Q2 2020 Earnings Call
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Greetings and welcome to the myriad genetics second quarter 2020 financial earnings calls during the presentation. All participants will be in listen only mode. Afterwards, we will conduct a question answer session at that time. If you have a question. Please press the one followed by the fourth.
And your telephone should you require operator assistance at any time, Please press star zero.
A reminder, this conference is being recorded today Thursday February six 2020, I would now like to turn the conference over to Scott Gleason VP Investor Relations. Please go ahead.
Thanks, Dave Good afternoon, and welcome to the myriad genetics.
Next fiscal second quarter 2020 earnings call during the call will review the financial results, we believe stay after which well it's a question answer session.
I had a chance to review our quarterly earnings release, it can be found on our website at Merian Dot com.
Presenting for married today will be Bryan Riggsbee, Chief Executive Officer, let's call. It can be heard lybia webcast at Merian Dot com and.
I will be archived any investor section of our website. In addition, there's a slide presentation for James days earnings call on the Investor section of our website and which we filed following the call on form 8-K.
Please note that some information presented today may contain projections or other forward looking statements regarding future events or the future financial performance for the company.
Statements are based on management's current expectations.
Stations any actual events or results may differ materially and adversely somebody's expectations for a variety of reasons.
We refer you to the documents the company files from time to time with the Securities Exchange Commission specifically the company's annual report on form 10-K, its quarterly reports on form 10-Q, and his current reports on form 8-K. These documents identify important risk factors that could cause the.
Actual results to differ materially from those containing our projections or forward looking statement.
With that and please turn the call over to Brian.
Thank you Scott and thank you everyone for joining today's call before we discuss our second quarter results I want to spend a moment talking about today's other announcement.
We announced this afternoon that Mark Poland has resigned as president and CEO.
And as a member of the company's board of directors.
I've been appointed interim President and CEO and will serve in this role as well as continue as CFO well the board conducts a search for March replacement.
We have made numerous scientific and business advances during March 17 years with the company that have contributed significantly to the health and.
Nation of patients lives around the world.
Mark played a pivotal role in guiding the company to where it is today and on behalf of the company I want to thank him for his leadership.
Ultimately as we position myriad for its next phase of growth and value creation. The board end market mutually agreed that now is the right time for leadership transition.
I want to take this opportunity to emphasize that we remain confident and Marriott and the numerous growth drivers in front of us and as interim CEO and an organization. We're highly focused on positioning the business for sustained profitable growth.
We have a talented team and strong foundation that will drive us forward as we deliver on our value.
An objective and execute on our critical success factors to position myriad for the future.
With that said this call is about our second quarter earnings. If you have questions related to the leadership transition I will refer you to the press release, we issued this afternoon for additional background.
Now, let me turn to the quarterly financial results.
In the fiscal second quarter, we generated revenue of $195 million and adjusted earnings per share of 23 cents, which were well below our financial guidance for the quarter. We're disappointed with these results, which are inconsistent with our goal to provide achievable guidance.
I will now provide some additional color on the reasons for the shortfall and.
In the quarter.
In the fiscal second quarter, we saw lower than anticipated cash collections from our prenatal business.
Prenatal cash collections were negatively impacted by issues in billing operations that occurred during the transition of the home grown council billing system to an industry standards system used by myriad.
While the.
These will be resolved this quarter the disruption in cash collections necessitated a negative adjustment in the second quarter for prenatal revenues recognized in prior periods.
In addition, we were required to lower the revenue accrual rate for prenatal tests performed in the second quarter to match the lower historical collection.
If we are sick.
Thats bullet collecting in excess of the store for rate. It will result in a positive out of period adjustment in future quarters. In total. These two adjustments represented about a $10 million impact to the second quarter prenatal revenue.
The remaining shortfall in the second quarter was related to lower than anticipated gene site cash collections from United Healthcare.
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In the last 18 months the molecular testing industry has seen an unprecedented onslaught of pay your activities that have significantly impacted our average selling price.
To put this in perspective, if average selling prices had remained the same as they were 18 month.
To go revenues in the second quarter would've been $35 million higher with 35 cents per share of additional earnings.
To be clear these reductions in average selling price are largely unrelated to lower contract prices or in eligible patients.
Instead, they are result of shifting Preauthorization rules.
Inappropriate denials, new documentation requirements and fluctuation fluctuating coating directions to address these challenges we have made significant organizational changes, including establishing a new department, which we have cob revenue operation.
This organization has the responsiveness responsibility to develop new.
Broaches enter coordinate resources across the enterprise to attack the highest priority opportunity.
For example in the second quarter, we developed and deployed in early warning system powered by artificial intelligence to detect billing anomalies earlier. So we can act on them immediately we've already seen some progress from this new organization, but.
Anticipate more significant improvement in future quarters.
