Greetings, and welcome to the Myriad Genetics First Quarter 2020 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, Monday, November 4, 2019. I would now like to turn the conference over to Scott Gleason, VP of Investor Relations. Please go ahead.

Thanks, Grant. Good afternoon, and welcome to the Myriad Genetics fiscal first quarter 2020 earnings call. During the call, we will review the financial results we released today; after which, we will host the question-and-answer session. If you’ve not had a chance to review our quarterly earnings release, it can be found on our website at myriad.com. Presenting for Myriad today will be Mark Capone, President and Chief Executive Officer; and Bryan Riggsbee, Chief Financial Officer. This call can be heard live via webcast at myriad.com. And our recording will be archived in the Investors Section of our website. In addition, there is a slide presentation pertained to today’s earnings call on the Investors Section of our website, in which we filed following the call on Form 8-K. Please note that some of the information presented today may contain projections and other forward-looking statements regarding future events or the future financial performance of the Company. These statements are based on management’s current expectations and the actual events or results may differ materially and adversely from these expectations for a variety of reasons. We refer you to the documents the Company filed from time to time with the Securities and Exchange Commission, specifically the Company’s annual report on Form 10-K, its quarterly reports on Form 10-Q and its current reports on Form 8-K. These documents identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. With that, I’m pleased to turn the call over to Mark.

Thanks, Scott. I will start today’s call by providing some commentary on our revenue shortfall in the first quarter where we delivered revenue of $186 million and adjusted EPS of $0.08 per share which were significantly below our financial guidance for the quarter. We are very disappointed in these results as it is entirely inconsistent with our goal to provide achievable guidance while working aggressively to deliver on upside to that guidance. I want to take this opportunity to provide some specific details on what led to this shortfall. The revenue miss was largely related to revenue adjustments associated with hereditary cancer testing, which included approximately an $8 million out-of-period adjustment. Excluding the out-of-period adjustment, revenue would have been $197.5 million. By way of background, reimbursement in the diagnostic industry is driven by three Cs, coverage, contracting and coding. This particular issue was not associated with coverage or contract pricing nor was it related to test volume. The root cause of this shortfall was driven by the deletion of 81211 and 81213 codes beginning on January 1, 2019. These two codes are the sequencing and large rearrangement codes used for BRCA testing, which had been included in our payer contracts since 2012, while 300 payer contracts account for about 85% of hereditary cancer revenue. There are more than a 1,000 payers that are responsible for the remaining revenue. These are generally small payers that on average reimburse approximately four hereditary cancer tests per month. Some of the payers have contracts with Myriad, but many are too small to justify the administrative costs of implementing a contract. The company obviously knew that these codes were going to be deleted and had taken steps to revise contracts with payers representing a substantial majority of revenue. For small contracted payers, we notified them…

Thanks, Mark. I would like to start by providing a more in depth overview of our fiscal first quarter financial results. Hereditary cancer revenue in the quarter was $105 million versus $116 million in the first quarter of last year. Excluding the out-of-period adjustments and reduced revenue accrual rates, we would have seen the hereditary cancer revenue growth of 5%. Moving onto GeneSight, revenue in the quarter was $22.7 million. The sequential reduction in revenue is slightly higher than expected and was associated with first quarter seasonality and volume reductions due to the discontinuation of our GeneSight ADHD and analgesic tests. Revenue from prenatal testing was $23.5 million and as anticipated we did see a small decline in volume on a sequential basis due to seasonality. Vectra revenue in the first quarter was $11 million, which was consistent with our expectations given summer seasonality. Prolaris revenue in the first quarter was $6.5 million with double digit sequential volume growth offset by a lower average selling price due to unfavorable mix. EndoPredict revenues in the first quarter were $2.3 million and were relatively flat and consistent with our expectations. Lastly, revenue associated with our pharmaceutical and clinical services business was $14.3 million and as anticipated was down sequentially based upon the timing of pharmaceutical customer activity. I would now like to discuss our financial metrics for the quarter. Adjusted gross margins were 73.3% and declined on a year-over-year basis. The out-of-period revenue adjustments drove 130 basis points of the decline and the remainder was due to lower test average selling prices as well as lower revenue mix of higher margin hereditary cancer and GeneSight revenue. Moving on to our operating expenses. We continue to focus on cost control and saw operating expenses decline approximately $3 million sequentially. Adjusted research and development…

