Q3 2020 Earnings Call

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[noise] greetings and welcome to the myriad genetics third quarter 2020 financial earnings call. During the presentation, all participants, hoping they listen only mode and of course will conduct a question and answer session at that time. If you have a question. Please press star one followed by the foreign your telephone.

If it anytime during the conference you may need to reach an operator. Please press Star Zero. This conference is being recorded Tuesday may the fifth 2020, and now I'd like to turn the conference over to Scott Gleason. Please go ahead.

Thanks, Scott Good afternoon, welcome to the myriad genetics third quarter 2020 earnings call. During the call. We review the financial results. We released today after which we will host a question answer session. If you have not had a chance to review our quarterly earnings release. It can be found on the website a myriad dotcom.

Hi, Scott Gleason, the senior Vice President Investor Relations and corporate strategy and presenting with me today will be Bryan Riggsbee interim Chief Executive Officer, and Chief Financial Officer.

This call can be heard live via webcast at myriad dotcom and recording will be archived any investor section of our website. In addition, there's a slide presentation pertaining today's earnings call on the Investor section of our website and which we filed following the call on form 8-K.

Please note that some of the information presented today may contain projections other forward looking statements regarding future events for 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.

Here for you 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 its current report on form 8-K.

These documents identify important risk factors that could cause actual results to differ materially from those contained in our projections or forward looking statement.

With that and please turn call over to Brian.

Thank you everyone for joining today's call in fiscal third quarter myriad reported total revenue of $164 million in an adjusted loss per share of eight cents. These results were negatively impacted by the coven 19 pandemic by approximately $18 million on the topline with earnings reduced by 13 cents we.

Significant impact to our business beginning in mid March associated with the global current virus pandemic, which has led to reductions in test volumes of between 20 and 75% across our portfolio tests that can be deferred saw the greatest reductions in volume, but weve, even seen demand for non elective testing in areas such as in college you testing.

Negatively impacted while the impact on our business has been significant we're focused on taking the appropriate steps to ensure the safety of our employees and customers, while maintaining business continuity I'm extremely proud of our team and their dedication to our mission.

Before I discuss the steps we've taken as an organization I believe it is important to highlight that prior to mid March volumes for our products were trending exceptionally well we were on pace to see strong sequential growth with gene site prenatal testing invekra. Despite typical third quarter seasonality gene type volumes were up 4% sequentially through.

The first 10 weeks of the quarter prenatal testing volumes were up an impressive 12% and vectra volumes were up 10%. Additionally, the hereditary cancer business was trending above our forecast on a volume basis in short the business was performing exceptionally well prior to the crisis.

I would now like to discuss the actions we have taken as a company to respond to the current buyers endemic which are focused on the safety of our employees and customers, while continuing to deliver vital information necessary to guide patient care.

First beginning in mid March we converted all field sales personnel from selling in physician offices to selling remotely via virtual tools, including zoom text phone in email beyond the impact of internal changes to selling process was further impacted by shelter in place orders that resulted in the closure of many physician offices, leading the.

Many patients collect canceling elective procedures.

Obviously this created significant limitations in our ability to interact and market to physician.

I am but I am proud of how our sales and marketing teams have responded to this challenge we have implemented a number of new initiatives some of which we will continue in the post pandemic world, including virtual learning videos virtual meeting programs direct to patient kit shipments and mobile Phlebotomy services. We also taking advantage of this Pete.

Period to undergo substantial sales training to ensure our teams are best prepared to respond when patient in healthcare provider demand returned to more normal conditions.

We have also implemented a number of initiatives in our laboratories to ensure continuity of lab operations across all product lines.

The policies, we have implemented or in compliance with CDC and local guidelines.

We've also taken additional steps to protect employees such as implementing isolation shifts to mitigate the risk for large scale exposure requiring lab personnel to stay six feet apart use of protective face yield an increase in facility cleaning and decontamination and allowing personnel who are not necessary on site to work from home.

