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

Good morning, everyone, and welcome to the third and final day of the Goldman Sachs Healthcare Conference. I'm Matt Sykes, the Senior Life Sciences Tools & Diagnostics analyst here at Goldman. And we have the pleasure of welcoming Myriad Genetics' management team here. We have Paul Diaz, the President and Chief Executive Officer; and Bryan Riggsbee, the Chief Financial Officer. Paul, Bryan, thanks so much for being with us today.

Thank you, Matt.

Thanks for having us.

Great. Maybe, Paul, I'll turn it over to you first and kind of let you set the stage and just go over a couple of the key highlights for investors to keep in mind for Myriad?

Yes. Thank you, Matt. This is a really terribly exciting time for Myriad Genetics, and really, our whole industry. The pandemic has shown, and I think policymakers and payers and others and consumers are seeing the power of diagnostics. And recent -- even recent developments have shown the excitement that people have about precision medicine, in particular, and what that can do to early detection and treatment and the development of new therapeutics. It's a huge and fast-growing market. It's part of the reason I came to Myriad Genetics, and I'm really excited about the platform we have here and what we can do with it. We've completed a lot. I'd say we're still in the early stages of our transformation, but the reset of the business has been completed, that will make us more efficient. But more importantly, we've reset and completed the first phase of our commercial reorganization with relatively little noise. So we are seeing great momentum and great energy in our team. We just had our first big in-person leadership meeting, which went really well. And so an organization that is known and has, I think, among the best products in terms of accuracy and clinical efficacy in the marketplace, a strong commercial engine that we're making stronger. Investments in tech capabilities, we have the tech capabilities. We haven't deployed them in terms of the customer experience and the way that we're starting to now. And we really think we have the emerging tools and capabilities we need to grow organically. And as we've stated and we'll talk a little bit more about to be profitable later this year and go into next year with an organization that's hopefully growing at double-digit rates and growing EPS even faster. So excited about kind of where we are but more importantly, where we're going.

Great. And maybe just talk about some of the trends that you've seen in the first quarter and so far this year as well as your -- some of your thoughts for some of the key drivers for the rest of the year?

Yes. We saw sequential growth of 12% in a seasonally weak quarter, and ASP continuing to stabilize and improved by 2%. And we've talked about that, and Bryan will speak more about sort of the pricing environment. We think much of that volatility is behind us. We do see continued pricing pressure probably in the 3% to 5% range. But the work that we're doing in the rev cycle side, the work we're doing with payers, again, that's one of the great strength is our team's ability to get coverage, and all of our products are covered now. And so it's more about execution. So we've seen trends like others. We're coming out of the pandemic with more access to offices, but I think we are deploying and learning the more modern tools to engage with physicians and with our patients. And we see going into next year that our investments in rev cycle, our investments in digital marketing, our technology investments to improve the patient journey and the physician journey can, we believe, accelerate growth going into next year. And a lot of this is repurposing our OpEx. So we still think net, we can save going into next year, $55 million to $60 million and another $15 million of OpEx savings next year. That includes the OpEx savings related to the divestitures. And then lastly, we're going to have a balance sheet that will enable us to accelerate investments in R&D and tech as well as begin to look at enabling M&A to accelerate growth in our new defined primary channels of women's health, mental health and oncology. So -- and we'll talk some more about that. But pretty excited about tailwinds we have and moving into next year how we can accelerate growth.

Got it. And we talked with a number of companies at this conference and in our initiation, just about the value of infrastructure and the investment that it takes to have a successful commercial organization, the expertise it takes to get test to market. You talked about the coverage of your test. Could you maybe talk a little bit more about how Myriad is competitively positioned from this standpoint?