Thanks, Bryan. I would like to spend the remainder of the call discussing some of the developments we believe will provide a positive catalyst for the business as we transitioned through fiscal year 2020. First with GeneSight, in early August, we have a pivotal event with the addition of GeneSight’s United Healthcare’s medical policy, which took effect on October 1. United Healthcare is the largest private payer in the country, and it’s highly respected. So this coverage policy has been widely reviewed by other payers. We continue to have productive conversations with traditional commercial payers and expect further positive medical policy decisions in a fiscal year. Discussions with payers are being bolstered with additional publications, the first of which is the new analysis for the GUIDED study, which was published last week in the Journal of Clinical Psychiatry. This analysis was based upon the patient population in the GUIDED study intended to benefit from GeneSight and includes the 787 patients at baseline who are on medications with predicted gene drug interactions. The analysis show that patients who had their treatment guided by GeneSight saw a 70% improvement in remission, a 42% improvement in response and a 23% improvement in symptoms, all of which were statistically significant. Given this data, one very significant tech assessment organization has expressed interest in an off cycle review the GeneSight RPA. In the first quarter, there were two draft LCDs from Medicare covering pharmacogenomics testing. These LCDs are overlapping and quite complex and we refer you to the MolDX website for more details. In summary, the first draft LCD is for combinatorial pharmacogenomics testing, which includes GeneSight coverage when ordered by a psychiatrist in patients with major depressive disorder. The second draft LCD applied to single, multiple and combinatorial pharmacogenomics tests, but also includes tests…

Thanks, Mark. As a reminder, during today's call, we use certain non-GAAP financial measures. A reconciliation of the GAAP financial results to the non-GAAP financial results and a reconciliation of GAAP to non-GAAP financial guidance can be found under the Investor Relations section of our website. Now we're ready to begin our Q&A Session. [Operator Instructions] Operator, we're now ready for the Q&A portion of the call.

Thank you. [Operator Instructions] The first question comes from the line of Tycho Peterson with JPMorgan. Please proceed with your question.

Hey, thanks. Want to start with the guidance. You missed the quarter by $16 million, you're lowering by $65 million. Can you just talk to is the remaining $50 million all lower collection rates in hereditary cancer, because if so, obviously that implies greater hereditary declines?

Yes, thanks Tycho. This is Brian. Just a couple of comments on the way we look at the quarter. We didn't provide a breakdown, but there are a few things you need to think about. First is the $11 million about a period as a part of it, but we also talked about how we lowered our accrual rate during the quarter that was – and how we would've grown hereditary 5% rate. If not for that that’s the large – that's the predominant share in terms of the overall. And then there's the change in our assumption with respect to United and the fact that 30% of the samples wouldn't meet the administrative criteria. So those are the factors that that get you to that number.

All right. And then for the follow-up on GeneSight I understand you're not – there's not really an update with related to the FDA, but is there kind of a timeline here that we should be thinking about? And, overall GeneSight was also late relative to our expectations. So I guess what kind of gives you the confidence in the pickup, obviously you have the benefit of the United contract?

