Myriad Genetics, Inc. (MYGN) Earnings Call Transcript & Summary

Okay. Good afternoon. We're going to go ahead and kick it off. I'm Tycho Peterson from the Life Science team. It's my pleasure to introduce our next company, Myriad. We'll do a breakout right after in the Olympic Room. So with that, let me turn it over to Mark Capone.

Good afternoon, and thank you, Tycho. Thank you for JP Morgan, once again, hosting an excellent and popular conference. Welcome to the Myriad Genetics corporate presentation. Just as a reminder, this presentation may contain forward-looking statements, and we would refer you to our detailed SEC filings on our website. At Myriad, our vision is to be a trusted adviser, transforming patients' lives worldwide with pioneering molecular diagnostics. Or as we say, in short, we would like to be the global leader in precision medicine. Now precision medicine offers the promise of accomplishing the dual lanes, and that is achieving better patient outcomes with significant reduction in health care costs. And in fact, if you look at the 4 areas where Myriad has chosen to focus, neuroscience, oncology, women's health and autoimmune, in total, in the United States, we spend about $600 billion in those 4 different disease states. And estimates are that about 25% of that spend is wasted. Our goal at Myriad is to help identify ways to reduce that waste and then, of course, capture a portion of that as revenue. And precision medicine has 4 different applications. The first is finding patients that are at high risk of disease and preventing that disease from happening in the first place. The second is aiding in early and accurate diagnosis of diseases so that we can bring effective treatments online much earlier than we would historically. Third is identifying patients that are at low risk for disease that potentially don't need any form of treatment at all. And the fourth is aiding in understanding what the appropriate treatments are for patients based on a genetic understanding of the underlying disease. Now Myriad was founded 27 years ago, and our focus at that point was in oncology. And in fact, up until now, most precision medicine investments have really been made in that oncology market. Now it's understandable why. In oncology, you've got 1.7 million patients every year that are diagnosed with cancers. There's about 15 million survivors that are living with cancer, and there's $137 billion of health care spend on cancer here in the United States. And again, much of that is wasted. Now we've seen a significant benefit by being one of the early movers in oncology, and those benefits have been long-term and sustainable. Our belief, though, is that we need to move precision medicine out of being exclusively something that's provided for oncology. And 2 other areas we're really excited about, from a leadership perspective, are neuroscience and autoimmune. For neuroscience, there are more than 11 million patients diagnosed annually, and there are 40 million living with some form of mental health disease in the United States. The spend is greater than oncology, over $200 billion a year. And once again, there's significant waste in this market from a health care spending perspective. The same is true for autoimmune, 1.3 million patients diagnosed every year. There are more than 25 million patients living with some form of autoimmune disease and over $100 billion spend a year, and again, much of that is wasted. So our belief is by being an early mover in the neuroscience and the autoimmune areas that we have an opportunity, once again, to develop long-term, sustainable competitive advantages in those other markets that are equally, if not more, attractive for precision medicine than oncology. We also think that Myriad is uniquely positioned to be a leader in this precision medicine market. We have unique scale, revenue of $850 million in fiscal year '19; more than 3,000 patients around the world; 11 products, what we believe to be the industry-leading pipeline; and more than 1 million tests were performed in fiscal year '19 alone. We've also invested very heavily in pioneering science. We're one of the few, if not the only precision medicine company with expertise in all 3 biomarkers that matter for precision medicine. That's RNA, DNA and in proteins. We have more than 1,000 scientific publications that Myriad has made and leading data capabilities coupled with broad regulatory and clinical expertise. We also have unique commercial breadth. More than 100,000 physicians have ordered our tests. We have more than a 700-person sales force here in the United States, with the largest managed care organization, and in network with more than 95% of payers. And physicians from over 140 countries have ordered our tests. And lastly, we have the financial strength. We're the only profitable precision medicine company, significant cash flow and operating margins and a strong balance sheet. Now the strategy of Myriad is, what we call, the 4 in 6 strategy, answering patients' 4 most pressing questions: Will I get a disease? Do I have a disease? Should I treat this disease? And how should I treat this disease? In 6 different medical specialties: women's health, neuroscience, oncology, autoimmune, urology and dermatology. And as a result of that strategy, we believe we have