Greetings, and welcome to the Myriad Genetics Second Quarter 2023 Financial Earnings Call [Operator Instructions]. As a reminder, this conference is being recorded Thursday, August 3, 2023. I'd now like to turn the call over to Matt Scalo, Senior Vice President, Investor Relations. Please go ahead, sir.

Thanks, Dave. And good afternoon, and welcome to the Myriad Genetics second quarter 202030 earnings call. During the call, we will review the financial results we released today and afterwards, we will host a question-and-answer session. Our quarterly earnings release was issued this afternoon on Form 8-K and can be found on our Web site at investor.myriad.com. On the call with me today are Paul Diaz, our President and Chief Executive Officer; Bryan Riggsbee, our Chief Financial Officer; Nicole Lambert, our Chief Operating Officer; and Mark Verratti, our Chief Commercial Officer. This call can be heard live via webcast at investor.myriad.com and a recording will be archived in the Investors section of our Web site, along with this slide presentation. Please note that some of the information presented today contains 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 to the documents that the company files from time to time with the Securities and Exchange Commission, specifically the company's annual report on Form 10-K, its quarterly reports on Form 10-Q and its current reports on Form 8-K. These documents identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. With that, I will now turn the call over to Paul.

Thanks, Matt. Good afternoon, everyone, and thank you for joining us. On today's call, we will discuss highlights from the second quarter and provide an update on the progress we are making towards profitability in the fourth quarter of this year and sustainable growth and profitability in 2024 and beyond. Before we begin, I'd like to announce that we will be hosting an Investor Day on September 19th with a presentation and tour of our new state-of-the-art facility in San Francisco, named Dr. Walter Gilbert Innovation Center after the Noble Laureate and co-founder of Myriad Genetics. An invite will be sent out and registration details for this event will be posted to the Investor page of our Web site soon. Transitioning to the quarter, I first want to thank our Myriad teammates and our provider partners for their continued support and commitment to advancing our mission and vision to making genetic testing and precision medicine more accessible and helping people take more control of their health, enabling providers to better treat and prevent disease. Total revenue grew 10% year-over-year after excluding an out-of-period adjustment of approximately $12 million of revenue in Q2 of last year, our third consecutive quarter of double digit top line growth. This growth was despite payer related headwinds in the quarter that are transitory and administrative in nature, which have largely been addressed in future periods. Bryan will discuss this in more detail shortly. Myriad Genetics drove significant volume growth in the second quarter across all of our products as our commercial and lab operations teams continue to execute in these underpenetrated markets. We believe we are gaining share in the hereditary cancer testing market each quarter, growing 20% in Q2 over the period of the quarter last year, driven by competitive account wins and increased…

Thanks, Paul, I'd like to start on Slide 7 and talk about our commercial team. We have made great strides in our commercial execution over the past year with changes made across the organization that enabled our sales force to effectively target and penetrate both new and existing accounts. The results speak for themselves with robust volume growth over the past four quarters. The majority of which are coming from existing accounts. This gives us confidence in the changes that we've made to the commercial team because growth in existing accounts means that tailwinds like market dislocation have to date not been the key drivers of our commercial performance. With that said, dislocation in select markets that Myriad operates in is starting to get noticed by our providers as peers in our industry struggle with everything from lengthening turnaround times to decreasing quality of service. A true driver of our volume growth is our skilled and focused sales force with years of experience in Myriad working alongside providers and their patients equipped with new digital tools, scientific insights that help them better serve our current customers while adding new accounts every quarter. We'll now turn to Slide 8, and talk about our core business units. Our oncology business delivered $80.7 million in revenue in the second quarter. Reported test volumes were roughly 52,000. Hereditary cancer testing volumes from our oncology sales team grew 18% year-over-year after growing 16% in the first quarter of the year. Prolaris, our market leading prostate cancer test, continues to reach patients with diagnosed prostate cancer to provide them and their physicians with important information needed for better treatment decisions. In the second quarter, Prolaris volumes grew 13% year-over-year. Myriad is making strides with Precise MRD as we are working with researchers at the MD Anderson…

