Myriad Genetics, Inc. (MYGN) Q3 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Myriad Genetics 2012 Third Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, May 1, 2012. I will now turn the conference over to Ms. Rebecca Chambers, Director of Investor Relations. Please go ahead.

Good afternoon, everyone, and welcome to the Myriad Genetics Third Fiscal Quarter Earnings Call. During the call, we will review the financial results we've released today and the progress we made this quarter on our strategic directive, after which we will host a question-and-answer session. If you have had not had a chance to review the earnings release, it can be found in the Investor Relations section of our website at myriad.com. Presenting from Myriad today will be Pete Meldrum, President and Chief Executive Officer; Mark Capone, President, Myriad Genetic Laboratories; and Jim Evans, our Chief Financial Officer. This call can be heard live via webcast along with the slide presentation at myriad.com. The call is being recorded and will be archived in the Investors section of our website. Please note that some of the information presented here today may contain projections or other forward-looking statements regarding future events or the future financial performance of the company. These statements are based on management's current expectations and the actual events or results may differ materially and adversely from these expectations for a variety of reasons. We refer you to the documents the company files from time to time with the Securities and Exchange Commission, specifically the company's annual report on Form 10-K, its quarterly reports on Form 10-Q and its current reports on Form 8-K. These documents identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. With that, I'll now turn the call over to Pete.

Thank you, Rebecca. To begin, I would like to provide highlights of our third quarter results and introduce the company's updated guidance for this fiscal year. I am extremely pleased to report that third quarter revenues increased 27% year-over-year to reach a new record of $129.8 million. All of our products contributed to this excellent performance. But COLARIS stood out with a 51% year-over-year growth, the second quarter in a row where COLARIS grew more than 50% year-over-year. Net income for the third fiscal quarter increased to $29.6 million and resulted in diluted earnings per share of $0.34. These results were beyond our expectations, primarily due to our strategic initiatives to expand our Oncology and Women's Health markets. Given the continued performance of these initiatives, we have decided to increase our guidance for fiscal '12 for the second time this year. Revenue is now expected to be in the range of $492 million to $496 million, which represents 22% to 23% growth over prior fiscal year. Diluted earnings per share guidance has also been increased to $1.29 to $1.31, representing a 17% to 19% growth over fiscal 2011. These strong results have positioned us well for continued success, particularly when combined with the strategic directives that we are focusing on for long-term growth. Myriad is dedicated to improving patient care through the development and marketing of transformative tests across multiple medical specialties, which address pressing clinical needs. With this strategy in mind, we have put forth the following 3 strategic directives: 1, to grow our existing tests and markets; 2, to expand our business internationally; and 3, to launch new transformative products, including companion diagnostic tests across a diverse set of major disease indications. Our international strategic initiatives continued to proceed ahead of schedule. Our 5 country managers and clinical affairs team have completed the orientation and training program in Salt Lake City and have now returned to their home countries to focus on growing Myriad's presence in Germany, Switzerland, Italy, Spain and France. During the third quarter, Myriad hosted a personalized medicine symposium and ribbon-cutting ceremony at the company's new laboratory in Munich, Germany. Approximately 100 physicians, scientists, politicians and journalists attended the event and heard presentations on the latest advancements in companion diagnostics and personalized medicine, including recent results in melanoma and prostate cancer research. In addition to Gary King and me, the presenters included Dr. Horst Domdey, the Director of the Bavarian Biotech Cluster; Dr. Thorsten Zenz, Professor of the National Center for Tumor Diseases at Heidelberg, and Dr. Helmut Klocker, Director of the Medical Laboratory at the University of Innsbruck. The event was extremely well-received and represented an important step for Myriad in building relationships in the region and increasing our visibility among the key opinion leaders in Europe. Our PROLARIS clinical programs in Europe are also progressing well. PRO009 is a clinical study from the German cohort of approximately 450 radical prostatectomy samples with the clinical endpoint of biochemical recurrence. And I am pleased to report it is ahead of schedule. We have received most of the prostate tumor samples for this study and expect to have results published next year. This represents our ninth clinical validation study on PROLARIS. We're also in discussions with large institutions in Austria and France and hope to initiate additional validation studies with these groups later this year. Our progress in Europe is ahead of schedule as we progress towards our goal of $50 million of international revenues by fiscal 2016. Our third strategic initiative is to launch new molecular diagnostic tests to meet unmet clinical needs in oncology, women's health, urology, dermatology, autoimmune and neuroscience. Our industry-leading pipeline of products includes 13 candidate tests across this diverse set of disease indications. Our melanoma test from the end licensing of technology from Melanoma Diagnostics, which determines whether a skin biopsy is benign or malignant, was originally planned for commercial launch later this fiscal year as an immunohistochemistry assay. We are now simultaneously assessing a quantitative PCR test, which we believe will increase the sensitivity and specificity of our test, which will be important for maximum reimbursement and rampant adoption. We now expect the optimal version of this test to be launched in calendar '13. We're also excited about our new homologous recombination deficiency or HRD test. Homologous recombination is a process that occurs within all cells to repair harmful breaks that occur in DNA -- known as double-stranded DNA breaks. The HRD test will incorporate a tissue BRAC analysis and is designed to provide physicians with a tool to determine which patients will likely benefit from DNA-damaging agents, such as platinum therapies and PARP inhibitors. Data has shown that our HRD test can identify patients who have a homologous recombination deficiency, caused not only by the BRCA genes, but by other genes as well. Recently, Myriad presented a poster at the American Association for Cancer Research Meeting which demonstrated a significant relationship between HRD status and BRCA1 and BRCA2 status in ovarian cancer patients. In this study, researchers saw a significant increase in the number of tumors with HRD defects beyond mutations in just the BRCA1 and BRCA2 genes. This data is an important step in the development of our HRD test. Our data suggest that this HRD assay would be more informative and identify a significant number of additional patients who could benefit from platinum and PARP inhibitor therapies, beyond the BRCA-positive patients. We have recently signed a research agreement with Stanford University to advance the development and validation of this novel test and are in discussions with a number of major pharmaceutical partners for the use of this test as a companion diagnostic in their clinical trials. If successfully commercialized, this new test would guide therapeutic decisions and represent a significant market potential since the homologous recombination pathway is known to play an important role in a number of cancers, including breast, ovarian, lung, pancreatic and esophageal cancers. I'm also pleased to report that our lung cancer prognostic test is progressing through the clinical validation stage. As a reminder, this test is being developed to guide therapeutic decisions for patients diagnosed with Stage 1 or Stage 2 adenocarcinoma of the lung. We have recently completed a study on 256 patient samples using overall disease survival as a primary outcome measure, and we'll be presenting this data at an upcoming professional society meeting. We are also underway with a validation study on approximately 400 patient samples. We expect to launch this test once these 2 studies have been published in the peer-review journal sometime during calendar 2013. The other products in our test pipeline are also progressing well, and we will be providing updates on these molecular diagnostic tests during future earnings calls. Complementing our strategy of diversifying across multiple products and disease indications, we continue to be very pleased with the progress being made at Myriad RBM. Revenues increased sequentially to $6.5 million in the third quarter, and the pipeline for projects in the companion diagnostic services business continues to be robust. Importantly, Myriad RBM recently entered into a collaboration with the Max Planck Institute and the Bavarian Blood Donation Service. This project will analyze hundreds of samples in an effort to identify a blood-based early colon cancer detection test. As part of the agreement, Myriad RBM will receive exclusive commercial rights to the early cancer detection product. We are also making excellent progress on a number of other fronts toward meeting the goals set forth in our strategic plan to diversify across multiple disease indications and grow revenues, both domestically and abroad. We are pleased with the strong performance of our core business in fiscal 2012 to date, and believe in our ability to execute on our strategic plan for the long-term growth. Now it is my pleasure to turn the call over to Mark Capone.