Yes. I think we've had the bones. We just haven't put the muscle around it. Our tech group is as good as anybody. They haven't been charged, quite frankly, with EMR integrations in the way that we needed to. That's something we -- Bryan and I just finished a review of yesterday to accelerate our investments, using some third parties now to get there faster. And EMR is a big thing, particularly in oncology. And so I think our product development, our go-to-market strategy in terms of reimbursement coverage are as good as anybody. I think where we have underperformed and we're going to quickly close the gap is the technology to improve the customer experience and reduce the friction there. And the second phase of our commercial strategy, our rebranding effort will happen later this year as well. It gives us the opportunity with our new product enhancements to go-to-market with a better articulation of our value proposition. So I think historically, we led with sort of scientific journals and people kind of roll their eyes. I mean, physicians are people first. And so we have to do a much better job, and I think we're starting to do that of articulating our value proposition of making ease of use and the customer experience a lot easier. And then we've introduced a cash price for prenatal. We have to be more competitive in terms of price if we want to improve accessibility. And there, again, a differentiating opportunity for myRisk by introducing risk score for all ancestries, other things that we have going on in terms of helping address the disparities in our health care system that I think are unique to Myriad Genetics, and we'll be talking more about that. And that just opens up the universe of patients in terms of our mission and our business opportunities.

Okay. That's really helpful commentary there. I think, Paul, maybe just shifting directly to you, you're about 9 months on the job. Maybe talk about your impressions first initially, the progress you feel you've made so far, which you've highlighted some and then the potential for return of momentum in the commercial organization that you're trying to drive?

Yes. Well, first of all, I continue to sort of be humbled by our team all the time. And it was, as you can imagine, difficult to connect with people virtually during this pandemic. I mean it has been the most difficult thing in my professional career over 4 different companies. But I am -- the level of commitment to the mission, to the patients, it's been quite easy, quite frankly, to engage people and change. And our partners at Bain that have been helping us accelerate this and our partners at KPMG that are helping on the rev cycle project that Bryan leads, we're way ahead of schedule, in my view. I came into this with the expectation, and we've talked about this, that we needed 3 to 4 months to just sort of figure out where we are in terms of our strategic operating reviews, some time to get people on board would change and change management and to start deploying those changes. But the fact that we completed our reorganizations in March and April that we're now moving into Phase II of our commercial strategy in rolling out the digital tools, already seeing progress in rev cycle and reducing no pay and taking the great coverage we have and putting it to work. And as you said, we have a platform to do more. And so I think you'll see acceleration in the back half of this year, but more importantly, in 2022 and '23, regaining some of that market share that we gave up and quite frankly, opening up new greenfield sites and to accelerate growth, and particularly with our product enhancements, our combined offering in prenatal, I think, would be a big differentiator. And GeneSight, the reintroduction of ADHD already, and we just did that a few weeks ago, is already being received really well by the marketplace. So we have a number of different levers to accelerate growth, and I get that there's some skepticism about the 8% to 10% growth target we put out there. But those that know me know I don't put a number out there that I can't meet or exceed. So we're -- our goal is to get to 10% or higher, and we certainly expect that we could do that over the next couple of years. And you put a 10% growth rate on a gross margin that we think we can improve by 100 to 200 basis points and a more efficient OpEx, you got -- you know the math better than I do math, that's an accelerating EPS story as we're moving into '23.

Great. Thanks for the detail there, Paul. Just in terms of -- you talked about driving growth for Myriad and you also talked about some of the pricing pressure, the 3% to 5% that you're seeing. Could you talk about how you plan to offset some of this pricing pressure that you're seeing? And what initiatives specifically are you undertaking to do that?

Yes. I'll let Bryan to start on that one.

Yes, Matt. I think, first of all, as we look at hereditary cancer, we've obviously taken some pretty significant price reductions over the course of the last 3, 4, 5 years, and believe today, we're contracting at rates that are much more in line with where the market is. I think where we have the opportunity, you would've talked about revenue cycle because ASP changes are a function of multiple things. Contract rate is just one of those, but by getting paid for tests that you run, reducing friction in the system, those are focus areas for us that we believe will help to get us to that sort of that nominal 3% to 5% sort of ASP decline longer term. Yes, I think that's sort of our view in terms of how we would focus on price over the next couple of years.

Got it. Thanks, Bryan. And you guys have recently completed a number of asset disposals. Maybe just tell us more about your plans for reinvesting that capital and what some of the focus areas are going to be?