Thanks, Mark. I'll begin on Slide 12 and give an update on our laboratory operations team. Thanks to our commercial customer service and laboratory operations teams, we grew volumes over 17% and reduced COGS by 6% in the quarter despite a challenging operating environment. Our lab operations team has shown tremendous resilience against these challenges, including a complex upgrade to our genetic sequencing platform, a successful FDA inspection of our Salt Lake City lab and the beginning of our lab move in Salt Lake City and South San Francisco. After some technical challenges in our myRisk lab in early Q2 that impacted our turnaround times, our average lab turnaround time across the enterprise have returned to approximately 5.5 days. Turnover is also down to 9.6%, half of what it was in 2021 and our employee engagement scores are up to 61%. We announced last quarter that we are a certified great place to work, where over 86% of our employees voted us a great place to work. Our Net Promoter Score among providers remain strong between 63% and 84%. We also announced in Q1 that we have started sharing data with ClinVar. Providers and genetic counselors have been quite vocal about the importance of working with ClinVar, and 81% of the providers that were asked are aware of our partnership with 13% saying they now have a more favorable view of Myriad. We encourage providers and counselors to life to share their thoughts and opinions with us because we are listening and we want to hear their feedback. Turning to the next slide. We have begun our transition to our new Labs of the Future, both in Salt Lake City and South San Francisco, which will be unveiled at our Investor Day on September 19th. In July of this year,…

Thanks, Nicole. I'd like to start by reviewing product volume trends on Slide 16. Total second quarter organic volumes grew 17% over last year, representing four consecutive quarters of double digit volume growth for the business, driven by strong double digit growth in both hereditary cancer testing at 20% and GeneSight volumes at 23% in the second quarter. Prolaris saw 13% quarterly volume growth from Q2 of last year and prenatal volumes, excluding contributions from SneakPeek grew 12% year-over-year. Overall, the quarter reflected broad based volume growth across the portfolio. Turning to total revenue on Slide 17. Recall that the second quarter of last year benefited from approximately $12 million in positive out of period adjustments, which were immaterial in the second quarter of this year. Excluding these adjustments, revenue in the second quarter of $183.5 million grew 10% year-over-year, marking a third consecutive quarter of double digit revenue growth, a reflection of consistent volume growth and execution of our commercial strategy. Consistent with others in our industry, during the second quarter, we experienced a negative impact to our rev cycle process from the transition of multiple Blue’s health plans to a new claims administrative process. The process changes left many health plans unprepared to handle the sometimes complicated preauthorization process, leaving providers unable to obtain the necessary preauthorization required to support testing for patients as well as reimbursement. This administrator transition resulted in a headwind of approximately $4 million in the quarter. As of today, we have seen these system issues mostly returned to normal. However, there was some spillover into Q3. With respect to the claims which were denied payment and not included in second quarter revenue, we are engaging with a number of large payers to discuss payment for claims that we believe should have been paid…

Thanks, Bryan. As you've heard, we've had a lot of exciting organizational changes happen this year, but we remain focused and confident in reaching profitability in the fourth quarter. Balancing growth and innovation while keeping an eye on profitability is an ongoing challenge and opportunity, but we are continuing to be committed to it. In closing, I'd like to offer what we believe are our strength and strategic advantages. First, we continue to grow volumes and revenues consistently every quarter across our businesses, and we get paid for the tests that we offer. Second, we have a disciplined cost management structure as we expect to maintain our strong gross margins and manage our OpEx as we did this quarter, responsibly. Third, we are committed to effective capital deployment in key areas that will improve the customer experience, including new tech enabled tools and capabilities, product innovation, our commercial capabilities and our lab to the future. Fourth and finally, our growth catalysts are clear as we continue to elevate our products to their full potential, launch new products and opportunistically look for strategic tuck-in acquisitions. All of this reinforcing our position as a trusted, differentiated lab with specialized expertise, best-in-class quality, a strong, scalable commercial engine underpinned by data, research and technology with industry leading margins and business management. Keeping patients and providers at the center of everything we do is starting to pay dividends and we are excited about finding new ways to make it easier to do business with us. Everything from increased price transparency and affordability for patients to the rollout of initiatives like our EMR integrations with Epic and our unified ordering portal, along with improvements to Myriad Complete, our customized suite of services and workflow solutions. And now I'll turn it back to Matt for Q&A.

