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

Good morning, and welcome to day 2 of the Morgan Stanley Healthcare Conference. I'm Tejas Savant, and I cover the life sciences here at MS. It's -- well, before we get started, important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, do reach out to your sales rep. So it's my pleasure this morning to host Myriad Genetics. And speaking on behalf of the company, we have Paul Diaz, President and CEO. Thank you for joining us, Paul.

Thank you.

You know, Myriad has transformed meaningfully versus where the company was 4 years ago. You've been with the company for a bit. What's changed? What stays the same? And can you outline Myriad's key accomplishments this year? What are you particularly proud of? And is there anything you wish should do differently?

Well, there's always more work to do for sure. I would say that we're really proud of how the team has come together. We've built a lot of capacity, both in terms of the team and our processes. I think our ability and the industry's ability to be part of a broader healthcare ecosystem and be successful in that ecosystem is going to depend on systems and process and leadership and people. So we are nearly complete with our labs of the future, the industrialization, if you will, of our labs and be able to do large volumes at low cost, really proud of the quality measures. We've just been through FDA and New York State surveys in our new labs and zero deficiencies. So these are things that you can easily take for granted. Turnaround times across the Board, improvement in ASP across our product portfolio, our Net Promoter Scores with our customers in a market where there's a lot of dislocation and fear and anxiety. I think we have reemerged as the go-to high-quality solid science, reliable partner for health systems and providers. And that's generating the kind of organic growth that we've been looking for, and we think that will accelerate here in the back half of the year.

Got it. Fair enough. I want to start with pharmacogenomics, Paul. Given the news yesterday, just around that discontinuation of the health economic study, you called out, I think it was controlled group disparities. So let's start there with GeneSight. Can you just elaborate on what happened?

Yes. So we continue to be very excited about the health economics and the clinical utility of GeneSight. And again, just to reaffirm to this, it has nothing to do with clinical validity. And we continue to get great traction. We even signed another payer last week. And so we don't see this affecting the momentum we have with payers, coverage or adoption. What we were trying to demonstrate was that Phase I showed a significant reduction in hospital utilization and cost, 29%, 39%. And so what we were trying to do is isolate what portion of that was specifically determined by GeneSight in the control group. And the data wasn't unable to do that. It does not mean that GeneSight did not contribute to those big numbers. The question is, what other therapeutic changes, medical management changes may have also in part because of using GeneSight demonstrated those savings. So the work with our partners just didn't demonstrate the ability to parse out how much of that 29% or 39% savings were attributable to GeneSight specifically and we didn't see a path to getting there. So no issues with the integrity of the data. This is one of the biggest data sources in terms of claims in America. And it is hard to, under any reasonable circumstance, not come away that whether you're looking at the 29% or the 39% that GeneSight help contribute to that better medical management and cost reduction. And so I could have done a better job explaining that yesterday in the 8-K, we were trying to just report the news, but zero impact on the trajectory we have with payers, coverage and ASP right now. This would have been a nice add to the story on economic utility, and we'll publish Phase I because, again, it showed material savings with respect to the GeneSight cohort.

Got it. In terms of just what those disparities were, Paul, that led to, I guess, lack of statistically significant difference between the GeneSight arm and the control arm. Is there any color you can share? And was this really a situation of your research partner here assembling the cohort? Like was that the issue?

Yes. I mean I haven't poured through the initial report. And what we did, we want to be reporting the news as we see the news. So they were not able to distinguish what other things in the medical management of the patient may have been the causal effect to the reduction in costs versus GeneSight. It does not diminish the fact that 39% of the patients that use GeneSight versus those that didn't had savings. And so I'm sure Dale and the rest of the team can parse through that in a little bit more detail, but there were no issues with the integrity of the data, and it was just a question of being able to separate the cause versus the effect with respect to the control group.

Got it. Now could you comment on the commercial the implications of this readout? Help us contextualize the data, right? You talked about this being one aspect of what gets payers onboard, what gets physician buy in. How should we sort of feel confident that the peers or the ones that aren't covering GeneSight today won't start pointing to this and dragging their feet for a little bit longer?

