Myriad Genetics, Inc. (MYGN) Q4 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standby. Welcome to the Myriad Genetics Fourth Quarter 2018 Financial Earnings Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, August 21, 2018. I would now like to turn the conference over to Scott Gleason, Vice President, Investor Relations. Please go ahead.

Thanks, Mike. Good afternoon. And welcome to the Myriad Genetics fiscal fourth quarter 2018 earnings call. My name is Scott Gleason. I am the Vice President of Investor Relations. During the call, we will review the financial results we released today, after which we will host a question-and-answer session. If you have not had a chance to review the earnings release, it can be found in the Investor Relations section of our website at myriad.com. Presenting from Myriad today will be Mark Capone, President and Chief Executive Officer; and Bryan Riggsbee, Chief Financial Officer. This call can be heard live via webcast at myriad.com. The call is being recorded and will be archived in the Investors section of our website. In addition, there is a slide presentation pertaining to today’s earnings call on the Investors section of our website and which will be filed following the call on 8-K. Please note that some of the information presented today may contain projections or other forward-looking statements regarding future events or the future financial performance of the company. These statements are based on management’s current expectations and the actual events or results may differ materially and adversely from these expectations for a variety of reasons. We refer you to documents the company files from time to time with the Securities and Exchange Commission, specifically the company’s Annual Report on Form 10-K, its Quarterly Reports on Form 10-Q and its current reports on Form 8-K. These documents identify important risk factors that could cause the actual results to differ materially from those contained in our projections and forward-looking statements. With that, I am pleased to return the call to Mark.

