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

Welcome, everybody. Good afternoon. My name is Matt Sykes. I'm the Life Science Tools and Diagnostics analyst at Goldman Sachs. And I have the pleasure of welcoming Paul Diaz, the President and CEO of Myriad Genetics. Paul, thank you very much for being here.

Yes. Great to be here.

Maybe if you could just kind of start out and talk about sort of the most recent quarter, but I think more importantly, sort of what you see over the course of this year, and kind of some of the things that have changed over the course of the last year and have during your tenure. I mean, I think there's been a pretty impressive reset of organic growth rate. And maybe talk about what you see as sort of the drivers of that continued growth over the course of this year.

We are really pleased and excited about how our transformation journey is unfolding. I still think we have a lot of work to do, but it really starts with the team. And I mean that sincerely, we have just seen turnover and retention rates in our sales force and across our organization. And we announced great places to work with 86% of our teammates. I think that Myriad Genetics is a great place to work. And I'll tell you that really matters to the customers and it really matters to the physicians and patients. And so I think there's been -- today on the tenth anniversary of the Supreme Court case, quite a change in the philosophy and our business practices which is really centered around putting our patients and the providers that serve them, first. And the market is really embracing that in terms of our transformation. So whether it's the way we go to market or the digital tools that we've invested in, focusing on products, the divestitures that we did to be more focused in women's health and oncology and obviously, the growth we're seeing in PGx that's allowed us to execute. And I think the rest of this year and really going into next year, Matt, is about execution and getting our products to full potential. I think we're incredibly excited about where we think a lot of our growth is coming from coming out of the pandemic finally about the market opportunity for hereditary cancer and adoption rates are still very low. And there was a Stanford study that just came out talking about that only 6% or 8% of people of color are getting access to ready-to cancer testing. And we know that there are 23 million people that meet guidelines that are eligible for hereditary cancer testing. So we see a lot of opportunity there. We see continued momentum in GeneSight. But as we talked about in the first quarter really across all our product lines, we're seeing double-digit growth now. And I think that bodes well foundationally for launching FirstGene, which we're really excited about on the prenatal side. And as we announced yesterday, our collaboration with MD Anderson, the progress we're making on the MRD side. So a lot of organic growth in front of us. So we're excited about where we are.

Yes. I mean we often have a conversation with investors talking about this reset in organic growth and the durability of it. And I think a lot of folks want to pin it on 1 or 2 things. And it seems like a lot of things and certainly in the Q1 you were kind of hitting on all cylinders. But as you kind of look at the engines of growth over the course of this year, I think GeneSight is clearly 1 of them, hereditary cancer is probably another, but maybe kind of highlight what you think sort of are going to be sort of the key drivers of that double-digit growth rate?

Yes. So again, I think there are sort of 3 things driving all our growth across the portfolio. This includes Prolaris on the prostate side, again, we saw for the first time in years, real growth in women's health and prenatal too. So it really has been across the portfolio. I would say 1/3 I would attribute it to the market just opening up. We're finally kind of getting the pandemic. And the kind of proactive testing that we do to help inform cancer screening and prenatal care, there's just more appetite and opportunity there. I'd say secondly, we're executing better. We've gotten our act together in terms of our go-to-market strategy. We had a great ASCO last week where just the energy is palpable, and the customers are recognizing the progress that we've made, and I heard a lot of that. And then I think third, the competitive environment is really challenging for some, and that's opening the door for us to have a different level of conversation with folks. So I think all of those 3 things, I think, give us a lot of confidence in our ability to drive organic growth over the next 2 or 3 years, quite frankly.

Got it. I mean, another sort of catalyst for our upgrade was -- which we did a few weeks ago was sort of the financial profile of Myriad, we think is pretty differentiated, and we don't -- did not feel like you were getting the credit for that, given the environment they're in that continues to be sort of where companies should at least augment their profiles towards. But could you talk about the balance that you're trying to strike between gross margins, path to profitability, but also driving growth?