We also have reviewed all supply chains to ensure we have sufficient laboratory materials and have not identified any potential shortfalls for any of our product.

Finally from a cost perspective, we're taking steps to lower our cash burn as we navigate through this period and ensure we preserve our cash.

First we amended our credit facility to modify certain covenants with the amendment period running through fiscal year 2021, we currently have $225 million drawn on our facility and on our $350 million credit facility and $224 million in cash and cash equivalents.

We have worked diligently on finding ways to mitigate our costs. During this crisis to minimize financial losses, we anticipate a meaningful reduction in commissions marketing travel and mileage expenses based upon our changes in sales policies as well as lower expenses directly tied to volume.

Additionally, we have initiated temporary furloughs and reduced hours for a number of employees in areas such as lab operations billing and customer service based on lower sample demand.

Furthermore, we have implemented temporary pay cuts for senior executives in the board of directors. We also have temporarily suspended matching contributions under the company's for I. One K. plan. The net impact of all these programs is anticipated to reduced our total operating expenses, including cost of goods sold by approximately $50 million relative to our.

Third quarter run rate.

Finally to do our part for the broader community myriad is in the process of validating and getting emergency use authorization from the FDA for Cobot 19 viral PCR based testing and serology testing at our CLIA labs across the United States.

All of these changes will mitigate our financial losses, but also will also allow the company to quickly recover when sample demand trends.

Began to normalize as the period official distancing comes to an end.

This was an important consideration as we evaluated cost reduction to ensure a quick future recovery.

Additionally, we are evaluating longer term structural changes within healthcare delivery, such as telemedicine direct to patient testing models, and virtual marketing, which could lead to opportunities for a longer term efficiencies in our business model later in the call I will discuss the number of positive developments in the quarter, which position us for improved revenue and profitability trends.

When business returns to our normalized environment with that I'm pleased to turn the call over to Scott to discuss our financial trends for the quarter. Thanks, Brian I'm pleased to provide more information on our pipe financial trends and outlook hereditary cancer revenue in the quarter was $85.2 million versus 117.6 million in the fiscal third quarter of last year.

Looking at the components of revenue growth test volumes declined, 4% and pricing declined by 25% on a year over year basis.

Prior to the onset of social distancing policies in March test volumes are growing in the mid single digits on a year over year basis.

Pricing declines in the quarter were attributed to the Red Terry cancer coding changes, we discussed in previous quarters, our recently negotiated national payer contracts and the impact of Pam on a year over year basis. In addition, this quarter, we had negative out of period adjustments for their hereditary cancer business the negative impact at an average selling price part of this was tied to a large national payer that is.

Not paid us on a significant number of claims due to internal system issues. The payers working diligently to process. The claims all of which have pre authorization from the pair. However, given the aging of owed amounts were forced to move them to cash revenue recognition until actual collection as of April Thirtyth, we have already collected unfortunately amounts owed which will be recognized in Q4.

Moving on to Dean site revenue in the quarter was $20.4 million versus 29.6 million in the fiscal third quarter of last year.

Looking at the components of growth test volumes declined by 33% year over year Importantly, we are on track to have our strongest seem site volume quarter. This fiscal year with test volumes up 4% sequentially through mid March.

From a pricing perspective average selling prices increased 2% year over year, and we did see favorable or unfavorable out of period adjustments for gene site. As we continued our efforts to educate physicians on new preauthorization requirements for United Healthcare and subsequently improve cash collections. This was offset by Copan deductible resets at the start of the fiscal year, if that resulted in higher patient payments premium.

Revenue in the quarter was 20.3 million compared to 30.6 million in the fiscal third quarter of last year impressively. Our test volumes were flat on a year over year basis. Despite the impact of social distance distancing policies late in the quarter and grew 12% sequentially.

Pricing declined 34% in the quarter.

Due to the impact of laboratory benefit management programs changes in prior authorization policies and continue to issues from our billing transition that were largely the record let rectified in the fiscal third quarter ASP for these products was flat with Q2.

