Myriad Genetics, Inc. (MYGN) Q3 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Myriad Genetics Third Quarter 2013 Financial Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, May 7, 2013. And now, it's my pleasure to turn the conference over to Mr. Scott Gleason, Head of Investor Relations. Please go ahead, sir.

Good afternoon, everyone, and welcome to Myriad Genetics third quarter fiscal year 2013 earnings call. My name is Scott Gleason, VP of Investor Relations here at Myriad Genetics. And 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 myriad.com. Presenting with me here today will be Peter Meldrum, President and Chief Executive Officer; Mark Capone, President, Myriad Genetics Laboratories; and Jim Evans, our Chief Financial Officer. This call can be heard live via webcast at myriad.com. The call is being recorded and will be archived in the Investors section of our website. 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 or 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 annual reports on Form 10-Q, and its current reports on form 8K. 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'd now like to now turn the call over to Pete.

Thank you, Scott. To start off, I would like to briefly highlight our financial performance for the third fiscal quarter. I am pleased to announce that Myriad delivered a strong quarter with both revenues and earnings exceeding consensus forecast. More importantly, the company was able to grow revenues at a 21% year-over-year in the third quarter, representing our seventh consecutive quarter where top line growth exceeded 20%. These results are a testament to the dedication and commitment of our employees, and I'm proud of the entire Myriad team. Every segment of our business grew in the third quarter. But I'd like to highlight 1 area in particular that was exceptionally strong. Our Women's Health franchise grew 35% year-over-year. The Women's Health team has done an outstanding job growing this business segment through innovative marketing techniques, such as our online Hereditary Cancer Quiz, and our focus on high-volume touch points such as mammography and imaging centers. Earnings per share in the third quarter was $0.46, up 34% year-over-year. And I believe these strong results demonstrate the continued leverage of our business model. Myriad looks to build upon this leverage going forward as we focus on growing our core markets, diversifying our business through our strong product pipeline and broadening our international reach as Myriad transforms into a global molecular diagnostic company. I'm also pleased to announce that we are raising our financial guidance for the 2013 fiscal year. We are now predicting revenues of $595 million to $600 million, representing a 20% to 21% top line growth compared to our prior fiscal year. The strong growth performance follows our 23% revenue increase last year. On the bottom line, we are calling for earnings per share of $1.65 to $1.67, representing earnings per share growth of 27% to 28%. Our strong earnings and cash generation has allowed us to continue to honor our pledge of returning cash to shareholders through our share repurchase program. As you may recall from our last earnings call, Myriad's Board authorized another $200 million share repurchase program. During the third quarter, Myriad repurchased approximately $45 million of stock. In aggregate, we have now repurchased over 24 million shares at an average rated price per share of $21.65, representing over 25% of our outstanding shares. We have approximately $175 million remaining on our existing repurchase authorization. And we'll continue to actively repurchase stock at price thresholds that we believe are not reflective of a long-term value of the company. Now I'd like to highlight some of the important events that transpired through our third fiscal quarter. First, we announced a companion diagnostic collaboration with PharmaMar, employing our new Homologous Recombination Deficiency or HRD test. Myriad's HRD test is able to detect when the tumor has lost the ability to repair DNA damage, regardless of the genomic causation. We believe HRD will be the gold standard in detecting whether a patient's tumor has lost its DNA repair function, making the patient a good candidate for DNA-damaging drugs such as the platinum-based therapies and PARP-inhibitors. As you may recall in the study we presented at the San Antonio Breast Cancer Symposium at the end of last year, 70% of the triple negative breast cancer patients with a high HRD score saw their tumors shrink and had minimal residual disease, while only 12% of the breast cancer patients with a low HRD score responded to carboplatin-based therapy. The body of evidence to support HRD as a companion test for these therapeutic classes is growing. And we believe 490,000 patients each year could be candidates for DNA-damaging drugs, which would represent a $2 billion market opportunity for our HRD test. Myriad is a content-driven company. Instead of focusing on developing DNA sequencing technologies, we are committed to understanding the cause of disease and elucidating the role genes play