Clearly the start to fiscal 2020 is not going as expected. Nevertheless, we remain focused and optimistic about delivering material near term building blocks for future growth.
With gene site, we anticipate a final multi ex LCD in the third quarter that could lead.
The coverage for tests ordered by primary care physicians, who are responsible for 60% of antidepressants prescription.
Also we now have six major employers that cover gene site and our negotiations with an additional 21 employers.
Lastly, we continue to expect additional commercial coverage decisions as we published.
Important you data to strengthen the dossier.
Given this optimism we are slated to expand the gene sites salesforce by 40% to broaden our call point to high decile primary care physician, which if combined with additional reimbursement will return gene site to significant growth.
The forward looking hereditary.
Answer guidance now reflects the signing of a new four year fixed price contract with United healthcare for our entire portfolio of products effective January onest.
The terms of the contractor consistent with our goal to maintain a solid hereditary cancer Foundation as we anticipate unitedhealthcares hereditary.
Cancer volume growth will offset the hereditary cancer pricing reduction in the first year of the contract.
Following the signing of the United Healthcare contract, we will have renewed contracts with the vast majority of commercial lives providing future pricing visibility.
In the prenatal business, we continue to grow the number of ordering physician.
And have seen positive improvements in sample volumes after publication of data highlighting the improved sensitivity of our prenatal test.
Extra testing volume has accelerated since the test was included in an American College of Rheumatology publication, stating that the test was one of several disease activity measures that met a.
Im standard for regular clinic use.
Prolaris volumes continue to increase and we have presented data to Medicare supporting coverage of an additional 25% of prostate cancer patients.
We have also received multiple companion recent companion diagnostic approvals and expect more in the near term including.
Levels for our proprietary mightily cdx product.
Lastly, we are in the beginning stages of commercialization for Mypath melanoma after obtaining a Medicare LCD that provides access to reimburse annual market of more than $100 million.
Given these opportunities we're highly confident that progress.
With our new products will more than offset the earnings impact from the event in the past two quarters.
Now I'd like to discuss the details around our financial results.
Hereditary cancer revenue in the quarter was $117.7 million versus 104.5 million in the first quarter.
We saw mid.
Well digit growth in hereditary cancer volumes on a year over year basis in the second quarter.
Moving on to gene site revenue in the quarter was $22.5 million, while we had anticipated sequential revenue growth from the United Healthcare coverage decision cash collections were lower than anticipated for two reasons.
First a higher percentage of samples.
Denied compared to 30% we had been assuming.
As you would expect we are aggressively working to improve this situation.
With about 17000 ordering physicians. This is a significant task, but we continue to make progress.
Second we saw a higher patient pay portion than expected, which lowered our average selling.
Price because pay collections for patient out of pocket costs in the lab industry are historically lower and take longer than was typically seen from the insurance company.
Prenatal revenue in the quarter was $16.4 million compared to 23.5 million in the first quarter.
As I noted earlier the billing transition.
Option accounted for approximately a $10 million impact in out of period adjustment and lower revenue accrual rate.
Vector revenue in the quarter second quarter was 10.3 million and inline with expectations.
Prolaris revenue in the first quarter in the second quarter was $6.8 million with double digit sequential volume.
Offset by a lower average selling price due to unfavorable mix.
Given the shifting mix in the Polaris business the expansion of Medicare LCD to all prostate cancer patients would have a material impact on the business.
Indebt predict revenues in the first quarter $2.6 million, we saw increases in.
It's volumes and revenue in both us and international market.
Lastly, revenue associated with our pharmaceutical and clinical services business was $14 million due to lower than anticipated revenue for myriad RPM based upon the timing of clinical trial samples from our pharmaceutical partners.
I'd now like to discuss our financial metrics for the quarter.
Adjusted gross margins were 74.8% and declined 150 basis points on a year over year basis.
The out of period revenue adjustments for a 50 basis points of the decline and the remainder was due to lower test average selling prices for hereditary cancer and in our prenatal test.
Moving on to operating expenses, we continue to focus on.
Cost control and saw operating expenses declined approximately $2 million sequentially following a $3 million sequential decline last quarter.
Adjusted Research and development expense was $17.2 million compared to $18.8 million last year adjusted SGN expense. This quarter was 110.3 million.
Compared to 108 108.8 million in the fiscal second quarter of last year.
Adjusted earnings per share were 23 cents for the second quarter. This quarter. We ended the 200 with $225 million outstanding on our credit facility and $191 million in cash cash equivalents.
Now I'd like to this.
Yes, our revised fiscal year 2020 financial guidance.
For fiscal year 2020, we're now guiding toward revenue of $735 million.
This guidance accounts for the change in revenue accrual rates associated with their hereditary cancer and prenatal business is lower genes site revenue due to the United healthcare Preauthorization requirements and the.