Yes. I talked to my board about this all the time, and we had a town hall yesterday where we had about 1,800 teammates and to try to pull them into this. And the challenge and opportunity to grow, to innovate and get to profitability. Those things are in fierce complex sometime when you think about the resource intensity of what we do. But that's what we're trying to do. We think to be sustainable here and to really be successful over the long term. One has to keep balance in terms of growth, continue to innovate at all times, and we've got to get to profitability into cash flow generation. So I think we're a pretty disciplined organization and have brought a lot of discipline that I think the industry has lacked quite frankly, over the years because there was just a lot of capital. Good science, a lot of capital and some struggling, I think, business models. But I talk about sort of 4 peers -- 4 pillars to be successful. You got to be great at the science because you got to make that science actionable in clinic. You got to have scalable and efficient lab operations and technology behind it all to make it work. You got to have a commercial platform. So a lot of great companies out there with some great science, but they haven't even built a commercial platform yet. And then lastly, the one that I think is underappreciated is you have to be really good at the regulatory licensing rev cycle payer markets. You got to be able to build and collect. And so we're really trying to build capabilities around all 4 of those so that we can put other products into the women's health channel. We can put other products into oncology. And I think, again, that's a source of strength for the long term. In terms of the P&L, if we can grow, as we've articulated double-digit, 10% plus on the top line, maintain our gross margins through automation and other efforts and lower sequencing costs and 68%, 70%. And as we expect to do over the course of this year, see much more modest growth if not declining OpEx spend and our CapEx spend will drop considerably too, because our lab of the future stuff is completed. So there's a lot of leverage in that P&L. When you think about OpEx growing at 5% or 6% and the drop through over the next couple of years should be significant. So I do appreciate you recognizing that. I'm not sure if that simple math is what I think investors should think a little bit more about.

And you obviously operate in 3 main testing markets, women's health, oncology and mental health. Maybe could you talk about each of these markets at a high level in terms of your penetration where you see the maturity level in each of these markets? And over the past sort of 1.5 years, how you've differentiated yourself to compete in these markets? Because there's been a lot of changes you've done even within these segments. -- to kind of slim the profile, focus the financial efforts.

Sure. Yes. So in women's health, Clearly, we've had a right to win there, but we didn't. We didn't integrate the [indiscernible] acquisition well. We didn't go to market with our prenatal products, particularly well. our NIPS as Prequel -- with the Prequel technology is highly accurate. And I think we're just doing a better job of our go-to-market strategy with respect to that. Our Carrier Screening product Foresight, we're going to be expanding the panel there. We've been listening to the marketplace, and this is part of the evolution. We actually are a product company that's doing product management. So we're constantly listening to our customers constantly following the competition and seeing how do we position our products in the context of the different market opportunities. So we never really did that before. And even as we did a road show, if you will, in advance of a first gene launch, we learned that feedback from customers about the need to expand our panel for Foresight. And now those customers are ordering hereditary cancer tests as well as getting excited about the first gene launch. So Melissa and the team are really growing and being successful with a much smaller team, quite frankly, because we reduced the size of our sales force there, began doing what we did in mental health, which is using more inside sales folks focused on smaller customers, so our outside sales force could focus on bigger customer opportunities. We've rolled out the portal now in women's health. Before if you wanted to order a prenatal product and hereditary cancer product, you had to go to 2 different places to order it. That's just the pain. Customers don't like that. So we've done a lot of things, and we're still doing a lot of things to relieve those pain points. And we're getting really great reception on the women's health side, and Melissa and the team are really executing well. On oncology, Again, we have a right to win there because myChoice HRD is a leading product in ovarian and we think about expanding myChoice to breast cancer and prostate and other indications we think that opens up the channel wider for us. Adoption rates are increasing for effective patients in terms of hereditary cancer testing and we're excited about our somatic offering and hopefully later this year launching the liquid to give access to liquid for our somatic offering. Again, there, I think what we're seeing is some dislocation in the marketplace with competitors, some confusion. And the people are receptive to the idea that we will have in precise oncology solutions, 2 or 3 of the different products that they want. Whether it's hereditary cancer tumor. And then we'll follow with MRD and which I think will be pretty exciting. So we're getting more and more traction on being a place where you don't have to send a tissue sample to 2 different places where you can get the results in 1 report. And what customers are increasingly saying to us is, once you make that hurdle of clinical validation, it's all about ease of use. Is the report easy for me to use? Is it easy for my staff to order the test and to get the results? Can I get the results on a timely basis. And so again, great progress in oncology.

