Q4 2019 Earnings Call
Thank you for standing by your conference call will begin in approximately two minutes. If you would like to queue up for question at any time a press. The one followed by the four on your keypad.
Greetings and welcome to the myriad genetics fourth quarter 2019 financial earnings Conference call. During the presentation. All participants will be in a listen only mode. Afterwards, we will conduct a question and answer session.
At that time, if you have a question. Please press the one followed by the four on your telephone.
If at any time during the conference you need to reach an operator, Please press star zero.
As a reminder, this conference is being recorded Tuesday August 13th 2019.
I would now like to turn the conference over to Scott Gleason VP Investor Relations. Please.
Thanks, Kevin Good afternoon, and welcome to the myriad genetics fiscal fourth quarter 2019 or painful.
My name is Scott Gleason, and I'm, the head of Investor Relations and corporate strategy at Marriott.
During the call we will review the financial results, we released today after which we will host a question and answer session.
If you've not had a chance to review the earnings release. It can be found in the Investor Relations section of our website at <unk> Dot com.
Presenting for me today will be Mark Capone, President and Chief Executive Officer, and Bryan Riggsbee, Chief Financial Officer.
This call can be heard live via webcast that Marriott Dot com. The call is being recorded and will be archived in the investor section of our web site. In addition, there is a slide presentation pertain todays earnings call in the Investor section of our website.
We filed following the call on form 8-K.
Please note that some of the information presented today may contain projections or other forward looking statements regarding future events or the future financial performance of the company.
These statements are based on management's current expectations and the actual events or results may differ materially and adversely from these expectations for a variety of reasons. We refer you to the documents the company files from time to time with the Securities and Exchange Commission specifically the company's annual report on Form 10-K , its quarterly reports on Form 10-Q , and its current reports on form 8-K, these documents and abide and identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward looking statement.
With that I'm pleased to turn the call remark.
Thanks, Scott I will start todays call by providing the business highlights from fiscal year 2019, after which Bryan Riggsbee will provide our fourth quarter financial results and fiscal year 2020 guidance and I will finish by outlining our strategy is to deliver upside to our fiscal year 2020 outlook.
For the fiscal year revenue increased 14% with earnings up 18%. Unfortunately revenue in the fourth quarter was 2% below our expectations with a corresponding impact to earnings that was largely attributed to lower reimbursement for expanded carrier screening test as a result of laboratory benefit management programs.
During the fiscal year, the cumulative impact of these laboratory benefit management programs across the portfolio with unprecedented and reduced revenue by over $50 million and adjusted earnings per share by approximately 51 cents.
Absent the pricing impact from these programs the underlying business performance exceeded our expectations for the year.
Well this impact was clearly on anticipated at the beginning of the fiscal year, we believe pricing has stabilized at the level seen in the fourth quarter.
As a result, we believe fiscal 2020 will be a transformational year for the company with increased volumes of reimbursement translating to record fourth quarter revenues and strong earnings momentum as we exit the fiscal year.
Now I would like to review some of the highlights from fiscal year 2019, beginning with our hereditary cancer business importantly, the hereditary cancer business returned to year over year growth for the first time in the last five years.
Additional progress across a number of fronts during the fiscal year positions. This market for continued volume growth broadened hereditary cancer guidelines were established for colon pancreatic and prostate cancer with companion diagnostic opportunities emerging for the latter two cancers.
The cumulative impact of these market expansions totals more than a 160000 incremental patients per year.
In addition, based upon published studies from Marriott's and other stakeholders. The American Society of breast surgeons updated professional guidelines to recommend hereditary cancer testing for all breast cancer patients.
This represents another potential 180000 patient expansion in hereditary cancer testing guidelines.
Lastly, our proprietary risk score tennis has accelerated penetration in the preventive care market and provides additional differentiation, which we plan to extend with new scientific developments to be announced in fiscal year 2020.
Myriad also continues its rapid diversification with new product volume growing to approximately 800000 tests and representing 75% of test volume versus 65% in fiscal year 2018.
Leading the way from a growth perspective with gene site were total test volumes increased 17% year over year.
During the year, we formed the leading women's health business unit by integrating our legacy hereditary cancer Salesforce with the council team and see strong leading indicators for future growth, including a 30% year over year increase in new ordering physicians.
And a 21% increase in doctors ordering two or more products.
With our strategy of scientific differentiation, a frictionless customer experience and broad customer reach I remain optimistic about our long term growth prospects in the $4 billion prenatal testing.
Market from a reimbursement perspective, we made significant progress with gene site by publishing the guided it impacts studies and submitting our reimbursement dossier to all commercial and public payers.
We were extremely pleased to see our reimbursement efforts translate into our first major coverage decision for jeans side with the recent United healthcare coverage decision.
Beyond being the largest commercial payer in the country United Health care is a thought leader in precision medicine. It is often a bellwether for additional coverage decisions.
During the year, we also launch new innovative approaches to engage with a broader set of reimbursement decision makers. As a result, we signed our first major employer agreement with Kroger, which include the pharmacy intervention program.
In addition, we continue to advance our discussions with other fortune 500 companies evaluating jeans, and vectra coverage decisions and have increased investments in this promising new payer market channel.
Another innovative approach to expand coverage is through pharmacy benefit managers and we expect to sign such an agreement in the near future and we'll provide more details at that time.
In summary, we remain bullish on our ability to drive additional reimbursement decisions for gene site and other new products through positive Paratek technical assessments employer agreements and pharmacy benefit manager program.
In our inaugural year as a participant in the prenatal market, we laid the foundation for broader reimbursement for our tests.
First we continue to advocate for average risk reimbursement for noninvasive prenatal screening and remain convinced that this will become standard of care for the 3.7 million pregnancies every year in the United States.
With fore sight, our expanded carrier screening product two pivotal studies were published identifying the approximately 40 genes required to meet published guidelines, providing the scientific evidence required to support reimbursement for the premium priced expanded carrier screening code.
Finally, we anticipate two new reimbursed products in fiscal 2020 based on our recent Medicare LCD for Mypath melanoma, and our FDIC submission for Mychoice HIV in late stage ovarian cancer.