Yes. I think, first of all, we've been -- the team has done a phenomenal job executing on the divestitures, and we think we're in a good position. Obviously, significant proceeds coming back to the company. Multiples of revenue that are higher than what Myriad is currently trading at in terms of the proceeds from those divestitures. As we look out and think about capital employment, first of all, we've said we'll pay off the line of credit that we have and put cash on the balance sheet to allow us to invest really in the areas that we're going to focus mental health, oncology, women's health, and that can be in a variety of ways. Historically, it's been really focused on M&A, but you've seen our collaboration with Intermountain. We're going to be focused on partnerships, collaborations and have a pretty high bar. If there's a way that we can grow inorganically via M&A, that will certainly be an option as well. But that would sort of be our near-term view in terms of reallocation of capital.

Okay. Great.

And that includes, Matt, investments in EMR. We had 200 EMR projects. We're trying to figure out how to partner with some outside vendors to get there faster. And historically, we've been trying to do that all ourselves. That's hugely important. And as you've written them out, we have -- among the best technology shops in the industry, we're one of the most robust. It's a question of directing them and giving them the resources to build those patient portals, those physician portals. And that's extremely powerful as we think about our new product launches, including the launch with Intermountain, the combined offering in prenatal and carrier screening. And we're seeing particularly in GeneSight, where we've piloted some of those things in the fall, some great traction. So now we can take some of the pilots and invest in those working technologies across the enterprise and want to have more of an enterprise approach to this. As we've talked about with investors, we were pretty siloed. And I never want to talk about Counsyl and Assurex ever again, but the fact that we didn't integrate those well, that we didn't standardize our enterprise approach means that we also underinvested in those assets. Those capabilities are all now being developed on an enterprise basis, which means new products, M&A that we integrate can take advantage of that, whether it's on the reimbursement side, the go-to-market strategy on the commercial side, rev cycle, all of these things. And so we're quite excited about our ability to deploy capital and include new things. We're clearly going to be looking at ways to liquid biopsy needs to be part of how we make our tests more accessible, looking at ultra-low-cost sequencing in different -- and potential difference. So capital deployment will look at some of those opportunities as well. We're not going to rush out and spend $1 billion to do liquid, but we think there's other ways to kind of get there. And those are important things that we need to do.

Got it. And in this sort of transformation that you're doing, how do you decide on the 3 key strategic focus areas for the company? What was the thought process behind that?

Yes. So we did bottom-up and outside-in and internal discussion, and I think it's very easy for large companies. And I've seen this on boards that I've served up, I've seen this in my private equity experience, and I saw this at Kindred where we had multiple business lines, to not have the focus and attention and to not resource and then sort of develop these orphans. So we looked at where are the areas that are growing, that have the biggest total addressable market and where we can play to win and win big. And those areas are, in particular, women's health and mental health, where there's still a lot of white space. Oncology is still a huge market where we have a lot of capabilities and a lot of expertise and really differentiating products. There is the area that we have a lot of catch-up to do in oncology, as we've spoken to. So the divestitures really were about where are the markets where we think we can make a big impact, accelerate growth. And really, the beauty of the divestitures are -- we're selling them for several multiples more than our own trading multiple, but they are slower growth assets than our core 3 businesses that we've talked about. So that's the industrial logic around those divestitures. And then the operational pieces, more intent focus and on the areas where we do think we can win.

Got it. Got it. And maybe sort of attacking the same issue in a slightly different way. You guys have had a very long history in genetic diagnostics space. Maybe tell us about some of the best parts of the company that you wanted to keep and strengthen where some of your additional capital is going to go.

Yes. Again, I think our scientific capabilities are significant in areas like bioinformatics and others. We're a little under-invested right now because we needed to refocus on where we wanted to invest. So I think you'll see additional investments and acceleration investments in R&D and tech. And -- but the strength of the company is really the culture, the commitment to the mission that we have in our 2,000 teammates. Again, our lab operations, we've got great technology. I think you saw our Lab of the Future expectations. So we have the technology in South San Francisco. We haven't deployed it in Salt Lake or in Mason. And so we have these great assets, these great people, but we have not aggressively deployed them on an enterprise approach across all of the product lines in a systematic way. And so it's building on that history, but investing more aggressively in R&D and tech to take that platform, quite frankly, to the next level. And that's what we're excited about.

Okay. Great. That's very helpful. And I think we kind of drill down a little bit. We look at the relaunch of GeneSight with ADHD, and you now have 2 indications in mental health. We know the interest in investment space has increased and that appears set to continue. So could you tell us a little bit more about other areas of mental health that you're working on and where you see the most opportunity to expand that segment for you?