Got it. Just one last high-level question on women's health. I mean it's a consolidating market. You have a strong presence there. One thing that really impressed me with Myriad when we went to go visit that lab in the Bay Area last year was sort of the focus on the cost side and improving the margins via automation. It's probably of the more automated labs that I've seen in a long time. Do you see this focus on the cost side is becoming increasingly important in the women's health market?

I see it increasingly important for [ everyone ]. I mean we cannot fulfill the promise of precision medicine and genomics. If we can't make what we do accessible to everybody, including Medicaid beneficiaries, and pricing is going to come down, and it should come down to increase access and adoption, which means we as an industry need to figure out how we're going to industrialize and how we're going to use automation in everything we do to bring down the cost, improve turnaround times, improve accuracy. And so I can't wait for you guys to come and visit our new West Campus in Salt Lake. And the new innovation center and lab in South San Francisco, both of which we're moving into this month and starting to move the products. And you're going to see even a more highly scaled, automated lab operations there. We actually built the robots in South San Francisco, and they're being boxed up and created and moving to Salt Lake. So -- this is where I think we need to go. And I think if we can make our test more affordable and accessible, obviously, the payers are going to push us there, but I think it bodes well for adoption and for access, which is ultimately our mission here.

Yes. I mean I think it kind of goes back to like my view of sort of Myriad for lack of a better term, sort of being the adult in the room in terms of when it comes to the business because when we've seen sort of the metric reaction to sort of the hangover of the funding environment we had was sort of on the OpEx side because it's an easy thing to cut and you can make the decision. But I think actually, it's the COGS that is really the hard work where it's probably more sustainable in terms of the margin expansion you can get from that. And so I think you seem to be well ahead of the competition in terms of focusing on the COGS and really trying to eke out those gross margin improvements.

For those of us that came from health services, we learned how to grind out -- [indiscernible] a long time ago in lots of different ways. Look, we have a 70% gross margin for a reason. Now I don't think we're going to be able to expand those margins I think we're going to have to do everything we can to mitigate pricing compression, mitigate supply chain costs, labor cost to maintain those margins and the automation is how we do that. But yes, we've placed a great emphasis on scaling, and the gross margins are a combination of our great work on rev cycle, great work in the labs. Nicole and the team have just done an awesome job, and we've built a lot more capacity around lab ops with some new teammates. And it is looking at everything we do there from supply chain cost to sequencing technology, all of those things factor in. And the new labs are just much more efficient. The West Campus, which is our larger production center is being built to do 3 million samples a year. It's right next to the airport. And we don't lose days because of snow, we don't lose days because of power outages. These things matter in the scheme of things.

Moving to the product side and starting with hereditary cancer testing. Maybe could you talk about how volumes have been tracking there? What your outlook is for this segment for '23? And will this continue to be a good driver of growth for Myriad?

Yes. I think that is -- when I joined the company, hereditary cancer was what everybody told me the reason not to come to Myriad Genetics and that it was a melting ice cube and that it was going nowhere about continued market share loss to our competitors and the pricing was going to drop to $800 and those things. That clearly hasn't come to pass. And since Q3 of last year, where we grew 4%, and then you saw double-digit growth in Q3 and Q4, and then you saw even more growth in Q1 of this year. We have the best hereditary cancer product, and that matters. It's why we've got our own specific Medicare code with a really good rate because of the technical specs around it. And again, I think that the future there and the financial leverage for us to grow myRisk is pretty significant, both because adoption rates are still low, and our ability to execute on the commercial team's better execution. And then lastly, the competitive environment has gotten a lot better for us. So I still think you'll -- that's a big profit driver for us here in the short to intermediate term. Even as we work to get more GeneSight coverage, which is probably sort of #2 on the opportunity list here.

And how should we think about pricing for hereditary cancer in terms of stabilization or sort of trends that you're thinking about?