In international markets, we continue expand reimbursement for Endopredict with new coverage decisions in the United Kingdom, Italy, and Greece. Additionally, we received two new companion diagnostic approvals in Japan.
Varian and metastatic breast cancer, which have propelled japan onto our largest international market.
Additionally, we see a meaningful opportunity to expand the market in Japan with their hereditary breast and ovarian cancer approval in fiscal 2020.
Finally, with elevate 2020, we continue to make substantial strides in building a more efficient and streamlined organization.
This year, our gross margins increased year over year, despite the impact of the lower margin prenatal test as we made significant advances in our DNA Arnie and protein laboratories.
The company's commitment to this program was evident as the Council acquisition went from a 12 million dollar quarterly loss the profitability in three quarters.
We are currently working on implementing additional programs that will benefit fiscal 2020 expenses and beyond.
In summary, while we face some unanticipated headwinds in fiscal 2019, I am proud of our team's ability to combat these headwinds through a combination of innovation and disciplined execution.
As we look forward to fiscal year 2020, we have a solid hereditary cancer foundation and an opportunity for transformational earnings growth with broader commercial coverage and adoption of our new test.
We truly believe we will exit the fourth quarter as a transformed company with record quarterly revenues and outstanding future growth prospects I will now turn the call over to Brian to provide an overview of our financial results and fiscal year 2020.
Thanks Mark.
I would like to start by providing a more in depth overview of our fiscal fourth quarter financial results.
Fourth quarter total revenues of $215 million was up 11% compared to the 194 million reported in the same period in the prior year for the full year total revenue was $851 million, an increase 14% relative to the $744 million reported last year.
Of note. We grew this year on an organic basis, despite the unprecedented handle headwinds from laboratory benefit management programs.
Hereditary cancer revenue in the quarter of $119 million, which was up 1% on a sequential basis due to increased volume.
Gene site revenue in the quarter was 29.8 million and volume was relatively flat on a sequential basis in may we made the decision to discontinue our analgesic and 80 HD products because of the level of clinical evidence did not meet the same high standards set by the gene sites like a terrific test in the guided study.
In addition, a few payers express similar views and we wanted to eliminate any potential hurdles to commercial payer coverage for gene sites like a terrific.
While these tests comprised a smaller portion of revenue there was a collateral impact to the gene sites like a terrific orders from 80, HD and analgesic ordering physician. The net effect was there a 15% reduction in gene site revenue in June , which we expect to continue into the first quarter. Nevertheless, we continue to see strong physician ordering trends with over 18000 ordering doctors in the quarter, including over 2500, new ordering clinician.
Revenue from prenatal testing came in below expectations at $25 million. The shortfall was attributable to a larger than anticipated impact from laboratory benefit management programs, which lowered average selling prices for our carrier screening product in the fiscal fourth quarter.
While the revenue in the fourth quarter was disappointing from a strategic perspective, we believe pricing has now stabilized with potential upside as we work with professional societies and Payors to move expanded carrier screening and average risk testing into medical policy.
Vectra revenue in the fourth quarter was $12.2 million and grew 8% on a sequential basis with volumes up for the second straight quarter. Following our restructuring of the business units.
Focusing on profitability.
Prolaris revenue in the fourth quarter was $6.3 million with double digit sequential volume growth offset by a lower average selling price due to unfavorable mix.
Endopredict revenues in the fourth quarter set a new record at $3 million growth and Endopredict revenue in the quarter was attributed to additional volume and reimbursement in international markets and increased test volumes in the us market.
Lastly, revenue associated with our pharmaceutical and clinical services business was $18.5 million due to strong demand from our pharmaceutical partners, especially in the field of immuno oncology, where myriad where our myriad RPM team has established a clear industry leading capabilities.
This quarter, we identified a new buyer for the German clinic and are finalizing terms, we plan to complete the sale of the clinic in mid fiscal year, resulting in lower clinic revenue for the full fiscal year.
I would now like to discuss our financial metrics for the quarter adjusted gross margins were 76.8% and excluding the impact of the council acquisition were up over 300 basis points year over year. This is a testament to the elevate 2020 program and the significant efforts from our operations team to lower laboratory costs.
Moving onto our operating expenses on an adjusted basis, our research and development expense was $19.3 million compared to $15.6 million last year. The increase in R&D expense is entirely attributable to the acquisition of council.
Adjusted EPS Gina expense this quarter was $112.9 million compared to $93.9 million in the fourth quarter of last year.
In the quarter, we saw higher than anticipated expenses, primarily associated with the women's health Salesforce integration incentive program with the started the new fiscal year. These programs have ended and then as and as a result, we would expect total expenses to decline in the first quarter.
Adjusted earnings per share were 41 cents for the fourth quarter. This quarter, we ended with $233 million outstanding on our credit facility and $192 million in cash and cash equivalents.
From a cash flow perspective, our fourth quarter adjusted free cash flow flow for share was 46 cents.
Now I would like to discuss fiscal year 2020 financial guidance.
For fiscal year 2020, we're going guiding toward revenue of $865 million to $875 million. This guidance assumes organic revenue growth of 2%, 3% after adjusting for the sale of the clinic and 11 months of council revenue in fiscal year 2019.
On an adjusted earnings per share basis, we are guiding to total adjusted earnings per share of $1.80 to $1.98, which represents 8% to 14% earnings per share growth.
Given the momentum we expect to generate throughout the fiscal year, we would expect revenue and earnings growth in the fourth quarter to be substantially higher than the average for the year.
Now I would like to discuss the assumptions underlying our guidance from a revenue perspective, along with potential upside drivers.
First for hereditary cancer, we continue to expect flat revenue in fiscal year 2020 relative to fiscal year 2019, with the assumption of modest volume growth being offset by modest pricing offset given the renewal of a significant portion of our long term contract.
Upsides to guidance could result from expanded NCCN breast cancer guidelines pancreatic cancer and prostate cancer companion diagnostic approval in the U.S. and ovarian cancer companion diagnostic and hereditary breast and ovarian cancer approvals in Japan.
For jeans side, we are anticipating double digit revenue growth, while we see a significant benefit from the United Healthcare coverage decision revenue in the first quarter will reset to a lower base. Following the discontinuation of the analgesic in 80 HD test as a reminder, the United Health coverage policy takes effect October Onest and consequently, we will have three quarters of impact this fiscal year.
