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

Good afternoon, everyone. I'm Derik De Bruin, the senior life sciences and diagnostic tools analyst from Bank of America. Welcome to our 2021 BofA Virtual Las Vegas Health Care Conference. My colleague, Ivy Ma is on. And joining us today is Myriad Genetics. We have Paul Diaz, Chief Executive Officer; Bryan Riggsbee, Chief Financial Officer. Paul, Bryan, thanks for being here.

Thank you, Derik. Thanks, Ivy. Appreciate the opportunity.

So Paul, I'm going to kick it off to you first. You had an Analyst Day last week where you outlined some of the changes going on in the company. So I want to first focus on those. But first, let's just sort of look -- you're approaching our 1-year anniversary since your arrival in company. You've under -- you've begun a big transformation of the company. Just at the stage of discussion, can you sort of -- let's go through and say what attracted you to Myriad? What were some of the challenges, where do you see some of the biggest opportunities? So just sort of like a big picture introduction on why you joined there?

Yes, that would be great. And I would say that over the last 9 months, I'm even more excited than I was last summer when I began my work around the company and trying to understand it. I would say it starts with I think this area of health care presents the greatest opportunity for patient-centered care and growth, quite frankly. So I've been in health care operations and an investor. And when I was approached with the opportunity to start doing work, I mean, there's just such opportunity for patients and such opportunities for growth here. Company specific, Myriad has a history of scientific innovation, diligence, the quality of the products because that clearly -- if we had bad products, that's something outside of my scope and capabilities to fix. So I think the products are unique and differentiating in the marketplace. We have more work to do to make -- help people understand that clinical differentiation. And I see a business that, in a growing segment, high margins, lots of leverage in the P&L and a pristine balance sheet. So from a personal investment thesis, became excited and even more excited given the receptivity of the team and the Board to change over the last 9 months.

Got it. And I guess what do you think is the biggest opportunity as you look forward, right? I mean, just from -- we were there, just sort of like summarizing it into 1 or a couple of sentences.

Well, from an investment standpoint, I mean, I think we have a clear path. We've got work to do. We got wood to chop, clear path to growth and profitability. I think you've seen stabilization in our operations the last couple of quarters. You've seen us put forth our growth targets, organic growth targets. We think there's going to be opportunity to deploy capital and accelerate that growth in a more disciplined and thoughtful way. And I think, quite frankly, as compared to others in the space, we have a clear path to double-digit growth and profitability in an intermediate term, profitability by the end of the year. And we're building, on top of our scientific capabilities, commercial capabilities, rev cycle capabilities to support more growth, new product innovations in R&D, M&A. And so as a person who has spent nearly 3 decades building pretty large scaled enterprises and integrating, I think we're on our way to building an organization that can grow pretty expansively and pretty ambitiously.

Great. So let's jump up on that. At your Analyst Day last week, you guided to 8% to 10% organic core revenue growth in 2020 to 2023. What are the components of that growth? And how much of that growth is driven by better execution on the current portfolio versus new product innovation?

Yes. No, great question. So the components are -- and this is primarily execution, organic, getting our products to full potential, and I'll go into that in more detail. But the components are probably 10% to 12% volume growth. We recognize there will continue to be pricing pressures. We're going to be able to mitigate some of that with our new rev cycle projects that we've been working on, Bryan is leading that with KPMG. But we expect 3% to 5% pricing compression to sort of continue. We also see, as we talked about the opportunity to improve gross margins by 150 basis points. And reduce our OpEx by $55 million to $60 million going in -- coming out of '22. How we do that is continuing to build on our commercial capabilities, a more productive sales force, and better execution there. The product enhancements that we talked about at our Investor Day. And the new products, we have pretty cautious expectations about that. I mean, that's a source of upside as we see launching our combined offering in prenatal and carrier screening our ability to offer riskScore for patients of all ancestries. Certainly, we launched our additional ADHD component to GeneSight. We do expect that to help our back half of the year and sustain double-digit growth that we're seeing last quarter and continue to see this quarter in GeneSight. So a number of different things. But I would say that a lot of it is -- the vast majority of that is execution and getting our products to their full potential.

Got it. Got it. So let's start on sort of different businesses, and I think then just work around it. So how should we think about the future of the hereditary cancer testing market? Just some thoughts on volume, and new competition in pricing. Just -- that's obviously one that's been quite volatile. We've had more competition coming in the market. Can you sort of talk about how you see the evolution of that going forward?