Yes, thanks Tyco. Really nothing more to add for the FDA. Obviously we noted mid-August that we had submitted a document to the FDA, but it's been three months since then. And as I noted, there has really been no material development since then and we continue with the report that we have. So there's no timeline or anything that we could supply other than to note that the initial discussion was back in August, mid-August. For GeneSight for the quarter, we noted that it was slightly below our expectations for the quarter and that was related to the volume reduction that we noted for the ADHD and the analgesic. Taking those products off the market we had anticipated a sequential reduction due to that and seasonality we saw slightly higher volume declines in the first quarter than we had initially expected. But the uptick from here is obviously going to be related to the fact that we continue to see volumes growing and from that re-base level and we also obviously have United Health Care with higher reimbursement, so those two should contribute to the GeneSight growth throughout the rest of the year.

And the next question comes from the line of Puneet Souda with SVB Leerink. Please proceed with your question.

Yes. Hi Mark. Thanks for the question. So, first of all, my question is around the 300 pair contracts that you said account for 85% of revenue in hereditary. Are any of those getting included here in the lowered guide and or only the thousand or so that you mentioned that are smaller payers? And sort of what gives you the confidence that contract that are coming up for renewal won’t seek a lower pricing for hereditary given these changes?

Yes thanks Puneet. Yes, the 300 contracts obviously that’s the vast majority of revenue and we obviously have a very good handle on what's in those contracts, and those contract prices and that was all taken into consideration when we provide the guide for this year. Just to reflect on that, if you remember we had noted for the year that we did expect a low single digit price reduction in fiscal year 2020 due to those contracts, but that would be offset by low single digit growth rates. So that was the assumption we had going into that. And that reflects obviously the good visibility we have on those contract prices. I'll note of course, that our volume was actually tracking significantly above that guide in that we had double digit volume growth for the quarter. In fact, we have not seen this strong of hereditary cancer perspective from a volume stand point since most five years ago. So that was actually outpacing what we had for the guide. So those are the things we knew. Obviously the part that impacted this was the a thousand plus very small payers average for hereditary cancer tests a month. So they're very small volume. And in those cases we didn't have that same type of visibility because as I mentioned, we had just informed them that we would crosswalk over to the new one, but we hadn't sat down and negotiated with those payers, and a number of those or even non-contracted payers that we don't have. So we didn't have nearly the visibility and that subset of payers. And that's where the issue surfaced is we have made assumptions about how we thought that pricing would evolve and obviously that assumption turned out to be incorrect.

Okay and then the benefit managers have had a significant impact this year. Could you give us a view into any other tests that potentially could be impacted here beyond GeneSight? And I hear your comments on the unique opportunity you have with the large masters agreement that you're establishing, but maybe can you provide me sort of what that means and if it could result in any benefit in the near term? Thank you.

Yes, thanks Puneet. So we'll slide that up in the lab benefit managers and then we can talk about pharmacy benefit managers. From a lab benefit manager perspective, the impact we saw last year was with both GeneSight and Foresight. As we noted, we had seen a step down in both of those through the year. But since that time we've seen pricing for both of those stabilize on a sequential basis. So we see the lab benefit manager has already rebased the pricing on that and we don't see additional impacts from that as we go forward. From a pharmacy benefit manager perspective, obviously that's a new development that we've been working on as we've looked at alternative payer options for coverage and we are excited about this first foray into pharmacy benefit managers. In this particular case, this was for GeneSight, a master service agreement. We already have a Fortune 50 company that signed on and we will of course be talking to a number of other customers for this large pharmacy benefit manager as we move forward. In addition, we're also talking to pharmacy benefit managers about Vectra. Vectra offers some really, unique propositions. As you know, one of the highest costs for pharmacy benefit manager is the entire biologic category. In fact, it can be in the top two for all of our payers. And so tools that can help them for that rapidly growing very expensive category are ones that they are actually quite interested in. So we continue some positive discussions with Vectra, as well as GeneSight with pharmacy benefit managers.

And the next question comes from the line of Bill Quirk with Piper Jaffray. Please proceed with your question.