in the disease process. In addition to the many genes discovered by Myriad scientists and collaborators, we are constantly looking for new discoveries and attractive in-licensing opportunities. As announced this afternoon, Myriad has acquired the exclusive worldwide rights to the MITF gene. MITF is an important gene in predicting the hereditary cancer risk from melanoma, a deadly form of skin cancer, and renal cell carcinoma, the most common type of kidney cancer. Patients with mutations in the MITF gene have a 14-fold increased risk of developing melanoma or kidney cancer during their lifetime. We will incorporate this important gene in our new next-generation hereditary cancer panel in the future. Our hereditary cancer panel will provide patients and their physicians with critical life-saving information on a broad spectrum of cancers. Additionally, Myriad is pleased to announce that during the third quarter, the U.S. Preventative Services Task Force clarified BRACAnalysis as a preventive service under the Affordable Care Act. This ruling will ensure that women with a family history of breast or ovarian cancer can now be tested with no patient out-of-pocket cost sharing for all non-grandfathered, private insurance plans. According to published studies, a vast majority of private insurance plans will lose their grandfathered status by 2014. Women will no longer have to worry about the cost when deciding on whether or not to pursue the life-saving testing provided by BRACAnalysis. And this comes at an important time as the percentage of high deductible plans has nearly tripled in just the last few years. From a business standpoint, this decision should reduce the small cancellation rate due to patient out-of-pocket costs concerned, and lessen some of the seasonality we have typically seen throughout the year. During the third quarter, Noridian, the Medicare administrative contractor for our region, announced its pricing for the new molecular pathology codes. Integrated BRACAnalysis was priced at $3,382, an 8.1% discount to the average private insurance reimbursement rates. And COLARIS was priced at $4,343, a 14.3% premium to the average private pay reimbursement price. Since Medicare reimbursement is so close to our current private insurance reimbursement rates, and since none of our private contracts are based on the Medicare rate, we believe that Medicare pricing will not have an impact, either positively or negatively, on our private insurance reimbursement in the future. I would now like to make a few comments surrounding the upcoming Supreme Court decision, as I know it is an area of key concern to the investment community. Of the over 500 patent claims around our BRACAnalysis test, only 9 claims are at issue in the Supreme Court case. Five claims cover the composition of matter of isolated DNA, and 4 claims cover the composition of matter of complementary or cDNA. Neither isolated DNA nor cDNA exist in nature, but are the result of specific human intervention in the laboratory. For the last 30 years, in every industrialized country in the world, both isolated DNA and cDNA have been patent-eligible. And this policy has been twice upheld by the Federal Circuit Court of Appeals. I would also note that 2 amicus briefs, 1 from Dr. Eric Lander, Head of the Human Genome Project, and the other from the United States government through the Solicitor General, supported the patentability of cDNA, which encompasses the probes and primers used in our BRACAnalysis test. As we look to the future of hereditary cancer testing, we envision moving away from single gene, single cancer test and believe that a pancancer panel, such as our hereditary cancer panel, will dominate the market. From a content and intellectual property standpoint, Myriad has, in addition to composition of matter patent claims, strong method of use patent protection around the many of the key genes that may be important in any pancancer panel, including BRCA1, BRCA2, DMS2, RAD51C, MYH, PALB2, P16, P10, ELAC2, and our recently acquired MITF gene. Coupled with our knowledge of the role these genes play in hereditary cancers, we believe Myriad's competitive position will remain strong well into the future. Myriad is a pioneer in the molecular diagnostic field and we are committed to maintaining our leadership position. Finally, Myriad is focused and always will be focused on the patient. And we will continue to pursue our strategic vision of improving patient care to the development and marketing of novel molecular diagnostic tests across multiple medical specialties. We will strive to answer the most pressing questions from the physician and the patient. We are entering an exciting period for the company as we look to transition to the next generation of hereditary pancancer testing. And greatly extend our product reach into new markets, both here in the United States and throughout the world. I look forward to talking more about our vision for the company and our strategic initiatives at our upcoming Analyst and Investor Day in New York on May 9. Now, I'm pleased to turn the call over to mark, who will provide an operational update.