Yes. I'll start, and Bryan can certainly add some color. Look, just like on the execution things, Derik, I think this management team and board have approached the last 9 months in soul searching with a fair amount of humility. And I think we've been transparent about our institutional weaknesses and how we can build on our strengths. We do see a lot of that volatility behind us in hereditary cancer. It's a $2 billion market where we have the right to win because we have the best product, and expanding riskScore to patients for all ancestries is quite a differentiator. We see pricing stabilizing there. This notion that we're $800 above -- an ASP above the marketplace is just inaccurate. Our pricing is pretty much in line with the market today. And I think the numbers sort of bear that out. And where we've underperformed has been in hereditary cancer in our Women's Health business segment. We have a new President of Women's Health starting on Friday. She is just a dynamo. We've retooled the team there. So we expect in the back half of the year to recover some of that market share that we gave up because of our own footfalls. And if we can continue to capture our fair share of that growing $2 billion market with what we think is pretty stabilized pricing, that there's a lot of leverage in our company, and that can support a lot more growth in terms of free cash flow. But Bryan, what would you add to that?

Yes. Derik, I would just add that in terms of the hereditary cancer market, to Paul's point, I mean, we really look at how do we recover over the course of the next 6 months or so from the pandemic, really in the preventive care, women's health space as the well woman returns to the office. And we believe that as that happens and we see the traction from some of the rework, restructuring that we've done in the sales team. That we'll be in a position to win when you couple that with the technology enhancements and other things that we've added to the market. But to Paul's earlier point, it's a growing market, and we believe that if we can get to the point where we can get our fair share of that market growth, that will put us right where we want to be relative to our longer-term targets.

So let's go back to the -- you mentioned you lost some shares, some missteps in the women's health market. I mean, can you be a little bit more specific on that and so I get some color on that one? I mean, is that -- I assume you're talking about the asymptomatic testing in that area that there were some issues. But could you elaborate a little bit more on that?

Yes. Yes, sure. There are 3 components that go into a physician ordering a test or a patient asking for a test or coming on our website and inquiring about hereditary cancer. One is the quality of the product and how is it differentiated. We need to do a better job. We have the best test, the most accurate test in the market. We haven't done a good job articulating that. Two, you need to have a customer experience and an ease of use, and that's particularly where I think some of our competitors have done a better job, and that's the technology enablement from order entry to sample processing to the timeliness of reports, that whole customer experience. So it's quality of product, customer experience and lastly, accessibility. And we've got to make ourselves accessible to all patients, patients of all ancestries and patients of different social economic issues, too. And so for challenges as well. We're attacking all 3 of those. And we've got good plans in place, again, to regain some market share, get back on some doctors' offices that we have given up the right to win. And we're -- again, we think we have the best product. We just got to execute better on the commercial side, and we're starting to see that on our way of doing it.

And I guess, what are some of the trends you're sort of seeing in the genetic screenings? Are patients starting to come back to the OB/GYNs?

Yes, they are. And we're seeing modest incremental growth. We're still a little under in Q1 of where we wanted to be in hereditary cancer. On oncology, actually Faith and her team has done a nice strong job. The bounce back there has happened faster as you would expect because of the dynamics in oncology. We've completely retooled the approach and the tools and incentive programs for our Women's Health group. And our new President of Women's Health, who starts on Friday, I can't -- I'll disclose that later, comes from Women's Health. She is sold in that channel of other products and services. And I'm sure our partnership with Nicole will yield us the results that we expect and accelerate in the back half of this year. We're confident in that.

So let's do the same analysis on Counsyl and that business and sort of like volume trends, growth trends. Apparently, we're facing a baby bus. So sort of like how you're thinking about filling to that market where birth may be down? Pregnancies maybe -- well, so birth was down, pregnancies are down. So yes.

Well, I think 2 things. Let me ask a favor first. I would really like everyone to stop referring to this as Counsyl. I think that's part of the problem, right? We never integrated culturally and operationally and from a system and process standpoint, the Counsyl acquisition. We're now Myriad Genetics, Women's Health. And we're very excited about further integrating that team across all our different functional areas. So I'm not trying to use so much as that I just -- I want to move this company forward that way. We certainly know that there are ebbs and flows in terms of birth. I think spring fever has hit, at least from what I see in my young adult children. And so I think this summer, we'll see an acceleration back to normal in terms of weddings and potentially births that follows. But I think much more importantly is we're sort of on the forefront of prenatal testing becoming the standard of care and the shift to noninvasive prenatal screening. I think that is a much stronger tailwind than sort of the temporal drop in births that we've seen here. And again, our AMPLIFY technology and particularly our new product enhancement or new product of combining Foresight and Prequel into 1 offering that can be done with 1 sample. So in terms of ease of use and accessibility and solving to the mission and the patient opportunity, we're just very excited about that new product offering, which we hope to launch next year and expect to launch next year.