Thanks, Paul. And as a reminder, during today's call, we used certain non-GAAP financial measures. A reconciliation of the GAAP to non-GAAP financial results and a reconciliation of GAAP to non-GAAP financial guidance can be found in our earning release and under the Investor Relation section of our Web site. Now we are ready to begin our Q&A session. To ensure broad participation, we're asking participants to please ask only one question and one follow up. Operator, we're now ready for the Q&A portion of the call.

[Operator Instructions] And your first question will come from the line of Matt Sykes with Goldman Sachs.

Paul, maybe first, you made some comments about the market share gains in women's health. Maybe could you kind of talk a little bit about that market, the share dynamics there and then what is your kind of view on the duration of the market share gains that you can achieve just given the dynamics in that industry right now?

We're really pleased by the progress we're making. And as Mark said, I think we're in the early innings here. First, as we've commented on that, we think adoption rates are still low. We saw a nice increase in adoption rates for prenatal testing when we move to average risk. We believe there will be expansion of guidelines around carrier screening soon. And as you see, our hereditary cancer and myRisk testing opportunity for unaffected patients is a huge opportunity for patients and for us to continue to grow. So we're really excited about that platform. It is a market that others are really struggling to find a path to profitability, but we are on the verge of profitability in women's health, and we have a path to that. So the leverage in women's health for us is pretty significant as we continue to grow. And we see a lot more opportunity for market share gains as well as just broader adoption as we continue to come out of the pandemic.

And maybe if I just -- two quick ones and just one quickly, Bryan, just you mentioned spillover in the administrative change into Q3. If you could quantify that? And then just secondly, the Lab of the Future, I think on the slide you said it's going to result in a 67% reduction in COGS. Can you just talk about the phasing of cost reduction as the Lab of the Future kind of gets rolled out?

I think with respect to the first question on the spillover, it was a system conversion that took place really at the really end of Q1. So we had a full quarter. So when we think about that $4 million, that was a full quarter. And as of today, we're largely back to normal in terms of the processing issues. So it would be obviously significantly less than $4 million as we look at the next quarter. And we tried to capture it, we provided some additional detail in our deck regarding sort of our profile in the remainder of the year as we track towards our full year guidance and profitability goals. So I think that slide sort of captured sort of how we would expect to see sort of general seasonality impacting Q3 and then a pretty strong recovery as we get into breast cancer awareness month and some other things in Q4. So that would be my take on that. I don't know if you want to add anything.

Well, look, on the second piece, Matt, you and I have talked about this. We're certainly striving for more gains in gross margins and we do see the opportunity as we automate, as we move into the new labs, I mean, our teams are so excited. We were in San Francisco altogether last week. The space has just afford -- when you think about time and motion studies and the ability to get work done and process, the volume, we're terribly excited about it. But as I've said, us maintaining gross margins of 69%, 70%, net of inflation and with the increased regulatory burdens that we see and expanding panels as our tests become more complicated, that's just an incredible work by R&D and lab teams. And there's just so much leverage if we can grow -- continue to grow the top side of this company, 10 plus percent, which is what we're working towards even as we mitigate payer noise, maintain those margins and then manage OpEx effectively, the EPS and cash flow leverage is pretty significant as we go into '24 and '25. So all of that is to say, Nicole and team did a great job lowering COGS in the quarter. We expected to do that a little bit because of seasonality. But given the lab moves, the moves to NGS sequencing, CLIA surveys, FDA surveys and a 17% growth in volume, I'm not sure if I could expect much more of a lot that we got this quarter.