Yes. Look, again, I think it would have been additive to the story, but we have significant momentum. We talked about Blue Shield of California a few weeks ago. We are using the biomarker laws across many states. Many states haven't even -- are still in the process of passing those biomarker laws. And the great strength of GeneSight for anybody who has a family member suffering with depression, the value proposition is getting on the right drugs faster. And that is compelling to all the nurse practitioners, all the physicians and the payers see value in that as well. And so while it would have been great to have additional health economic data to support the 39% reduction in hospitalizations. Again, it's -- there's no doubt in the thousands of patients that we're using and the feedback we get from the data that we are collecting in the PHQ-9s that GeneSight is proving itself to be a useful tool in the medical management of people with anxiety and depression. And so we don't really see in the customers that we have today or the payers that we have contracted with, including a payer that we signed last week, affecting the trajectory of GeneSight. It certainly would have been a nice boost to accelerate that adoption, accelerate that coverage. And we're going to keep working on clinical validity studies, clinical utility studies because that's our job for all of our products that continue to support the use cases. But Again, we don't see it slowing down the double-digit growth in the ASP strength that we've seen in GeneSight here recently. And we think yesterday, again, maybe some more clarifications on my part would have been helpful, but we don't see it diminishing the trajectory for GeneSight. And certainly, we're not seeing that in the numbers as we see this quarter.

Got it. So what's next on that health economic study? Will you sort of work with them to create a new sort of control arm and then publish those data at some point?

Well, definitely going to publish the results of Phase I and make that clear. And we're still working with our partners there to determine whether or not there is an ability to access the data. So it's just not clear yet. At this point, there's just not a clear path and just not value added. But again, we'll be looking at other ways to continue to validate the clinical utility of GeneSight.

Got it. You highlighted a couple of peer wins, including Blue Shield of California on the biomarker law. And you've got, I think, another 12 states beyond California as well signed up for covering GeneSight, I guess, as part of that legislation. What's the response been from clinicians? And have you seen an uptick in the adoption rate in California?

It's a little early. I haven't gotten any data on California specifically, but I was there a couple of weeks ago and actually with the folks from Blue Shield and we do see -- we do expect to see an increase in both adoption and payment. And look, kind of strange for this industry, but really pleased about cash collections this month and the trajectory of that and what that says for the underlying strength of the business. And that's the only thing I know right now about it. The first couple of months is how strong cash has been these last 2 months.

Fair enough. I know you don't sort of manage the franchise in terms of just purely the no pay rate. But I think for GeneSight, it's about sort of 60% today, right? So as you think about the next 3 years, you've got these biomarker wins coming through. How do you see that ASP trajectory over the next sort of 2 to 3 years?

Yes. I think that's one of the great levers. We'll talk about the other levers for growth here. And again, I think that one of the things that we've tried to do is really refine the portfolio. You've seen us over the last few years, try to be much more focused on products where we think that we can grow and be successful and GeneSight certainly one of those products. We expect to see continued double-digit volume growth and we continue to see ASP growth, not just as a function of the biomarker laws, but of all the other work our payer markets are doing and the progress that we're making with payers, again, demonstrating the clinical utility. We've entered into a couple of value-based arrangements. The economics are -- economics around GeneSight are pretty compelling. So it gives us the ability to enter into value-based arrangements and put some risk and those are exciting arrangements, too. So we do expect to see continued growth in ASP, low single digits probably, but maybe more. That's certainly one of the levers to sustain our 12% growth number that we talked about and gives us a lot of confidence there. Again, even in the last couple of months, we've seen some nice payer wins and acceleration of ASP for GeneSight. You saw that last quarter.

Yes. What does repeat ordering among physicians look like today? And has the GeneSight churn rate improved over the course of the last 12 months?

Yes. It's improved slightly. It's something we're really focused on. We -- it's not particularly efficient to have an office order to GeneSight test a month. So one of the things that Mark and the team are really focusing on across our portfolio is just better execution on conversions and more wallet share pull-through. One of the things I commented on the last earnings call, I'm perfectly willing to give up some volume for revenue. We are much more focused on maintaining access for all patients across all payer types, but this industry needs to get away from giving test away for free, which is still happening with a lot of our competitors, free cascade testing and different things. One can argue there's some compliance issues there as well. But for us, I think what you have seen the last couple of quarters, and I think you should expect to continue to see is double-digit revenue growth, that 12% target, in part on just being smarter about what customers and focusing on selling products that we can get paid for.