Vectra revenue in the third quarter was $10.5 million versus 11.3 million in the same quarter last year vector volumes declined 6% year over year over growing prior to mid March and were up 10% on a sequential basis prior to social distancing policies being implemented.

Pricing declined by 2% on a year over year basis.

Prolaris revenue in the third quarter was 6.8 million compared to 6.9 million in third quarter of last year Prolaris volumes increased by 9% year over year, However, pricing declined by 10% due primarily to mix changes physicians increasingly using the test more frequently and higher risk patients.

And our freight revenues were 3.5 million in the fiscal third quarter versus 2.8 million in the same period last year.

We saw increases in test volume and revenue in both us international markets, which drove the increase revenue.

Lastly, your revenue associated with our pharmaceutical and capital. So clinical services business was 13.5 million versus 16.1 million in the fiscal third quarter of 2019. This quarter. We did have approximately 4 million of revenue and offsetting expense tied to determine clinic.

This quarter. We also recorded a reserve of approximately 2.2 million related to patient accounts receivable as we expect the impact of the global pandemic on the unemployment rate will have a negative impact on our ability to collect from patients.

This reserve predominately impacted gene site Red Terry cancer, and prenatal revenues in the third quarter.

I would now like to discuss our financial metrics for the quarter adjusted gross margins were 69.7% compared to 77.8% in the third quarter of last year.

Adjusted gross margins were detrimentally impacted by the year over year pricing changes the out of period impacts in hereditary cancer and lower fixed cost absorption due to lower test volumes from the Corona virus impact to our business late in the quarter.

Adjusted Research and development expense was 18.4 million compared to 19.6 million last year.

Adjusted FCX expense this quarter was 108.1 million compared to 111.4 million in the fiscal third quarter of last year.

Adjusted earnings per share were a loss of eight cents for the third quarter. This quarter. We ended with 225 million outstanding on our credit facility and 224 million in cash and cash equivalents.

Our cash position benefited from the sale the clinic, which brought in 23 million in gross proceeds.

Finally, this quarter, we recorded an impairment charge of 98.4 million.

The impairment was primarily precipitated by the reduction in our market capitalization required required us to reassess the value of certain intangible assets on the balance sheet and resulted in the subsequent charges 80.7 million or the impairment charge was tied to write down of goodwill associated with it presents crescendo acquisition and 17.7 million was tied to a write down of and process R&D should.

Rated with Sividon acquisition, given our decision to no longer pursue FDA approval for the product.

While we have decided not to provide financial guidance for the remainder of the fiscal year 2020 due to the uncertainty in the duration of the Corona bias pandemic and social distancing policies. We wanted to provide some commentary on the potential impact of krona virus on our business in the fiscal fourth quarter and on into fiscal year 2021.

First from a test volume perspective, we're currently seeing a significant impact and testing volume due to social distancing policies with most pronounced impact occurring in more elective areas, such as hereditary cancer testing and the preventive care market.

We have seen volumes for our most selective tests, such as hereditary cancer gene site Invekra down approximately 70% to 75%.

Cancer tests, such as pulled Prolaris, endopredict and Mychoice cdx down 40% to 45% and are free to needle testing volume is down 20% to 25%.

Physicians are typically the gate keepers for our clinically focused products and many physician offices are currently closed or only taking patients with medical emergencies. Additionally, the inability to perform in office physician marketing has clearly impacted test volume trends.

As Brian previously stated we have identified approximately 50 million and cost reductions relative to our third quarter 2020 expense run rate that will help to mitigate the financial impact of the chronic virus pandemic.

Some of these cost reductions could extend into fiscal year 2021, depending on whether social dispensing and policies remain prevalent in the next fiscal year.

In addition, we're assessing the potential impacts of changing business practices on our ability to make longer term structural changes to our business.

As.