what is the most attractive pipeline in the precision medicine industry. We have 11 products. In total, the market potential for those products here in the United States is $15 billion of annual revenue. And you can see that these products are distributed in many cases across multiple sales channels that we have in the company. The first set of products are our hereditary cancer products. Those are myRisk and riskScore. And these products are designed to answer the question: Am I at high risk for developing cancer at some point in the future? Now riskScore is particularly important because if you actually look in hereditary cancer market, for patients that are typically indicated for hereditary cancer testing, those patients will only test positive 5% to 10% of the time. Well, that leaves the other 95% of patients wondering, even though I have this family history, what's actually going on that causes my family to continue to have cancers run through the family. What riskScore does is actually look across the genome at select SNPs and combines those with the family history modeling tool to provide a patient's risk for developing breast cancer when she tests negative for a mutation in 1 of the 35 genes that we test on the myRisk panel, which means, unlike other companies, 100% of patients walk out with understanding her future risk for developing breast cancer as opposed to only 5%, which is what our competitors typically deliver from a results perspective. GeneSight is the second product. GeneSight is designed for a patient that's been diagnosed with depression that is not well. And this identifies whether or not the medication the patient is on has some level of gene-drug interaction that might, therefore, benefit the patient from trying some alternative medication. For our prenatal tests, our Foresight and Prequel, they help determine whether or not a woman's child may be at risk for a genetic condition. Vectra is designed for patients with rheumatoid arthritis, and this helps a physician determine whether or not a patient's rheumatoid arthritis is under control. Prolaris is indicated for men that are diagnosed with prostate cancer to understand if that prostate cancer is aggressive or not, and therefore, whether or not a man needs to take definitive treatment. EndoPredict is indicated for women with breast cancer to help her understand whether or not chemotherapy is an appropriate selection for her breast cancer. And then our companion diagnostic products, BRACAnalysis CDx and myChoice CDx, help a patient with cancer understand if, in fact, they are appropriate for a class of drugs called PARP inhibitors. And lastly, myPath Melanoma, which is a diagnostic that helps determine whether or not a suspicious skin lesion is actually melanoma. As a company, we've defined our strategic goals, with revenue growth of more than 10%, 5 -- 7 products with more than $50 million in revenue and 30% operating margin. And to achieve those, the 3 critical success factors are; building upon our solid hereditary cancer foundation, growing new product volume and expanding reimbursement for our new products. And I'll talk some more about each of those on the next slides. Starting first with building upon our solid hereditary cancer foundation. Reflecting back on fiscal year '13, which is the year the SCOTUS decision overturned the BRCA patents, until fiscal year '19, we've actually been able to grow our volume in hereditary cancer at an 8% CAGR, despite the level of competition that we've seen in those markets. This market is still less than 15% penetrated. And in the first quarter, we actually saw double-digit year-over-year growth in this market. We also believe that we're reaching a rational pricing floor in this market. The pricing has declined over that 6-year time frame. But we actually believe we're at a point where our pricing is at a rational level. We have long-term contracts signed with payers that give us pricing predictability into the future. And today, the smaller price premium that we have relative to competitors, we think, is easily justifiable, given some of the quality advantages that Myriad offers in our hereditary cancer testing. Lastly, we also are excited about some of the market catalysts we see that can drive volume growth in the hereditary cancer market. Just in the last year alone, we've seen new indications that add 175,000 additional patients per year that are now eligible for hereditary cancer testing. We've received companion diagnostic indications for pancreatic cancer and are anticipating a prostate cancer companion diagnostic indication in this fiscal year, and we see the potential for an adjuvant breast cancer companion diagnostic in fiscal '29 -- '21, which would now make virtually every breast cancer patient eligible for one of our hereditary cancer tests. And lastly, we've seen ASBS and NCCN both expand guidelines in the last year, either expanding the age criteria or expanding the number of genes that are appropriate for testing. So in summary, what we see is a very large market that's underpenetrated with growing indications for use and a product that we believe reached a rational pricing floor. So we continue to be excited about the hereditary cancer potential as we move into the coming years. Now let's shift gears to our diversification goals. Our