Thanks, Pete. I'm happy to provide an operational update. As Pete mentioned, we are exceptionally pleased to again exceed 20% top line growth in the third quarter, with all of our product lines in business segments contributing to this strong growth. Oncology grew at 13%. And as Pete mentioned, the Women's Health segment was exceptionally strong in the third quarter, growing at 35%. We continue to believe that there is substantial room for growth in both Oncology and Women's Health as the company executes on the first of its 3 strategic initiatives of increasing penetration in our existing markets. Our managed care team continues to make significant progress on BART reimbursement in the fiscal third quarter and we ended the quarter with reimbursement coverage for approximately 80% of patients, once again, exceeding our internal expectations. We expect to make some additional progress with the remaining private insurance providers over the next few quarters. The oncology segment continued to demonstrate solid double-digit growth in the fiscal third quarter, growing 13% year-over-year. We are pleased to see COLARIS revenue resume its previous growth trend to 19% year-over-year growth. Oncology BRACAnalysis revenue was also a growth driver during the quarter. We continue to further penetrate the new BRACAnalysis indications of triple negative cancer, DCIS, and ovarian cancer, and we now believe we are approximately 40% penetrated in these markets. Additionally, we have now fully implemented our protocol integration program. In concert with these programs, we have developed a strategic resource allocation strategy based upon a new methodology for identifying physician practices with the highest growth potential. This initiative is already starting to make an impact and I am pleased to announce that Oncology growth accelerated toward the end of the third fiscal quarter, based on this targeted selling strategy. We are exceptionally pleased with the strength in our Women's Health division in the third quarter and believe this success is attributable to our strategic initiatives, which include protocol integrations, radiology expansion, interactive marketing and sales force expansion. Our protocol integration efforts are beginning to show dramatic results in the OB/GYN channel. And as of the end of the third quarter, we have completed over 800 protocol integrations, surpassing our plan for the year. We have found that following the completion of the protocol integrations, physicians tend to order more tests and tend to be more consistent in their ordering patterns. OB/GYN customers who have completed protocol integrations have average volume of over 10x that of OB/GYN customers who have not completed protocol integration. Additionally, this program dramatically improved ordering consistency, thereby reducing their variability in a given practice. We have also seen great success with our radiology expansion program and the interactive marketing campaigns. Radiology revenue has grown dramatically in the last 12 months and was up 45% year-over-year in the quarter. On the interactive marketing side, we have seen a significant impact with our online Hereditary Cancer Quiz. Over 100,000 individuals took our online quiz in the third quarter and over 50,000 individuals warranted further discussions with the physician about their risk for hereditary cancer. In other direct-to-consumer campaigns, we have seen 10% of patients follow through with these recommendations. With the Women's Health market in excess of 8 million patients, this approach may provide an efficient means to facilitate a national patient awareness campaign. In our urology division, we continue to see increases in physician demand for PROLARIS. During the past year, Myriad has received over 3,000 PROLARIS test orders and help those patients determine how to best treat their prostate cancer. This level of demand is significantly greater than sample volumes for any other cancer prognostic in the first year of a new product launch. Currently, about 90% of the orders we receive are biopsy samples from patients recently diagnosed with prostate cancer, and trying to make the difficult initial decision of how aggressively to treat their disease. Additionally, over 350 urologists have used PROLARIS in their practice to improve the quality of life for men with prostate cancer. While Myriad does not yet have Medicare reimbursement, it is important to note that Medicare may pay for legacy claims once reimbursement has been established. On the subject of reimbursement, we are also making progress with our Proceed prostate cancer registry study and are actively opening up new enrollment sites for the clinical trial. Enrollment has taken a little longer than we initially expected, but we believe we are on track to provide data to Medicare by late summer. This would keep us on schedule to potentially receive Medicare reimbursement for PROLARIS in the first half of calendar year 2014, which is in concert with our previous guidance. We presented 3 posters at the recent American Urological Association Meeting this week. One of the posters for PRO009 study was presented by the University of Hamburg, after evaluating 271 biopsy samples, there was once again a strong correlation between the PROLARIS score and biochemical recurrence with additional prognostic value beyond adverse pathology. We view biochemical recurrence and survival as the gold standard endpoints for any prognostic prostate cancer product. With the completion of this study, we now have data on over 200,000 biopsy patients in 6 separate clinical studies. Another poster presentation at AUA demonstrated the field effect of the PROLARIS score outside of the tumor tissue. This study further validates the potential applicability of our technology in a diagnostic application for confirming a negative biopsy result. Finally, I am also pleased to announce that our fifth peer-reviewed publication conducted in conjunction with Duke University was accepted in the International Journal of Radiation Oncology, Biology and Physics. Results from this prospectively designed clinical study show that in patients who underwent external beam radiation therapy, the PROLARIS score was significantly associated with survival outcome after radiation therapy and provide a prognostic information beyond what was available from clinical parameters including Gleason score, PSA level and clinical stage. Based on this study, the PROLARIS score could be used to select high-risk men for more intensive combination therapies such as radiation, prostatectomy and/or pharmaceuticals. This study should be published within the next few months. Myriad also continues to make the commercial investments to support our new product pipeline, and we are pretty completing the hiring for our new 8-person sales teams to support our early access lung CCP launch and Melanoma diagnostics launches, which are planned for the next fiscal year. In support of these launches, we are submitting verification studies and validation studies for presentation at upcoming medical conferences. While these products will not garner substantial revenue traction until we receive reimbursement coverage, they are critical to our long-term growth and diversification strategy. Finally, Myriad continues to make excellent progress in preparation for our hereditary cancer panel launch. In April, we announced an important collaboration with RainDance Technologies, a leader in target enrichment technologies for next-generation sequencing. RainDance will supply Myriad with systems, reagents, gene panels and consumables that we will utilize for the sample preparation prior to sequencing the genes in our hereditary cancer panel. RainDance's proprietary single molecule droplet technology provides unique capabilities, including the ability to handle up to 20,000 targets from a single sample, rapid throughput, which allows us to continue to meet our goal of less than 14-day turnaround times, the ability to handle large rearrangements, the capability to easily expand the number of genes in the panel and attractive margins. When we evaluate the BRACAnalysis genes, we utilize 82 amplicons to analyze 17,000 base pairs. The hereditary cancer panel will utilize over 1,200 amplicons to analyze over 200,000 base pairs. The completion of a front end sample preparation solution was not trivial and represents one of the key milestones in our preparation for launch. I look forward to providing a more thorough update on the hereditary cancer panel at our Investor Day this Thursday. In conclusion, we believe this is a very exciting time for Myriad Genetics. Investments we have made over the last few years in our core technology and product pipeline are beginning to come to fruition, and we are on the cusp of transforming our hereditary cancer testing franchise into a broader reaching and more informative business. We are truly entering a new period of Myriad Genetics where we believe the company will transform into a more comprehensive and diversified business. Now I would like to turn the call over to Jim Evans.