Additionally, as many of you know the FDA has recently increased its attention to the area Pharmacogenetic test, including a safety communication late last year and a warning letter to a laboratory earlier this year.
As we have previously noted earlier in 2019, we provided the FDA with clinical evidence and other information to support our genes sites like a terrific test more recently the FDA requested changes to the gene site test offering and we have been in ongoing discussions with the FDA regarding its request, although we continue to disagree that changes to the test or acquired on August 10th 2019, we submitted a proposal regarding the reporting of genes Psych test results to healthcare providers that we believe address the FDA principal concern. We believe this approach should not affect the benefits that we believe are provided by the gene site test, which is reflected in our guidance.
Our guidance does not incorporate any additional private payer reimbursement the potential impact from an LCD expansion into primary care by Medicare or the impact from an expansion of the sales force with the prenatal business. We are assuming double digit volume growth that will be partially offset by lower pricing, which we expect to be consistent with pricing in the fourth quarter.
The stronger than anticipated volume growth based upon our expanded sales.
Organization professional guideline updates for average risk in IP, EPS or expanded carrier screening could be significant sources of upside.
For Vectra, Prolaris and Endopredict, we are assuming modest growth with no increase reimbursement incremental reimbursement coverage for these tests could provide revenue upside.
Finally, we are assuming a modest decline in our pharmaceutical services business in fiscal year 2020 based upon lower expected pharmaceutical demand for myriad RPM services. After an exceptionally strong fiscal year 2019, we also anticipated decline in clinical services revenue with the planned sale of the clinic at mid year, which will create approximately a $12 million year over year headwind.
From an earnings perspective, we are anticipating total expenses will be relatively flat year over year based upon planned efficiencies under elevate 2020 program. We are anticipating a higher effective tax rate in fiscal year 2020, do just to some of the nonrecurring tax benefit we received in fiscal year 2019.
Additionally, we are assuming a modestly lower share count in fiscal year 2020 based upon our accelerated share repurchase program, we completed in fiscal year 2019.
For the fiscal first quarter, we are guiding to revenue of $200 million to $202 million and adjusted earnings per share of 30 to 32 cents.
Our guidance assumes the typical Meg negative seat summer seasonality prenatal average selling price consistent with the fourth quarter and a reset to gene site revenue based on our previous comments.
While we did experience some headwinds in fiscal year 2019, we successfully offset much of the impact through disciplined cost management, we remain committed to optimizing our cost structure with moderating expense in fiscal year 2020 relative to our fourth quarter run rate. We have set what we view as an achievable fiscal year 2020 guidance with multiple upside opportunities as we work on driving adoption and reimbursement for the test.
Overall, we remain highly optimistic about the long term financial prospects for the company I would now like to turn the call back over to Mark.
Thanks, Brian .
I would like to further elaborate on plans and progress for the upside opportunities that Brian identified for fiscal 2000, Twentys, starting with gene site.
Looking at the market for GE site psychotropic, our commercial efforts today focused on depressed patients treated by psychiatrists, which only represents about 20% of the $13 billion market.
Substantial additional opportunity exists in the primary care market and with patients diagnosed with anxiety both of which are covered by the recent United Healthcare policy.
Our plans for fiscal 2020, our to publish additional depression data from the guidance study to facilitate expanded coverage to publish data on exactly from the guided study and to expand our sales force into primary care.
A publication is in the late stages of review that provides additional clinical evidence regarding the clinical utility of gene site.
This precision medicine analysis of the guided study evaluates the 70% of patients entering the study on medications with gene drug interactions that could benefit from gene site and this excludes those that were not expected to benefit.
The data shows that at the eight week time point readmission rates increased by 70% response rate by 42% and symptom improvement increased by 23% all of which were statistically significant.
In addition, the results continue to improve over the 24 months of this study with remission rates, increasing by 82% response rate, increasing by 64% and symptom improvement increasing by 56%.
As a reminder, the original guided publication by Dr.. Greg included an analysis of patients entering the study on medications with significant gene drug interactions and compared those that switch to those that did not.
This data remains very compelling to medical directors and shows that patients that switch, 153% improvement in remission rate of 71% improvement in response rate and a 59% improvement in symptoms and all were highly statistically significant.
We are also submitting a publication regarding the value of the common at Torrey Elgin site approach compared to single gene approaches. This data was presented at the sea pick conference in May and showed that gene site was more than twice is predictive of drug blood levels compared to single gene approaches and was statistically significant.
We thought a useful to provide a scorecard of our progress with gene site reimbursement six months after submitting our dossier.
We were very pleased to see the Pharmacogenomic coverage decision from United Healthcare, the largest fair in the country and a recognized thought leader in precision medicine.
In this industry. It is unprecedented and see a significant coverage decision in only six months, which is a testament to the quality of the data and the talents of the myriad team.
The coverage decision is for multi gene panels of 15 or fewer genes for patients that have a diagnosis of major depressive disorder or anxiety and it failed at least one prior medication.
There are no provider limitations and reimbursement will begin October onest based upon our previously negotiated price.
In July gene site was part of a Medicare coverage Advisory Committee meeting, we're experts unanimously recommended expanding coverage to primary care physicians.
This recommendation is bolstered by strong evidence from the impact study conducted specifically for Medicare, which showed the ability of primary care physicians to achieve outcomes comparable to or better than psychiatrists.
We believe the clinical evidence and physician endorsements strongly supports an expansion of coverage to primary care physicians. We are anticipating this LCD will be reviewed in October .
Finally, we recently received a technical assessment from evidence Street, which is referenced by Blue Cross Blue Shield affiliates, representing 40% of commercial covered lives.
Hey, Ted Technical assessment was not specific to gene site, but evaluated the entire class of pharmacogenomics tests, which remained experimental and investigational.
However, we also received gene site specific feedback, which we believe provides a clear path to a positive coverage determination.
The review identified three de Minimis, evidenced GAAP all of which can be readily addressed.
The first was a question regarding patient dropout in the guided study, which was already answered in the supplemental section of the great and publication and it's consistent with historical Depression studies.