Pact of the approximately $16 million of out of period adjustments for Rytary cancer and prenatal testing taken in the first two quarters.
On an adjusted earnings per share basis, we're guiding to total adjusted earnings per share of 45 cents, which reflects the lower revenue and approximately 16 cents of negative impact due to the adjusted.
Out period adjustments to read trade cancer and prenatal revenue.
Now I'd like to discuss the updated assumptions.
Underlying our guidance.
One for hereditary cancer, we are forecasting single digit year over year volume growth in the second half of fiscal year, we're not assuming any positive impact from the recent pancreatic cancer approval.
The anticipated prostate cancer companion diagnostic approval or the recent Japanese hereditary cancer approval.
Based upon our hereditary cancer contract renewals and the impact of Pam on Medicare and Medicaid revenues, we are expecting a modest decline in hereditary cancer pricing and the second half of fiscal year 2020.
Which has been incorporated into our guidance.
For gene site, we are anticipating continued volume growth, but have not yet factored in any primary care reimbursement for Medicare or any additional coverage decisions from commercial payers employers are far for pharmacy benefit managers.
For the prenatal business, we expect.
Hi, good volume growth, but have not factored in any improvements in revenue accrual rate due to improved cash collections.
Backdrop, Prolaris and Endopredict, we are assuming revenue consistent with current trends.
Finally, we are assuming approximately $16 million in lower revenue in the pharmaceutical and clinical services business in the second half.
Of the year do the sale of the German clinic and the decline in other revenue based upon lower pharmaceutical research milestone payment.
We would note that this revised guidance does not include several events that we believe could materially impact revenue and earnings as we transition into fiscal 2021.
Onest and expansion of the gene site.
Medicare LCD to primary care would add approximately $30 million annually and 30 cents and earnings at current volumes.
Second a Medicare LCD expansion for Prolaris unfavorable intermediate and high risk patients would add about $19 million annually and 19 cents per share per.
We are in earnings.
Third improved collections for prenatal and gene site test could add $20 million annually in 20 cents per share in earnings.
Finally, the expansion of the sales team for gene site could add over $15 million annually in additional sales in fiscal 2021 and be neutral to earnings.
Within.
Additional revenue and earnings impact in fiscal 2002.
Combined these events would be more than offset with more than offset the financial headwinds we have faith in the first half of fiscal 2020.
For the fiscal third quarter, we're guiding to revenue of $172 million and adjusted earnings per share of two cents.
We are expecting.
At $10 million sequential decline in hereditary cancer revenue due to seasonality and Panama, a $9 million sequential decline from the sale of the clinic and lower pharmaceutical research milestones.
Modest negative impact hereditary cancer revenue based upon our renewed payer contract and relatively flat new.
Revenue has increased prenatal revenue will be offset by negative seasonality and the rest of the portfolio.
While we are very disappointed in the financial results in the first two quarters.
I am confident that our guidance fully reflects this rebase business and puts us in a position to meet or exceed.
Expectations in the second half of the fiscal year.
In response to these challenges we have made some significant organizational changes to ensure a clear accountability for delivering upside through increased cash collections. We're also evaluating additional initiatives focused on maximizing profitable revenue growth.
Before.
Before I discuss some of the business highlights from the quarter I would like to discuss the significant opportunity before the company in the United States alone. The total addressable market for our nine new products is $15 billion in annual revenue with a current reimburse addressable market over $5 billion per year.
Every product in the portfolio.
Folio has at least Medicare coverage, our priorities are penetrating these currently reimbursed market and gaining additional coverage decisions.
I would like to spend the remainder of the call discussing some of the near term building blocks that will start to tap into this potential.
First with gene site, we had several important.
Patients in the fiscal second quarter, which continues to strengthen the reimbursement dossier.
The first publication was a precision medicine analysis of the guided study, which was published in the journal of clinical psychiatry.
This analysis was based upon this patient population in the guided study intended to benefit from gene site and.
Includes the 787 patients at baseline who are medications with predicted gene drug interaction.
The analysis showed that patients who had their treatment guided by Jean site. So I, 70% improvement in remission, 42% improvement in response, and a 23% improvement in symptoms all of which.
Were statistically significant.
Additionally, we published a new analysis of the guided clinical trial using the six item Ham D six and BMC psychiatry. The key finding of this study was that there were statistically significant improvement in all three clinical endpoints remission response and symptom.
Between gene site guided care and treatment as usual at week eight using the Hamdi six scale. The Hamdi six scale is a subset of the hamby 17 scale and has been shown to be a better measure of core depressive symptoms than the Hamdi 17 scale.
For example questions such as have you had trouble sleeping which could be.
She added with conditions other than depression are excluded from the Hamdi six score.
As a result, it is increasingly being incorporated as an endpoint in contemporary pharmaceutical study.