Thanks, Mark. And I'm pleased to provide the detailed look at Myriad's financial results for the third quarter of fiscal 2013. Third quarter revenues came in at $156.5 million, a 21% increase over the prior-year quarter, which represented a new record for the company. The strong revenue growth this quarter is fully reflective of the new Medicare reimbursement rates for BRACAnalysis, BART and COLARIS, which took effect at the start of the third quarter. We have completed the process for renegotiating all of the new molecular pathology code pricing with all private insurance companies as well. So we anticipate reimbursement stability. The breakout of revenue includes Molecular Diagnostic revenue of $148.4 million, which was up 20% year-over-year, and Companion Diagnostic revenue of $8.1 million, which was up 25% year-over-year. The Companion Diagnostic segment again benefited from the Sanofi diabetes collaboration this quarter. Based on the large amount of work done as part of the Sanofi collaboration, we are increasing our revenue guidance for Myriad RVM in fiscal 2013, and are now calling for revenues of $28 million to $30 million, versus our previous expectations of $25 million to $28 million. Revenue growth in the quarter was driven by increased patient demand for our existing products with Women's Health and COLARIS having exceptionally strong quarters, as Pete and Mark mentioned. Also contributing to our growth was BRACAnalysis, which grew 5% compared to the prior sequential quarter. BART revenues were up strong year-over-year basis as expected, and on a quarter-over-quarter basis, increased 7% to $16.9 million. Turning to the operating expenses. Our research and development expense in the quarter increased 16% year-over-year to $13.6 million, coming in just under 9% of total revenue. We continue to anticipate research and development spending will equate to approximately 9% of revenue for the full year, as we continue to make investments that support our industry-leading product pipeline. Our SG&A expense in the quarter was $64.6 million, representing 18% year-over-year growth and contributing to our operating leverage. The increase in SG&A expense include our sales force expansion in the urology and dermatology market segments, investments to support new product launches and long-term growth and increased spending to support international operations. Operating income during the third fiscal quarter was $57.9 million, representing 26% year-over-year growth. Our operating margins in the third quarter were 37%, up 150 basis points from 35.5% for the same quarter of fiscal 2012. We have been successful in driving improvements to our operating margin, while at the same time, making significant investments in R&D and preparing for new product launches. We did see a onetime reduction in our tax rate in the third fiscal quarter from 40% to 36%. This reduction is primarily due to Congress' extension of the R&D tax credit. Since its introduction in 1981, the R&D tax credit has expired 8 times and been extended 14 times. Given the wrangling over other issues in Washington, D.C., Congress did not renew the credit when it expired December 2011. The credit was finally extended in the first quarter of 2013 and allows for a catch-up for credits earned during calendar 2012. We were therefore able to recognize a year's worth of tax credit all in our third fiscal quarter. For upcoming fourth quarter, we believe our effective tax rate will return to approximately 40%, but for the full year, we are now guiding for an effective tax rate of approximately 39%, which compares to our previous guidance for full year tax effective rate of 14%. Diluted weighted shares outstanding for the third quarter were 82.4 million, which was down approximately 2 million shares sequentially, and 4 million shares year-over-year. The reduction in diluted shares outstanding is primarily due to the execution of our stock repurchase program. During the third fiscal quarter, Myriad repurchased approximately $45 million of stock, representing 1.7 million total shares. We will look to continue to repurchase stock at valuation thresholds that we believe are now reflective of the inherent long-term value of the company. Additionally, to answer a question we often receive from investors, Myriad utilizes 10b5-1 plans that allow the company to repurchase stock during quiet periods. The 10b5-1 plan typically sets thresholds where the company will repurchase stock at varying volume levels, dependent on the share price. Diluted earnings per share in the quarter were $0.46, which exceeded analyst consensus forecast of $0.39. Diluted earnings per share grew 34% in the fiscal third quarter, which is the highest rate we have seen in the last 2 years. Focusing now on the balance sheet and cash flow statement. We ended the third quarter with over $462 million in cash and cash equivalents, representing approximately $5.61 in cash for fully diluted share. Cash from operations in the quarter came in at $37.4 million. Accounts receivable net of allowance increased to $93 million in the third quarter, primarily due to the fact that Noridian, the medicare administrative contractor for our region, did not make payments in our fiscal third quarter for testing performed in calendar 2013, as they were working to determine the reimbursement rate for the new molecular pathology codes. Noridian has now begun processing those claims. We're again receiving payment from Medicare testing. We expect our receivables balance to normalize over the next few quarters and our days sales outstanding to return to historical levels of approximately 45 days. Finally, turning our attention to financial guidance. Myriad is again increasing both its revenue and earnings guidance for fiscal year 2013. As Pete mentioned previously, our new revenue guidance calls for revenues of $595 million to $600 million, an increase from the $575 million to $585 million range we provided last quarter. Our new guidance for fiscal year 2013 diluted earnings per share calls for earnings per share of $1.65 to $1.67, up from the $1.55 to $1.58 range previously announced. As a reminder, our diluted earnings per share guidance does not take into account potential future share repurchase activity. We continue to see opportunity for strong growth in all of our business segments and we believe several of our new product initiatives and strategic collaborations will start to become meaningful growth drivers for the company in the near term. Consequently, while we are not yet ready to provide detailed fiscal year 2014 guidance at this time, we would like to provide some thoughts on next year's revenue growth. At this time, we feel very comfortable guiding investors towards a low double-digit top line growth rate for fiscal year 2014. I look forward to providing more detailed thoughts on our longer-term growth trajectory at our upcoming Analyst Day later this week. With that, I'll now turn the time back over to Scott.