Thanks, Scott. I would like to start today’s call by providing key highlights for our fiscal year and the fourth quarter, after which Bryan Riggsbee will provide details regarding our financial results and guidance, and then I will finish the call by providing additional information on our initiatives to drive an inflection in our current business trends in fiscal 2019. In the fourth quarter, we once again exceeded expectations with revenues of $200.9 million and adjusted earnings per share of $0.38. For the full year, we reported revenue of $773 million and adjusted earnings per share of $1.20, which significantly exceeded our initial guidance and what is in line with our most recent revised guidance. For the fiscal year, earnings increased by 17% on a slight increase in revenue, which highlights the success of our efforts to reengineer our cost structure. As a company, one of our fundamental values is a commitment to pioneering science and fiscal 2018 represented another significant year in scientific achievement. Having pioneered the field of hereditary cancer testing more than 20 years ago, we remain committed to research that will enhance our understanding of future cancer risks. This commitment culminated in the launch of riskScore in September, which began the fourth major EPIC and hereditary cancer testing. In the field of neuroscience, we successfully completed the GUIDED study, which is the largest pharmacogenomics prospective study ever conducted in mental health. In companion diagnostics we received approval for BRACAnalysis CDx for metastatic breast cancer patients in the U.S. and Japan. We have committed more than 10 years of research to understand how best to select patients for PARP inhibitors and we are extremely pleased to help bring this class of pharmaceuticals to a broader group of patients. In the field of rheumatoid arthritis, we completed landmark research demonstrating that Vectra DA was three times better at predicting radiographic progression in rheumatoid arthritis patients compared to historical measures of disease activity. For the first time, physicians can use a completely objective and reliable measure to guide treatment for RA patients. In total, the company had 70 scientific presentations and 23 published manuscripts, which represent a substantial body of scientific progress. We also made important progress in our diversification efforts with new products representing 70% of our total sample volume of approximately 750,000 tests. This is a significant change from fiscal 2013 when new products represented less than 1% of samples. It is also interesting to note that hereditary cancer test volumes have grown significantly since fiscal 2013, the year before the Supreme Court decision. In fiscal 2018, we also had record new product revenue of $212 million, with GeneSight growing 59%, Vectra DA up 31%, Prolaris growing 73% and EndoPredict up 16%. During the fourth quarter, we continue to make progress on our five critical success factors to build upon a solid hereditary cancer foundation, grow new product volume, expand new product reimbursement, increase international RNA kit revenue and improve profitability with the Elevate 2020 program. From a hereditary cancer perspective, we saw continued strength with revenue up 4% and volume up 3% sequentially. This represents our sixth sequential quarter of volume growth and the third sequential quarter of stable pricing. riskScore has proven to be a strategically important competitive differentiator in the market and as a result, we saw strong year-over-year growth trends in the Preventive Care market with double-digit volume increases for patients with less severe family histories. Following the BRACAnalysis CDx approvals in the second half of the year, metastatic breast cancer patients tested in the fourth quarter increased 13% sequentially and we continue to increase our physician and patient education efforts in the U.S. and Japan. Lastly, we saw a significant number of positive changes and guidelines for expanded indications this fiscal year. These changes include major expansions in the prostate, pancreatic, colon and endometrial cancer testing guidelines that in aggregate add over 120,000 patients per year to the addressable hereditary cancer testing population. GeneSight was the most significant contributor to the new product growth in the quarter and the number of ordering physicians has more than doubled since we completed the acquisition with ordering frequency remaining relatively consistent. This quarter, we set two new records with greater than 15,000 doctors ordering a GeneSight test and almost 3,000 new ordering physicians, results that we attribute to the strength of the GUIDED study. We believe these metrics are both strong indicators heading into fiscal year 2019. We also saw Prolaris approach at $30 million run rate and Vectra DA achieved a $60 million run rate in the fourth quarter. In fact, due to these strong results, both our urology and autoimmune business units reached profitability in the fourth quarter, joining our women’s health, neuroscience and oncology business units in that regard. This fiscal year, we made significant progress establishing broader new product reimbursement. We measure reimbursement according to the percent of addressable market that has a coverage decision. Using this metric, we ended the year with EndoPredict at 90%, Prolaris at 55%, Vectra DA at 40%, GeneSight at 6% and myPath Melanoma at 1% of targeted U.S. reimbursement. In total, the reimbursed addressable market for new products exceeds $1.6 billion in potential revenue per year. For GeneSight, we completed the landmark GUIDED study, which represents the first pharmacogenomics technology to demonstrate statistically significant changes in response and remission rates versus an active drug arm. Based upon the strength of this data, we have secured our first commercial coverage decision with CareFirst, the 15th largest payer in the country with over 3 million covered lives whose policy went into effect August 1st. We recently published the IMPACT study and the GUIDED and Optum studies are in the later stages of review. When all three studies are published, they will put us in a strong position to receive additional coverage decisions in fiscal 2019. With Prolaris, we saw significant expansions in coverage throughout fiscal year 2018. Prolaris was included in updated NCCN guidelines, which broadly endorsed biomarker-based prognostic testing, making it standard of care for low-risk and favorable intermediate patients. This has resulted in expanded Medicare coverage for favorable intermediate patients and eight commercial payer decisions encompassing over 20 million covered lives or approximately 12% of all commercially insured lives in the United States. This year we also developed a new approach to securing coverage by working directly with self-funded employer groups, which make up approximately 50% of total commercial lives in the United States. Our first success was with Kroger Prescription Plans, the pharmacy benefits manager for Kroger, the fourth largest employer in the United States. Kroger will cover Vectra DA for employees with a medical benefit and we are finalizing an expanded agreement to cover GeneSight as well. Furthermore, we recently signed a contract with a second large employer that has approximately 30,000 employees, which covers GeneSight. These agreements demonstrate the utility that personalized medicine offers to self-insured employer groups who are best positioned to see the full value from our advanced diagnostics. We also received a new coverage decision from a regional payer for Vectra DA, which includes a prior authorization requirement mandating Vectra DA testing prior to adding biologic therapy. This is yet one more example demonstrating how our proprietary tests can reduce costs, while also improving patient outcomes. With EndoPredict, we received our final LCD for Medicare in January increasing total coverage to over 90% of breast cancer patients. Given the momentum from fiscal 2018 with new guidelines and critical data, we believe fiscal 2019 represent even a greater opportunity for a transformational increase in reimbursement. Moving to our international business, we made significant progress in fiscal year 2018 on advancing our kit-based strategy and improving profitability with the announcement of our restructuring program. For EndoPredict, we currently have reimbursement coverage in France, Switzerland and in the province of Ontario, Canada. We recently received a NICE recommendation to cover EndoPredict in the United Kingdom, a market which represents approximately 27,000 patients per year. In addition, both Germany and Italy are evaluating coverage for breast prognostic testing and should make decisions by the end of the upcoming fiscal year. In the fourth quarter, we received Japanese regulatory approval for BRACAnalysis CDx from the Japanese Ministry of Health Welfare and Labor, and in June started receiving samples, which are processed by our U.S. laboratory. This market represents approximately 15,000 potential patients per year. Additionally, we initiated our international restructuring with plans to consolidate laboratory testing for hereditary cancer and companion diagnostics in our Salt Lake City facilities and closed the Munich laboratory. We expect this laboratory transition to be complete by the end of the calendar year. Also, we have initiated -- we have identified interested parties to purchase the German clinic and have assumed the sale of the clinic in the first half of fiscal year 2019. Finally, with Elevate 2020 we continue to make significant progress and so total adjusted expenses down again in the fourth quarter declining approximately $7 million year-over-year, despite double digit test volume growth. This led to a 380 basis point improvement in adjusted operating margins on a year-over-year basis in the fourth quarter. And as we look forward to fiscal year 2019, we see significant additional opportunities with the laboratory process improvements, Crescendo and international restructuring and Counsyl synergies. Overall, fiscal 2018 was a transformational year for the company and we made substantial strides towards solidifying Myriad as the global diversified personalized medicine company. We created a stable foundation for hereditary cancer revenue with pricing visibility and a return to year-over-year volume growth. Moreover, 70% of our volume was attributable to new products growing from 1% of volume in fiscal 2013 and we made meaningful progress in advancing reimbursement for our key pipeline tests. Finally, through our Elevate 2020 programs, we increased the efficiency of our organization leading to significant profitability growth. As we look to fiscal 2019, with the recent completion of the Counsyl acquisition, we believe the transformation of the business will continue to accelerate. With that, I will turn the call over to Bryan to discuss our financial results and guidance.