Yes. think I you saw the big price declines back in '18 and '19. So I think what you've seen from us over almost 3 years that I've been here is pretty stable pricing in hereditary cancer. Now that is not just contract price, right? So what goes into ASP is also your rev cycle and the ability to get paid. And that's something that we put a lot of emphasis on, and we still have opportunity. So I think we have to assume that payers are going to continue to try to negotiate contracted rates down. And we've continued to evolve our strategy to engage with payers on, "All right, we'll accept the lower headline price, but you got to pay us for our test." You got to pay us for the things that we have prior off for. We have medical necessity documentation because the no pay issue is a huge opportunity, and that goes right to the bottom line. So I think you'll still see that pricing compression, but I think we can maintain, as we've discussed overall in the portfolio sort of a 5% pricing compression probably a little higher in hereditary cancer. But that's still a great profit center for us, even if we see pricing decline by 6% or 7% in hereditary cancer.

Do you think that in terms of just the revenue could that part could be offset by increased market share gains given the competitive landscape?

Absolutely. And the biggest early data point and it's early was the hereditary cancer growth in women's health, for unaffected patients. And that's the channels there. Our partnership with Simon Man, for example, in imaging centers, the discussions we're having with some hospital systems. There's an increasing appetite and desire to do more screening. And we're seeing that from large hospital systems and imaging and within OB/GYN practices as well. So I think we're going to continue to grow hereditary cancer in affected oncology, but I think the bigger single driver could be for the growth of unaffected patients in terms of low adoption rates and the market opportunity there.

Got it. You touched a little bit on the -- we talked a little bit automation efforts in the lab of the future. In terms of like how do you see sort of longer term, the operational costs that you expect to be saving as a result of these scaling efforts. Does it change the fixed cost base as you scale? Or does it create additional operating leverage that we might be underestimating?

Well, again, I tend to think that we have to work really, really hard to maintain these margins. But our rents are going to drop by $7 million once we finish the move out of Research Park. And we move out of the spaces in South San Francisco into the new spaces. So that's real money, $7 million of rents. I mean, that's a lot of R&D we could be investing in and a lot of cash flow for our shareholders. So there are real savings there. The challenge for us the last couple of years has been the lack of investment that happened at Myriad over the last decade. And the lack of IT investment, the lack of investment in the labs, quite frankly. So we've been getting rid of a lot of tech deficit and a lot of lab deficit, but I want to underline a point maybe that we didn't do a particularly good job of on the first quarter call. The majority of that investment now is done here in Q2. And so you're going to see the CapEx that was $23 million in Q1 dropped to like $6 million or $8 million in Q3 and Q4. The majority of that is behind us. And so that will improve our cash flow profile going into next year pretty considerably.

Got it. I think one thing that I think is sort of underlying a lot of these improvements and changes the EMR integration unified portal system, which can you maybe talk about the progress you've made there with myRisk and the early progress you've made in women's health. And what type of benefits you can see from volumes from these integration efforts?

Yes. So as I mentioned before, ease of use is something that we hear from customers all the time. We love your task. But boy, all the research I did join in the company and the diligence, it was all about, "God, we love Myriad's test, but you guys are so difficult to work with." So we really have made that a rallying call. It was easy, by the way. People want to be good partners. And but part of that is the technology that enables that. So physicians and oncologists are seeing 30 or 40 patients a day. They want to get into EPIC or have their physician assistant at into EPIC order the test, get the results quickly and then have a result in a reporting page, it's very clear about what they do with those results. And so what these EMR integrations allow us to do in the portals, if you're not -- so essentially, if you're on EPIC, you can do everything, which is awesome. We're going to -- we're doing the same thing with athena, and we're trying to do the same thing with Cerner and Flatiron and others. But EPIC is clearly the market leader. They've been wonderful partners to us. I got to give Judy a shout out. But the power here is the ease of use for the docs. They get the reports for us. We get into the system and we get our prior off. We get our medical necessity documentation. So that means our ability to turn around and bill Cigna or bill United, just improved by weeks in terms of time. So it just really lubricates the whole process for the patient, for the docs, for the payers and for us. And so that's why investing in those systems, I think, has proven so valuable. And in the recent EPIC integrations that we've done we've seen a 25% lift in volumes. Well, we won't -- from the time we implemented EPIC to afterwards. That's just, again, just lubricating and making it easier to order.