Thank you, Jim. In order to ensure a broad participation in today's Q&A session, we're asking participants to please ask only 1 question with no follow-up, and then jump back into the queue. Operator, we are now ready for the Q&A portion of the call.

[Operator Instructions] Our first question comes from the line of Bill Quirk with Piper Jaffray.

First off, can we talk a little bit about the new rates? You mentioned, Jim, that you finished negotiating rates for private pay. Obviously, I think everyone on the line knows the new Medicare rates. So can you comment, just with respect to private payments, how consistent are they with where they were previously or perhaps where the new Medicare rates are?

Let me start off and I'll ask Mark to add to my comments. We've been negotiating the private pay insurance rates over the course of the last 6 months or so and now have, with all of our private pay insurers, established for the current contracts our new rates. And we have not seen any adjustments in those rates as a result of the Medicare reimbursement pricing that was announced recently by Noridian.

And Bill, I might -- just a few more color to that. Obviously, with the BART and with the ACA preventive services discussions that have been going on, we've really been in constant communication with our payers. Not only do we have to implement all the new molecular codes, but we needed to work through agreements on BART and we needed to work through processes on how we would work together on the ACA preventive services. So throughout all of those continual discussions, we have not seen any -- there's been no changes to the underlying BRACAnalysis pricing. In fact, as you've seen, we've been able to get reimbursement for BART and are now doing integrated BRACAnalysis on 80-plus percent of patients.

Very good. And then just as a follow-up regarding the preventative services comments. Can you just remind us guys, where does your bad debt stand right now? And what change might we see as a result of being added to the Preventive Services Task Force and obviously having that out-of-pocket pay issue essentially go away for many of your tests?

Yes, Bill, that is probably the biggest component of our AR is that the individual's co-pays are deductibles that need to be collected. And it is one of the more difficult areas for us to make inroads into those collections. Right now, our bad debt is about 5.4%. Now we have -- there will be a period of time as the new preventative policies are folded into plans that lose their grandfathered status. It is, again, only for that part of our market that is addressing the asymptomatic group. So we don't expect it to have a significant impact to the bad debt right out of the box. But we would hope over time as it is integrated into more practices, as those grandfathered statuses roll off, that we'll be able to see a positive impact to our bad debt.

Our next question comes from the line of Vamil Divan from Crédit Suisse. Vamil Divan - Crédit Suisse AG, Research Division: So just one that I had on -- apologize if I missed this when you were giving some of the financials. In terms of gross margins, we'd assume that, that would -- might come down a little bit as you rolled out BART, and it actually came in a little bit higher than what we're expecting. I'm just trying to get a sense of is there any updates to what you think the gross margin might be for the full year or even maybe looking into next year?

Let me take that question, and then I'll ask Jim to add additional comments as well. You're correct, we've been pleasantly surprised by the ability to maintain the gross profit margin in part because of the rapid uptake of the BART test. We anticipated with BART at lower volumes to have a lower gross profit margin, but at larger volumes to approach that of BRACAnalysis and we've seen such a rapid uptake in the BART test that's happened very quickly and fortunately, not impacted our margins. And we see these margins continuing for this fiscal year, and we'll certainly give guidance in the future on what we might see for the next fiscal year. Vamil Divan - Crédit Suisse AG, Research Division: Okay. And then I guess my second question just relates, again, to BART. I think you mentioned 80% is the penetration you're having now. Just how should we think about that as we kind of look forward also in terms of when do you think that will get up to maybe closer to 90% or higher as we look out into the future quarters?

Yes, you're right. We did -- last quarter, we were at 65%. We surpassed our expectations and moved to 80% by the end of this quarter. We've really gone through most of the major payers, all of the major payers at this point, and are really left with a large number of smaller payers. And so generally, those will take some time to get through those smaller contracts. So we would expect that 80% to continue to increase, but it will be a relatively shallow increase as we have to finish off many additional contracts to get the remainder of those patients.