Second the review identified the need to publish the intent to treat analysis.
As a reminder, the guiding publication already include the favorable intent to treat analysis.
Lastly, the review requested the guided power calculations, which are readily available and consistent with typical anti depressant study.
Given that the evidenced gaps are easily addressed we have secured a meeting to present, the dossier and we'll be submitting a request for an off cycle review to be conducted specifically on gene site as the only test with clinical validity and utility data.
From an industry perspective. It is typical for all tests, including for example, Cologuard to go through and additional evidenced Street review.
While we pursue an off cycle evidenced Street review. We are also reviewing data directly with Blue Cross Blue Cross Blue Shield affiliates, which can and do make independent decisions. For example, the Afirma test from Vera site is still label investigational by evidenced Street. However, it is covered by the vast majority of Blue Cross Blue Shield affiliates plans.
Given the increased coverage and the potential for an expanded LCD with Medicare we are finalizing plans to expand the gene size sales force in the second half of the fiscal year to increase our reach into the primary care market.
Long term, we believe gene site requires approximately 320 sales territories.
Compared to our current 170 sales territory.
We expect the first wave of the expansion to total approximately 65 new territories.
And we'll provide more details on this expansion during the fiscal year.
As a reminder, we have not incorporated any primary care expansion into our guidance and would expect that any costs associated with the launch would be more than covered by incremental revenue.
Moving on to the hereditary cancer business as Brian mentioned, our guidance for the year implies modest hereditary cancer volume growth offset by modest pricing reductions. This outlook is consistent with our strategic goal to diversify the business by building upon a solid hereditary cancer Foundation.
However, there are significant potential upsides in fiscal 2020 that could increase volume beyond the level contemplated in guidance.
In the past year, we have seen expansions in medical professional society guidelines that header over 160000 eligible patients per year in United States with colorectal prostate pancreatic or metastatic breast cancer. All of these indications remain less than 10% penetrated with substantial opportunity for future growth.
Our guidance assumes no inflection in demand as a result of these new guidelines.
In addition, guideline expansion from NCCN consistent with the Sps guidelines would added more than 180000 additional eligible breast cancer patients per year for hereditary cancer testing.
Typically these revised guidelines are published in the fall and we would expect them to be quickly incorporated into payer coverage policy.
Besides expanded indications for use increased clinical utility for hereditary cancer testing will likely drive additional adoption.
In fiscal 2020, we expect approval for the Bracanalysis Cdx test as a companion diagnostic in both pancreatic cancer and castrate resistant metastatic prostate cancer.
Combined these two indications represent approximately 75000 patients per year in the United States and we believe the availability of TARP therapies in these markets.
He will lead to greater clinical emphasis on testing.
Again, we have not incorporated this potential upside in our guidance given the pending FDA approval.
Furthermore, the recent approval of Bracanalysis Cdx as a companion diagnostic for patients diagnosed with ovarian cancer in Japan could lead to an increase in testing as we saw with metastatic breast cancer in fiscal 2019.
Additionally, we believe our hereditary cancer submission for the Bracanalysis tests to the Japanese Ministry of Health Labor and welfare will receive approval in the first half of fiscal 2020, adding up to 30000 patients per year.
Because we are still awaiting Japanese regulatory approval, we have not incorporated into our guidance for the year.
Moving onto our prenatal business, we continue to focus on efforts to increase reimbursement in this market with average risk coverage for an IPO testing and broader coverage of expanded carrier screening rather than just basic carrier screening.
While guidance does not assume any progress in these initiatives in fiscal 2020, we believe it is likely at least one more materialize during the fiscal year.
We also continue to drive deeper penetration into this market this quarter on a year over year basis, we increased the ordering base of new physicians by 30% and increase the number of physicians ordering multiple products by 21%.
As a reminder, our market reach increased from 35% to 85% with our sales force expansion and these leading indicators are consistent with our strategy to move prenatal testing into the mainstream although BG land practices.
This is identical to the approach we use with hereditary cancer testing, which ultimately drove a dramatic increase in testing by building a broad base of users.
For vector we are anticipating additional developments that could increase both volume and pricing.
From a volume perspective, we are substantially increasing the utility by adding two new features to the test report.
As a reminder, the current test report includes the Vectra score, which is validated measure of disease activity in the first half of the fiscal year, we will add the risk of radiographic progression.
Which quantifies the probability of irreversible bone damage after one year based upon the Vectra score.
In the second half of the year, we will add the three year risk for cardiovascular events based upon the Vectra score and additional clinical parameters.
Market research physician thoughts substantial additional value for Vectra. When all three features were included on the test report.
This is particularly true for cardiovascular risk said it is the highest cause of mortality in rheumatoid arthritis patients.
We are also anticipating the release of the American College of Rheumatology diagnostic guidelines in late calendar year 2019.
We believe that a vector is identified as an option in guidelines it could provide a catalyst for both test adoption and payer coverage.
With Mypath melanoma, we have completed our salesforce hiring and training and now have a team of representatives focused on high volume Dermatopathologists.
We have not incorporated any material mypath revenue in our guidance. So increased adoption of the test would represent upside.
Finally, we have submitted a PMA for Mychoice HR D. As a companion diagnostic for Niraparib and advanced ovarian cancer.
Based on typical time frames, we anticipate approval in the first half of the fiscal year, along with reimbursement. However, prior to approval, we have not incorporated into guidance.
In summary, we believe the headwinds we faced in fiscal year 2019 are behind US we have a solid foundation provided by the hereditary cancer business and the opportunity for transformational revenue and earnings growth with our new products.
In addition, we have a number of upsides that are highly likely to materialize, but have not been incorporated into guidance.
We are confident that we will generate financial momentum throughout the fiscal year and will exit the year with record quarterly revenues and substantial growth opportunities with that I would now like to turn the call back over to Scott.
Thanks, Mark as a reminder, during todays call we use certain non-GAAP financial measures a reconciliation of the GAAP financial results to the non-GAAP financial results and a reconciliation of GAAP to non-GAAP financial guidance can be found under the Investor Relations section of our website.
Now we're ready to begin our DNA session in order to ensure broad participation in today's today's session.