We believe this data along with the precision medicine analysis, the red switching data and the original guided study do.
We can create compelling clinical picture that gene side is clearly improving patient outcomes.
Additionally, we continue to make progress with employer plans, especially following our recent pharmacy benefit manager agreement. We currently have six major employers that will cover gene site and 21 other employers.
Engaged in discussions including customers of the pharmacy benefit manager that signed a gene site Master service agreement.
We also continue to have productive dialogue with multiple large national payers and important technical assessment organization.
That are evaluating the reimbursement dossier.
Based upon our current and anticipated reimbursement progress we're now advancing our gene site Salesforce expansion plans. This fiscal year, we are anticipating the first wave will expand the salesforce by 40% with 65, new sales territories with additions beginning in the fourth quarter, our fiscal 2020 revenue.
Revenue guidance does not reflect the impact of these additions as any benefits will mostly occur starting in fiscal 2021.
Finally, I would note that consistent with last quarter, there have been no material developments in our interactions with the FDA on gene site and there have been no changes to the test report recently that the website.
Has been updated to provide a list of more than 300 clinical references that have formed the basis for the gene site tests report.
In the registry cancer market, we continue to differentiate our products with ongoing development of the risk score test at the San Antonio breast cancers Symposium. This year, we introduced some pioneering.
Once demonstrating the ability of risk score to personalize risk predictions for women, who test positive for genetic mutation for example, before being modified with risk score a patient with of how be two mutation would be informed that she had a risk of up to 50%. However, when the result is modified using risk score.
The patients risks can be anywhere from 26%, 79% in fact at the high end of the range of patients risk would be similar to a BRC, a one or BRC eight to mutation with the potential for significantly different medical management, we plan to introduce this new to into our test report in calendar year 2020.
Which we believe will be a significant competitive differentiator.
From a companion diagnostic perspective this quarter, we saw significant progress with both Bracanalysis Cdx and Mychoice Cdx.
First we received FDA approval for Bracanalysis, Cdx and pancreatic cancer.
Every year in the United States.
Proximately 50000 people are diagnosed with pancreatic cancer, and we believe less than 5% or tested for hereditary cancer mutations and Astrazenecas study lynparza almost doubled the time to disease progression when compared to placebo, creating a highly compelling clinical argument for testing given the limited treatment.
Options for pancreatic cancer patients.
In January we submitted our application for Bracanalysis Cdx in castrate resistant metastatic prostate cancer from the FDA with anticipated FDA approval in the second half of the fiscal year. In addition, we are expecting data from the Olympia adds event.
Breast cancer study to be announced in the second half of fiscal 2020, which could lead to another approval in fiscal 2021.
The incident patient population for this indication is 198000 patients per year.
If this indication is approved it would expand testing indications to the vast majority of.
Yes cancer patients.
Additionally, much we cdx our proprietary tests for assessing genomic instability received FDA approval as the companion diagnostic in our ovarian cancer patients being considered for Niraparib treatment in the fourth line setting.
We also received.
Status for the test within.
The Nash and initial price under Panama of $4040 based upon this initial approval we saw microwave cdx volume increased 80% during the quarter relative to the run rate for the LDC version of the tests in the fiscal first quarter.
Importantly, this fall at the European Society of medical oncology.
Meeting several of our pharmaceutical partners presented data on parks in first line ovarian cancer that included a mychoice Cdx analysis.
We're currently in discussions with our commercial partners and the FDA on the role of Mychoice Cdx in the syndication.
Example, in the Paolo study recently.
Published in the New England Journal Medicine, Mychoice Cdx negative patients saw no statistically significant improvement improved progression free survival survival, where the microwave cdx positive group saw a highly statistically significant improvement in progression free survival similar to the BRC positive population as.
As a result of these studies, we recently filed an S pmeight with the FDA for Mychoice Cdx in this first line ovarian cancer setting.
Also we are pursuing might we cdx in PARP inhibitor indications in Europe, Japan, and China and have already filed with Mychoice Cdx in Japan last.
Yes.
Our prenatal products had two important publications in the fiscal second quarter, which we believe will help differentiate our test versus competitors first we published data from 58000 patient study showing prequel is more sensitive than other technologies in low fetal fraction samples within.
The leading one in 1000 no call rate. This rate is typically in the 5% range for a re based test and can lead to invasive and expensive follow on procedures, such as an amniocentesis.
Second we published a patient study showing that prequalified cheese high accuracy with an.
Very low test failure rate of 0.1% and in general population of pregnant women, including women with a high body mass index.
In fact, the no call rate for SNET based NIPT tests can be up to 24% in high BMI patient, which constitute up to half of all pregnancy.
This data led the.
In college of medical genetics, and genomics to recommend against using NIPT in patients with significant obesity.