Great, thank you. A couple of questions. Thing on hereditary cancer here for a moment. Bryan, appreciate that the business would have been up about 5% if you didn't have to make any of the revenue adjustments. Could you give us kind of what that number would have been at the prevailing rate? In other words, eliminating kind of the catch-ups that you had from previous quarters kind of what would have hereditary cancer been at your new current accrual rate?

Yes, thanks Bill for the question. I don't think we – I mean I think our commentary around where the hereditary business would have been is that it would have been up 5% year-over-year x the impact of the out of period adjustments and the change in our core rates. So I think that would be the only commentary I would add on that.

Okay.

I don't think we gave a specific numbers in terms of – go ahead.

Okay, maybe I'll take it off line then.

Sure.

And then could you go into a little detail about what helped drive the double-digit growth in hereditary. As Mark pointed out that is certainly the strongest kind of organic volume number that you've had in several years.

Yes, thanks Bill. I think one of the things that we've been very pleased with is Nicole Lambert and she's the President of our Oncology team and we've really been able to see the oncology team make some very significant stride in particular segments of the oncology market. So I think that's caused some of the inflection we've seen. I think the other thing on women's health side, if you remember one of the reasons that we had done the acquisition prenatal, is that we thought being able to offer a complete portfolio of high value added genetics to the Ob/Gyn market has some intrinsic value as a one stop shop. I think we're seeing the benefit of being able to provide more comprehensive solution with a really outstanding application that was developed by the Council team called the – what's now called the Myriad Complete application. So I think that one stop shopping with that application has allowed us to continue to demonstrate some real strength, in the preventive care, the Ob/Gyn segment. And the last thing I would point to is there remains very significant interest in risk score as a differentiator between Myriad and others in the preventive care space. The fact that every patient can get an understanding of her risks for breast cancer as opposed to just less than 10% to get a positive mutation resolved, I think, that continues to be seen as a significant value. Myriad is the only one with a highly validated test in that regard. And so we continue to see significant interest from the Ob/Gyn side. So I think those combinations unfortunately of course are masked by the revenue accrual rate adjustments. But in the absence of that, actually very pleased with what we're seeing in the hereditary business. I would note on a go forward basis I gave a listing of potential upsides that are going to happen this year, BRACAnalysis, CDX approvals for prostate and pancreatic cancer. That's a very significant development. We're also talking about other companion diagnostic opportunities in adjuvant breast cancer. That's big because, as we mentioned, if that was to come pass, then virtually all breast cancer patients are indicated for hereditary cancer testing. We also are anticipating expanded NCCN guidelines for a broader number of breast cancer patients and potentially the addition of TAB2 as a gene that potentially promoted for the same level of importance of BRAC 1/2 and two. So I think there's a whole series of things that are very highly probable to occur this fiscal year that are obviously not included in that current double digit year-over-year growth. That gives us encouraging signs that there are still going to be very nice volume growth opportunities in the hereditary cancer market as we look out to the rest of the fiscal year and into fiscal year 2021.

And the next question comes from the line of Derik de Bruin with Bank of America. Please proceed with your question.

Hi good afternoon. Mark I’m just sort of struck by the fact that when I go back and look at your last Analyst Day in 2015, I know it’s making history. But your worst-case revenues that you were modeling at that time which didn’t include council, which didn’t include gene site, were about $1.35 billion and sort of claim of that they’re going to give assessment for about $600-ish million in terms of your 2020 numbers. It’s a big delta from where you thought you were going to be in terms of where you are right now. And that's with some fairly conservative assumptions back then. I'm just sort of struck as – the question I get only is like it's more of the visibility into some of these lines going forward. It just seems like everything seems to be following short. And how do we sort of gain confidence if these names are going to pick up when they just haven’t over the last five years?

Thanks Derik. You were a little hard to hear. I think I caught all that.

Yes.

