double the size of the oncology market.

We also made significant progress in our near-term new product pipeline. With Prolaris, we nearly doubled our clinical volumes this year, with total volume up 94%, with more than 15,000 tests ordered for the year. And we established Prolaris as the market leading gold standard test for prostate cancer prognosis.

For Vectra DA, we successfully grew test volumes 11% year over year, implemented a collaboration with LabCorp to expand access, launch practice integration programs to deepen penetration and initiated a prospective clinical study.

From a payer perspective, we gained promising traction with these two critical new products. We received a Medicare local coverage determination for Prolaris and signed private payer contracts representing an additional 29 million lives. For Vectra DA, we signed our first five commercial payers, representing 3 million additional covered lives.

On the companion diagnostic front, with our partner TESARO, we validated myChoice HRD in a prospective clinical study that demonstrated highly statistically significant improvement in progression-free survival for ovarian cancer patients. We currently have more than 22 ongoing clinical studies in the area of companion diagnostics for PARP inhibitors with multiple cancer types, which in total represent a $6 billion global opportunity.

We also laid the groundwork for our next generation of pipeline products. With myPath Melanoma and myPlan Lung Cancer, we have now completed all of the studies necessary for reimbursement and will submit dossiers as soon as these studies are published. Furthermore, we completed the first validation study for myPlan Renal Cancer and began enrollment in our prospective validation study for myPath Bipolar. In aggregate, our stage two and three pipeline tests represent market opportunities of greater than $25 billion per year and can leverage our existing commercial infrastructure.

Importantly, we completed two significant acquisitions in fiscal 2016, including Sividon Diagnostics and Assurex Health. These companies bring to Myriad strategically important products that will allow us to leverage our commercial infrastructure and drive greater long-term value for investors.

Lastly, we made excellent progress in our international business during fiscal 2016. We ended the fourth quarter with international revenue contributing 6% of total revenue, which represents substantial increase compared to the beginning of the year at 4%. We believe this progress remains on track for international revenue to represent 10% of total revenue which is consistent with our strategic plan.

Overall, I'm pleased with our progress in fiscal 2016 and remain confident in our strategy to transform Myriad into a much larger diversified global leader in personalized medicine.

With that, I will turn the call over to Bryan to review our financial results for the quarter and financial guidance for fiscal year 2017.

R. Bryan Riggsbee - Chief Financial Officer

Thanks, Mark. I'm pleased to provide an overview of our financial results for the fiscal fourth quarter of 2016 followed by additional detail on our fiscal year 2017 financial guidance. Fourth quarter total revenues were $186.5 million compared to $189.9 million in the same period in the prior year, a decline of 2% year over year.

While revenues in the quarter with within the range of our previously provided financial guidance, hereditary cancer revenue came in below our expectations. Total hereditary cancer revenue in the fourth quarter was $152.8 million and was down 2% on a sequential basis. The sequential decline was mostly attributable to some incremental market share losses concentrated in the oncology segment of our business.

On a year over year basis, hereditary cancer revenue was down 7%, which was mostly related to volume declines and some incremental price declines consistent with the full implementation of the long-term contracts that have been negotiated.

Vectra DA revenue reached a new record in the fourth quarter with total revenues of $12.7 million, which was up 8% year over year. Total volume was 41,300 tests which represented a 5% increase year over year. During the quarter, we saw improved collections on Medicare Advantage claims, which led to revenue growth outpacing volume growth.

Prolaris revenue was $3.5 million in the fourth quarter. Again, Myriad experienced record volumes with total test ordered at 4,750, which was up 91% year over year and 11% sequentially. Revenue associated with our pharmaceutical and clinical services business was $12.7 million and was up 14% year over year.

I now would like to discuss our financial metrics for the quarter. Gross margins were 78.6% in the fourth quarter compared to 80.3% during the fourth quarter of last year. The year over year decline was primarily attributable to product mix with more revenue from lower margin segments such as pharmaceutical and clinical services and lower fixed cost absorption on lower hereditary cancer revenues. Additionally, we had a one-time laboratory rework issue during the fourth quarter, which reduced gross margins by approximately 60 basis points. Lastly, there was a small impact from the price reductions associated with the full implementation of our long-term contracts.

Moving on to our operating expenses, GAAP research and development expenses were $19.5 million in the fourth quarter and grew 4% relative to the fourth quarter of last year. GAAP SG&A expense this quarter was $91.3 million and declined 6% relative to last year. However, last year's GAAP SG&A included approximately $8.3 million of executive transition costs. GAAP operating income in the fourth quarter was $35.7 million and declined 1% year over year.

On a non-GAAP basis, our adjusted research and development expense was $19.4 million compared to $18.5 million last year and grew 5%. The increase in research and development spend was anticipated as we initiated our prospective clinical trials for myPath Bipolar and our Vectra DA prospective outcome study. Adjusted SG&A expense this quarter was $88.1 million and was up $2 million from last year's fourth quarter. The fact that SG&A was relatively flat year over year is reflective of our efforts to leverage our existing infrastructure as we look to drive growth with our pipeline products.

Adjusted operating income was $39 million in the fourth quarter and declined 19% relative to the fourth quarter of last year. The decline in adjusted operating income is based upon lower revenue, the mix of our revenue toward lower margin products, and slightly higher operating expenses.

This quarter and fiscal year we recognized a tax benefit associated with a reevaluation of our stock-based compensation expense due to the adoption of the new accounting standard ASU 2016-09. From an accounting standpoint, we were required to apply this benefit throughout fiscal year 2016 in the quarters when it was generated. The benefit for the fourth quarter and full year was $300,000 and $12.7 million, respectively. This new rule will result in variability in our tax rate due to the excess tax benefits and expense we will record associated with equity compensation. Given the potential variability and unpredictability of this change, we plan to exclude these adjustments in our non-GAAP earnings going forward.