We believe our new data will be a very important differentiator in the market, where no call rates are very frustrating and lead to more invasive procedures.
Lastly, we continue to make progress on three initiatives to improve.
Okay, and reimbursement with average risk pregnancies and Microdeletions for Nip and expanded carrier screening.
For Vectra, we achieved an important milestone in the quarter as the test was included in an American College of Rheumatology publication, stating that debt that test was one of several disease activity measures that met a minimum standard for.
Irregular clinic use as a reminder, vector is also listed in the bend care and United Rheumatology guidelines, which represent more than 20% of rheumatologist.
Additionally, at the mayor at the American College of Rheumatology meeting New data was presented on the ability of extra to predict risk of radiographic progression.
And cardiovascular risks.
We believe these additional indications add significant clinical value to vectra by helping a physician understand and communicate the broader impact from unmanaged inflammation.
We plan to add these additional indications to the Vectra test report in calendar year 2020 after publication of the data.
Finally, this quarter Bluecross, Blueshield, Walmart announced a favorable coverage for prolaris, adding approximately 2 million additional covered lives.
We're also in discussions with multi ex regarding a coverage expansion request for unfavorable intermediate and high risk patients and expect a decision by the end of the fiscal year.
This.
Medicare decision is favorable it would provide prolaris coverage for an additional 50000 patients per year.
In conclusion, while the industry and myriad have faced some significant headwinds over the past 18 months, we remain optimistic about the outlook for the company, our new product sets have substantial untapped potential in the currently.
Reimburse market and even greater upside with expanded reimbursement coverage and we continue to build these new product opportunity on top of the hereditary cancer Foundation with growing test volumes and future pricing stability afforded by the successful renewal of our long term contract with that I'm pleased to turn the call back over to Scott.
For our Q and a session.
Thanks, Brian 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 in a reconciliation of GAAP to non-GAAP financial guidance can be found under the Investor relations sections of our website now we're ready to begin our QNX session in order to ensure.
Broad participation in todays session. We're asking participants. Please ask only one question and one follow up operator, we're now ready for the Q and a portion of the call.
Yes.
Thank you very much if you would like to register a question. Please press. The one followed by the four on your telephone you will hear a three to approach to acknowledge your request if your.
Question has been answered and you would like to withdraw your registration. Please press. The one followed by the Threeq Onesix interest for question. It's one for on your telephone Keypad first question comes from line of Bill Quirk.
Piper settler your line is open.
Great. Thanks, Good afternoon, everyone say, Brian I appreciate that the company business.
Definitely want to talk about the leadership transaction or change rather excuse me that you just announced but given.
The state of affairs here with some challenges with respect to reimbursement and hitting guide guidance and such can you can you help us can you give you shed a little bit of light here in terms of.
You are kind of what led to the.
The change and how the board is thinking about the timetable here to nominate.
Or rather so to replace Mark with say.
I guess with a formal CEO. Thanks.
Sure Hey, Thanks, Bill for the question.
Really I'll just refer you back to the press release.
It was really just date.
As we as as Mark in the board looked at the next phase of value creation and growth for myriad.
There was just mutual agreement that now is the right time for for leadership transition.
And really that's that's all that we're going have to to comment on that at this point.
Okay got it and then when we think about the guidance for the back half of the year.
Brian is there any does that assume that the current environment that you're operating under with respect to pre ops and collection challenges in such that that effectively stays the same does that does that suggest any improvements or for that matter any any worsening in the environment.
Sure.
For the back half of.
The year, what we've assumed is just status quo. The same level of reimbursement rates that we're seeing now I think there'll be some.
Modest improvement as we go through the year in the initiatives Havent started to happen impact on our cash collection rates, but as you know those things can tend to take more time than you liked but we're focused on the execution now of.
Our initiatives and so.
We have.
Looking at a positive impact going forward, but for purposes of guidance, what we've built in his status quo.
Understood all right. Thank you.
Thanks.
Next question comes from Doug Schenkel Cowen Your line is open.
Doug.
Okay.
Sorry can you hear me now.
Can you hear you now.
Okay.
So maybe maybe first with a cleanup question and then with a bigger picture question.
Can you just talk about revenue recognition practices going forward and what.
And just given a series of Contra revenue developments across a couple of your businesses over the last few quarters.
Yes, sure I think we talked about as to some extent on the during the formal script.
In terms of some of the improvements that we've made in order to help for earlier identify vacation of changes in collection trends, where we're seeing.
Saying payers or patients or others pay at lesser rate than they have historically, so I think as we think about.
Changes that we're making going forward.
Yes, that's that's really what's going to happen the biggest impact and make it more accurate and get us to the point where.
As it was the case in the current quarter for hereditary.
Cancer as an example, we had a positive out of period adjustment as we had put in place some of the corrective measures to address the codes, which change that we had.
Sort of bled over into the first part of the fiscal year. So.