Thanks, Mark. I would like to start by providing a more in-depth overview of our fiscal fourth quarter financial results. Fourth quarter total revenues of $200.9 million were up 1%, compared to the $199.6 million we reported in the same period in the prior year, with year-over-year declines in hereditary cancer pricing being offset by new product and hereditary cancer volume growth. Hereditary cancer revenue in the quarter was $126.8 million, with volumes up 3% sequentially and year-over-year volume growth increased for the sixth consecutive quarter, and once again exceeded 3% growth. Notably, pricing has been stable on a sequential basis for three consecutive quarters and we anticipate continued stable pricing throughout fiscal year 2019. GeneSight revenue in the quarter was $33.9 million and grew 33% year-over-year. Once again, volume in the quarter achieved a new record and we ended the year at a run rate well in excess of 300,000 tests per year. As Mark mentioned earlier in the call, this was on the hills of record total ordering physicians and record new ordering physicians, which was largely attributable to the strong incremental interests from doctors following the presentation of the GUIDED study at the American Psychiatric Association Annual Meeting. We believe these physicians ordering trends are strong leading indicators for future growth. Vector DA revenue in the quarter, in the fourth quarter was $15.1 million and grew 47% year-over-year. Polaris revenue in the fiscal fourth quarter set a new record at $7 million and was up 133% relative to the fiscal fourth quarter of 2017. Growth was primarily driven by the recent expansion in Medicare coverage to favorable intermediate patients and double-digit volume growth. EndoPredict revenues in the fourth quarter also set a new record at $2.8 million growing 40% year-over-year. Growth in the EndoPredict revenue in the quarter was reflective of increasing adoption and reimbursement in the U.S. markets. Lastly, revenue associated with our pharmaceutical and clinical services business was $13.3 million and grew 6% year-over-year. Once again, we saw continued strength at our, of Myriad RBM division with robust clinical trial activity from our pharmaceutical partners. I would like to discuss our financial metrics for the quarter. Adjusted gross margin were 78.6%. The strength we saw this quarter in gross margins was attributable to incremental new product reimbursement and the partial implementation of new process improvement for our DNA, RNA and protein laboratories that we announced on the last call. These efficiency programs will become more pronounced as they are fully-implemented in fiscal year 2019. Moving on to our operating expenses, on an adjusted basis, our research and development expense was $16.9 million, compared to $18.6 million last year. The decline in research and development expenses largely attributable to the completion of the GeneSight GUIDED study. Adjusted SG&A expense this quarter was $106.2 million, compared to $111.4 million in the fourth quarter of fiscal year 2017. This $5.2 million reduction was almost entirely a result of our Elevate 2020 initiatives. Total expenses including cost of goods sold declined approximately $7 million year-over-year, despite double-digit test volume growth. Adjusted earnings per share were $0.38 for the fourth quarter, compared to $0.29 in the fourth quarter of last year an increase of 31%. Our fully diluted share count increased sequentially to 72.9 million shares outstanding. We continue to prioritize debt repayment as a near-term use of cash. We ended this quarter with $9 million remaining on our -- outstanding on our credit facility. It is interesting to note that the $290 million acquisition of Assurex will be repaid in less than two years with the cash generated by the company. Our cash and cash equivalent balance at the end of the fourth quarter was $211 million, which compared to $209 million at the end of the third quarter. We continue to generate meaningful free cash flow with adjusted free cash flow in the quarter of approximately $50.6 million or $0.69 per share, which was significantly higher than our adjusted earnings per share. Historically, our adjusted EPS have significantly understated our free cash flow per share, and in fact, our free cash flow per share for fiscal year 2018, was $1.82 per share. In order to more accurately represent the earnings power of the business and consistent with our other growth technology companies, we have decided to exclude stock-based compensation expense from our adjusted earnings per share starting in fiscal 2019. We expect in fiscal year 2019 the stock-based compensation expense will represent approximately $29 million or $0.30 per share. Next, I would like to discuss the revenue adjustments that were identified by our finance team during our fiscal year 2018 financial close. As we completed our analysis for the transition from ASC 605 to ASC 606 and with the benefit of perfect 20/20 hindsight, our team identified nonmaterial revenue adjustments to our reported financial results for the period from fiscal year 2015 through the third quarter fiscal 2018. In aggregate, these adjustments represent a 0.6% of total reported revenue over that period. Because these adjustments flow directly to the bottom line net of tax, there is a corresponding adjustment to earnings. While our accounting procedures include a process for revenue adjustment every quarter in hindsight’s provision made for adjustments was slightly understated. These adjustments were not deemed to be material and had been approved by our auditor Ernst & Young and will be the basis for all future financial reporting. For fiscal year 2018, the total aggregate impact to revenue associated with these findings was $6 million and the adjust earnings per share impact was $0.05. For fiscal year 2017 the impact to revenue was $1.5 million and the impact to adjust earnings per share was $0.02 per share. Now I would like to discuss our fiscal year 2019 financial guidance. For fiscal year 2019, we are guiding to revenues of $880 million to $890 million and adjusted earnings per share of $1.70 to $1.75. I now will discuss the relevant drivers of this financial guidance. First, from a revenue perspective, our financial guidance assumes organic revenue of $750 million to $760 million, which is reduced by the impact of ASC 606. Secondly, this