Thanks, Pete. For the third quarter in a row, we saw strong growth in molecular diagnostics revenue with contributions across our portfolio of tests, including a record quarter for both BRACAnalysis and COLARIS. These results are due to the successful execution of the initiatives associated with our first strategic directive to grow our existing tests and markets. I will provide a brief update on the progress of these initiatives and our PROLARIS test. Our Oncology segment grew 19% year-over-year in the third quarter. This accelerated growth was due to a 51% growth rate in COLARIS, and a 14% growth rate in BRACAnalysis in the oncology market. Our efforts to grow the Oncology market for BRACAnalysis through the development of the ovarian cancer, carcinoma in situ and triple negative breast cancer indications, again contributed significantly to growth this quarter. As a reminder, these indications increase the addressable oncology market for BRACAnalysis by approximately $200 million to an annual market potential of $650 million. In total, these indications grew 57% this quarter compared to the third quarter of last year. We continue to educate physicians on the updated NCCN guidelines for triple negative breast cancer, and as a result, are testing newly diagnosed patients and also reaching patients which have been diagnosed prior to the updated guidelines. We believe the BRACAnalysis oncology market is approximately 45% penetrated and anticipate continued opportunities for future growth. I would also like to provide an update on our strategy to pilot cancer specialist teams in our Oncology segment. As a reminder, this program added an 8-person colon cancer specialist team to sell COLARIS, COLARIS AP, TheraGuide and OnDose, alongside what became a breast cancer specialist team focused solely on BRACAnalysis. I am pleased to report that this program is demonstrating strong results. Since the beginning of the program, both the pilot colon cancer and the breast cancer teams have grown revenue at close to twice the rate of the national average, and generated approximately $1.5 million of incremental revenue. This increased focus has allowed these specialist teams to spend more time with the specialty physician groups in mammography centers or GI centers that see large numbers of high-risk patients. We are continuing to monitor the progress of this program and are planning on expanding the program in fiscal 2013. In the Women's Health segment, we again encountered headwinds of resetting and higher deductibles in the beginning of the calendar year. As a result, Women's Health revenue declined 3% sequentially. But more importantly, compared to the prior year, Women's Health revenue grew 25%. We continued to deliver strong results from our initiatives to grow same-store sales and new territories in addition to our interactive marketing campaign. In the third quarter, same-store sales grew an impressive 24% year-over-year. The new territory split in the beginning of fiscal 2011 grew 23% year-over-year during the third quarter and the new territory split in the beginning of fiscal 2012 grew 31% year-over-year. Our interactive media campaign also continues to progress well. During the quarter, we launched a new website called mysupport360. This site is a unique personalized resource for patients and provides information and encouragement about testing for hereditary forms of breast, ovarian, colon and endometrial cancers. The purpose of this website is to provide guidance, education and support through the testing process, thereby empowering people to be proactive about their health and their families. We also continue to optimize our physician website, myriadpro.com, which has resulted in a 56% increase in revenue directively attributed to these online inquiries. In total, during the third quarter, we have seen 100% increase in our physician and patient website visits to over 30,000 visits per quarter. While we are happy to report that the utilization environment improved this quarter, these initiatives have been put in place in an effort to grow the Women's Health segment independent of OB/GYN offices. COLARIS and COLARIS AP continue to gain traction in the field. Revenue from these tests grew 51% during the third quarter, benefiting from both the impact of PMS2 and an increase in overall demand. The impact of PMS2 led to approximately 60% of the growth and the rest came from an increase in demand and market share gains. In the third quarter, we presented a poster at the American College of Medical Genetics that showed that 14% of mutation carriers were attributed to a mutation in the PMS2 gene. As a result, conversations with payers on PMS2 reimbursement are progressing well with more than 90% of our top payers now reimbursing for our 4 gene test. In addition, we received New York State approval for PMS2 in the third quarter which will provide additional revenue growth in the fourth quarter and beyond. Now I would like to provide an update on the clinical research program for PROLARIS. During the third quarter, our clinical research and commercialization efforts showed significant progress. PRO003, our second study for the pre-prostatectomy indication was published in the British Journal of Cancer. Additionally, PRO004, our second study for the post-prostatectomy indication conducted in collaboration with UCSF, was presented at ASCO GU and won the Best Poster Award at the EAU Annual Congress and has been submitted for publication to a major journal. PRO006, the 250 patient Phase IV study being performed in conjunction with a clinical research organization that represents 25% of the community of urologists in United States is enrolling well. The study is designed to document the distribution of PROLARIS scores and the resulting treatment decisions, both of which will be useful for reimbursement discussions. As of the end of March, more than 180 patients have enrolled in the study, and we expect to complete enrollment during the fourth quarter. We have completed laboratory processing for PRO005, a 340-patient biopsy study conducted in collaboration with Duke University, which is designed to assess biochemical recurrence for patients selecting either radiation or prostatectomy. For PRO007, we have collected 25% of the biopsy samples which will eventually be correlated to biochemical recurrence. Lastly, we signed a research collaboration agreement with Intermountain Health Care, covering numerous potential research projects, the first of which will be PRO008, a 200-patient biopsy data set evaluating biochemical recurrence after radical prostatectomy. In total, after completion of all 9 of these studies, we will have tested PROLARIS on about 3,500 patients. Our commercialization efforts are also progressing well for PROLARIS. We almost doubled our sales team and now have hired 18 of the 20 field-based personnel focused on PROLARIS. Urologists have been very receptive to utilizing a new diagnostic tool, and we are receiving commercial samples from physicians. Our laboratory has been successful at producing a PROLARIS' results for 95% of biopsy and post-prostatectomy samples, which are much more challenging to work with than blood samples. Our conversations with payers have also been very positive, both from a clinical utility and a pricing perspective. By the end of the fourth quarter, we expect to have meetings completed and dossier reviews underway or completed with all of our major payers. In summary, we are very pleased with the performance of the molecular diagnostic business. We have diligently focused on the execution of our first strategic initiative, to grow our existing tests and markets, which led to strong financial results for the third quarter. We continue to see significant opportunities for growth from our existing products and in the future, from PROLARIS. I will now turn the call over to Jim.