Moving on to GeneSight, which has been a great growth story for you guys. How do you see GeneSight volumes tracking this year? What are your expectations for the remainder of '23? And it's becoming a material part of the business now, too. So it's also becoming sort of a driver for the group.

Yes. No, it's -- the GeneSight team that Mark Royle and Fred leads now and our inside sales leader, Cassie. I mean we just have a great team. We actually did our Board meeting in Cincinnati 2 weeks ago. And the progress they have made and the efficiency of that lab and our COGS are very low there. Our challenge there is getting paid, as you know, and we're working hard at expanding coverage, and we're making some progress there. But no, we expect to continue to grow 20% plus in terms of volume. We expect to improve -- begin to see improvement in ASP in the back half of this year and certainly going into next year. And we're growing more than that, faster now. 4,000 new providers ordered GeneSight last quarter. And again, the experience for GeneSight, 95% of the tests are ordered online. 30% of the tests are home-based saliva kit. And that's where I think we're pushing towards. The more we make our test accessible where we meet patients where they are at home, that's why we were so excited about the SneakPeak acquisition in women's health, the more penetration we get, the more affinity we will create with customers and patients. And what we want like the pharma companies do, we want patients coming into the doctor's office asking for Myriad Genetics test. We want somebody who knows they're pregnant and found out that they're having a boy or a girl on SneakPeek to come into their OB/GYN and say, yes, now I understand that now maybe I should get a prenatal screen to find out about the health of my baby. And that's the kind of relationship we're trying to create with consumers.

You touched on it for a second, but I just want to kind of get what your expectations are for commercial coverage potential for GeneSight?

Yes. So both with Medicaid state Medicaid plans, and we're making some great progress with some regional plans still working hard on some of the big payers. Obviously, the renewal of United contract, which will include GeneSight will happen before the end of the year. We're making good progress there. But getting through the door in terms of medical policy has been tough with some of the bigger payers. That's not to say we don't have it because we just renewed a contract with a big payer the other day that we had. A lot of the payers don't want us to announce publicly that we've entered into these contracts. So we're not really in a position to talk about the contract that we renewed last week, which included GeneSight on the Medicare van side. But I hope that in the next couple of months, we're going to have some announcements on some new coverage for GeneSight, and I think that will create more momentum there with some of the other affiliated plans in that network.

I think it's an interesting lever -- just given the growth rate of the test to with the COGS that you've mentioned is low. And if you get the ASPs, I think that's a really nice driver.

Absolutely. I mean there's a lot of financial leverage there if we can do it. So we are excited about that. And listen, most of all, the mental health crisis in America there's a person in this room that doesn't have somebody in their family. It isn't struggling with anxiety or depression and GeneSight works. And we get feedback and we have real-time data that we're collecting on ICD-9, which is what the therapists use. We have some preliminary data on a study we're doing with Optum about reduced emergency room visits and reduced hospital visits. So we're building this body of evidence in the context of a mental health crisis that GeneSight is a really powerful tool to help manage anxiety and depression. And that's what the PRIME study, the VA PRIME study pointed to as well.

And just before we move on to some of the financials. You talked about it earlier about MRD. I think there's some perception of that it's a crowded market, but it's really early still. And I think given your experience in the market, how do you see sort of Myriad's role in MRD? And you've gone down the partnership route, which I think, personally, I think is a smart way to go. But just maybe talk about what you sort of longer-term envision MRD is being pretty Myriad portfolio?

Yes. I mean we're terribly excited about the patient opportunity for MRD. We announced the collaboration with MD Anderson yesterday in terms of clinical validation study. They obviously were impressed with the analytical validation work that we did that Dale and his team presented or they would not have partnered with us to do the clinical study. We hope to be running samples for MRD in our labs by Q4 for some of our biopharma partners. And that will help subsidize the further development work that we need to do there. We've done that in companion diagnostics. I just remind folks that we are standing up MRD on the circulating DNA side with the Prequel technology that's up and running right now with AMPLIFY and with the FDA approved tumor informed assay work that we do with myChoice that the FDA approved HRD. So for us, setting up MRD and operational MRD is not novel in our labs. These are operating technologies today. Commercially, it fits right into our portfolio of oncology solutions, precise oncology solutions. So unlike precise tumor that we partner with in a mountain, MRD is completely our assay. The studies are separate. So we're very comfortable, Matt being a fast follower in a very early days of MRD. And our assay, as we mentioned a little bit in the press release yesterday, is much more sensitive. It's a whole genome on the perform so much more sensitive than all of the other products out there. And the response we're getting from pharma companies and others gives us more confidence about that. So we think we're going to have a highly competitive product and put it on an organization that isn't outsourcing MRD and isn't farming out most of the other work and stuff. So I think we're going to be winners in MRD.