At the anything really that that's what we're focused on now is sort of early early warning in or early detection.
Okay.
Was it was there more discussion that.
That helps so for the bigger bigger picture question bigger picture question.
Clearly it was time for a change.
Does it change at CEO go far enough I know this is pretty direct Brian and I don't mean.
Be rude, but I I think it's fair to ask why investors should trust the broader management team and really largely the same board of directors that has been at the home for the past decade, and why why should investors.
Trust This management team in the sport to make the right decision.
After a decade plus of making so many.
We're on ones what comes next in terms of leadership change not just at the management, but also at the board level it on and on what timeline should we expect to hear more.
Sure well, yes, a pretty direct question, Doug what I'll, what I'll do that sort of Formula help you with the answer is I think really where where we're focused.
Yes, right now is.
Riding the ship in terms of hitting the numbers that we put out there so really having an execution and accountability mindset, but so first and foremost focusing on that I think beyond that.
This is a this is a business.
Where the path from.
Inception to commercial launch to reimbursement to broader utilization is a long path and so I think it is as we talked about you see in some of the F. why 21 positive that we have on the horizon.
I think we're just on the cost, but really realizing especially for gene site for.
Whereas.
Microwave mypath melanoma microwave cdx with recent payer coverage I.
I think it's just part of the cycle in and as much as we would like four to go more quickly.
I think the reality is just that these things.
Take longer than anyone would like but I think from in terms of the management team and the board.
Word.
We're all aligned around the strategy that we've laid out and we believe that the best path to returning to growth is to accelerate.
And Thats why we talked about on the call the commercial launch and of the Salesforce expansion for gene site.
Now we're at the point, where we really just need to step on the gas relative to.
Delivering on some of the revenue and that we've talked about historically and I think that'll that'll largely.
Alleviate concerns that rate.
Next question comes from align Us Tyco Peterson.
With JP Morgan your line is open.
Hey, thanks.
I want to start with.
Counsel and what's going on in the pre nail side I know you're setting the billing issues. We've heard just anecdotally there theres been a lot of turnover there a lot of maybe retention issues can you speak to how the integrations gone obviously you originally guided for it to be 20.
Is accretive this year, that's not going to happen, but talk to how that integration has gone overall and you do have competitors I can we take out there with $99.
Patient pay an IP test now so why is pricing not increasing problem for that business too.
Sure.
Yes, Tyco I think I think as we look at.
The integration of the Council business first and foremost I think obviously, there's been some challenges there the one that comes to mind.
Obviously is the billing operations issues that we've had to deal with here.
In the current quarter I think relative to the Salesforce, what we've talked about is the fact that we're focused.
On broadening the base and so as you think about a broader approach towards the BG why end market, probably less focused on the I've, yet if clinics and some of these other large box volume clinics, which is probably where some of the the folks that you're talking about are primarily focused and we've actually seen relatively you we've actually seen.
The increase in volumes, we in the in the current month January in January we actually had a record a couple of record days relative to the volumes for those businesses. So I don't think feet. The issue is really driving further penetration and driving volume I think at this point we have.
Some operational issues relative to billing and collections.
But we are still excited about the business and believe that we positioned at for long term sustainable growth.
And take a one thing I'd just highlight equity you referenced $99 price that's a patient cash pay price you were really matters in terms of the.
The market and where pricing is where you're contracting and we've actually seen a lot of stability on the commercial cyber contracting and I think when we look at.
Where pricing can go theres, a number of upside drivers when we start thinking about.
We start thinking about large rearrangements, you start thinking about average risk testing Dcs and guidelines.
And then also just executing on a lot of the cash collection initiatives that Brian Brian referenced earlier in the call and so we actually see pricing and trending up from current levels as we move forward here.
Alright, and then in terms of follow up first on operating margins, Brian you emphasized the goal to to protect.
And if I go back to 2016, you're supposed to earn $4. This year now we're talking about 45 cents can you talk about steps operationally you are taking and we'll take going forward to try to protect margins.
Again, including potential restructurings.
Sure, Yes, I think the couple of comments that I would have there one is.
Obviously, the biggest driver and we've always said this for.
Improving improving operating margins is reimbursement for our products that has a that has a significant impact on our operating margin percentage I think as we look at.
Cost initiatives and we talked about this during our prepared remarks over the last two quarters we've seen.
Roughly $5 million and lower operating expense. So we're very focused on managing the bar business continuing to drive out costs. Both were elevate 2020 program, which has been very successful as well as the integration of count So where we continue to to integrate that business and yield cost saving so those are going to be the primary.
Drivers as we think about how we're going to improve operating margins, it's going to be focused on getting better higher reimbursement.
And then also at the same time, managing our cost profile.
All right and if I could just ask one last quick one on genes side, just so we're clear you're not factoring in other pre off with any other payers going forward like you have with United.