Got it. And I think there's a lot of companies that are offering noninvasive prenatal testing. How does your go-to-market strategy differ from everyone else? I mean, I have not really found talking to my friends, talking to people, I mean, none of my friends who got pregnant, who've got a -- they have no idea who's servicing them at the back end for this. So how do you sort of like go into the OB/GYNs offices? How do you sort of like -- what is the Myriad Genetics Women's Health? It's relative to the many other players in the market?

Well, I think first, it is building on the legacy of Myriad Genetics and Counsyl. In terms of the respect that the products have with OB/GYNs, and we do a lot of diligence. We did a lot of work. We interviewed almost 350 docs as part of our strategic operating reviews about what they like, what they didn't like. And I think others have done a better job on that customer experience or -- and the accessibility. We are introducing a cash price for prenatal to deal with that part of the access issue. But significant technological and customer-facing investments, a change in our approach to the market, a complete revamp of our sales force. And Eric Santa, who just joined us as our Chief Growth Officer out of Optum is leading what we've already started, which is a big shift to a digital transformation. So what we hope is that when women go into -- and most women, I just know this, their primary care doctor is their OB/GYN. Most of the health care, they look at happens in the OB/GYN offices. And we want that patient, that office manager, that OB/GYN, to be thinking about Myriad Genetics broadly and the opportunity to empower women with genetic testing. And that's prenatal, hereditary cancer and hopefully, other products in women's health. So a lot of energy and excitement around educating women about those opportunities, using digital and social media to engage them differently and have them going into those offices asking for neurogenetic products.

Got it. So let's move on to GeneSight. I think we had interacted with Assurex well before the acquisition. And so we have a rather long familiarity with business. And look, I mean, we continue to do calls with docs and our calls continue to come back fairly skeptical about the product. I mean there's still some controversy on the product. I guess, why -- what is your view as to why the KOLs, why a lot of the psychiatrists, why a lot of the docs are still very skeptical about your GeneSight?

Yes. Look, we acknowledge we have more work to do with the KOLs and with the physician community, generally. But I would say we're making great progress there, particularly in primary care. Let's take a step back. Mental health is an exploding challenge for America at all social economic and age levels. We are seeing great demand for GeneSight and excitement about GeneSight, the addition of ADHD. We have 2 studies that were completed. We talked about in our Investor Day. We have a study with the VA, which we think is promising. So we're committed to continuing to do the work to further support the clinical utility of GeneSight. But in the meantime, we have an explosion of mental health issues here. We know that GeneSight helps psychiatrists and health primary care docs avoid patients having to go through the trial and error of 5 different medications while they're struggling with anxiety and depression. The VA sees that opportunity and we're seeing great acceptance and momentum and solutions. We've got 2,200 new docs ordering GeneSight. And the expansion of the LCD into Medicare, United support and the tailwinds behind this, we're making progress in a number of different states on the Medicaid side. So I think you're going to see continued growth in GeneSight this year, double-digit growth there. But we accept that we need to continue to work on helping with the clinical efficacy of the product. But we've got a number of studies underway to do that, and we published them recently. But again, we're committed to doing a better job there. In the meantime, I think you're going to see continued strong growth in GeneSight and continued coverage expansion over time as well.

So on the ADHD, I thought this product withdrawn. I thought that was on the market previously. It was withdrawn back in June because of some of the -- June '19 because some of the pharmaceutics reviews that were going on with the FDA. Have you done new data on the ADHD to sort of overcome some of the issues that the FDA had concerns about?

We did. And in the most recent Medicare LCD expanded coverage to include ADHD. So I think that further evidenced it. I think there were some other issues involved in that. And when the company proactively pulled it, others -- some of our other competitors did not and have not felt any consequences to doing that. I think the company was just trying to be cautious in that regard. And Bryan, maybe you can give a little bit more background. But I think we feel really confident about the clinical utility. We think this is an important add to the insights that it provides. And we're getting great receptivity just in the last couple of days about the reintroduction of ADHD, particularly from primary care physicians. But also from some of the psychiatrists, who we lost when we pulled that capability out of the mix. Bryan, do you have any comments you want to add?

No. I would just highlight the points you made, again, which are -- I think the additional studies were important relative to relaunching the product here last week.

Got it. So you sort of mentioned about potentially doing a DTC push on GeneSight. So can you sort of talk about -- in general about your DTC effort, how you're sort of thinking about that? And more importantly, how do you sort of think about maybe integrating Myriad with some telehealth -- with the broader telehealth universe?