Yes. I mean -- and again, trying to be more disciplined. So I think about women with postpartum depression and what we're doing in those OB offices to help people through a pregnancy. I think about the announcements this week around Alzheimer's. And the incidence of depression in seniors, which is significant. As you know, I spent the first 28 years of my career working with seniors in a variety of different settings and working with Medicare Advantage in helping patients in a variety of different settings. And I know that the mental health issues, depression, dementia are often the cause of hospitalizations and people having medication administration issues and falls and those things. So I look at quite a bit of white space in mental health and our opportunity to engage with the payers now with the Medicare LCD expansion and particularly our Medicare Advantage plans, where a lot of the action in the payer space is happening that I've seen over the years. And so really beginning to look there at what other investments and what are other areas we can play in. We have a study with the VA that we're quite excited about that we should get some early results on early next year. That's obviously another population that struggles with mental health issues and depression in specifically. So we think GeneSight is the core product there and has a lot of legs, but there are clearly new products and where I think we can take our mental health business.

Okay. Great. And maybe let's shift to oncology. You did talk -- you just mentioned briefly liquid biopsy. Obviously, that's been a hot topic for the market. Could you just talk about where you see the most opportunities in oncology? And how you think about the liquid biopsy space and potential opportunities for Myriad?

Yes. So Matt, we haven't done a particularly good job of helping people understand where we think oncology is going. You obviously have a view, and we share it. The part that I think that is underappreciated is the Intermountain collaboration supported by Illumina to bring germline and somatic testing together. And it's not just limited to the Intermountain Healthcare system. And it is a differentiating offering as compared to what's out there with some of our competitors. So we're quite excited about that. So we felt to win in oncology, 85% of the oncologists want a report on somatic and germline. So that's one thing that we're tackling and will begin to offer next year. Liquid is the next. We know that we need to have a liquid strategy. We just had a 2.5-hour working session yesterday on various ways we can get there. I don't think you'll see us go out and spend $1 billion to advance the liquid strategy, but I think there are other ways to do that, potentially in partnership and collaboration with others. But we absolutely recognize to fulfill our mission to serve more patients, improve accessibility. We have to have a liquid strategy. We have to have an ultra low-cost sequencing strategy, and that's another area that we can see ourselves deploying capital and potentially partnering with others. So germline and somatic, liquid, ultra low-cost sequencing, these are enabling technologies that I think you'll see us deploy capital and look at selective M&A to get there and get there faster. But we're trying to figure out new novel ways to do that, and those are very active discussions with our Research and Products Committee and the Board, we just met a couple of week ago, as well as the internal group. So those are the areas, I think you'll see us spend a lot more energy and time and deploy capital.

Got it. Got it. And maybe shifting to women's health. Can you talk a little bit about the opportunities you see there? And how are you articulating your competitive positioning in this market?

Yes. I think there is a great deal of strong tailwinds there. We've also seen some of our competitors drop out, which is kind of interesting. So that gives us the opportunity. Again, we've underperformed operationally in women's health. We had some footfalls on the rev cycle side. We failed to really position our hereditary cancer product, myRisk, in those OB offices. But we have President Melissa Gonzales, who just started last week, who really knows the channel. She is going to -- and she and Eric are refreshing our go-to-market strategy in that channel. And we think given the coverage expansion that we're going to continue to see there, and improved tools and a refocused sales force, we think there's a lot of opportunity there. Similarly, it's a competitive market. And bringing down sequencing cost is really going to be important there as well. We think the marketplace already is excited about the introduction of our cash price there. It's something that differentiate our competitors for us. So we're eliminating that barrier on the prenatal side. And again, we're really excited about launching next year, and we're making great progress there on the science side, our combined prenatal and -- NIPT and carrier screening product. I think that will be a big differentiator in the marketplace. And AMPLIFY, which is a technology that really improved the accuracy of our prenatal products, that's a big differentiator, too. And we're seeing that create a lot of excitement in the marketplace.

Got it. And maybe just staying in this -- in women's health, just the expansion of coverage to average risk pregnancies. How much do you think that could expand the NIPT market? And how much could that be an opportunity to benefit Prequel?

Bryan, do you want to speak to that? I'm pretty excited about it, but let's get you...