I think you were referencing our 2015 Analyst Day. So yes, certainly five years is a long time to reflect on what's happened. I think if you go back to some of the assumptions that we made that time, I think, there's probably a couple of things where that were inconsistent with those assumptions. The first thing I would argue is that the hereditary cancer business held up much better than many analysts had anticipated. So I think we deserve some credit for really seeing hereditary cancer business, our volume, despite all the competition has actually grown since that timeframe, we've obviously seen compression in prices, which we had anticipated at that point and certainly, probably a little higher than we thought. I don't think we anticipated that there might be a competitor in the space that would be willing to price significantly below cost. And amount losses of over a $0.5 billion. So I would argue we probably didn't anticipate that type of business model. But I think absent that, I would argue that hereditary market probably held up better than some would have projected. I think if you look at the industry large including our assumptions, really the biggest gap is the lack of reimbursement. I think reimbursement has proven to be much more difficult than we would have expected when we put some of those thoughts out as far as how the markets would evolve. I think there's a number of reasons why you've heard us on many conference calls over the last five years talk about some of the obstacles we're facing. And in fact, in the last 18 months, you've seen us pivot to try to use some unique and different approaches to gain reimbursement. And the pharmacy benefit manager progress, I mentioned already today,…

Thank you.

And the next question comes from the line of Doug Schenkel Cowen and Company. Please proceed with your question.

Doug, are you on the line?

Hi there. This is Adam Wieschhaus on for Doug. Sorry I was on mute. Can you provide any more color on the unexpected United pre-authorized requirement. And addressing this issue, just a matter of educating providers and having to implement new ordering procedures or do you think it would potentially cause a structural decrease in the percentage of tests eligible for reimbursement because the more stringent requirements? And does it typically take three quarters to address these types of issues as your guidance implies?

Yes thanks Adam. I think there's three components for this. As we mentioned, this is details that we were notified of as we started to approach October 1 details in September. What I would say is it's similar to the types of things that we've had to do with Medicare and so we need to provide documentation of diagnosis, documentation of failed medications. The other thing that's required is that physicians register through the portal ordering portal so that they can actually place – receive prior authorization through that ordering portal. So I think it's a combination of all three of those things having to be done successfully that causes us to assume 30% are not going to make their way through those hurdles. Now we've obviously got experience doing this, particularly on Medicare and the team will work aggressively. But we think it's prudent to assume that we're going to have that type of failure rates throughout the year. Obviously we like to over achieve on our guidance. And so given that as the team makes progress that gives us an opportunity for potentially upside the guidance, based on lower failure rates we just think that's the prudent way to approach this.

Okay. Thank you. And thanks for the second quarter guidance. Can you provide an update for how we should think about the cadence of revenue for the back half of the year? Previously, you know you expected the fourth fiscal quarter to be materially above fiscal quarter as one through three. Do you still think that will be the case based on the development today? Thanks.

Yes, thanks Adam. Yes, just I guess, we had some commentary in the script regarding our expected profile for the remainder of the year. Obviously given where we are, we would expect to trend up from both the revenue and earnings perspective as we move through the back half of the year. So we would expect the back half earnings to be significantly higher than the front half.

The only other thing I might add obviously not in guidance, but as you look at the potential upside drivers slide, the last slide in the presentation, it lays out a number of things that are anticipated to happen in this fiscal year. And so as you think about the fourth quarter, things like expanded Medicare coverage for primary care, for example, or anxiety that's not in our fourth quarter guidance. But given the timing that we reflected on this call well we would anticipate the LCD being effective in the fourth quarter. You potentially could see upsides on that. myPath Melanoma, we expect revenue to kick in, by then myChoice CDx we expect revenue to kick in by then. The changes in NCCN guidelines for hereditary cancer they have the opportunity to be effective by then, pancreatic cancer approval for BRACAnalysis CDX. So there are a number of the initiatives that are listed on that that potentially could become effective for the fourth quarter. So as we start to think about the financial momentum as we transition into next year, although those numbers are not in guidance those are some of the things that we’re anticipating as we reflect on what that fourth quarter could look like and how that could ultimately affect some of our guidance for fiscal 2021. I just think that she is important because all of the things on there are very high probabilities. And therefore there are opportunities to cause some inflections through the year.