financial guidance assumes the sale of the German clinic in the first half of the fiscal year with no revenue in the second half of the fiscal year. Also, our revenue guidance assumes no additional reimbursement beyond what we already know to be in place for the fiscal year. After adjusting for ASC 606 and six months of clinic revenue, our guidance corresponds to organic revenue growth of 3% to 4%. For Counsyl, we are assuming current run rate with approximately $130 million in revenue based upon 11 months of owning the asset in fiscal year 2019. Our Counsyl guidance implies some revenue disruption from sales force integration and assumes no revenue synergies and known reimbursement. Overall, we are guiding to revenue growth of 20% to 22%. This revenue guidance assumes double-digit growth for every new product and a nominal increase in hereditary cancer revenue that will be offset by a decline in pharmaceutical services revenue due to our assumption of fewer pharmaceutical research contracts. Our earnings guidance corresponds to a 16% to 19% increase and assumes additional impact from known Elevate 2020 program that the Counsyl acquisition will be neutral to fiscal year 2019 earnings, that stock-based compensation will be excluded and assumes a fully diluted share count of approximately 76 million shares. Additionally, consistent with our prior commentary, we expect a tax rate on our adjusted financials of approximately 17%. Now I would like to discuss the potential upside drivers to our financial guidance for fiscal year 2019. Although, our guidance assumes only known reimbursement, we believe we are strongly positioned to see increased coverage for GeneSight, following the publication of the GUIDED, IMPACT and Optum studies. As a reminder, we already have contracts with commercial payers representing 25% of commercial lives in the country. Obtaining coverage decisions -- in addition, as we noted, these payers alone would represent an additional $67 million revenue, the vast majority of which will drop to the bottom line. Additionally, if Medicare expands the GeneSight LCD to include primary care physicians based upon the IMPACT study, it would increase the reimbursed addressable market by another 7% or $350 million. Our guidance assumes that we will not launch GeneSight into the primary care channel in fiscal 2019. However, with sufficient reimbursement, we will expand our sales targets into primary care. As a reminder, primary care represents more than half of the market for GeneSight. Guidance also assumes no additional reimbursement for Prolaris, Vectra DA, EndoPredict, or myPath Melanoma. For Prolaris, we have seen a number of recent significant reimbursement decisions from commercial insurers and Medicaid state based upon the updated NCCN guidelines and the American Association of Clinical Urology Physician paper supporting biomarker testing as a standard-of-care and lower -- in low and favorable intermediate risk women. We believe it is likely we will see additional positive coverage decisions in fiscal year 2019. For Vectra DA, we note the recent Kroger employer coverage agreement and believe the test is being considered for updated American College of Rheumatology guidelines, which are anticipated by the end of the calendar year. We believe we could see additional Vectra DA employer and commercial coverage decisions, if the provisional guidelines are favorable. Also with myPath Melanoma, we have obtained eight commercial coverage decisions with regional payers and are in late stage discussions with the Medicare MolDX program and anticipate that NCCN could incorporate the test into their professional guidelines this fiscal year. While we have included no myPath Melanoma revenue and guidance, given these developments, it is possible that this test will generate revenue in fiscal year 2019. As reimbursement decisions materialize, we will also look to expand the size of our dermatology sales team. In addition, as noted, we have seen substantial expansion in indications for hereditary cancer testing in the past six months totaling more than 120,000 additional patients per year. We have not assumed any significant penetration to these markets, although sales and marketing efforts have already been initiated. Moving on to the Counsyl acquisition. As I previously stated, our guidance assumes some level of revenue disruption associated with the sales force integration. To the extent this does not occur, it would represent upside to our guidance. Additionally, we are assuming no increase in foresight reimbursement associated with the new expanded carrier screening code. We are also not assuming any incremental coverage from commercial insurers for Prelude in covering -- including coverage for average risk patients or coverage from additional Medicaid states. Lastly, our guidance assumes no revenue synergies, despite the fact that we will be calling on an additional 9000 OB/GYNs. The potential business in these accounts is substantial and if each of these physicians were to only order one test per month, it would represent an additional $50 million in revenue. Moving onto the fiscal first quarter, we are guiding to revenues of $200 million to $202 million and adjusted EPS of $0.28 to $0.30. From a revenue perspective, the guidance includes two months of Counsyl revenue, assumes the typical negative summer impact for all of our tests and includes the impact from ASC 606. From a comparative perspective, if we incorporated ASC 606 into the fiscal fourth quarter of 2018, total revenue would have been approximately $192 million. From an earnings perspective, the guidance assumes relatively flat sequential expenses and assumes dilution from the Counsyl acquisition to be approximately $0.06 per share. Reflecting on fiscal year 2018 I am pleased we were able to exceed our financial guidance and carry significant momentum into fiscal year 2019. Even with current reimbursement, our business will generate significant top and bottomline growth and as you can clearly see, there are substantial number of catalyst, which could drive material upside to our financial results. We believe we are on the cusp of substantial revenue diversification and a significant inflection in profitability as we seek to build the world’s leading personalized medicine company. With that, I will now turn the call over to Mark to discuss our business highlights.