Thank you, Mark, and good afternoon, everyone. It is my pleasure to present a more detailed look at Myriad's financial results for the third quarter of fiscal 2012. As Pete mentioned, Myriad's revenues for the fiscal third quarter were $129.8 million, an increase of 27% over the same period in the prior year. Molecular diagnostic revenue grew 20% year-over-year to $123.3 million, driven by increased sample volumes and new products. The contribution of price to the third quarter revenue growth was not material. A breakdown of revenue by product shows total BRACAnalysis revenue grew 17% to $105.9 million, compared to $90.3 million in the same period last year. Revenue from COLARIS and COLARIS AP increased 51% year-over-year to $11.2 million, and Myriad's other molecular diagnostic products grew 34% year-over-year to $6.2 million. Companion diagnostic services grew 24% sequentially to $6.5 million. Moving down the income statement. We see the financial impact from the exciting long-term investments we are making to ensure ongoing growth. This quarter, research and development expense increased 76% to $11.8 million or approximately 9% of revenue, as we have previously guided. This increased expense was associated with the large number of clinical research programs we are investing in to grow and diversify revenue in the future. These programs have been put in place to not only further adoption of our existing products, including OnDose and PROLARIS, but also to further the development of important pipeline products such as the Melanoma Diagnostics, HRD and lung cancer prognosis tests Pete mentioned earlier. Third quarter SG&A expense was $54.7 million or approximately 42% of revenue. As a percentage of revenue, SG&A expense increased 30 basis points versus the prior year due to increased commissions associated with higher revenue, investments in our European operations, administrative costs from Myriad RBM, and a modest increase in bad debt expense. We expect bad debt to remain stable around this level in the coming quarters. Operating income for the quarter was $46.1 million, resulting in an operating margin of approximately 36%. This level of operating margin represented a 150 basis point contraction sequentially, due primarily to the impact of the accelerated commercialization efforts for PROLARIS, including the impact of doubling the sales force, increased investments in marketing, Myriad RBM, research and development, investment in European operations and higher bad debt expense. The third quarter effective tax rate was approximately 38% as compared to the 34% tax rate in the same period of the prior year. As a result of filing our fiscal 2011 tax returns during the third fiscal quarter, we recognized additional R&D tax credits, which lowered our effective tax rate this quarter. Diluted weighted average shares outstanding were 86.5 million shares. During the third quarter, we bought back $12 million worth of our stock and have $161 million of the current $200 million repurchase authorization remaining. Diluted earnings per share were $0.34 for the third quarter of fiscal 2012, an increase of 10% over the $0.31 reported in the same period of the prior year. Moving onto the balance sheet and cash flow. Our ending cash and investments for the quarter were $466.7 million. This compares to $428.3 million at the end of the second quarter. Cash from operating activities equaled $40.7 million in the third quarter and $100.1 million year-to-date. Total cash generated, accounting for the impact of excess tax benefits equaled $125.1 million year-to-date. Highlights of the first 9 months of fiscal 2012 include an increase in revenue of 23% year-over-year, and 17% growth in Molecular Diagnostic revenue. Operating income grew 15% as compared to last year and earnings per share have grown 19%. We are pleased with our results thus far, and are now focused on delivering strong results in the fourth fiscal quarter. Given our performance in the first 9 months of the fiscal year, we have again increased our expectations for fiscal 2012. As Pete mentioned, revenue is now expected to grow 22% to 23% year-over-year and equal $492 million to $496 million. We've increased our guidance for Molecular Diagnostic revenue to $467 million to $471 million, and we continue to expect Companion Diagnostic revenue of $24 million to $26 million. Diluted earnings per share guidance is now $1.29 to $1.31, representing 17% to 19% growth over fiscal 2011 earnings per share of $1.10. This EPS guidance takes into account the impact of stock buybacks completed to date but does not factor in the impact of any future buybacks. Additionally, we have increased our operating cash guidance net of excess cash -- net of excess tax benefits to $140 million from $130 million. Other items considered in this guidance are as follows: Fourth quarter R&D expense is expected to be approximately 9% of revenue as we continue to invest in our clinical research programs; in regard to fourth quarter SG&A expense, we expect to incur the remaining $2.5 million of the $6 million investment in salaries and marketing in Europe; and also will recognize the full quarter impact of the additional urology sales representatives; and finally, the fourth quarter tax rate is expected to be 40%. We do not see this tax rate changing in the foreseeable future. With that, I will hand the call back over to Rebecca for Q&A.