And just as a reminder, we ask everybody to please limit your question to one question to facilitate the broadest participation possible.

Our next question comes from the line of Peter Lawson with Mizuho.

Peter, I just wonder if you can give any commentary around pricing and volume for the test and how that fit into the increased guidance?

I think as we mentioned, the pricing has been very consistent as we've had negotiations with the private payers. This quarter fully reflects the discount to BRAC and the slight premium to COLARIS based upon the Medicare reimbursement rates. But again, that is only about 10% of our total volume. So we didn't really have any price increase benefit. All of this quarter's revenue increase, I think, can be fairly attributable to a sample flow increase and increased volume.

And how does that feed into the guidance? Is that all around volume?

Yes, yes, there's really no anticipation for price increases in the guidance for the rest of the year.

Our next question comes from the line of Tycho Peterson with JPMorgan. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: Just you guys didn't call out Europe. So wondering if you can provide a little bit more color on how that's tracking relative to expectations, if there are any kind of catalysts we should think about there and maybe just update us on reimbursement thoughts for Europe.

Thank you, Tycho. Yes, European operations are proceeding on schedule. They're going very well. Our lab in Munich, Germany is in full operations and generating revenues. We have now a complete sales and marketing team on the ground in all of the major market countries, and we have distributors now in over 80 countries throughout the world. So again, it's an international focus, not just Europe. And we feel very good about how that's progressing, and we remain on track to hit our goal of $50 million in international revenues by our fiscal 2016. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: And then could you update on thoughts on reimbursement for additional tests in Europe?

Right now we're very excited about PROLARIS, and I know Gary King, who heads our international operations, is having discussions with the various countries about the importance and the value of our PROLARIS test and the ability of PROLARIS not only to save lives and improve the quality of life of men with prostate cancer, but also to reduce the overall health care costs with -- in each of those territories. And I think those discussions are going very well, but I will caution the investors that reimbursement in Europe is a slower, more challenging process. We have to negotiate with each of the major countries. And in some countries like Switzerland, it's reimbursed on a canton by canton basis. So we're very excited about PROLARIS, very optimistic about its future in Europe, but it will take some time to get broad reimbursement coverage.

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

This is Charmaine on behalf of Mike. My question concerns the upcoming Supreme Court outcome. So we understand that Myriad has a very strong patentless [ph] data around BRCA, but I'm curious as to what your views are on how competitors would view their freedom to operate differently. Should the outcome be validation of all genes, both isolated DNA and cDNA being validated versus only validation on cDNA? How do you think competitors would view that and proceed differently, if there's any difference?

Thank you. Good question. The Supreme Court is currently hearing 9 claims, 5, as you pointed out, are isolated DNA for our complementary DNA. As I mentioned, almost all of the amicus briefs were in support of cDNA claims, and that's certainly the way we do our test, any form of targeted sequencing using primers and probes. However, if the Supreme Court were to rule against both isolated and cDNA, making the United States the only developed nation in the world not to allow patenting of genes, that would still leave a substantial number of method of use and correlation claims that will give Myriad very strong patent protection around not only BRACAnalysis, but other genes we've recently discovered or acquired, such as RAD51C and the one we announced today, the MITF gene for melanoma and kidney cancer. So I think it's important that investors not lose sight of the fact that method claims are still very important in the diagnostics setting and still give companies very strong patent protection beyond any composition of matter patent claims that companies may have.

Our next question comes from the line of Dan Leonard with Leerink Swann.

I just had a follow-up on the mechanics of your discussions with commercial payers. It sounds like you revisited all of your commercial pay contracts recently and I'm wondering, is that typical or unusual into the degree where you are at the negotiating table on pricing sooner than you would normally be in the contract life of some of your -- some of the payers? Would you be able to extract anything like longer contract terms or other nonmonetary concessions in your favor or otherwise?

Yes, thanks, Dan. This is -- I think what precipitated much of the discussion that we had were some one-time events. Just by way of reference, typically, our contracts are in the range of 1 to 3 years. And generally, we don't have discussions around pricing until those contracts reach whatever that termination date is. That's by far the most typical situation. In this case, there were 3 events that were happening, 2 in particular relating to pricing that caused us to have discussions with those payers before we would typically require. One was just an administrative function, and that is all of the codes from molecular pathology were being changed from previous codes to new codes. And therefore, we had to talk to payers about exactly how they were going to implement those codes and how they were going to take the pricing that had been on the old codes and translate those on to the new codes, which was really completed by January of this year. Not long after that, for many of those payers, then we were in negotiations with BART coverage. And as a result of all the medical professional society guidelines, you can see that most of the payers at this point have now agreed to cover BART and that has been -- those are being delivered on 80% of patients at the end of this quarter. And so those were pricing discussions that we had to agree to with each of those payers. And then the last discussion we've been having is, again, back to an administrative discussion about how to implement the preventive services, the recommendations that were made by USPSTF and then approved by Preventive Services. And so we are now in discussions about precisely how those will be implemented, benefit payment plans for patients, et cetera. So I think all of those things were atypical, which is why we've had so many discussions with payers. The more typical would be at this point since we've actually agreed to all of those is that we will not revisit those until the contracts come to their end dates, which are typically from 1 to 3 years from now, which again is why we've underscored, I think, in a couple of comments today that we don't anticipate any changes to our private pay rates. We think that we're in a very stable reimbursement setting at this point. We also believe that Medicare next week will publish their final pricing recommendations based on median pricing. And so we'll have some clarity on what CMS recommendations are for median pricing as well. So I think we're entering a stable period for reimbursement at this point.