Part of the Cares Act. We have also received 8 million and nonrefundable stimulus cash from the government in the fiscal fourth quarter, and 30 million and accelerated payments for Medicare against anticipated future claims.

Combined these will help mitigate our anticipated cash burn in the fiscal fourth quarter.

When social distancing road restrictions or will relaxed, we expect to see an associated recovery in test volumes.

Current guidelines are ease prior to the ended the quarter. This will lead to improved test volume and revenue trends.

What is unknown is whether we will have an extended period of social distancing into fiscal year 2021. Additionally, we anticipate some lingering effects from the current of Iris falling social distancing as patients may be afraid to go to the doctor for electric procedures in the short term. Consequently, while we expect a recovery as people return to work. It may take some time to get back to fully normalized demand trends.

While we are clearly seen a dramatic impact on our business due to the global pandemic. Ultimately this will be a transient event. We believe Mary is well positioned given our strong balance sheet scale within the personalized medicine industry and given a number of pending business catalysts that could further improve our profitability profile.

With that I'll turn the call back over to Brian discuss some of the key business highlights from the quarter.

Thanks, Scott now I would like to discuss some of the key business highlights in the quarter of beginning with our progress on gene site. We continue to anticipate a final LCD in the near term on gene site, but we believe the process has been delayed due to the global pandemic based upon the volume of Lcds, which have been issued by Medicare as a reminder, based upon our pre.

Pandemic test volume, we believe this new LCD would add approximately $7 million in incremental quarterly revenue based upon a higher percentage of our existing test volumes getting reimbursed in the third quarter, we began initiating our expansion plans into the primary care channel, including an expansion of our gene site sales team and making plans for direct to consumer.

Test cases in select markets with high rates of reimbursement due to the current pandemic conditions, which have dramatically lower demand for elective testing such as gene site. We have slowed our planned rollout of these programs with plans to begin to ramp than once again when market conditions return to a more normalized level, we remain exceptionally optimistic surrounding.

This opportunity and the positive impact it can have on gene gene site revenue in fiscal year 2021.

With gene site. We also recently published our Mehta analysis of multiple studies covering four major clinical studies and 1500 56 patients across the patient populations patient.

Patients, who received guided care with teen site by 10% improvement in symptoms on average a 40% improvement in response rates and a 49% improvement in remission rate.

All of which were highly statistically significant many payers have expressed interest in this data as part of our expanding clinical dossier supporting the clinical benefits of genes site when combined with the recent publications of our precision medicine analysis, and our Hamdi six dataset.

We also saw some significant advancements with Polaris this quarter following the presentation of our data at the ASCO Gi EU cancer Symposium in February demonstrating the ability of prolaris to predict which unfavorable intermediate and high risk cancer patients will respond to multimodal modality therapy in which patients.

And can safely of weight the additional morbidity associated with increased treatment in the study of 718 men patients who were above the risks threshold. So a statistically significant reduction in metastasis, when receiving multimodal modality therapy, the hazard ratio for Prolaris for predicting metastasis in these.

Patients was 3.75 and was highly statistically significant even after taking into account the impact of standard pathological features.

Based upon this data set and others the national comprehensive cancer network updated their professional guidelines to include Prolaris across all major risk categories, making our guidelines as or more expensive than any test on the market. We believe the NCCN recommendation will be influential as Medicare evaluate a reverse.

And to coverage for Prolaris in both unfavorable intermediate and high risk patients.

As a reminder, based upon our pre pandemic test volume run rate for Prolaris expanded Medicare coverage for these new indications would result in almost $20 million in incremental annual revenue for Prolaris as the mix in testing for prognostic Biomarkers in prostate cancer has increasingly move to higher risk patients.

We also saw significant progress with our companion diagnostic programs this quarter, including significant advancements with our Mychoice cdx product.

First we are currently in discussions with the FDA regarding our submission of a supplementary PM may for Mychoice Cdx in the first line of varying cancer setting with several of our pharma partners based upon these discussions we believe there's a significant profitability mychoice Cdx may receive companion diagnostic staff.