Thank you, Jim. [Operator Instructions] Operator, we are now ready for the Q&A portion of the call.

[Operator Instructions] And our first question comes the line of Peter Lawson with Mizuho Securities U.S.A. I'll just move on to the next question. Our next question comes the line of Scott Gleason with Stephens.

I guess to start off, when we look at the BRACAnalysis piece, can you give us a little bit more granularity on what happened in Europe this quarter? Was there a meaningful impact from a revenue standpoint from Europe, and can you give us a little bit -- you mentioned that you were ahead of plan, can you give us a little bit more color there?

Yes. We have opened up the European labs. They are in full operation and accepting samples. But as I mentioned on the call, we had our ground -- our ribbon-cutting ceremonies in March. And so the operations have been in full swing for only about a quarter, and revenues are too small yet to break out separately. But as Europe builds, we certainly will provide additional color and guidance on the international revenues.

Great. And just real quick for a follow-up. When we look at the PMS2 gene and the COLARIS test, can you give us a sense for what percent of inbound COLARIS orders are basically incorporated in the PMS2 gene today?

Sure, Scott. Over 80% of tests right now, physicians are requesting all 4 genes. So it's clearly evolved to the point where that's really becoming the standard at this point. And again, when data gets published like what we did, would show that 14% of mutations -- mutation carriers -- are attributed to the PMS2 gene, I think that increased level of sensitivity is enough for people to gravitate towards that as really the new standard of care.

The next question comes from the line of Jon Wood with Jefferies.