And your next question comes from the line of Andrew Cooper with Raymond James.

Maybe first, going to stick with one on gross margins here. If we do the math on that $4 million, assuming you did run all those volumes and just not get paid kind of put your gross margin north of 71% for the quarter. I guess just help me think about, is that the right way to think about things? When we think about the guide, it seems like that maybe implies a little bit of a step back from that sort of adjusted adjusted number. But just help me think about kind of what the moving parts are through the back half of the year on the gross margin side?

I mean I think that we certainly ran the test and that would have been a helper, but there are always a number of puts and takes any time you look at the numbers. And we say in the -- when we talk about the $68 million to $70 that it will fluctuate throughout the year. So I guess I just -- we still feel comfortable in that range around 70% gross margin. I don't know that I would put a finer point on it relative to that.

Andrew, look, I think the thing that we're most encouraged about going into the third quarter and more importantly, the momentum that causes going into the fourth quarter, which is our strongest quarter is that volumes are -- we're not seeing the seasonal dip that we typically see. We're growing through that right now, that's the bigger pressure -- that's a bigger leverage in terms of gross margin. The payer stuff is just frustrating and we're pretty good at that. And we certainly see some upside in the back half of the year. As Bryan said, trying to work through that. But let's be clear, the payers are -- have raised the level of difficulty on prior ops and just the administrative part of doing business here. And we're doing a lot of sole searching to think about how we can continue to up our game, leveraging AI and other things. But as Bryan said, I would resist the urge to focus too much on any one lever. But the bigger lever is growing volumes and then continuing to manage cost and again, the drop in OpEx cost quarter-over-quarter, which is what we committed to, I'd point your attention back to. And again, we're just we're working hard to make sure that we deliver on our commitments and I think we're really positioned to do that in the back half of the year.

And maybe just one more from me. I don't think you went into too much detail on kind of anything on new products still to come. So maybe just can you confirm timelines or if there's any updates to FirstGene MRD RUO launch and others in the Precise portfolio, if those are on track or anything else we should be contemplating in terms of timing?

So happy to talk about it a little bit. We're going to really spend some time at our Investor Day talking about that and hopefully, you and others can attend and get from Dale and the rest teams morning sites. And you're going to hear from our product management team that is fully integrated now more. What I would say is we continue to listen to our customers, do pilots, listen to what people are expecting pre-launch here. And so we're much more focused on launching with a go to market strategy that we think will win and be differentiated. Generally, everything is on track. We are working on carrier screening panel expansion in front of guidelines, which to me is a precedent before the first three months, we've got to kind of get that done, more flexibility around our myRisk panel. So we just continue every quarter to look at how do we need to position our products. With respect to MRD, really enthusiastic. We are processing samples as we speak for Memorial Sloan Kettering. We are close to announcing some other clinical validation studies. And so again, we'll get into more detail. But as we've talked about in terms of our three year growth path, FirstGene MRD are not big contributors to that, that's sort of on top of a 10 to 12 -- 10 plus percent that we expect, but we'll have a lot to talk about on Investor Day and generally, things are progressing.

[Operator Instructions] The next question comes from the line of Daniel [Sammarco] with TD Cowen.

Quick question on GeneSight, grew 22% this quarter, volume at 117,000. How should we think about performance for the remainder of the year? And should we be looking at any additional payer announcements in the near future? And if you can provide any time line on additional publications supporting the utility that would be great, too?