Yes. I think, Matt, I mean, I think one of the things that we've seen over time is a lot of physicians have been ordering NIPT on their average risk patients. So I think in addition to the volume increase where they -- where it's more prevalent that they order the test, I think you'll see more payments from payers. United now covers average risk, et cetera. So I think that you'll see a volume impact, but probably given the fact there was already significant ordering in the market, an ASP lift there when you think about the revenue opportunity.

Okay. Great. And maybe I'd get a question from the audience. I'm going to kind of marry it with something that Paul, you and I have talked about, which is sort of the transformation of the commercial organization. And the hiring of Eric Santa for Chief Growth Officer, you reduced some of the sales force. You've realigned some of the incentives. Maybe talk a little bit about the perception of the market. How do you turn around that perception? How are you kind of realigning incentives? And how are you reenergizing the commercial sales force in order to meet these growth goals that you have?

Yes. That is all really taking hold, I will say. The hard part was the organizational changes and the reductions in force. Now we have our top performers with, as you mentioned, greater incentives. They have now supporting inside salespeople. They're given new junior salespeople to manage. So we're elevating our best performers into more leadership roles. And we're giving them the tools that have been a barrier to winning new accounts and to retaining accounts, things like the EMR that we talked about, the patient portal, the physician portal, really dealing with those friction points. Look, our challenge on the commercial side was not the quality of our products, it was articulating our value proposition. And secondly, the bigger challenge was the ease of use. How hard it was to do business with us? And the commercial strategy goes right at that. We're in the Phase II of that now. And so if you're a salesperson and now you've eliminated the barrier of the EMR integration or you now have an inside salesperson to help facilitate response times, that can make a big difference there, as you know, Matt. And so Eric is bringing a fresh perspective to that from Optum, from the digital transformations he'd let it rally. We're going to double down on the pilots that we initiated in the fall that are working. They're working in GeneSight. I think we can point to the things there, you'll see over the next couple of quarters. And now looking -- and again, Bain has been a really big thought partner and implementation partner here. These are not things that other companies haven't done. We just haven't done them. And now with the help of Eric and supported by Bain and really, our operators embracing change and our sales force embracing change, they feel liberated and energized by what we can do now. They want to win. And so we just need to give them the tools to win. And we're starting to win. And I think you'll see a bit of acceleration in the back half of this year and hopefully even more next year.

Got it. Thank you for that really helpful perspective. Maybe, Bryan, if we shift to financials a little bit. You guys have talked about resetting that growth rate, 8% to 10% this year. But if we can maybe focus a little bit on margin expansion opportunities. Paul talked about 100 to 200 basis points. Maybe talk about how you're balancing, taking out costs versus reinvesting? And how you're trying to think about supporting that growth at the same time being mindful of profitability?

Yes. Thanks, Matt. I think the first comment I would have is just that we believe we can do both. We believe we can reduce costs, reinvest in the business and get to profitability in the back half of the year and grow 8% to 10% over the next couple of years in terms of the top line. So as you know, in a lot of cases, it's not similar with our capital deployment strategy. It's not how much you spend. It's how you spend it. And so we're just being really focused on where we make investments, what we invest in, what our hurdle rate is in terms of what we should be investing in. So from a margin perspective, we've talked about the opportunity, the improvements in the laboratory, deployment of new technology to increase our gross margins 150 basis points over the next couple of years, obviously, getting the profitability and the trend that we see through the current year getting to profitability by the fourth quarter of this year speaks to the fact that there's drop down to the bottom line there. But as you know, there's significant leverage in this operating model. And so nothing drives margin faster than growing the top line, impacting ASP positively via revenue cycle improvements that we've talked about. And so we're focused up and down the P&L, and the net of all that is opportunity to improve gross margin all the way down to the operating margin line.

Got it. And kind of related to this, one question I've been asking a lot of management teams is kind of lessons learned during COVID. And I think a large part of it is sort of the level of digital engagement on the sales side increased because, frankly, it had to, just given the situation we're in. What kind of durable lessons can you take from that? And do you think that you can have a more efficient go-to-market because of the digital capabilities that you might have developed or had in place, but were actually utilized during COVID?