Thanks, Bryan. I am excited to discuss more details around our execution to create an inflection in our current business grounds from a hereditary cancer perspective our guidance assumes relatively nominal growth rates in hereditary cancer volumes. Yet we do see important new growth opportunities in fiscal 2019. First, given changes in the National Comprehensive Cancer Network guidelines in fiscal 2018, more than 121,000 additional patients per year will meet criteria in fiscal 2019. Significant changes were made for pancreatic cancer patients or unaffected patients with a family history of pancreatic cancer that increased eligibility by 40,000 patients per year. Additionally, NCCN recently broadened its guidelines on high risk colorectal cancer syndromes that will lead to an incremental eligibility for 41,000 colon cancer patients per year. Finally, in July, NCCN updated its prostate cancer hereditary cancer testing guidelines to include all metastatic patients and all patients with the family history of breast cancer, which increase eligibility by 40,000 patients per year. Another continued growth opportunity in fiscal 2019 will be driving deeper penetration into the women’s health market by leveraging riskScore. This year we will launch further enhancements to riskScore including expansions into new ethnic groups, the inclusion of additional relevant clinical data to further enhance the predictive power of the test and additional validation data to expand the ability of riskScore into broader populations. We already saw an impact in fiscal 2018 with double-digit growth rates for patients with less extensive family histories that represent 60% of the market. Lastly, from a companion diagnostic perspective, we continue to see new opportunities for growth. We have already seen 13% sequential growth in metastatic breast cancer volumes following the Lynparza launch in fiscal third quarter. Marketing efforts will increase this fiscal year as Pfizer and Myriad have filed applications with the FDA for talazoparib in the same indication with the PDUFA date of December 2018. In addition to this U.S. opportunity, we received Japanese BRACAnalysis CDx approval for metastatic breast cancer in June and have already seen samples ramping up. As a reminder, the opportunity in Japan represents about 15,000 patients per year. Additionally, we plan to submit a supplementary PMA for BRACAnalysis CDx in first line advanced ovarian cancer, consistent with the outcome of SOLO-1 AstraZeneca trial. Our penetration of testing into the ovarian cancer market is still less than 40%. So an earlier indication may improve adoption. With GeneSight, we are encouraged with the publication of the IMPACT study and the future publication of the GUIDED and Optum study. The IMPACT study was an unblinded prospective study with 1,871 patients and all patients received GeneSight reports. The primary endpoint was a comparison of the outcomes of patients treated by a primary care physician to the outcomes of patients treated by psychiatrists. In the IMPACT study, primary care physicians actually achieved better results with 27% higher symptom improvement, 35% higher response rates and 63% higher remission rates, all of which were statistically significant. These results were in part attributed to the fact that there were higher test compliance rates with primary care physicians. Another important observation from the study is that the outcomes in the IMPACT study are strikingly similar and supportive of the outcomes in the GeneSight arm of the GUIDED study. Because Medicare is specifically asked for primary care data before expanding the LCD, we will be submitting this publication for their consideration. The other two critical papers on the GUIDED study and the Optum study are in the latter study are on the latter stages of the publication review process. Having met with all of the top players in the country, we believe these publications will be the key catalyst to expanded coverage decisions throughout fiscal 2019. One of our new reimbursement strategies is working on coverage decisions directly with self-funded employers. This quarter we saw two major national employer groups express interest in covering GeneSight. We are in the late-stage negotiations with Kroger, the fourth largest employer in the United States, and we signed another major employer with approximately 30,000 nationwide employees. We believe these collaborations demonstrate the high level of interest from self-insured employers. Because these employers see both the cost savings and the improved productivity, the benefits of GeneSight are even more apparent. Approximately 50% of commercial lives in the United States are covered by self-insured employer groups and as employers increasingly insist upon coverage for personalized medicine products, it also helps to provide impetus for payers to assess their coverage decisions. Moving to the Counsyl acquisition, we are starting to train the Myriad representatives on the ForeSight and Prelude tests. As we evaluate the overlap with sales territories, we have determined there are 9,000 OB/GYNs currently accessed by the Myriad sales team that have not been targeted by Counsyl. We believe these doctors represent a substantial incremental market for Counsyl’s carrier screening and noninvasive prenatal screening tests, but have not included this in our guidance. It is also important to note that we still only call on about half of the OB/GYNs in the country. With a broader portfolio of tests to amortize our sales force expense, we are evaluating the potential for territory expansion. For Prolaris, we saw an inflection in private reimbursement following the new NCCN guidelines and American Association of Clinical Urology position paper, which recognized prognostic biomarker testing as standard-of-care in low risk and favorable intermediate prostate cancer. We now have eight commercial payers with coverage determinations comprising 20 million covered lives including a top five national payer. Throughout fiscal 2019, we will complete the technical assessment process with multiple additional payers and believe it is likely we will see expanded coverage. However, we have not reflected this expectation in our guidance. Finally, on myPath Melanoma, I am pleased to announce that we now have eight payers covering the test. We are also in late-stage discussions with Medicare on a draft LCD and believe NCCN is considering the test for inclusion its professional guidelines. However, despite these positive developments, our fiscal 2019 guidance does not include any revenue from myPath Melanoma. Overall, I am exceptionally pleased with our progress as a company in fiscal year 2018 and I am excited about our prospects for fiscal year 2019. We have a solid hereditary cancer foundation with growing volumes and stable pricing in a market that still remains less than 10% penetrated. In addition, we continue to grow new product volume at a robust double-digit pace in highly underpenetrated markets and believe we are on the cusp of a significant expansion in reimbursement coverage. Lastly, we have reengineered our cost structure with Elevate 2020 and have multiple additional material projects set to impact fiscal 2019. The path to achieving our strategic goals is clear and our talented team is passionately committed to delivering results for our patients and our shareholders. With that, I am pleased to turn the call back over to Scott for Q&A.