I think this is for Mark. So if we look at the COLARIS demand-related growth over the past 3 quarters or so, it's been about 20%. Just looking for some indication of how we should look at that, that assay once we lap the introduction of the PMS2 gene. I mean is 20% the right level? Is that too high? Can it accelerate from there? Any color you can give on kind of the direction from the demand perspective would be wonderful?

Sure. Well, first, I'd like to just characterize again, the size of the market. So we're talking about a product that has a $400 million market potential. We've penetrated only about 10% of the market. So just from a big picture standpoint, there's still ample market opportunity for COLARIS. And so we continue to be excited about what this can represent over the long term. You're right, as we break this out and tease out the PMS2 part, which will start to become comped next year, the underlying demand is in that mid-teens to 20% type of range. We continue to believe that those opportunities exist. That increase is coming both from increases in demand and increases in market share because there are some other competitors in this market. And so I mean, we are comfortable that as you look in that mid-teen range, high teens, that those opportunities continue to exist for COLARIS.

All right, that's good color. My follow-up is I think for Pete. So on the capital reallocation front, so you guys have kind of slowed down the pace of buyback over the past couple of quarters. Just looking for any perspective into that. Does that have to do with the M&A pipeline, does that have to do with valuation, and I would love to hear any update from the board level, on the cash dividend policy?

Yes. Myriad is committed, first of all, for -- to reinvest our cash in growing the business and as I mentioned on the call, we have 3 very important strategic initiatives which will diversify revenues and grow revenues for the long term. However, Myriad does generate a significant amount of cash, and we have enough cash generation to return cash to the shareholders and we're very committed to doing that. As Jim mentioned today, we've repurchased over $340 million worth of Myriad stock, and have an additional about $160 million authorized from the board. The dividend topic has come up from time to time as we meet with investors, particularly over the last several months. And I will certainly share these conversations with our board at an upcoming board meeting. As our board continues to weigh the pros and cons of either issuing a dividend, doing a stock buyback, or what I think is also appropriate, a combination of both dividend and stock buyback.

The next question comes the line of Amanda Murphy with William Blair.

I had a question on the guidance increase. I'm just curious, obviously, you had a number of areas of outperformance in the quarter. But as you look through the year, what kind of gives you the confidence in the guidance increase specifically? Is it same-store sales? Is it COLARIS? Or what is the -- just curious if there is something you can point to in terms of the driver?

Let me start off and I'll ask Mark to add some additional comments as well. As we look at the guidance going forward, we have noticed that we've been very successful with a number of initiatives that we've launched in growing existing products and expanding existing markets. And I think COLARIS is a good example of that, 2 quarters in a row now, we have north of 50% revenue growth. I think we're also very excited about PROLARIS, and even though that's relatively new, as Mark pointed out, we have seen very good receptivity among urologists. So I think those internal initiatives give us the most confidence in terms of increasing guidance for the future. But certainly, we are seeing increased physician office visits and we certainly benefit from that as well.

Yes. And might I just add, Amanda. What we continually look at are what are the sequential growth rates, how do those look relative to what we've seen historically. So we model both historically and what we hear from the field about activity that's going on, on BRAC and COLARIS, obviously, continue to be the drivers and most of that in Q4. We've looked at all that information and feel comfortable with the guidance that we've provided, that the sequential growth rates that would be necessary to meet that guidance are things that we feel good about. So we have a lot of data points internally and from the field to help us provide that guidance. Again, BRACAnalysis market, only 45% penetrated, and Oncology, less than 7% penetrated in Women's Health, and COLARIS less than 10% penetrated. Still ample opportunities for growth in all those markets. And with the initiatives that we put in place, we think we're continually tapping into those growth potentials. So again, we feel confident with the guidance.

Got it. And then I guess just a follow-up to that, there's been a lot of talk about what's going on with Medicare-related reimbursement. But curious again, kind of thinking about the year and revenue trajectory, how do you guys think about private payers, especially as you're launching new tests and I think you usually get a year sort of grace period. But curious as the newer test become a bigger component of your revenue, how you think about that?

Yes. So I think for PROLARIS as I mentioned, we're really right in the midst of the payer conversations which would include Medicare. I think what we've been encouraged by what we've seen from CMS decisions around pricing over the last quarter or so is that they have consistently priced products according to value. So $3,000 price points have been relatively consistent with CMS pricing. And so continually, CMS talks about and recognizes the importance of value-based pricing if, in fact, some of these products, like PROLARIS, which offers the opportunity to save health care system substantial amounts of money if those products are going to continue to be developed. And so we've been encouraged by the environment for pricing in the CMS discussions that we've had, and we think the clinical dossier that we will be providing for Medicare is rather substantial. And so we're looking forward to those conversations and we think PROLARIS is very well-placed from the standpoint of the $3,400 list price point that will be the starting point for our discussions. As it relates to reimbursement around our other products, BRACAnalysis, COLARIS, those conversations, as you're aware, continue. I think our next discussion point around that will be the July clinical lab fee schedule public hearing that CMS will schedule. We continue to believe that our products make sense to be on the clinical laboratory fee schedule, since they are not physician-interpreted tests. And so again, all of our conversations that we've had with CMS and around the topic of reimbursement continue to make us believe that they should be reimbursed there and that our products are well-positioned from a reimbursement standpoint.