Is that fair to say that or is that an issue with your other discussions and then secondly, there have been new drugs approved bravado, the nasal spray how do you incorporate that.
Into it given that it wasn't incorporated in the original trial.
Well first what I would say relative to and we havent provided by 21 guidance we provided.
20 guidance for gene site.
It's based on the payers that we have and the end of pre off programs that they have so we havent, we haven't added any new.
Impact of any pre off programs.
And then on the on the on the nasal spray question.
Yes, I mean, when you look at some of the newer drugs on the.
On the Pharmacogenetic side.
Some of them are more in the acute care setting where remember most of our patients are making flexions on kind of longer term therapy and spent a lot of cases those aren't necessarily relevant.
Alright, thank you.
Next question close.
From Aligners switching them with BTG Your line is open.
Thanks for taking the questions sorry, I missed that but was there an incremental out of period adjustments for hereditary cancer.
The last quarter and if so what's driving that and are you, making any progress in terms of.
Our collections on.
Non contracted payers.
You talked about last quarter.
Yes, so sung ji. Thanks for the question I think you when you see the Q. It will have the the out of total out of period, which is less than what the prenatal was prenatal was around $5 million and so the balance is largely a positive out of period.
That we had for hereditary cancer and and in large part probably driven by some of what you reference which is our re contracting with some of these small payers. We continue to focus on that initiative and we hope to continue to have positive adjustment you know as we're able to two to update those contracts and capture that.
Revenue, but it was positive in the quarter.
Okay.
And then you talked about the the higher percent samples denied from United Health and was wondering what's driving that.
Thank you.
What drove that.
Sure, Yes, I mean, I think right now we're we're focused on.
Understanding.
All the drivers for there for what's not making it through the United pre off screen. What we said we says that it was higher than what we had modeled which was 30%.
Not going to get into to the specific because it's a range of issues that we're dealing with there but.
When we talked about the revenue operations team I.
Just to take that a little bit farther part of that is a dedicated enterprise wide pre off team is focused on.
Reducing the number that don't make it through that process. So we hope to make improvement over time, but what we've seen in the current quarter. Since launch is just level are just levels that are higher than what we'd expected.
Just one other things we've talked about on the call was that.
Some of the payers have preauthorization portals or the physician has actually going into that pre authorization to be a registered user and that portal and so one of the things that we obviously have to work through is getting physician signed up when you think about psychiatry. These aren't physicians that tend to order a lot of.
Ignostic test and so thats been a major undertaking for the team is to get out there and getting physicians enrolled and in those preauthorization portal.
Okay. Thank you.
Thank you.
Next question comes from Derik de Bruin. This bank of America. Your line is open.
Hi.
You might look like today. Thank you for taking my question.
First flung.
So I appreciate the color.
Thank you.
You talked about potential upside driver.
Wanted to see what probability of fiber.
Thank you.
Hi, birth or rank order them in terms of likely program for.
Yes, I think I think the first two that we referenced obviously the Medicare LCD.
For gene side that could expand into primary care, we expect resolution on that here in the third quarter.
And so there will be relatively near term resolution on that initiative. Additionally, we talked about with Prolaris LCD for expanding into.
Hi, Riskin.
Non favorable intermediate patients thats something that we would expect this fiscal year on and so those are relatively near term events that we.
Should get resolution on.
The other piece, which is mainly the collections.
And improvements in collections for the hereditary cancer business in the prenatal business. That's obviously, a big focus as the business going forward here.
We're actively working implemented a number of initiatives, Brian stated our guidance doesn't anticipate any improvement.
Based upon the number of programs that we're implementing but thats something that is actively ongoing right now and lastly, Ivy to the last one on that list was the salesforce expansion, whether things that we're moving aggressively on is our initiatives that are.
Focused on delivering.
Revenue acceleration on the topline and that will be.
Hiring those reps, we said we do in hiring in Q4, and we would expect it to be have of this fiscal year 2021 impact.
Got it. Thank you and then one on one side.
Said that.
The pricing arrangement.
For one of the.
You could comment on what that.
Oh or.
Correct.
Correct.
Commercial coverage.
Yes, we didn't we didn't we're not going to give the ASP in the contract.
But but yes, we said on the call in our press release that we had signed a new long term fixed price contract with with.
Hi, good health for our portfolio of products.
I think we described the agreement is very favorable one time and we did make around rytary cancers that we felt volume growth in year one in the contract.
Could lead to offset pricing headwinds that we would face associated with that new contract.
Great. That's helpful and then on Jim's Eduardo.
Sounds like.
Okay. Thanks, very much in the back but wondering if the.
What kind of.
From what you would you categorize.
Oil with solid core Pemex.
Correct.
Yes.
Obviously, the Medicare decision Hasnt come yet and so.