second critical success factor was to expand our new product volume. Again, reflecting back on that same time frame, if we look back at fiscal year '13, less than 1% of our volume was from products other than hereditary cancer testing. In fiscal year '19, 75% of our volume was from hereditary -- from new products and not hereditary cancer testing. But of course, hereditary cancer was growing over that same time frame as well. So that represents 153% CAGR on new product volume over that time frame. And the most recent addition was the acquisition of Counsyl, which allows us to now compete very successfully in a high-growth prenatal market. Now the reason we're so excited about this new product portfolio is shown on this slide. Looking at fiscal year '19, we did about $300 million in revenue from these new products. But if you actually look at the reimbursed addressable market here in the United States, that is the market where we currently have reimbursement, that market is $5 billion of market potential here in the United States. So without additional reimbursement, we have the opportunity to drive our revenue from $300 million to $5 billion in that new product portfolio. Of course, this gets even more exciting when you layer on the opportunity for increased reimbursement because on an average, we're only being reimbursed about 30% of the time, which is why you have a $10 billion opportunity on top of that with a total market TAM for $15 billion here in the United States. So obviously, focusing on additional insurance coverage, focusing on driving penetration in those reimbursed markets are very significant priority and can transform our business at the company. One of the most important opportunities for driving additional new product volume growth is in GeneSight. GeneSight, up until now, has largely been used in the psychiatry market. And we have 165 sales representatives that sell into that psychiatry channel. But the reality is that 60% antidepressants in this country are written in the primary care setting, and we have yet to really develop that market anywhere near where we have the psychiatry market. Right now, we are planning to expand our sales force to begin to penetrate that market by adding -- by expanding about 35%. Our sales force expansion is 35% expansion, and we expect to have that completed by the end of our fiscal year in June, which obviously opens up the opportunity to call on those very high-decile primary care physicians as we approach fiscal year '21. Now this was facilitated by the fact that we saw UnitedHealthcare coverage decision that became effective October 1. We also have additional coverage with CareFirst, 3 major self-funded employers have covered the test, and we are anticipating in this third quarter that we are in now that -- by the end of this third quarter that we could have a Medicare decision to potentially expand into primary care physicians as well. So moving on to the importance of obtaining additional reimbursement for our product portfolio. This is just a snapshot of how transformational these efforts can be. Looking at fiscal year '19, if we had received full reimbursement for the number -- for the new tests that we actually ran during the year, that would have actually translated into a company that was a $1.5 billion in revenue, 40% operating margins, $8 in earnings per share and $600 million in free cash flow. That's just how much locked up potential we have if we are able to secure additional reimbursement. Now obviously, 100% reimbursement would be fantastic, but even making any step towards that direction can be truly transformational from the standpoint of the financial performance of the company. So when you look at where we are in that reimbursement journey, that's what this slide shows. For each product, it shows the level of coverage that we currently have here in the United States. And the column next to that shows the additional market opportunity we have, if we are able to secure 100% reimbursement. Obviously, the most important on this slide is GeneSight, with full coverage would give us an additional $8 billion of market opportunity. And as I noted, the UnitedHealthcare decision that we had, effective October 1, was an important step in that direction. Now one of the things we also realized is that there are other stakeholders throughout our health care system that we have an opportunity to try to secure additional coverage. And so we have been working with large self-funded employer groups and with pharmacy benefit managers to try to secure additional coverage, and this is particularly true for GeneSight and Vectra, where both have shown expressed interest in covering that. For self-funded employers, in many cases, mental health disease is probably one of the most troublesome, not only because of the direct cost but the indirect cost to organizations. And in the case of Vectra, where we have an opportunity to rationalize the use of biologics that now constitute one of the largest pharmacy spends in the country, both of those have really piqued the interest of PBMs and large self-funded employers. So you will continue to see us make announcements in those areas to begin to get broader coverage for all of these products. As we look to the near term, there are a number of catalysts that present themselves