Adjusted earnings per share were $0.36 for the fourth quarter compared to $0.41, respectively, in the fourth quarter of last year.

Our fully diluted share count decreased sequentially by approximately 1.2 million shares to 72.4 million shares outstanding. This reduction was driven by our share repurchase program. During the quarter, we used approximately $55 million to repurchase 1.6 million shares of Myriad common stock at an average price of $33.86 per share. During the quarter, Myriad's Board of Directors approved an additional $200 million repurchase authorization. As of the end of the fourth quarter, we had $195 million remaining on that authorization.

For fiscal year 2016, our free cash flow was $161 million, and our share repurchases have totaled $163 million, which reflects our goal to match these two metrics over time. As we stated last week, based upon the acquisition of Assurex Health, our primary use of cash in the short term will be debt repayment.

Our cash and cash equivalent balance at the end of the fourth quarter was approximately $239 million, which declined from our cash balance of $286 million at the end of the third quarter. The primary reason for the decline was the use of cash for the Sividon acquisition.

I now would like to provide you with some additional commentary on our fiscal year 2017 financial guidance. We are guiding to total revenues of $740 million to $760 million and adjusted EPS of $1.00 to $1.10. This financial guidance includes the impact of the recently announced Assurex Health acquisition.

Let me discuss our assumptions underlying our fiscal year 2017 revenue guidance, beginning with hereditary cancer. As you can see on the graph, the hereditary cancer revenue for the past 10 quarters has been relatively flat. However, we saw some incremental share erosion in the oncology segment of the market in the fourth quarter and some incremental price declines associated with our long-term contracts.

While we are working on a number of initiatives to address the share decline, until these initiatives have demonstrated success, we will not include this upside in our guidance. Consequently, we are assuming marginal declines in hereditary cancer revenue in fiscal 2017 of a magnitude similar to what we saw in the fourth quarter of fiscal year 2016.

We would note that at this level of hereditary cancer revenue, we remain within the envelope of potential outcomes from our Monte Carlo simulation upon which we based our five-year plan. As a reminder, even at the lower boundary of our hereditary cancer revenue, we were still able to exceed our total revenue growth goals due to new products which has only improved with the addition of GeneSight.

Moving on to our newer products, we expect continued strong volume growth from Prolaris, Vectra DA and EndoPredict; however, consistent with our previous approach to financial guidance, we are only assuming known reimbursement coverage. Our guidance does not assume any revenue impact from myPath Melanoma, myPlan Lung Cancer, or myChoice HRD. In addition, we are not assuming any U.S. EndoPredict revenue in our guidance for fiscal 2017.

Additionally, we are assuming lower revenue from pharmaceutical and clinical services this year. We had an exceptionally strong second half of fiscal year 2016 for Myriad RBM, and we are assuming this business will return to a more normalized trajectory in fiscal year 2017.

Moving on to Assurex Health, we are anticipating revenues from GeneSight of approximately $50 million in fiscal year 2017. We have assumed ownership of Assurex starting on October 1, and we have assumed some minor sales disruption as we work through the integration process.

Moving on to the bottom line, we are assuming higher research and development expenses throughout fiscal year 2017, based upon our prospective outcome study for Vectra DA and our prospective clinical validation study for myPath Bipolar. Additionally, we will have other R&D expense associated with the Assurex Health acquisition as we work to broaden the indications for use for GeneSight and expand the product offerings for other tests such as GeneSight Analgesic and GeneSight ADHD.

From a selling, general and administrative standpoint, we expect only minor growth in expenses with the exception of additional Assurex Health and Sividon expenses. As we previously communicated, we expect Sividon to be neutral to fiscal year 2017 earnings and accretive in fiscal year 2018.

We expect Assurex to be approximately $0.20 dilutive to adjusted EPS in fiscal year 2017 and become accretive in the first half of fiscal year 2018 based upon current reimbursement coverage. Any significant coverage expansion for GeneSight could accelerate this timeline. We expect the dilution from Assurex to be more heavily weighted towards the first couple of quarters as we grow revenue, achieve operational efficiencies and pay down debt throughout fiscal year 2017.

As a reminder, we are planning to finance the acquisition with cash on hand and approximately $200 million in debt. We are assuming this debt will have an interest rate of approximately 4%. Additionally, we will have some one-time closing costs as well as restructuring charges associated with the acquisition of approximately $20 million. Furthermore, we will have incremental non-cash amortization charges associated with both the Sividon and Assurex acquisitions of approximately $15 million for the full year. We will exclude these acquisition related charges and non-cash amortization expense from our adjusted earnings per share.

From a tax perspective, we are assuming a GAAP tax rate of approximately 38% for the fiscal year. Additionally, as we have previously stated, we are not assuming any share repurchase activity throughout fiscal year 2017.

Moving on to the first quarter, we are guiding toward revenue of $168 million to $170 million and adjusted EPS of $0.25 to $0.27 per share. This guidance reflects the typical summer seasonality we experience in the fiscal first quarter for all of our diagnostic test as well as the recent trends in hereditary cancer that were discussed previously. Fiscal year 2017 will be a year of investment for Myriad as we look to drive greater traction with Vectra DA, Prolaris and GeneSight, integrate two major acquisitions and lay the foundation for our companion diagnostic portfolio.

While these investments will dampen our short-term profitability, we remain highly confident in our ability to achieve the goals laid out in our five-year plan, and the recent acquisitions completed by the...