The next question comes from the line of Michael Yee with RBC Capital Markets.

My question actually is digging a little bit into PROLARIS and the reimbursement. So following up here a little bit, what is the timeline to actually getting a CMS answer on PROLARIS? And then secondly, what would be the breakout of private pay versus a CMS reimbursement on PROLARIS?

Sure. As I mentioned in my opening comments, this next quarter, we will be having conversations with all of our major payers, including CMS. And those are the initial conversations where we can present all of the clinical data and the value proposition behind the product. And so it's a little early to make any additional commentary as to what those conversations will be like. We have had preliminary discussions with various payers and with consultants who generally believe that the value proposition is very strong for PROLARIS. So we're excited about having those conversations with all those payers including CMS. CMS will probably represent about 60% of the patient population that is appropriate for PROLARIS. So obviously, they are much more important part of that mix than for our current portfolio, which is more like 10%. And so we recognize the importance of that dialogue. If you were to reflect historically, on how long does it take CMS to ultimately make decisions about these type of molecular diagnostics, those decisions can take anywhere from 6 to 24 months. And obviously, we're doing all we can to make sure we're at the shorter end of that timeframe. But you're never really sure what that's going to look like until we sit down, put the date in their hands and begin to see what other questions they might have.

Our next question comes from the line of Bill Quirk with Piper Jaffrey.

I wanted to, I guess, kind of pick up on one of Amanda's questions. And Pete, when we consider the new guidance range for the fourth quarter, on the lower end of that, you're basically forecasting a flat sequential growth. And if my model's correct here, I think we've only had that type of scenario play out in something like 2 years of the past decade or thereabout. And so I guess, first question, is there something in the market that you're seeing that would suggest the business should go flatter in the fourth quarter?

Bill, your analysis is correct. The lower end of the guidance would anticipate a flat quarter. But again, I think, historically, Myriad has tried to provide relatively conservative guidance. And I wouldn't read into anything else in that guidance number.

Got it. And then secondly, and perhaps this is one is for Mark. Just thinking a little bit about Europe, can you just refresh for us, Mark, how are you thinking about the overall size of the market? And then the piece that Myriad is directly addressing right now, and I know one of your strategies was to go after some lab business where the labs are currently not making money on that, in fact, I think in some cases, they're losing quite a bit. So maybe you could kind of outline for us kind of the pie-in-the-sky, the applicable market and then kind of what the low-hanging fruit is?

If you look at the overall diagnostic market in Europe, it's about 75% the size of the U.S. market. So it certainly represents a significant opportunity. In Europe today, there are probably a market size of about $100 million annually in BRACAnalysis and COLARIS testing. So again, it's a significant opportunity for Myriad to come in and take market share away rather than trying to build up a market from scratch. Our discussions are progressing well throughout the region. Of course, our marketing strategy, as you alluded, is to address key oncology and genetic opinion leaders, major hospitals and networks within the country that do a large portion of the testing, and also physicians that order their molecular diagnostic testing directly. And with our laboratory now open, we are moving forward aggressively on all 3 of these fronts. And I think the discussions that we've had with physicians, hospitals and the networks are proceeding well. So we're very pleased with the progress we've made today.

Next question comes from the line of Doug Schenkel with Cowen & Co.

You talked a good deal about the strength of the quarter for COLARIS and for BRAC. But one thing that I don't think was touched on real specifically was the strength of other molecular diagnostics, which I believe were up close to 30% year-over-year in the quarter. Is that mostly PROLARIS? I'm just curious if there's anything there of note to talk about there, would be interesting, of course, if PROLARIS is a key contributor to that outperformance. And actually, I think it was up close to 35%?

Yes, I think you have those numbers correct as far as the growth of the other bucket that we provide. PROLARIS, we are receiving samples for PROLARIS. But it's still very early at this point, as we still need to work through some of those reimbursement issues that we've talked about. So it was not a large driver of growth during the quarter. Instead, all the rest of our tests in that other bucket performed very well during the third quarter and so we continue to see growth among those other tests driving that other bucket with a lot of potential for PROLARIS, but that really was not one of the key drivers during the third quarter.

Okay. And then in fiscal Q1, you came into the year with R&D spend at around $8.5 million. Seems like you're going to end the year around $12 million in fiscal Q4. Should we continue to assume that you're going to spend at those levels for the foreseeable future? Or if you continue to outperform, will you potentially use that as an opportunity to keep investing in the pipeline at higher levels?

Myriad does have the industry-leading product pipeline, as I mentioned, with 13 molecular diagnostic tests under development. And we're very committed to reinvesting in the business and growing the business for the future. We did see, as you pointed out, strong investment in R&D this year. I think we're comfortable at the 9% of revenue level. So I think you'll see revenue grow -- sorry, research expense grow but in proportion with revenues next year. But I don't think you're going to see another jump as a percentage of revenues beyond the 9% level.

Okay. Actually, if I could sneak in one real quick one. Just on reimbursement, I just want to confirm that you guys still have not received a survey pursuant to moving BRAC over to the physician fee schedule?