Thanks, Mark. As a reminder, during today’s call, we use certain non-GAAP financial measures. A reconciliation of the GAAP financial results to non-GAAP financial results and reconciliation of GAAP to non-GAAP financial guidance can be found under the Investor Relations section of our website. Now, we are ready to begin our Q&A session. In order to ensure broad participant in today’s Q&A session, we ask participants to please ask only one question and one follow-up. Operator, we are now ready for the Q&A portion of the call.

Thank you. [Operator Instructions] One moment please for the first question, which comes from the line of Amanda Murphy with William Blair. Please go ahead.

Hi. Thanks. So, just a question on GeneSight, so obviously, making some progress there in terms of reimbursement. I just was curious as you have had conversations with payers, just kind of what got you over the line, so to speak, with CareFirst, what kind of got them to cover the assay? And then also some of the projections we have gotten just more from the investor community, is just around obviously, the various endpoints. And I am just curious in your conversations if you feel like payers are kind of where they stand with the data thus far. And then also maybe I am throwing in a bunch here so just kind of this idea of generally a lot of companies in the diagnostic space have been doing tests almost for free at this point as they are building up the data and so kind of the idea that why would payers cover it at this point if the testing is being done already kind of thing, so just curious if you could get some perspective there?

Thanks, Amanda. I hope I get to all of these if I miss something…

Sorry.

… please follow up, okay. I will cover the rest, okay. First, I think, from a CareFirst perspective and I actually personally had a chance to interact with them and get to see their response. First of all, it starts with the clinical evidence. They were very impressed with the clinical evidence. To your second question, the thing that really impresses payers the most is remission in response rates reflect on that for a couple reasons. The first data is well known that if you look at what it cost to treat a patient in remission that that’s treatment resistant depressed patient it’s about $20,000 per year. If you can get that patient into remission, you save $20,000 a year, if you get that patient to respond you save $10,000 a year. And so payers to without exception have really focused on remission and response as the endpoints that matter, because those are the ones that drive value for patient, those are the ones that drive value for physicians, those the endpoints that are in guidelines and those are the ones that are ultimately going to save them money. And so, they were very impressed with that, particularly when you compare to an active drug arm. It’s data they had never seen before. It’s just never really been produced in prospective studies like this. I think -- and that’s really been consistent across the board as we have talked to all payers that continue to focus on remission and response. The other thing to note is that when they are looking at HEDA scores it is remission and response that are the two endpoints that matter as they try to generate higher star ratings. And so, again, it plays into exactly what they are looking to from a clinical perspective and a health economic perspective. Now, from a standpoint of why cover this, as we mentioned, we are not currently marketing to the primary care setting, recognized that that primary care physicians prescribe over half of the antidepressants in this country. And so, if in fact you are going to see both the patient benefit and the financial benefits you really need to do that in the primary care setting and that’s something that we will only do once we have sufficient reimbursement to justify that. Secondarily, even in our psychiatry call point, we only call on a portion of the psychiatry market at this point. We don’t reach the 40,000 psychiatrists, and so, again, with reimbursement, there is an opportunity to expand much further into the psychiatry market as well all of which again will just tell patients and increase the health economic advantage for a payer. So, let me stop there see if you have a follow up, Amanda.

Yeah. I guess, I was -- I won’t keep asking since I have asked three basically in that one question. But, I guess, it was a broader question around the space at a higher level where you have, I think, payers have been reluctant to cover tests for so long and so companies like Myriad and others have been doing the tests anyway. And I guess, I am just curious at what point do you sort of push back and say, look, we are going to test regardless and you have, obviously, talked about the volume levels that you are performing. So, just curious the give and take there with coverage versus actually still performing the test for patients?

Yeah. Again, I think their perspective is there is large swaths of the market that right now are not getting the benefit of GeneSight, which is the majority of psychiatrists and all of primary care. That’s really their focus. Was that they want to look at ways to get this into a broad market and that’s only something that we are going to do once we have a chance to get additional reimbursement. So that their perspective is there is a benefit to them if we can work together and get this to a much, much broader set of patients than we currently do today.

Got it. Okay. Thanks so much.

The next question comes from the line of Drew Jones with Stephens. Please go ahead.

Thanks. Good afternoon, guys.

Good afternoon, Drew.

Mark, maybe you could -- just kind of following up on GeneSight, could you give us an update on our RCT publication, time lines, maybe any insight on what’s going on there?

Yeah. Thanks, Drew. As I noted in the prepared remarks, the RCT which is now got GUIDED is the actual official name of the study. We are in the latter stages of review for that. Obviously, we had initially had hoped that we would get more accelerated review with publication at the beginning of this fiscal year. I think what we have seen is particularly with summer months in a large number of authors and the typical review process that it hasn’t really been accelerated review. I think we are on a more traditional time line at this point. But we continue to obviously be encouraged with the publication, so we work through this as quickly as we can. But a typical publication process has multiple rounds of review response by authors and this complexity with it. So, I think, what we are seeing is a typical time line right now. But, again, we are encouraged that and focused on getting this published as soon as we can.

Okay. And then last one from me. Do you guys have any better visibility in terms of CDx contribution to growth maybe in the back half of fiscal ‘18 and especially once met breast came on later in the third quarter and how is that trajectory, if you can see that far in, how is that trajectory look as the year progressed?