Yes in at least one indication coupled with the recent FDA label change for mice Mychoice Cdx that expands testing to patients who may become eligible for a PARP inhibitor versus older criteria that required patients to be in the fourth line setting. We believe we are potentially on the cost of seeing a meaningful increase in microwave cdx revs.

Anew.

This quarter Mychoice cdx exceeded $10 million in revenue on a run rate basis for the first time, and we believe recent and future catalyst, including USLF da approval in first line ovarian cancer international regulatory approvals and expansion into additional cancer indications such as breast in pancreatic cancer, where we have a number of.

Owned going discussions could lead to further growth for this product.

This quarter, we launched Bracanalysis cdx in pancreatic cancer in conjunction with our recent FDA approval in this indication.

Based upon the launch we saw pancreatic cancer volumes increased by over 40% sequentially in the fiscal third quarter.

We continue to expect FDA approval for Bracanalysis Cdx in prostate cancer by the end of this fiscal year and anticipate data from the Olympiad study in the near term, which could provide a pathway to bracanalysis cdx being a companion diagnostic in her to adjutant breast cancer.

This indication would provide for testing opportunities with the majority of breast cancer patients in the United States.

We also continued to make progress with self funded employer contracting this quarter, we engaged with six new major employers in discussions on gene site coverage. We began noted node negotiations with two major insurance brokerage consulting firms with 30 million lives under coverage and issue and initiated strategic discussions with four.

Additional pharmacy benefit managers.

In the prenatal business, we saw strong volume trends in the quarter with 12% sequential growth in testing volumes in the fiscal third quarter, our strongest sequential growth rates since the acquisition.

In the first half of fiscal year 21, we plan to begin marketing our branded amplify technology, which provides a unique ability to have enough no call rate of one in 1000 for pre equal versus up to 5% for array based competitors.

We believe this technology will be a significant point of competitive differentiation within the noninvasive prenatal screening market.

Next fiscal year, we will also launch our new Microdeletion technology for prequel that utilizes what we believe will will be the most accurate technology, which we achieved we derived from our technological issues.

Experienced in hereditary cancer testing.

In conclusion, while we currently facing significant headwinds from the global current virus pandemic as a company. We have responded to this challenge and we will emerge in a strong financial position ready to continue our leadership position in molecular diagnostics and precision medicine, we remain focused on maximizing revenue and driving growth across our business unit.

Optimizing cash collections in pursuing appropriate reimbursement for our new products. We also have a number of potential business catalyst emerging which could lead to improved revenue and profitability trends as we transition into fiscal year 2021 with that I'm pleased to turn the call back over to Scott for our Q and a session. Thank.

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 and reconciliation of GAAP to non-GAAP financial guidance can be found under the Investor Relations section of our website now.

Now we are ready to begin our DNA session in order to ensure a broad participation and say it's been a session. We're asking participants. Please ask only one question and one follow up operator, we're now ready for that going a portion of the call.

Thank you for like to register for questions. Please press. The one followed by the foreign your telephone you will hear a threefold prompt talked onto request. If your question I would answer than you would like to withdraw your Registrational. Please press. The one followed by the three once again, that's one four to register for question.

And we do have a question from Puneet Souda was SVB Leerink. Please go ahead.

Hey, guys. Good afternoon. This is actually Westlake on per puneet, thanks for taking our questions here.

I want to slowed on council.

Should the headwinds experienced here from cobot 19 or is that as other segments of the business.

Just wondering if you could provide any commentary on the expected recovery for the business itself and kind of the puts and takes.

The bounced back one when that does come.

Sure. Thanks, Wesley, Yes, I think and we obviously, we didn't give forward guidance in terms of talking about what we expect the recovery to look like I think the thing I would highlight in terms of the council business for the for the current quarter is that we were extremely pleased with the with the sequential growth in volumes for that business being the strongest that we've seen.