You are asking us to please ask only one question and one follow up operator, we're now ready for the Q and a portion of the call.
Thank you.
So if you would like to register a question. Please press the one followed by the four on your telephone you'll hear through tone prompt that acknowledges the request.
If your question has been answered and we'd like to withdraw your registration. Please press. The one followed by the three so again for questions. One the four on your phone.
And first question is from Sony nom with B T. G. Please go ahead.
Hi, Thanks for taking the question Martino for jeans side are there are still other payers that are currently reviewing the dossier and might still make the decision a coverage decision.
In this that in this cycle I guess this year cycle.
Yeah, Thanks gene, but yeah, there are Uh huh.
A number of payers that are still in the tech assessment process for a four g. insight.
Obviously, we never speculate on on when those decisions might calm, but and certainly we are still in those review cycles I think we are confident.
In this fiscal year that we will see additional coverage decisions for gene site.
Obviously, there's also the Medicare LCD.
That would potentially provide expansion into primary care.
That that we're excited about and we feel optimistic about that as well, which would be another significant opportunity.
So you know we continue to see very positive feedback I think one of the interesting to things to note is on the day of the United Healthcare policy decision.
They're they're up there or significant numbers of payers that have access now that policy decision.
And so its very helpful. As others are in the review process to have a template from one of the most widely respected large volume.
Payers in the country that they can now use as a potential template. So we've seen a lot of interest in that policy decision and I think timing was perfect in that it can now fall right into the latter stages, where we have others that are doing the review I'd also call attention that not only do we potentially see that pathway for payers, but as I mentioned in our comments that employers. We think we are very confident we will see additional players sign onto Jean site.
Coverage like we've seen with Kroger and as I noted a pharmacy benefit managers. We think are another very interesting opportunity for both gene gene site and vector and we're anticipating the ability to sign some agreements with them. This fiscal year as well. So I think when you combine all of that Tech assessment Pbms employers.
We are still very confident that we're going to see increased coverage opportunities.
For new products, and specifically gene site this year.
Okay. Thank you and then just one for Brian did you sorry, if I missed it but have you guys broken out what the cost savings could be from elevate 2020 for fiscal year 2020.
Yeah, we havent provided any update on elevate 2020 for next year.
Okay. Thank you.
Hello.
Next question is from Patrick Donnelly with Goldman Sachs. Please go ahead.
Great. Thanks, Mark maybe just one for you on the on the guidance philosophy, I guess with you anyway.
Relatively set I guess why Didnt you guys roll that into guys are there more variables that need to play out. So maybe just talk us through kind of process I'm sure you guys deliberate it back and forth.
Why why that isn't rolled into guidance and then if you can help us kind of size, what the upside could be that'd be helpful as well.
Yes, Thanks Patrick.
Just to be clear when we look at United Healthcare.
We know that there is going to be three quarters of benefits and the coverage will start October one. So we have incorporated the upside expect expectations from United Healthcare.
Into our guidance for this fiscal year and Theres, obviously, a couple of things to know that.
Also work.
With that one is of course as Brian mentioned, we saw a 15% reduction in revenue in June for.
Gene side as a result of discontinuing 80, HD analgesic and that of course carries over and also unfortunately impacts volume for United Healthcare as well. The other thing to note is that we were getting.
Some reimbursement from United prior to this coverage decision. So it's not as if there was no reimbursement obviously now we're getting we will get fully reimbursed at the contracted price, but it's not like we were working from.
No level of reimbursement. So those are the puts and takes as as we approach the benefit of the United coverage.
Okay, and then are you able to just talk through kind of a gene site Salesforce Buildout and how you kind of talked about the longer term plans, what's baked into the kind of this next year or so and what's your expectation as an attraction there.
Yes. Thanks, Patrick So just also to be clear, we have not incorporated into guidance any revenue or cost impact of the expanded primary care sales force.
As I noted on based on the way we've modeled this we believe the incremental revenue delivered by that expanded sales team were more than offset the costs. So that would all be upside.
Lastly on both the revenue and the earnings line.
Were finalizing those plans and would expect to go into more detail on that but we wanted to give at least the big picture vision of where this will progress over the next year or so.
So just to step back we have a 170 representatives now and we expect that we will ultimately need 320 representatives and that would cover the largest prescribing primary care physicians and we'll detail that out in some additional calls in the future.
We expect the first wave we would add 65 of those 150, new additions and that's the way that we would expect to do in the second half of this fiscal year. Obviously, then that leaves the next wave or two for fiscal year 21, and so thats how were thinking about this expansion.
And one of the reasons, we won't do everybody at once is we want to make sure that we do this right that anytime you hire them any salespeople you want to make sure they're effective hires and we want to ensure that that's the case. We also want to take advantage of where we have coverage.
So that we're doing so in a very appropriate cost conscious manner.
So for example, we know with United Healthcare, we have the ability to look by ZIP code level at at where we have higher levels of United healthcare coverage and so we actually have modeled.
For each ZIP code, what the ASP impacts our for example of United decision and a Medicare LCD expansion and so we will target territories based specifically on those modeled Sps and Thats why we think that first wave is going to be somewhere around the 65 sales person size. So not only do we have the increase of reimbursement for jeans side, but as you know patrick be adding that many additional sales.
People actually has the opportunity to double the market potential just in the number of physicians that were calling on so I think we've got two opportunities here for some pretty substantial gene site.
Expansion over the next couple of years.
Appreciate it thanks.
So again to register questions press, the one followed by the four on until fall.
Next question is from Bill Quirk with Piper Jaffray. Please go ahead.
Great. Thanks. Good afternoon, everyone question for Brian on Council, the it looks like it was off.
It was 18% sequentially, Brian were there any FC six so six accounting changes or anything like that that was going on there or is this just straight up lower reimbursement and so we had to make the adjustments yeah. I would just say I would make one general comment relative day assay success sectors that were every quarter, we're going to have.
Positive and negative.
Adjustments based on what we collect in terms of cash but relative to the prenatal business specifically as we know as I noted earlier I would I would attribute the entirety of that Delta really to the impact that we saw from the lpms on our carrier screening business. So I think that would that would be where I would wear I'd point to for that for the sequential decline that you saw.