Yes. And that's an important nuance and distinction that I want to tie on GeneSight. I think some of the legitimate concerns from the FDA and others were about a direct-to-consumer GeneSight approach. And I think this question has been raised maybe with others. When we talk about direct-to-consumer, we're just talking about educating consumers to engage with their ordering physicians. And that's a really important distinction because as we reintroduce ADHD and as we launch and expand, we are talking about telehealth, educating consumers so they can engage with their primary care physicians, ask about the test. We can support that not trying to get people to order GeneSight online from us directly. So we're trying to facilitate that process and the physician orders it, we've had great success with sending the kits, saliva based, to patients' homes. This is, again, how do we empower patients with the ability to engage in the health care system with home-based kits. But these are all driven from a physician's pen, and I just want to underscore that. With respect to the direct-to-consumer opportunity for riskScore, and particularly the expansion of riskScore to patients with -- from all ancestries, Derik, I think that's tremendously important at a time when the country is facing the obvious weaknesses in our health care system in terms of the racial disparities, economic and social disparities. And so riskScore for all ancestries covers people of African-American decent, people of Asian decent. That's a big differentiator from our -- many of our other competitors, and we'll make both the myRisk and riskScore offering that much more compelling. We do think about direct-to-consumer in telehealth and potential partnerships in direct-to-consumer with people who have done that and have been successful, I think we have to maintain the humility. We're going to do some pilots and certainly continue to advance our own digital efforts. But I think partnering is the way to get to market faster here. And whether it's on a direct-to-consumer partnership or telehealth partnerships for GeneSight, we have to maintain the humility of the capabilities that we have until we build more muscle. But there's exciting opportunities there for growth as well.

Got it. Can we talk a little bit -- I mean you just divested a number of businesses, you've got some cash on hand. Can we talk about inorganic opportunities? I mean, what have you learned from sort of looking at the businesses that you're divesting, which a number of those were acquired? What have you learned from what didn't work and what could potentially work? How do you sort of think about capital deployment going forward? And then I want to finish up on some boring financial questions for Bryan.

Awesome. Awesome. Can't wait to hand the mic over to him. So the capital deployment is something that we're quite partnered on as is sort of repositioning the company for growth and profitability. And again, I do want to keep underscoring that. We are on the path to long-term growth and profitability in a way that many of our competitors, I believe, are going to struggle with. So -- and part of that is the balance sheet and the cash generated from these divestitures that we can invest both in R&D, technology-enabled solutions as we think about not just offering tests or offering solutions and insights for people. And how technology can enable and empower providers as well as patients with that. And on the M&A front, I've done a lot of M&A and a lot of integrations. We formed a transformation management office headed by Maggie Ancona. She did this at HP. He did this at Dell. At Kindred Healthcare, I had a project management office. So what I told our folks is we need to have the same science. We have the same disciplines around running the business that we have around the science that we've produced. And so that means being very thoughtful about your acquisition targets. What their capabilities are, what your capabilities are, being very thoughtful about the cultural integration, the system and process and people integrations, but actually doing those. And I think what you can count on with us is when we go do a deal, we're going to integrate it. We're going to integrate the people. We're going to integrate the systems, and we're going to not break what we buy, which is the first rule of M&A. And try to figure out how they can make us better and we can make them better. And I think there's a lot of leverage in finding emerging products and putting it on our improved commercial rev cycle and other enterprise capabilities, technology, et cetera. So we're excited about that next chapter in our future deploying capital both in terms of R&D, our own new product development and technology as well as a more disciplined approach to M&A.

Great. So Bryan, how should we think about mid- to long-term margin evolution? I mean, you're investing in R&D, you're also going to do some sales force reductions, a lot of things going on. Can you give us some sort of like framework on how to think about the margin opportunity?

Yes. Thanks, Derik. So we talked a little bit about gross margin and then down at the operating margin line. But I think, obviously, revenue and revenue growth has a significant impact. There's a tremendous amount of leverage in this operating model, broadly speaking. From a gross margin perspective, we've talked about things like lab of the future notice, other transitions that I think where we have some opportunity. And we highlighted, we believe we have 150 basis point opportunity to expand gross margin over the course of the next few years. From an operating margin standpoint, getting more efficient, better tools, better digital tools, being more efficient with the dollars that we have from a sales and marketing perspective, which is 2/3 of our total OpEx, roughly speaking, is driven by sales and marketing. And we talked about the fact that we're going from 900 to 750. We're moving from customer -- external salespeople out in the field, high cost, in some cases, to some more junior salespeople, inside sales reps. And all that time supplementing the sales team with new digital tools to help improve the experience for the physician, the patient, et cetera. So I think the combination of all that, along with investments that we make in R&D and other things in terms of rationalizing programs that we have is going to help us over the course of the next couple of years to see some nice margin improvement along with, at the same time, we're growing the top line.

Great. And with that, we're at the quarter of hour. We know where we are anymore in terms of time. So Paul, Bryan, thanks for being here. Thank you for participating. Good luck and end of this conference. Investors thank you for support, and have a great rest of the conference.

Thanks, Derik. Bye.

Thanks.