Related to GeneSight, I mean I think you've seen almost eight quarter, nine quarter double digit growth. And given the new providers that we're adding every quarter, we expect to continue to see strong volume growth for GeneSight. Related to new clinical data we were expecting and we should hope to see some clinical data announced at the end of this year, so the second half that we're coming up into. And we're going to continue to see some new data coming out at the beginning of next year as well. So I don't expect any slowdown related to the GeneSight franchise.

And to the second part of your question. We've had some preliminary readout from our study with Optum genomics on the clinical utility, which is really pointing towards GeneSight as a really effective tool to reduce psychiatric hospital days and emergency room visits. This is like the real world stuff that I like to talk about. Mark mentioned in his script the meta analysis work that all continues to be confirmatory. We've had a number of states, three specifically, now pick up the PLA codes and we are generating revenue from that expansion, that's some fee for service Medicaid plans as well as some managed Medicaid plans, and we are making progress with some commercial payers. We had hoped to announce one here this quarter and it's just taking a little bit more time. But we do expect to be able to announce several additional commercial coverage before the end of the year and more coverages from different Medicaid plans as well. One of the things that we're working really hard on has been a source of frustration is that many of the Medicare Advantage plans are not who are required to cover GenSight, because it's a covered service are not paying. And that's one of the things in our payer markets and web cycle teams that we are really getting much more assertive on when clearly a covered service by a Medicare Advantage plan is not being covered ostensibly because of prior off issues or other documentation issues. And so we do see upside in ASP for GeneSight in the back half of the year and more momentum for GeneSight ASP next year.

We have another question coming from the line of Jack Meehan with Nephron Research.

Bryan, I wanted to start with what's your expectation for free cash burn in the second half of the year? And could you just call out some of the one-timers we might be looking for like the legal payment?

Jack, we had a slide in the deck in a little section in the press release where we talk about where we show our liquidity as well as the payment coming out for the legal settlement and also our CapEx and cash flow expectations, trying to give a view as to kind of where we think we'll end the year from a cash and availability on the credit line perspective. So it should answer your question in the release.

It's pretty much a checkbook version, Jack, so it should be very clear. And the thing that I would underscore is the settlement as well as our ability to access other capital remains. We have a lot of financial flexibility. We have till Q4 to complete the settlement and a number of different levers, whether expanding the ABL or other things. But there is a very simple walk through on Slide 19 on the losses that kind of gets you there.

And based on the way things are trending with Gateway with SneakPeek, would you expect to make the $32 million milestone payment in 2024 there as well?

Yes. Unfortunately not, but -- which, again, if they were hitting all their metrics, we would be happy to pay it. And they have an ability to get paid later. Right now, their volumes are flat. We're starting to see some attachment rate to NIPS testing. We're going to have some more announcements about acceleration around SneakPeek and some new channel opportunities there at the Investor Day. But that is not a payment we expect to make right now. They've been managing costs well. So it hasn't been a big cash flow or EBITDA train. In fact, they're under budget on the cash perspective but they are only flat year-over-year right now on volume. But we're not even a year into it yet and we're really proud of the integration and how it's going. And I think we'll get some more momentum here as the year progresses.

One last one. The FDA is about to release new rules as it pertains to LDTs coming back again. I was curious if you've had any recent discussions with them about GeneSight, how you think these rules might impact Myriad?

I'm not sure if I could be any clearer, but I will restate this. We have not had any exchanges or the FDA has made any inquiries about GeneSight since 2019, and we don't expect the FDA to to have any inquiries about GeneSight. Most of the focus of the FDA and our associations are engaged with these discussions are principally focused at at-home testing for cover and other things that they view are high risk. And so we are not concerned nor do we have any new information since 2019 about concern from the FDA on GeneSight.

There are no further questions pending. I'll turn the call back to Matt Scalo for closing remarks. Thank you.

Okay. This concludes our earnings call. A replay will be available via webcast on our Web site for one week. Thank you again for joining us this afternoon and see you at our investor event in September.

And all that does conclude the conference call for today. We thank you very much for your participation. You may now disconnect your lines.