Okay got it and then as a follow up and it kind of working off of somebody's question, a little bit on any updates mark specifically around EDI core anthem as it relates to GE insight.
On we're still in discussion so let's take evercore as as the first.
One of the things that we're working with Evercore on is that there were some factual corrections to the.
To the policy decision they made earlier in the year and again, just as a reflection with Evercore was really.
Quick review of the guided study as opposed to the entire dossier.
So a couple of things, we'll do we'll review the entire dossier were also correcting some of the factual errors that were in that.
And then one of the things that they had noted was they wanted some additional information on symptom improvement.
And so that data that I outlined a precision medicine analysis build that I outlined in the slides that data is very important to them because it answers that question, which is that if you exclude the patients that you don't expect to benefit from gene site and analyze their patients where you did you will see statistical significance on everything including symptom improvement. So I think the acceptance of that manuscript is actually going to be important for our ongoing discussions with with Evercore.
From an anthem perspective, we do continue to have active dialogue I think given that a kroger, which is a very big customer of atoms.
I was very impressed with the data and obviously chose to cover this and is also working on a pharmacy intervention I think all of that peak the interest of anthem.
As as obviously, they want to be as a payer in a position to be able to bring those type of solutions to their customers and so that has enabled us to go back into can you continue to have very productive dialog with anthem and and review the dossier in much greater detail. So those discussions are ongoing.
Next question is from Dan Leonard with Deutsche Bank. Please go ahead.
Oh. Thank you. So so my question and follow up of both PNG insight. So first off market can you elaborate on what changes to the GE insight report the proposed to the FDA.
Yes, Thanks, Dan can't really have they don't have any other additional comments other than those that that Brian made I think the only thing I would point you in to point you to in his statement is the comment that we believe the approach should not affect the benefits that we believe are provided by the gene flight test So no comments beyond that Dan.
Okay, and then my follow up I'm trying to better understand how pulling the analgesics and eight each detached from the market could add such a big impact on total GE insight revenue in the month of June and then your forward. So is there any anything further you could offer to help me better understand the knock on effects. Thank you.
Yes, Thanks, Dan good an understandable question.
Yeah, as we noted the test themselves for a smaller percentage of revenue.
But when you look at the fact that there were a number of very large.
Ordering physicians that ordered both analgesic and 80, HD and jeans I could throw back so I think when we obviously saw the direct impact.
Of the pulling 80 HD in analgesics, but the collateral to those large orders the collateral impact was that constantly there their genes I psychotropic volume came down as well and so it would certainly disproportionate to the volumes of those two smaller products.
But it was really because there are large volume ordering physicians that that order the entire set of products.
Whether those physicians went to other laboratories.
Or whether they stopped ordering entirely probably a little mix of both of those obviously we're in there.
With those customers try to win them back on both fronts.
And.
But you know as we give guidance, we can't assume that we're going to win that back and so we've we've obviously set our guidance based on the volume impact that we saw and again I want to underscore the rationale for what we did.
First we have a pretty high standard for what it means to be able to have clinical evidence.
And with the guided study and what we promote the physician that that the level of evidence with jeans I'd psychotropic is unmatched that's a level of standard we want to hold ourselves to and and we obviously don't have those type of prospective studies on analgesic and 80 HD. So we wanted to be credible.
When we're in front of physicians and.
Therefore chose to take those off the market I do think I want to underscore underscore as well that we didn't want it to be an obstacle for for payers. You'll note for those who have looked at United Health care policy. They specifically excluded coverage for jeans, I analgesic and 80, HD and so I think Thats a good example of of why we Didnt one products out there that somehow could impact our ability to get additional coverage decisions from payers.
Okay. Thank you.
Next question is from Puneet Souda with SVB Leerink partners and your line is open.
Yes. Thanks, Mark first question around lot benefit managers I mean, that's been a sizable impact this year.
And now in carrier screening. So just could you provide us a clear view of among all the tests that you have where could.
Whereas the lot benefit managers are actively looking at and what potentially the other area that can potentially look at and I just want to get a clear sense of is that contemplated fully in your guidance for 2020.
Yes, Thanks, Puneet it really was concentrated in two test gene site and fore sight.
And the reason is that those two tests don't have specific codes that are associated with those and so.
As a result of that your billing multiple genes and I think it's those scenarios, where you don't have a specific code with the specific contract price.
That.
That we've seen the interventions from a lab benefit management program.
It's not something we expect for the rest of the tests that have codes.
And that's why we really didn't see any of that in the fiscal year with the other tests now what we saw with jeans site is as you know earlier in the year, we saw the impact for a couple of quarters.
That rebates than for the last two quarters now we've had consistent pricing for teens site that was our expectation with fore sight. This is now the second quarter that we have seen an impact.
And of course, we can see whats happening as we go into the first fiscal quarter and we're seeing a similar pattern pattern with a pricing have been reset after a couple of quarters.
And stabilizing after that so.
Based on on that experience and what we saw this year.
We were comfortable assuming pricing would be stable in this fiscal year and thats, what we used to base our guidance I mean, obviously to your point it was on anticipated by us and it was significant when you look at a 50 million dollar impact for the year and 51 cents per year 51 cents in earnings it was a pretty remarkable impact but Brian .
And his team and many others did a great job Cushing to blow from that through many of the elevate 2020 initiatives, but we think that that's really behind us at this point.
Okay. Thanks.
Just on the follow up on the earlier question around the his recent trends in August stem that they requested so if you could just.
I know, it's tough to give details around that but if you could maybe at a high level.
Would this impact what is actually you know sort of desired by the physicians or what impact. The current you know CMS reimbursement on or you know United coverage or other covers that that's in place and maybe if you could provide a few that's giving you any.
Rethinking on the primary care sales force and just help us around you know also if you could around the timing of this when do you think this can potentially get resolved. Thank you.
Yes, thanks pretty to appreciate the question.
Yes, we really can't.
Provide any other comments other than the ones that Bryan provided I would just three articulate that we believe this approach does not affect the benefits that we are provided by cheap that are provided by Jean site.
And.
Other than that I can't really provide any additional comment.
Okay. Thank you if I could just squeeze one last one on my end up.