Yes, absolutely. I think we're going to redouble those efforts. Again, the pilots that we've done on the digital side are really working, and they're extending people. And we're having consumers, and Eric talked about this, doubling the number of people that come into the top of the funnel in terms of our website. And then Karen, our new VP of Digital, her effort is everywhere through that funnel, improved conversion rates. And again, these aren't new strategies; they're just new strategies at Myriad Genetics. So we see a great deal of opportunity there to really help our salespeople. And I tell this to them all the time. By adding the consumer into the mix here, we're not taking anything away from you. In fact, you get your commission coming out of that physician office anyway. However, they come into the channel. So these are tools for you to accelerate growth, for us to accelerate growth, to create more stickiness with patients. So I couldn't agree with you more, Matt. And Kevin and our technology team are hard at work at this. And as Bryan said, we're essentially repatriating investment dollars. And now we've got the balance sheet to put more to work to think about more investments in sequencing equipment to -- in the Lab of the Future, the robotics. There are significant savings for us, if we can, over the next couple of years, take the South San Francisco automation and move it into our Salt Lake lab, and that's exactly what we hope to do.

Got it. Thanks for that. Yes, I often think that a few years ago, digital engagement in its various forms was maybe seen as a cannibalization of efforts versus actually being additive. And I think now the mindset is shifting to it actually being very additive to either sales, service, support, whatever it might be.

You had to -- we had to convince the sales force that this is not taking money out of their pocket. In fact, this is greasing the wheels for them and enable them to cover more territory and more accounts. And so that's part of what we've worked through over the last couple of months.

Got it. And maybe just to finish up here. Capital allocation, Bryan and Paul, you guys have talked a little bit about it over the course of this session. You have the money from some of the disposals. You've talked about probably focusing on organic first, but also being on the outlook -- on the lookout for inorganic opportunities. Maybe just talk more broadly about capital allocation over the next few years, how you guys are thinking about it? What some of the bigger needs are? And again, balancing that, wanting to have -- maintain a strong balance sheet to be aware and available for opportunities, but at the same time, knowing that you're going to be investing in the business?

Yes, I'll start and let Paul chime in, please. I think, first and foremost, your question around build versus buy, and we've talked about this sort of through the presentation. I think we have a lot of great internal capability that's, in a lot of cases, just been underinvested in. So when we think about investments in EMR integrations and some of the tech work, focusing our R&D efforts, et cetera. I think, first and foremost, we're going to take a hard look and make sure that we're giving the appropriate investment to the internal areas of the company, which, in a lot of -- most cases have the highest return if you can really leverage things internally. And then obviously, there's an exceedingly high bar for us relative to our M&A. At the same time, we believe there's opportunity for partnership collaboration. It doesn't always have to be an acquisition, but there's ways that we can deploy capital to grow the business inorganically over time as well.

So the only thing I would add, I think that's all correct. But building enterprise-wide capabilities in R&D, in tech, in rev cycle, and in commercial, right, having that -- having Eric oversee an enterprise approach to our commercial strategy, having Bryan now full control over payer markets, reimbursement, rev cycle, enabled us, Matt, to put that to work, right, in discrete M&A where we bring value. So the test is really what M&A can bring to us in terms of new product and new research and innovation because a lot of that happens in the smaller companies. But the more important question is, what can we do with it? And can we put it on our commercial engine? Can we put it on our payer markets and coverage engine and really help that product, that business grow? And then have a much more disciplined approach to integration and execution, which, again, I think, they have a pretty good track record around that in terms of doing that. So we're excited about that, but we're going to be very disciplined, both in terms of valuation and it's -- and yes, the headline prices are really kind of take you back a little bit for some of the M&A. But the more important question is, how do you bring that purchase multiple down, right? Can you look 2 years after the acquisition and have a view that it is accretive to your multiple 2 years out? And that's a lot of what we were doing in private equity across the company, which is a growth private equity fund, is what value creation can you do when you deploy capital. And that's the same approach that we'll bring here. We'll pay for growth, but we've got to make sure that we can ultimately bring the purchase multiple down in a way that isn't dilutive to our multiple.

Got it. And with that, I think we're out of time. Paul, Bryan, it's been a pleasure. Thank you very much for joining us. I really appreciate it.

Yes. Thank you, Matt. Appreciate the thoughtful questions today. Take care.

Thanks, Matt.