Yes. That is correct. We have not received any surveys that would be the initial step in any consideration for a physician fee schedule placement. So we have not received any surveys.

The next question comes from the line of Tycho Peterson with JPMorgan.

If we look at new indication growth for BRACA, I think you said it was up 57%, that's a noticeable acceleration I think from, I think you'd said 41% last quarter. Can you just talk to whether maybe we're seeing an inflection point here with some of the new indications? And underlying that, are you stepping up your sales and marketing initiatives around some of the new indications?

Yes, Tycho, you're correct. We saw 57% growth attributed to the combination of those 3 strategies we've been pursuing all year. Each of those have really contributed to that growth. I think probably the one that we highlighted a little further than the others was the triple negative indication, and I think that one has been -- we've been particularly pleased with the speed with which physicians have adopted that as a new indication. And so I think we're going to continue to see contributions from all of those. Again, we think we've only 45% penetrated. So there's ample opportunity for even the traditional indications, but as well, these 3 indications, we've yet to fully realize the growth potential in those. So we continue to expect to see that on a go-forward basis.

And then I think last quarter, you talked on Rules-Based, about the profitability there coming up a little bit late as a reflection of maybe some timing of contracts and geographic mix. Can you just talk a little bit about below the revenue line for the rules-based medicine business, where the profitability is and the trajectory there?

Yes. I think when we announced the Rules-Based Medicine acquisition, we indicated that we felt it would become accretive after about 2 years. And I think we're still on schedule for achieving that goal. They will have a small loss this year, but that was budgeted in our forecast from the beginning.

Many of the costs associated with RBM are more of the fixed type. And so when you look at how that is impacting our gross margins, it really depends on what they're able to do on the top line. And we saw a stronger top line revenue number this quarter from RBM, which helped drive an improved gross margin percentage. And we would expect that that fluctuates a little bit from quarter to quarter, depending on the timing of those contracts. But we're excited about the potential of RBM and its contribution to the company as a whole.

And anything new on the pipeline there for -- with VeriPsych or any of the other products that's worth noting?

Mark's group is working very aggressively on a number of the potential products from Myriad RBM. And we will be addressing some of those in future conference calls. With regard to VeriPsych specifically, we have been in discussions with the military, as you're aware. The military has now received the data from the VeriPsych study and they're currently analyzing that data. I don't have a specific timeline for a decision. But we're very interested in the military's analysis and we'll certainly keep the market updated as we learn more from the outcome of that study and their decision around that.

The next question comes from the line of David Ferreiro with Oppenheimer.

I just wondered if you could make just a comment about PROLARIS, considering the amount of money that you've spent investing in this product and the clinical data that you've generated, and also the early marketing efforts that you've done, maybe you can compare it to the BRACA launch and maybe what you've learned from the BRACA launch and how you can make the PROLARIS launch even better and contribute to revenue a little quicker?

Sure, David. So far, we're very pleased with how PROLARIS has gone. As you mentioned, we are in the early stages of both adoption and payer discussions. But we're very pleased with the reception that we've had. In the urologist mind, PROLARIS clearly has a role to play. Because they understand the tools that they currently have at their disposal, are relatively blunt in sorting out aggressive from indolent prostate cancer. So, so far, we've been very pleased with that. You're right, one of our goals is to make sure that as we look at new product launches, that we have entirely changed the adoption curve profiles that we've historically seen at Myriad, which for BRACAnalysis was a rather slow build. And so our strategy is to take the learnings we've had from our early molecular diagnostic days, apply that to a significant change in adoption curve. One of the critical differences that you can see is just the wealth of clinical data that we've already generated and continue to generate. That's a very different profile than what you would have seen when we initially launched BRACAnalysis. That still had some data that -- on medical management -- that have yet to be collected. And so it really is that clinical data that's going to make a fundamental difference in both physician adoption and payer reimbursement. And we think these 3,500 patient outcomes that we're correlating to is a substantial size. In fact, if you were to look at just a pharmaceutical product in the prostate cancer space, the numbers of patients that would be in a Phase III study is nowhere near the size of the studies that we've conducted on PROLARIS. And so we continue to be encouraged that the health economic story is strong, the clinical data is strong and that this can lead to adoption curves that are fundamentally different than what we might have historically seen.

Great. And just one sort of unrelated follow-up. I was wondering if you can comment or -- forgive me if you've already said this. Because it's early days in Europe, maybe you can comment on how your interaction with payers over there have gone in terms of reimbursement?

With regards to the operations in Europe, we're fortunate in that we have reimbursement in all 5 of our major market countries for BRACAnalysis, COLARIS and COLARIS AP. We're very excited about those products. But if I can tag on to what Mark said on PROLARIS, even though we're in the process of seeking reimbursement and don't yet have reimbursement for PROLARIS, the interest in that product from key opinion leaders and physicians and hospitals in Europe has been absolutely amazing. They really get it and they get it quickly. They see the value and the benefit both to the patient and lowering the overall health care cost. So I think we're very excited about where we're at right now in terms of reimbursement in Europe.