What's your expectation there in terms of increasing the sales force them in the dermatology practices around the country are fairly widespread so just wanted to get a sense of your investment into that thank you.
Thanks, Puneet, we think the sales team that ultimately would be required to get to that entire market, which by the way we size at about $400 million market potential is 16 salespeople. So we're about halfway there with this expansion.
And so we're going to let these salespeople.
Get in place get the territories that let's see what kind of experience we have with the sales team and then we'll decide when to expand to the broader market at that point.
But I think that is.
One of the attractive things about this market is if you can cover a $400 million market was 16 salespeople.
Obviously, it's it's one that we're very excited about.
As I noted we have not included that in our guidance for the year because we're still in the early stages of that Salesforce expansion. So to the extent that we are successful in that that team is able to drive significant revenues in my path. It would be something that's not contemplated in our current current guidance nor is in an expansion of that team contemplated in our current guidance.
Okay. Thanks Mark.
Next question is from there to Bruce with Bank of America Merrill Lynch and your line is open.
Hi, this is off like that today. Thank you for taking my question.
On my two questions about the ongoing right.
The first could you update us what's the assumption.
For commercial reimbursement rate 14 site in ongoing conversations.
That we discussed earlier.
Especially given multiple offerings on the market competition might be self the competition might be at a much lower rate.
Thank you.
Yes, we have not from a guidance perspective, we don't incorporate any additional anticipated reimbursement, we only incorporate reimbursement that we know of at this point.
And so as I noted to Patrick's comment that we have incorporated our expectations around United but other than that we have not incorporated anything for the Medicare LCD, we've not incorporated any of the other.
Potential positive coverage decisions in our guidance at this point so those those would all represent upside.
I think from a competitive standpoint.
There are others in this space there or not.
Many large competitors.
And I would note again that all that data that I showed again on this call gene side is the only test that has been able to show clinical validity and utility data that in fact patients have better outcomes. When when doctors have the information provided by Jean site.
And so we've also as a result of that been able to show substantial cost savings to the healthcare system $6000 in the first year no. Other test has been able to demonstrate those types of cost savings.
So when we're able to go into a pair demonstrate that utility data validity data and the cost savings data, whereas others are unable to do that we think we present, a very strong value proposition for payers.
And that's that's why we remain bullish on additional coverage.
Great.
I wanted to clarify that question is more on what.
The broader thoughts regarding commercial pricing.
And electricity nation is around 2000, I just want to clarify that.
And then the follow up question.
On a song anxiety wanted to see.
Any additional color on how long does it take to showed onsite data from the guided study.
When can we expect to see that up to adopt.
Thank you sorry, I, probably missed that we're still targeting a 2000 dollar SP as fourg sites. So.
That remains our target and again with a 6000 dollar first year savings, we think thats.
The return on investment is substantial and note that 6000 does not include.
Increased productivity, which really employers find to be one of the strongest value propositions for gene site.
From a timing standpoint brings I'd, we have it I don't think we're prepared yet.
Discuss when we might see an anxiety publication from guided.
That is something we expect in this fiscal year.
We we would note obviously, United healthcare has already covered anxiety and it's important to know that that's 40 million people a year diagnosed with things I'd a much more the depression. So that's an important consideration.
For payers and for providers. So it is one that we are quite interested in and and you will see anxiety data this year from guided.
Great. Thank you for the color.
Operator, we'll take our next question please.
And the next question is from Stephen Unger with Needham. Please go ahead.
Hi, Thanks, a just a nudge insight and Kroger I was wondering if you could provide more details as to how that program is rolling out I guess, it's my understanding that it's the literature drop.
For for patients picking up prescriptions to inform them of gene site, but.
Maybe more color there would be helpful. And then is it possible for you to quantify the revenue opportunity within United and what United represents in the current mix of volume.
Yeah. Thanks, Steve from a Kroger perspective, obviously, there is a couple of things first theres coverage for their own employees, but I think you're probably speaking specifically to the pharmacy intervention on so that's one that that Kroger is actually piloting or preparing to pilot whereby they would actually have their pharmacist intervene with the patients health care provider.
In order to make them aware of the fact that there is an alternative for for patients that have failed on one or more medications and that this is a patient that would potentially qualify for that.
And solicit involvement from the health care provider and in providing genes I test.
To provide some additional aid in selecting that next medication. So it's actually an active pharmacy intervention program. We're in the early days, it's hard to know exactly how this is going to impact ultimately.
Patient care and volumes, but certainly it's a very intriguing opportunity with a successful pilot. We can then roll that out to a couple thousand stores instead of 500.
And then of course, we can look to other.
Pharmacy programs that might be interested in offering that type of valued service. So I think theres benefit beyond just what we might see.
With the with the Kroger program per Se I'm, sorry, what was your second question Steve.
Just on United is it possible for you to quantify the just the overall revenue opportunity within the United membership and what the current mix is in the volume.
Oh, Yeah I think.
We haven't given specifically, but I think you can just assume generally it's consistent with their market share in the commercial payer.
Landscape, so we generally see volumes pretty consistent with payer.
Payer market share so.
Okay. Thank you.
Next question is from Tyco Peterson with JP Morgan. Please go ahead.
Hey, Thanks, I want to follow up on the FDA dynamic I understand you don't want to say a lot, but our understanding is they are actually actively making calls to companies telling them. They cannot report, which drugs are classes you know to take based on the Pharmacogenetic testing are you able to comment on whether that's the case, whether you see that call from them and are you able to talk about what you're actually reporting the United for example, can you report out the red and green buckets, suggesting specific drug products anymore.
Yes, Thanks, Tyco really cant make any additional comments other than those that that Brian made in his statement.
Okay.
You know given that United owns behavioral health centers with access to genetic counselors. You know I guess is there a view that this is maybe just more of a marketing tool to drive.
Volume for their behavioral health centers can you comment on that dynamic.
From the perspective of United Tyco, You mean, yes correct.
Well I definitely think United I think there's opportunities to do more with United Obviously, we are.
We're in the early days of a coverage decision, but I think with any coverage decision typically we will follow up and talk to any payer about what other programs. They may want to wrap around a coverage decision.
We're actually in active discussions with multiple payers about those types of programs. So.