And the next question comes from the line of Jack Meehan with Barclays. Please proceed with your question.

Thank you. Good afternoon. So I had a few follow-up questions on hereditary cancer testing, first on October 17, MolDX had a new test panel alert which define multigene orders regardless of testing methodology. So I was wondering if that applied to myRisk maybe why are you confident you’re going to be able to continue billing 81162 versus 81432. And I appreciate all the coding details you’ve already given, but I’m just curious, is there – do you see any risks that 81162 could also be deleted and you would have to migrate over to 81432?

Yes. Thanks, Jack. The – I think actually when you look at the articles that I think that conversation has actually been superseded by the NCD update that occurred last week. I know you’re aware of that. I think that’s probably the bigger question right now in the hereditary cancer space. And for those who aren’t as familiar, there was an NCD that was issued some time ago, which was initially interpreted by the industry to be for somatic testing and not germline. CMS noted that they now apply that to germline testing and in fact made some clarifications on that last week as well. What’s important about that is what this notes is that if you’re using next generation sequencing technology for breast and ovarian cancer, hereditary breast and ovarian cancer testing that in order to bill Medicare, you need to have FDA approval. And that’s what’s being proposed in the current draft that is now open for public comment. Now as a reminder, Myriad actually has Sanger sequencing technology and it is FDA approved. And in fact, the only germline test that is FDA approved is Myriad Sanger sequencing technology, which falls outside of the confines of that NCD. And so I think that’s really the question right now is how is that NCD going to ultimately resolve. And for Myriad, of course, we still have a testing option, which is Sanger sequencing with our FDA approved tests. So I think the articles – because they’re only really applicable if you’re using next generation sequencing because it’s the only cost effective way to do multigene testing. I think that’s really going to get superseded by whatever resolution ultimately occurs with that NCD. And as far as the code is concerned, I think it’s important that there will always…

Great. And as a follow up on GeneSight, first, which of the two Medicare policies do you think applies to you? I assume it was the combinatorial one since that was the one you commented on at the open meeting. And then just for Bryan, what is your new guidance call for in terms of revenue for GeneSight for the year?

Yes. Jack, I think as we mentioned obviously there’s some overlap between these LCDs. Both at LCDs mentioned combinatorial. The first one is, very similar to the current GeneSight LCD and that is combinatorial only. There is one other tests included but the second LCD that includes primary care physicians and expands to other indications like anxiety also includes combinatorial pharmacogenomics. So as written today, combinatorial tests are covered by both LCDs, hence some of the overlap. We’ll have to see how this resolves itself as we go through the common period. I will know one other curiosities in this is that if you look at the second LCD, which is – covers primary care and combinatorial, the reference noted in that LCD to justify the expansion into primary care is the fact that there was a clinical study done that demonstrated the primary care physicians can actually have as good or better outcomes associated with pharmacogenomic testing as psychiatrist. It doesn’t include the footnote for that study, which in and of itself is unusual and I’m sure that will get corrected. But your recall the study that actually produce that result is the IMPACT study that was done with GeneSight. So the fact that that study is not referenced in the first LCD, which explicitly covers the test that generated the data is quite unusual. And so I think that’s something again, you’ve got an opportunity to potentially see and modify as we move into the future. From the standpoint of, I know you’d asked Bryan, I think from the standpoint of guidance we didn’t specifically – we don’t provide product specific commentary on GeneSight. I think obviously we’re going to see sequential growth as I mentioned from both the volume and United Healthcare reimbursement perspective. And so that’s why we are anticipating a continued GeneSight growth throughout the fiscal year.

And that does conclude today’s Q&A session. I will now turn the conference back to Mr. Gleason.

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

And that does conclude today’s conference. We thank you for your participation and ask that you please disconnect your line.