The next question is from the line of Isaac Ro with Goldman Sachs.

Most of my product-related questions have been answered. So I did want to just ask a question on the financials and first one would be on just sort of the EBIT margins. Obviously, you guys have made some considerable investments in the franchise, diversified the product portfolio in recent quarters. And as a result, operating margins have come in a little bit. Just wondering kind of as you look out in the horizon, the trajectory towards stabilization to maybe refinancing [ph] of that operating margin over the long term, how do you look at that.

Well, you're right, we have made a concerted effort to make investments in those key areas that we have talked about on the call. We do expect to see areas that we will be able to leverage in the future and would hope to be able to see those operating margins stabilize and then actually start moving to expand in the future. That's all going to be driven off of the payback on these investments that we've been making up to this point. So as we see them start to bear fruit, we would expect that we will able to see that improved operating margin and running through all the way to the bottom line. But it is a direct correlation with the payback that we get on these investments.

Great. And just as a follow-up. If I look at sort of the tax lending [ph] side of things, wondering if there's anything that the European initiative could do to maybe help you on the long term to bring that tax rate down or is there something else that you'd need to do altogether to sort of get back into a lower tax bracket.

Yes, I think we do have great opportunity with the European operations as they start to grow. One of the reasons that we had targeted our Swiss headquarters was because of the aggressive tax rates that they offer there, and we hope to be able to leverage that as we grow the operations over in Europe. But it will mean that we are starting to recognize profits there to be able to have those -- the benefit of the tax rate. So it will take a little while before we get to that point, where the European operations are throwing off enough profit that it helps impact the overall tax rate for the entire company.

And Isaac, as a reminder, in the fourth quarter, we do expect approximately a 40% ETR. And we expect that rate to continue for the near term.

And our final question comes the line of Kevin DeGeeter with Ladenburg Thalmann.

Two quick questions to close out. Could you maybe provide a little granularity on the source of the strong same-store sales growth within the Women's Health franchise? Is that translating through from the online media side? Is there a specific change in the message? And how should we think about sort of a sustainable growth rate for the Women's Health sales force?

I think for the same-store sales, we mentioned I think, a couple of calls ago, that one of the major focus we have is to try to increase the frequency of ordering for physicians that have shown a propensity to order, but generally, order at a rate much lower than what would be recommended by professional society guidelines. And so we put a number of initiatives in place that try to just -- that focus on increasing the frequency of ordering from those physicians. I think what we're seeing in this quarter is those initiatives are bearing fruit. Their teams are applying lien [ph] systems-types technologies to work hand-in-hand with physician offices, to help them identify patients that are appropriate. Typically, what we'll see in a physician's office is by guideline, you would expect somewhere between 4% to 6% of patients that come into the office to be appropriate. But even at 4% to 6%, it's clearly the minority of patients in that physician's office. And so ways in which the physician's office can be more effective at identifying patients and not letting them fall through the cracks are the types of things we're doing that are driving those same-store sales initiatives. As the future potential growth, again, this is a market that we've only penetrated 7%. There are significant opportunities for growth in same-store and new-store sales. And so we're going to continue to look at these initiatives that have proven to be successful and continue to expand those. I think the last comment I'll make on the interactive media front is that we have begun some more pilot-type activities and those have been very successful. And you will see us continue to now expand those into more national types of initiatives over the coming quarters. So while it did contribute to what we saw in this quarter, I think as we expand those nationally, those have the opportunity to provide more meaningful growth on a larger scale.

Terrific. And then just one more if I may. Can you kind of give us your current thinking on M&A strategy. The company has done a fair number of product end licensing and acquisition transactions in the last 12 months, also some strategic transactions as well. Can you just give a sense of where the priorities are and the sense as to frankly, bandwidth on further expansion pipeline which has expanded very rapidly here in the last 18 months.

Yes. As I mentioned, the company is very committed to growing our business for the future and diversifying our product portfolio. And we're doing that by investing in R&D certainly. And we've seen that R&D investment throughout this year. But we're also very aggressive in looking at end licensing technologies and products or actual acquisitions of companies. And so we remain very active on the M&A front. We look very closely at a number of opportunities. Unfortunately, there aren't a lot of significant opportunities in our space. So there isn't a lot there to choose from. And our hurdle rate for doing an acquisition of a company is actually relatively high. But we are committed to it. We're excited about it. But there just isn't a lot of opportunity in the molecular diagnostic area. In terms of our financial resources, obviously, we generate a lot of cash. We have $466 million on the balance sheet, unused borrowing capacity. So there's no financial constraint to our M&A appetite. And I think as a company, we feel we could do another acquisition and still have the bandwidth internally to handle it if, in fact, we found a company that we got excited about and wanted to consider acquiring.

Ladies and gentlemen, that is all the time we have for questions today. Ms. Chambers, you may now continue with your presentation or your closing remarks

Thank you. This concludes our third quarter earnings conference call. A replay will be available via webcast on our website for one week. Thank you all again for joining us this afternoon.

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.