Our next question comes from the line of Isaac Ro with Goldman Sachs.

Jim, I wanted to ask a question about the guidance as it relates to expenses. Could you maybe quantify your expectations for the expense associated with sales force expansion on PROLARIS over the balance of the year and specifically touch on kind of how you think that will impact margins either sequentially or year-on-year? And then as a second part to the guidance question, have you guys touched on double-digit growth for 2014 on the top line? Given the timing of the BART implementation, the comps there, should we assume that that's a back-end loaded sort of picture for the fiscal year '14?

Yes, so we haven't gotten into the details of our 2014 guidance as particularly on the expense side, so we'll move more into giving a better picture of that with our next earnings call. But for the remainder of the year, we have been heavily engaged in building up our sales teams for the new product launches and getting those programs established, getting the research and development completed and ready for publication. So for next quarter, I don't see that we'll have a significant change in the expense side from what we've seen over the last couple of quarters. I think it should be fairly consistent with what we've seen the prior quarters of this year. Let's see, as far as the revenue growth next year, it is going to be a challenging year in that we do have some high BART comps that we'll be coming up against. As you know, the BART came on more toward the end of the year. And so we will have to make sure that we are able to drive growth on the top line to meet that expectation of the double digits above and beyond the comps that we see in BART. But we do think that, that is going to be reasonable and possible.

Our next question comes from the line of Derik De Bruin with Bank of America.

So I'm just curious, when you start thinking about the competitive landscape and reimbursement, and given the amount of clinical data and the amount of data you guys have of the years and that your private payers have seen, what sort of is the level that a competing test would have to reach in order to convince the payers to reimburse it? And I guess, are there any examples, any precedents where you would have -- you would see a similar test and how long it take -- do you have any sort of like analogies you can sort of run with this. I don't know the answer to the question here.

So let me get a stab at it, Derik, and I'll ask Mark to elaborate on my comments. First of all, patients and physicians are going to demand accurate quality testing and rapid turnaround time, particularly in affected patients for this test helps guide surgical intervention for patients diagnosed with breast cancer. So it's more than just a cost component. The accuracy and the quality and the turnaround time are key attributes that our customer, the physician and the patients, will demand. I think it's also important to use as a surrogate or a proxy the COLARIS test because there's a good example of a product that Myriad sells that we have no competitive advantage in terms of intellectual property. We compete on a completely level playing field. We have a dozen different labs, both smaller venture capital-backed startup companies, major reference laboratories, as well as very fine hospital and university institutions. And in that market where we don't have patent protection but do have the gold standard quality testing with the most rapid turnaround time and a very excellent reputation in that marketplace, we dominate that market with a 70% market share and we are the premium priced product. So I think that's a good example of how Myriad would face competition in the future, and we're certainly facing it and doing an outstanding job of preserving a very strong market share. But Mark, any additional thoughts?

Yes, the only thing I would add, Derik, is -- and you're well aware, this is the uncertain variant database that we've been able to establish, this is true on both the COLARIS side and on the BRACAnalysis side. A competitor that comes out with a new test is going to face the same journey that we have faced over the last 15 years. When we initially launched BRACAnalysis, we had a 40% uncertain variant rate, which means 40% of the time, a doctor had to sit across from the table with the patient and say, "We've identified a mutation in your gene, but we're not sure what it means." That obviously is an unacceptable situation for both the patient and the provider and because of that, we've invested significantly to reduce that uncertain variant rate down to below 3% for BRACAnalysis and below 6% for COLARIS. And it's incredibly important not only to patients and physicians that they can have conversation about the certainty of the test results, it's actually equally important to the payers. As Pete mentioned, we have a premium for COLARIS, and that's part of the reason is because of this low uncertain variant rate. For a payer, it's crucially important to know that a patient has a true negative or a true positive test result because if there's some uncertainty about whether a patient is truly negative or not, a payer will have to continue to pay for the very expensive intervention, such as prophylactic surgeries or very expensive imaging technologies. And they can't withhold those unless they have certainty around the fact that this patient is truly negative. And so all of those factor into the other things that Pete mentioned, turnaround time, sensitivity, customer service, all of that has allowed us to be very competitive in the COLARIS market despite the significant competition.