Well, the approvals for the met breast indication really came in the middle of the third quarter. So, I think, the first read we could really get on that is the data point that I provided in the prepared remarks that we saw 13% sequential increase from Q3 to Q4 in patients with metastatic breast cancer. So we obviously saw a nice increase in uptake for those patients. I think as we turn the page here to fiscal ‘19, we have got a couple of other contributors to growth. Japan where we are the only approved product there with BRACAnalysis CDx. That obviously just came online here in the first quarter. And as I mentioned, we have already seen a ramp up in samples from Japan. So that’s going to be another opportunity. We will also see a substantial increase in marketing effort as Pfizer gets approval for a talazoparib in the same indication in metastatic breast cancer and will be the companion diagnostic there and our PDUFA date is in December and so now you are doubling the number of salespeople that will be out there talking about the importance of doing BRACAnalysis testing for metastatic breast cancer patients. So we saw a nice growth from Q3 to Q4, but I think we are really just in the early stages of that as we bring on Japan, as we bring on another pharmaceutical manufacturer in the middle of the year.

Thanks, guys.

The next question comes from the line of Derik de Bruin with Bank of America. Please go ahead.

Hey. This is Amy [ph] on for Derik de Bruin. Just a question on Counsyl. So, there are many companies offering carrier screening services, a good part which was acquired by [inaudible] and it mentioned higher detection rate, et cetera for the product. I just wanted to see what are some competitive differences between ForeSight and the other vendors and maybe you can update us on the investment situation a little bit more? Thank you.

Yeah. Thank you for the question. I don’t know if I caught every -- all of that. Your line was a little choppy. But I think the question was really around ForeSight and what do we see as some of the advantages. One of the things that we were very attracted to Counsyl is their ability to integrate all of this into a very smooth workflow process and that includes ForeSight and Prelude, and now, of course, we will be adding in our hereditary cancer test. So the complete integration of that in an OB/GYN office is, we have already heard just in a few weeks that we have owned the asset just how important that is, that they would like a single solution for those tests and they want the highest quality test they can and now with the launch of Myriad women’s health, they are going to have an opportunity for exactly that, a very clear smooth workflow with the best tests. ForeSight, clearly have some advantages and in fact Counsyl was the pioneer in the expanded carrier screening test and so as the pioneer they have got advantages and their ability to deliver accurate results and more results to patients than they might see with other laboratories. So, I think, it’s really that that ability for an integrated workflow, it’s the much expanded reach that we can now provide as Myriad women’s health broader organization and if that reputation for quality. I think all of those things are going to be opportunities for us to show advantages relative to others that are in the market.

Thank you. If I could squeeze in one more just housekeeping. So why did you suddenly decide to exclude the Stockholm, the $0.30 from FY19? From what I understand it’s not common practice with other life sciences or diagnostics company to exclude this, just wanted to see what’s your rationale behind that? Thank you.

Yeah. Thanks. Yeah. Thanks for the question. I think based on the look that we had relative to peers in the industry I think it is relatively common to exclude it. Also we have started providing information through the course of last year on our free cash flow per share, which is dramatically understated as we look at our adjusted earnings per share more and more investors and the questions we get are around the free cash flow generation of the business and that’s really what they are focused on and we felt that by excluding that it provided a better measure of the ultimate earnings power of the business. So that was really the thinking behind that.

Okay. Thank you.

Next question comes from the line of Sung Ji Nam with BTIG. Please go ahead.

Hi. Thanks for taking the questions. Mark, I was wondering if I could probe further into the self-funded market -- self-funded employee market. Sounds like it’s obviously a significant opportunity there, do you see it as equally important in terms of going after that as you would see with the commercial payers? And in terms of the criteria where the hurdles, do you think there are kind of different sets of price for hurdles that you need to address for both parties? And if, for example, is the publication of the GUIDED study as important for the self-funded employee market?

Yeah. Thank you, Sung Ji. We are excited about the progress we have already made in that given -- and Myriad is a good example, we are self-funded from a health care perspective as well. And for us what matters most is employee wellness and productivity and ultimately we pay for all of these funds anyway and a payer is really just the administrative portion of that. And so we are in the decision-making seat when it comes to what’s best for our employees and what’s best to control our health care costs. So that’s part of the reason we are excited because they have a complete lens on this whereby from a payer perspective, they don’t capture productivity improvements and those types of things. So we have had a very warm reception. This is just something we started in 2018. So, I think we are in the early stages. I think the opportunity is significant and how significant, I think, we will have to see how the rest of the year plays out as Chip Parkinson and his team begin to focus more on that. But the endurance level has actually been very significant. And in fact you see big efforts from employer groups actually now joining together to try to find different solutions to our healthcare challenges in this country. And so we are playing into that dynamic. I think from the hurdles perspective, they generally look at things very much like another payer would. They may not have it as extensive of a tech assessment approach, but they use literature, they rely on guidance documents that are out there for medical professional societies. So there is still some similarities between that. I can say their view on GeneSight for example is very similar to commercial payers and that they are looking for remission and they are looking for a response, because again, we are trying to get our employees well and those are the things that matter and so that’s been a very consistent theme in our discussions with those self-funded employers.

Okay. That’s very helpful. And just a quick one for Bryan, for the ASC 606 adjustment that you provided, is that for revenues especially -- is that largely impact -- attributable to hereditary cancer or other product lines, just curious for modeling purposes.