United and Optum.
Obviously do a substantial number of programs and so I think there's opportunities that we can and will explore with them and with others on on other ways to provide services I think to your point, it's a stupid that many of these payers are in competitive markets and they want to attract additional clients based on services that they can provide the clients appreciate and mental health is tops on the list of most employers and so as a pair if you can bring additional services to those employers.
It's something that is very beneficial as you compete with others in this marketplace and so.
Thats certainly something you are seeing and that's part of the reason we've been so.
Investing so heavily on the employer side is that we really see some different dynamics here that in this mental health space that we have not seen.
In some of our other products.
All right and if I could ask one more you made comments about prenatal pricing bottoming out I'm, just curious given competitive dynamics within butane others why why do you think thats the case.
Why couldn't get worse.
I think the comments were making on the pricing is really related to the fact that on the left benefit manager impact that we saw in the fact that we've seen two quarters of impact, but we're seeing that stabilize in.
In the first quarter I think from a pricing standpoint, as we look at expanded carrier screening, which is really where where this dynamic has played out I think what's important to look at strategically is that.
Basic carrier screening is still the only testing that is broadly reimbursed expanded carrier screening is not on and as you know tyco, there's a specific code for expanding carrier screening the Medicare price of that code is $2400.
What we are working on is to provide the evidence to get guidelines and broad coverage for expanded carrier screening and not just basic carrier screening, which by the way only identify somewhere around 30% of affected couples and so as we are successful in broadening guidelines and.
And coverage consistent with that guidelines. We think there is the opportunity to shift to a code that is obviously price at least with Medicare is significantly higher than where we are so I think this market is going to move to expanding carrier screening I think the evidence is very striking and I think as it does.
We're going to see I think a different dynamic from a from a pricing perspective.
Okay. Thank you.
Next question is from Doug Schenkel with Cowen <unk> Company. Please go ahead.
On for Doug I appreciate all the color you disclose about where you are in that coverage decisions with major Payors for gene site, probably with United you actually establish a contracted rate out of their coverage decision have you disclosed if you have established contracting decisions with Needham major.
Any other major payers at this point I'm, just trying to get a sense of that maybe a leading indicator for future coverage decisions.
Yes. Good question on we we actually have contracts in place with with commercial payers that represent more than 25% of all covered lives in the country United was part of that.
We havent disclosed anybody else outside of United on where we had a contract in place.
And and so we will do that just.
Because we don't have agreement to do so, but I think that frame the opportunity that.
Theres still obviously is a significant number that have deep insight in contract, where we don't have a coverage decision yet and of course, we're actively working with those.
Okay, and the United decision I think had an effective date roughly two months from initial coverage announcement should we expect a similar timeline to other major payers were to issue a coverage decision or would it take longer since maybe some of those peers don't have the contracting decision in place.
Yeah, I think a month or two to actually have a policy be effective is pretty typical.
There are some that actually make effective dates even faster than that so.
But it's relatively short timeframe from coverage to effective date typically.
Okay. Thank you.
Next question is from Brandon Couillard with Jefferies. Please go ahead.
Hi, Thanks, good afternoon.
Brian just on the guidance you kind of pointed to a fourth quarter being substantially higher in terms of revenues.
Mr source speak to the factors behind that back end loaded outlook the level of confidence and perhaps relative growth rate kind of exiting the year in the fourth quarter.
Sure. Thanks, Brendan Yeah. The the few comments I would make I mean first of all we talked about an organic rate of 2% to 3% for the year.
As you mentioned trending higher through the year I think the things to note. There are one when you when you look at the reset in terms of the LPM impact on our prenatal business and the impact of removing the two products from the from the gene site portfolio.
Yeah, Thats going to reset you at a lower base at the beginning of the year and then you will grow from there and then also as as you as you know the United coverage decision is effective October one so we'll get three quarters of that so that was the rationale for you know for the statement around you know trending higher through the year again, because you'll be one building off of a bigger base and then you'll have a catalyst that will kick in as we get and move into the second quarter.
One other thing I'd, probably note is that.
That seasonally Q1 is a very weak quarters. So year. When you when you look at something like a Q4, which is one of our stronger quarters.
Youve got seasonality advantages that are pretty significant first quarter really does face headwinds throughout all the summer for all of our products.
Thanks, and then one more Brian can you be more specific about the tax rate you've penciled in for the year.
Yes, so we didnt update on the tax rate on the only commentary you made was that it would be higher than it was this year and really the reason for that again those are some of the discrete items that we had in the current year the benefits that will not be recurring next year.
Okay. Thanks.
And next question is from Jack Meehan with Barclays. Please go ahead to London.
Hey, Thanks. This is actually much Peterson on for Jack This afternoon.
In 2017, you commented that United Healthcare fully reimbursed Virgin site would be roughly $40 million of revenue and EBIT.
I'm thinking more on an annualized basis is it still a rough framework that we could use to help us size the opportunity. Thanks.
Yes, Thanks I think.
As as we noted there that was fully reimbursed and.
That that's still a reasonable.
Number to think about I think as we think about the impact for this fiscal year.
Probably a couple of things to remember is that we've got only three quarters, obviously that that were going to be able to see the benefit of United We have seen this reduction in volume of 15% that I mentioned.
Previously so those two things obviously weigh on on what that number is for the fiscal year, but.
I think thats still a reasonable number to.
To think about.
Okay, and then maybe on hereditary just to confirm are you still billing code 81162 for Medicare and if you could just refresh us on the rationale behind using that code over a one for three to that would be helpful. Thank you.
Yes, Thanks Mitch.
The codes, we bill our very much dependent upon what happens to be in the contact our contracts for our payers and as you might imagine with hundreds of contracts is extraordinarily complex. So it's not something we really elaborate on because frankly.
Mind Numbingly complex on whatever payers may have in their particular contracts. So it's it's not a detail that we actually go into.
Okay. Thank you.
There are no further questions I'll turn the call back to you.
Thank you Kevin This includes earnings call for today, a replay will be available via webcast on our website for one week. Thank you again for joining us this afternoon.
So thank you for attending everyone that does indeed conclude our conference call for today, we thank you for participating and you may now disconnect.