Our next question comes from the line of David Ferreiro with Oppenheimer. David Ferreiro - Oppenheimer & Co. Inc., Research Division: I don't mean to beat a dead horse, but just to follow up on Dan's question previously on pricing. Could you just provide the average duration of all your contracts in aggregate now? And also, can you provide a more precise percentage on how many renegotiated since the Medicare rates were released this year?

Thanks, David. The range of contracts is anywhere between 1 to 3 years. Probably 2 years is a reasonable average to think for our average contract. We've essentially renegotiated every one of those contracts over the past few months. So any contract of any significant volume has already been renegotiated. The new codes are loaded, the new prices are loaded, BART has been contracted. And so at this point really, any discussions with payers are no longer really about hereditary cancer testing, it's really about our new tests and coverage rates for -- and coverage for our new tests. So again, we think we're in a very stable reimbursement environment. We've really done quite a bit of work in the last 6 months with payers. And in every one of those circumstances, it's another great opportunity for us to reinforce the value of these tests. The health economics around these tests is really significant, and it's a great opportunity for us to be able to reemphasize that. I think the fact that we've been able to get the type of BART coverage that we have over the past 6 months is a true indication of just how meaningful the health economics are because payers recognize that identifying these mutation carriers with the most sensitive tests is critically important to preventing what are incredibly expensive cancers, and also to ensure that patients truly are false negative and there -- or true negatives and therefore will not undergo unnecessary treatments that they may undergo if there is some uncertainty as to whether or not they are truly negative.

Our next question comes from the line of Amanda Murphy with William Blair. Amanda Murphy - William Blair & Company L.L.C., Research Division: I had a question on PROLARIS and some of the comments you made about reimbursement in '14. Just curious, obviously, you've been compiling more and more data, but have you actually had conversations with Noridian ongoing? And then just curious, what percentage of your samples that you foresee thus far are Medicare? And does that -- is that incorporated into the top line sort of guidance you gave for '14 at all?

Thanks, Amanda. Yes, a couple comments on that. We -- back at September, when we had initial discussions with Noridian, they were very comfortable with the analytical validity, the clinical validity of the test. They thought the data was quite strong. And in fact, as we've talked about, it's only gotten much stronger since then with a variety of additional publications. Every time we have a new publication or a new presentation, we will update Noridian on that additional data. And so they continue to be impressed with the amount of data that we provided. We have had multiple face-to-face conversations with them over the past 6 months, and do keep them up to speed with this test. They are very interested in this. Certainly, the ability to differentiate which patients need very expensive treatments and which ones don't is something that is of keen interest to Medicare. And so we have stayed in consistent contact with them. The one thing they asked in September and we've continued to amass data on is clinical utility studies that show, in fact, that physicians are willing to change their medical management decisions based on the results of the PROLARIS test. And that's the Proceed study that's underway that we're collecting data on and will provide as the last piece of information that Medicare had requested before they ultimately make a reimbursement decision on PROLARIS. As I said in my comments, we are expecting therefore that we could receive Medicare reimbursement in the latter half of this year or in calendar -- in fiscal year '14. And so as a result of that, we are contemplating that in our revenue forecast for next year and as Jim mentioned, we'll obviously provide some additional insight into that when we get into our next earnings call. So we are contemplating some revenue from Medicare in the latter half of the year for PROLARIS. Amanda Murphy - William Blair & Company L.L.C., Research Division: Again, just what were the percentage of -- of the samples you've received already, what percentage are Medicare roughly?

Yes. The majority of the samples are Medicare samples. This, in general, is a Medicare-type population. About 65% of prostate cancer patients are covered by Medicare. So I think that gives you some insight into generally the mix.

Our next question comes from the line of Doug Schenkel with Cowen and Company.

You've guided to low double-digit revenue growth for 2014. I know you don't want to give a ton of detail on that at this point, understandably so. But I just want to be clear, is that your guidance regardless of the Supreme Court outcome? And then I guess a bigger picture question. Presumably on Thursday, we're going to learn a lot more about the fruits of some pretty significant R&D investment over the last couple of years. R&D has increased, I think, about 50% was last year, and it seems on target to grow about 25% year-over-year this year. Is it fair to assume that the rate of R&D spend growth is going to slow moving forward?

Thank you, Doug. Yes, regardless of the decision of the U.S. Supreme Court in our current case on gene patenting, we're very comfortable guiding to that low double-digit revenue for next fiscal year. We have spent a lot of effort and research activity on both HRD and our hereditary cancer panel. We're certainly going to highlight those in 2 days at our Investor and Analyst Day, and you'll learn a lot more about that, but we're very excited about the fruits of that R&D effort. While we have grown the R&D over the past several years, it's approximately 9% of total revenues, and we think that's a good number given the projects we're working on. So I don't see that growing faster than revenues, but it probably will grow at the same rate and in line with our revenue growth and remain at 9% of revenues for 2014.

And there are no further questions at this time. I'd like to turn the call back over to you, Scott.

Thank you. This concludes our earnings call. A replay will be available via webcast on our website for 1 week. Thank you for joining us, and have a great afternoon.

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