And how should we think about sort of time frame for MRD.

So again, I hope we're running samples for pharma by Q4. '24 will be advancing these clinical validation studies. We announced MD Anderson, we have another couple that we'll announce here in the next couple of weeks. I hope, certainly in the next month. And then we need to do that clinical validation work then proceed with reimbursement. Again, those are core strengths of ours on the reimbursement side, getting things reimbursed, getting things through the FDA and standing up and launching this commercially. I think it's a 2025 launch commercially. Between now and then, though, I think we can generate a lot of revenues to essentially support the development of it. And so that's where I think the real in time frame is, but probably '25 commercially.

Got it. And then just in terms of the CapEx and OpEx levels this year, how we should be thinking about sort of trend? I mean, you've guided towards positive operating cash flow in Q4, but how should we be thinking about -- you've already actually addressed the CapEx, it's going to come down quite a bit on the OpEx side, how should we think about it?

Yes. I think you'll see OpEx moderate over the course of the year. we ran ahead because we had some opportunistic investments and the sales team did a great job. So commissions ran pretty hot in Q1. So we've actually adjusted targets there a little bit. So everybody had a little -- they have to work just a little bit harder to get to the same level, but they're well on the way of doing that. And so we've just had some expenses run hot, some intentional, a couple that, quite frankly, you normally run a certain vacancy factor and the vacancy disappeared. We did have very few vacancies in the company right now, which is more good than not. So I think you'll see the OpEx moderate over the year. And what I would suggest to investors more importantly is our OpEx embeds all the investments we need to launch FirstGene and launch MRD. So you should expect modest OpEx growth as you think about '24 and '25. We're talking about inflationary levels, 5%, 6%. And because the R&D clinical validation studies, the stuff we need to do in IT, that's all kind of embedded in the run rate right now.

And then just on the balance sheet. You spoke about replacing the existing credit facility you have which I think expires at the end of July and the new one, maybe talk about sort of to the extent you can about the new credit facility, size? Is it asset backs, timing? And kind of does this help successfully bridge you to profitability?

Well, it bridges us to financial flexibility. Yes, we could have done -- Brian and I could have done a better job of helping investors see the cash flow in Q1 with a big cash flow quarter between bonuses, payroll taxes, the CapEx. We just -- we had a big cash flow spend in Q1. Q2 will also have a pretty high CapEx that drops a lot like I talked about. We expect to have an ABL asset base in place by June 30. So well in advance. We're targeting like a $100 million facility. The borrowing base will be based on receivables, $80 million, $85 million, probably the borrowing base. So that's going to give us plenty of financial flexibility to continue to grow, continue to be opportunistic and give investors more comfort than we poorly did on the earnings call that we're fine from a financial flexibility. And so that would just give us more runway in terms of that. And it's a very efficient use facility for working capital purposes.

Got it. In the 30 seconds just so we have left, maybe if you want to highlight, what do you think is underappreciated or misunderstood about Myriad. We tried to highlight a number of those things in our report.

You did a great thing. I guess I'm scratching my head about valuation, given the strength of our company, the execution we've shown over the last 3 years, our product mix, our margin profile, how we trade at a discount to some of our peers, and you mentioned this and you're right up. At the end of the day, we just got to keep building a great company and serve our patients, and that will take care of itself. But I would -- as investor, I would think you take a look at where we are and take a look at our relative valuation and growth prospects and margin prospects and think about that a little bit because I think it's still a pretty good entry point at this level.

We agree. Thank you very much, Paul. I appreciate it.

Appreciate it.

Thank you.