Sure. Yeah. I would say it’s largely attributable hereditary, the other business lines were already on a model that was relatively consistent with ASC 606.

Okay. Great. Thank you.

The next question comes from the line of Jack Meehan with Barclays. Please go ahead.

Hi. Good afternoon, everyone. Mark, I was wondering if you could give us some color on any conversations you have had with CMS-related GeneSight and the GUIDED and IMPACT studies and what you think is the potential timeline for an update from them related to the primary care market?

Yeah. Thanks, Jack. It was very early on actually that obviously CMS provided coverage for the psychiatry-only market and the feedback even back then was that we would like to see how well primary care physicians do using this tool compared to psychiatrists. And so that’s really the genesis of the entire IMPACT study was specifically to answer that question from CMS, obviously the data is outstanding. They did even better. And it’s probably not a surprise because they were probably more diligent at following the results from the test report. So we, obviously, were waiting for that publication to approach Medicare with that and that’s what we will be doing. Our plan is to approach Medicare with that study and with the GUIDED publication and so because they are interested they have seen all of the topline results on GUIDED. They were very impressed with those results as well, but we want to go forward with both of those publications to discuss then the potential expansion of the LCD into the primary care market. So as that GUIDED publication happens, you can assume we will be approaching them immediately after that with both of these. So, we think this data answers all of their questions and excited to get to talk to them about it.

Great. Thanks for the color. Just as a follow-up, I was hoping you could help me with within 2019 guidance what the assumption is related to the contribution from hereditary cancer that can grow or decline in 2019 and any thoughts on the pricing environment would be helpful? Thank you.

Yeah. Yeah. Jack, this is Bryan. I think the few comments that we have made are one as we have seen three consecutive quarters of stable pricing. We expect that to continue through next year and we -- I would say that hereditary cancer will be increased nominally through the year just given the fact that we have got some stable pricing locked in. But again that would get offset by lower RBM revenue and then a contributor next year will also be the double-digit increases for our new products. But relative to hereditary cancer, I think, the assumption would be relatively stable through FY19.

Very helpful. Thanks, Bryan.

Yeah.

The last question comes from the line of Patrick Donnelly with Goldman Sachs. Please go ahead.

Great. Thanks, guys. Maybe just another quick clarification on the guidance. Can you just talk through the assumptions on Counsyl, I know we only get 11 months of it in a year. Can you just talk through what growth assumptions are there, any revenue synergies, it doesn’t seem like you are baking in a lot and leaving most of it to the upside, but I am just curious kind of what’s baked in for Counsyl this year in ‘19.

Yeah. Patrick, I guess, the commentary that we have had around Counsyl is just that in terms if we are going to own the asset for 11 months, we expect it to be at $130 million number for next year, obviously, any time you do an acquisition like that there is some revenue disruption that occurs, but in terms of upside relative to our revenue synergies we have left those out of the guide.

So, Patrick, we basically just assume current run rate in a very simplistic way and part of that is because growth opportunities we expect to be offset by some of the disruption, as Bryan mentioned. So we have assumed just run rate for next fiscal year. Now, obviously, we have only had the asset for a few weeks so that’s probably a prudent assumption at this point. But you can imagine our focus is on something much different than that, particularly with the opportunity to penetrate 9,000 OB/GYNs that we haven’t called on at all, but which is not building any of that in the guidance at this point.

Okay. And is the revenue disruption primarily around kind of that 8% a rev that they have tied to hereditary cancer, it kind of seemed like that was potentially going to be cannibalized in a way, but I am just trying to figure out, is that kind of the relation there?

No. It’s not that. It’s just any time you bring two sales teams together and as you begin to integrate those and assess territories, there is just typically historically, some sort of disruption when you are doing that and it’s just the result of merging two sales teams. It’s not related to their hereditary cancer. Obviously we have an opportunity with the hereditary cancer product where we are assessing exactly what we are going to do with that right now. But obviously, myRisk is the market leaders so it gives us an opportunity to look to shift volume -- more volume into the myRisk product. So those are the things we will be working on immediately to try to make that happen. But the disruption we mentioned is really just that that bring two sales forces together as you look at territories and allocate those, typically there is some disruption.

Okay. And then maybe one more just quick one on the Counsyl side, can you just talk through the cost synergy opportunity, I know again, you have only been kind of behind the curtains for a few weeks here. But still expecting to be neutral to 2019 EPS and you may give the dilution number for 1Q, but just expectations there and kind of what you have seen in the first few weeks here?

Yeah. Sure. I think you are right. It is early days relative to owning the asset. I think the few data points or the few comments I would have would be. One, yeah, relative to the first quarter, it’s really hard to get anything accomplished and have an impact in the first 60 days. That really has an impact to the quarter. So I think we are still very comfortable with the fact that it will be neutral earnings for the year, but it’s going to take us a little bit of time to get projects ramped up. I think relative to the opportunity, as you think about this and compare and contrast relative to Assurex, the fact that we have channel overlap here that we didn’t have with respect to that acquisition. We obviously believe there is significant opportunity for synergies, but it’s just going to take a little bit of time to get that executed.

Okay. Thank you.

There are no further questions at this time. I will now turn the call back to you. Please continue the presentation and your closing remarks.

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

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