as opportunities for additional coverage. And virtually, every one of our products has near-term opportunities. I've already talked about GeneSight and the opportunities that we see with the potential for our Medicare expansion. In addition, we're in contract with 25% of commercial payers, but we're working to get coverage and contract decisions for the rest of those. In particular, one of the most important things is for us to continue to publish data that will allow us to strengthen what we think is already a very strong reimbursement dossier. We have published 2 studies just in the last 2 months on GeneSight. The first is, what we call, the precision medicine analysis. That takes the large prospective study that we did call GUIDED and evaluates the patients that we would expect to actually benefit from GeneSight in that study. What it does is preclude the patients that entered the study on, what we call, green medications. Those are medications with no gene-drug interactions, and therefore, they wouldn't expect to benefit from GeneSight. And when we ran that analysis on the GUIDED study, we showed statistically significant improvements in all endpoints: remission, response and symptom improvements. We also published another study recently on HAM-D6 endpoints. The initial GUIDED study was calculated on HAM-D17 questionnaires. HAM-D6 is a subset of that, 6 questions on the 17-question HAM-D scores. And the reason we did that is, increasingly, HAM-D6 looks like a more sensitive way to assess the effectiveness of antidepressants. When we conducted the analysis on HAM-D6 scores, again, we saw highly statistically significant improvement in patients in the GeneSight arm compared to the treatment as usual arm in all endpoints: remission, response and symptom improvements. And all of those studies are now being added to our dossiers for commercial reimbursement. For Foresight, our expanded carrier screening product, we see opportunities for ECS to be included in ACOG and ACMG guidelines. And were that to happen, we would expect that to then translate into broad payer coverage for ECS. That's important because there is already an ECS code in existence that's reimbursed at $2,400 by Medicare. So we think we've got the opportunity with broad coverage to potentially get an increase in ASP for expanded carrier screening testing. The other product for prenatal testing is Prequel, which is a noninvasive prenatal screening test. We all continue to await average risk being embraced by both ACOG and ACMG guidelines, which would increase, we think, both utilization and ASP. And in addition, we see an opportunity to include microdeletions in both ACMG and ACOG guidelines. And given that microdeletions already has a code, inclusion of that in guidelines then has the opportunity to potentially see an ASP increase when that occurs. For Vectra, just recently in the last 2 months, we saw Vectra included in the ACR recommendations as one of the disease activity measures that can be incorporated into routine clinical practice. That's an exciting advance because that, again, potentially can translate into increased volume as well as increased payer coverage. For Prolaris, we look to the opportunity to expand the indications from Medicare in the LCD to unfavorable intermediate and to high risk. And that also then would have a material increase in the revenues for Prolaris. And lastly, I'll just talk about myChoice CDx. That's a proprietary companion diagnostic that's just recently received FDA approval for late-stage ovarian cancer patients considering PARP inhibitors. We have ADLT status at a $4,000 reimbursement, and we have the potential to see myChoice CDx be a companion diagnostic for first-line ovarian cancer and for metastatic breast cancer in the upcoming year. And that, too, would be transformational from the standpoint of earnings for the myChoice CDx product. In total, that's more than 75,000 patients that could be eligible for that companion diagnostic and will only get PARP inhibitors if they test positive with our proprietary companion diagnostic. So again, lots of opportunities as we look to the future for additional coverage. Lastly, on uses of cash, as I noted, we are the only profitable precision medicine company, which means we have a few decisions our colleagues do not, and that is how to put that cash to use. Primarily, we invest in R&D internally to secure the reimbursement potential that you saw in the earlier slides. Second is M&A activity. And right now, we're focused on integrating Counsyl. We see the opportunity for potential consolidation. We have $225 million in debt and $124 million in share repurchase authorization, where we can deploy that capital as well. So in closing, we think precision medicine is entering a hyper-growth phase and the opportunity to expand beyond the areas of oncology, where traditionally precision medicine has been deployed. Molecular diagnostics are the keystone to improving both patient outcomes and reducing the waste in our health care system. We're the global leader in this precision medicine market, and we see a number of exciting near-term catalysts that we believe can transform the earnings potential of this company. So thank you for your attention. Look forward to answering your questions in the breakout room, in the Olympic Room.