We've had positive dialogue in discussions with Medicare, but that decision will come we've said this quarter I think when you look at the primary care market will reset historically is that about 60% of the patients are in that channel and we would really be focusing initially on high volume ordering physicians we have dr.
Yes.
With about 15000 physicians that comprise the larger.
More than half of that total volume and so that would be the initial focus of the salesforce expansion. The other piece of it is we also have data on reimbursement levels on a nationwide basis and so the targeted launch that we'd be doing would really look at reimbursement levels and we'd be putting those.
Absent the territories, where there is the most favorable reimbursement on a nationwide basis, and obviously the Medicare LCD would be very very helpful on that front.
Okay.
Next question comes from pseudo with SVB Leerink. Your line is open.
Hi.
Thanks, Brent first question when do you think the council billing transition is going to be resolved and.
Where do you think you land in terms of SP. After all that is.
Completed.
Thanks, Tony.
We have largely completed the transition to the new.
Q2, our in house billing system. So thats done I think at this point, where we're focused on is the Rev. Ops team is focused on improving that process. We had some process issues as we went through that transition. So I think relative to ASP, we haven't given out product specific ASP, but I think we would expect obviously given the.
Impact that we saw in the current quarter that you would see them higher than where they are currently and what is factored into our guide.
Okay, and then I know you prior call you had mentioned about 300 pairs contract that account for 85% of revenue unheard jittery.
And could you update us did you see the worsening.
There are.
Worsening SP and the.
Among the smaller Payors and where do you expect that those those group to trend through the year.
Yes, I think again as you look at the as we look at.
Q2, we actually saw positive adjustment in the.
Current quarter really driven by.
The contracting process that we had done with this large group with payers.
And we would expect it we would expect that to continue through the back half of the year.
But it but again there are very small on individually and so it takes a lot in order to make a difference but I think.
Our general feeling is that.
We should see that improvement play out over time, which is what weve communicated previously.
Okay. Thank you.
Thank you.
Next question to streamline of Jack Meehan with Barclays. Your line is open.
Thanks, and first one wish Mark and luck.
Learned a lot from our interactions.
Wanted to start with hereditary cancer testing. So you referenced that volumes were growing in the mid single digits, but revenue declined in the high single digits. So that would imply price was down double digits and talked about some of the adjustments there.
So.
We look forward with the unit, new United contract, what's a reasonable expectation for pricing in 2021 can it be down in double digits again.
Thanks, Jack for the question I think what we talked about relative to hereditary cancer and the sequential change there from Q2 to Q3 was the impact.
Pack to seasonality the impact of Panama that was about $10 million.
When we think about the United contract at the reference that we made was that a few million of our total change was related to the renewed contracts that we had.
And then the other data point that we gave was that the.
The volume growth in hereditary would offset the pricing in year one so.
Our expectation would be and that that contract is retro to January onest. So what you'll see in Q3 will be representative from an ASV perspective.
Of kind of where the.
Active will incorporate the impact of the United renewal.
What we said on the call Jack is that we didn't anticipate anything else from a contract in standpoint.
As we go through this year that would materially impact the pricing when we look at next year.
Is there any reason why the hereditary volumes would accelerate under the new United Health contract.
Yes, I mean, I think when you look at the contract the contract obviously doesn't really impact volume we're in a network provider with United Healthcare. That's status has remained the same.
So I don't see anything that would change the volume outlook relative to our current volume now when we look at next year, we talked about a variety of factors, we have a series of new companion diagnostic.
Approvals that are coming in the back half year here.
One of those could be very significant which is the Olympia data that we talked about from astrazeneca that would be an additive in breast cancer indication, which is a very large indication and could expand testing in the breast cancer space pretty dramatically, but the contract itself wouldnt have an impact on our volume.
Okay, and then one follow up on gene site, just as we await be finalization of the LCD. This quarter is there any risk the gene sites $2100 price could get reduced.
And then similarly are you planning pursue your own CPT code for the test. Thanks.
Yes Jack.
When we look at the price and remember this is a coverage decision. It has nothing to do with actual pricing, we have a contract price through our.
Our local.
Medicare administrative contractor Fourg insight.
And so theres been no indication that theres any type of pricing change on the horizon.
When we.
Can you remind me of your second question I'm sorry.
Are you planning for CRM CPT code for the test, Yes, we have we haven't talked about our strategy around CPT code for gene side, We've obviously thought about that internally. There's a series of things to think about there, but we havent publicly discussed.
And gentlemen, there no further questions at present time. Please continue with your presentation for closing remarks. Thank you.
All right. Thanks, Dave. This concludes earnings call a replay will be available via webcast on our website for one week. Thanks again for joining us this afternoon.
And that does conclude the conference call for today, we think very much for participation Essi. Please disconnect.
Excellence.
Okay.
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