I mean since the time of the acquisition as well I think our commentary around the fact that our ASP was flat with Q2 Q2, I feel like we've made a lot of progress relative to some of the challenges that we had noted on our last call in terms of the billing conversion. So I think I think overall, we feel really good about that business. We did highlight the fact that we've seen less of an impact on the pre.

NADL business from Cove at than we've seen on some of the more elective areas of our business, but I think thats. That's about the commentary we would have in terms of an update for that business.

Okay, and then just as a follow up sticking on coal good.

So you mentioned some some testing capacity that is ramping up just wondering if you could provide any color on that.

Potential volumes that can be run for both molecular oncology testing any sort of.

Inclinations on what kind of impact it will have going forward.

Yes, Thanks, I guess I guess in terms of last part of the question of Whitney prepared at this point to provide an update relative to what we would anticipate for volume I think where we're at in the process right now as it were just very focused on.

Validating and understanding which technology or how we would deploy the technology and also how we would.

Handle that from a commercial perspective in terms of sample collection and getting into the lab et cetera, So I think where thats the point at which we are in the process I think in terms. It you know the capacity, it's probably too early to to make a characterization on that front, but as I said on the call we sincerely believe that.

As a CLIA lab in the US we have an obligation to bring up this testing and make it available to support the broader effort and Thats what were working hard every day to day.

Again, if you'd like to us so for questions. Please press one for on your telephone and we do have a question from Derik de Bruin with Bank of America. Please go ahead.

Hi, this is.

Good day.

Yes.

A question.

Okay.

All right so one coli.

Given the significant decline.

And your question.

Firstly the rates lower altogether.

Bob.

Yes.

Okay melodic testing.

I Wonder what's your thoughts on how will the hi.

Right.

Slide 21.

Yes, Thanks, I think the where we've seen the it's obviously.

Has an impact in terms of both in terms of the procurement of services as well as.

The the payment by the by the patient as we said on the call earlier, we did recorder reserve in the current period based on our expectation for a significantly higher unemployment rate and then with respect to have what we might see in terms of.

The impact on demand I think at this point, we're not providing any any forward commentary both with respect to what the unemployment rate how that might impact sample demand, but also in terms of what any recovery from kind of it might do.

Yeah, and Ivy I think the one thing I would just add to that is if you looked at the last experience that myriad add going through a period of extended financial hardship with the with the.

Great Depression through the 2008 2009 period.

Actually grew its volume so we tend to be a pretty defensive sector relative to the broader industry.

So while you typically would see some.

You have seen increased kind of consumerism with patients.

We don't we don't see.

Financial changes, usually having large impacts on testing demand across the industry.

Some color.

Falloff.

Are you are now coming along.

Moving directionally.

Thank you bye.

Well.

Our last.

Yes.

Oh Boy Monterrey.

Our oncology.

Okay.

Yes I.

I don't know that I would characterize them any differently I think the.

We made some commentary with respect to.

Test within our portfolio that are more elective and so I think what we've seen with respect to gene side and backdrop is just the fact that they tend to.

To be more elective and in the case of extra you're dealing with an immuno compromised patients. So there's obviously some probably some hesitancy to go and see their physician, but I don't think Atwood I don't think I would characterize.

So many differently from an unemployment standpoint that more so from a the fact that they tend to be more elected.

Yes, I think I'd also isnt, it's important to point out that one of the.

Unfortunately.

Results of the in the extended period of isolation here that many folks faces that we have seen a pretty significant increase in rates of depression across the country. You saw Cvs rollout a significant program. This morning.

Tied to depression, and so I think as as we do get back to a more normalized environment. We're we're looking at ways to partner with folks around gene site testing because we do think that is going to be a very important part of the solution.

And so I think actually when you look at that test recent conditions could lead to some.

In some positive trends relative to demand.

And as a reminder, if you'd like to run.

Mr. For a question. Please press the one followed by the four on your telephone.

Sure line.