Fair enough. All right. Let's transition to the hereditary cancer. You talked about stable average revenue per test for next year. Traditionally, folks have looked at this market as one where you see a degree of pricing pressure. I think your new guide assumes about like low single-digit sort of ASP growth here versus a 3% to 5% decline in the past. How much of that is a function of peers like Invitae exiting the market versus key payer contract renewals for you? And how are you thinking about pricing in '25?

Yes. I mean consistent with that commentary, look, I think the dislocation in the market at the margins has improved. We're not seeing typically, we were seeing $30 million, $40 million of headwinds in terms of pricing, contracted pricing. And we said in the early years of our transformation that we're more than making up for that with rev cycle. And you saw that it come through an out-of-period collections and other things. We're just not seeing that kind of headwind in the near term. And certainly, we're not seeing that for hereditary cancer. Part of what is guidelines continue to expand. We've increased penetration for unaffected patients with payers, which is still the most underpenetrated market. And you've seen over the last couple of quarters really just the progress from rev cycle and contractual wins for -- so for example, our big 4-year contract with United, it wasn't about the contracted rate. It was about coverage. And so you've seen ASP in that contract improve because our no pay came down by 10%. And so we've always talked about ASP, average revenue per test being less about contracted rate and more, when you're talking about an industry that doesn't get paid, and I think others are worse, 44% of the time getting paid for what we do and selling for what we can get paid.

So I guess on that point, Paul, how much runway is there in terms of the revenue cycle management initiatives and efforts to minimize the no pay rate? How long do you see that sort of being able to offset or I guess, even more than offset the contract renewal pricing pressure?

Several more years. I mean, we are still in the early days of -- Scott talked about this on the last earnings call, we've engaged PwC to help us with a number of new tools. Our EMR efforts not only help us bring on new customers, the big customer wins that we're seeing. But every time we get a big customer on EMR, we're able to pull prior off. We're able to pull medical necessity documentation. All of that helps with no pay and rev cycle and ASP. So we just see. And I think what's interesting is you're seeing a lot of interest from our competitors in hereditary cancer. And more and more people recognizing that for so many cancer indications, hereditary cancer is an important part of the diagnosis and treatment decision process. And so we think there's just a tremendous amount of opportunity still. And more than 50% of the hereditary cancer testing in America is not happening with us, Invitae and LabCorp and Ambry, it's happening in a lot of small LDT labs which will probably regulated at some point here. And so continuing to grow the -- look, we think the hereditary cancer market is growing 8%, particularly when you count unaffected patients, and men included more and more oncologists remind me that family history for prostate cancer, for example, calls for in guidelines for men to be tested for hereditary cancer too. So there's just a number of different levers for why we think hereditary cancer both were affected and unaffected, will continue to grow both volume and ASP.

Got it. You talked about double-digit growth in hereditary volume in '25 as well. How much of that is share gain following several peer exits versus just increasing penetration?

Again, our share, if we just get our share, we think that's 8%. So clearly, continuing to get more wallet share and market share gains is what I think gets us to 10% or more. So I don't think those are big stretches given the market dislocation and the changes that are just starting to happen. I commented that a lot of the acceleration we saw in prenatal was due to the dislocation of Sema4 and Invitae early in the year, and it takes time for me to change. I think we will get more than our fair share of some of the dislocation happening right now over the next several quarters. Some of that integration work is just occurring as we speak. And customers are -- some customers are taking a wait-and-see approach, and others are already saying to us, "No, we're moving business over to you."

Got it. That's actually a good segue to my next question. As you look at the second half of this year on NIPT. What's your sense of new customer wins versus existing customers now electing to do more business with you just in terms of that share dislocation you talked about?

Yes. So excitingly, most of the volume gains you've seen in the last couple of quarters have not been from new customers. They've actually been really great execution from Mark and Melissa and Ruben are vastly improved and more focused commercial teams. It's taken a couple of years for everybody to use sales force appropriately to target the right kind of customers. And so most of the growth you've seen is really execution. Look, when we started this transformation, we were turning 37% of our sales force was turning over. Last quarter, 9% of our sales force turned over. That makes a difference in training, using the processes and systems. So I think much of our -- and that's wallet share gain. So I think much of our share gains are still in front of us. Can we replicate 25% growth? I hope, but I think that's probably a high bar.

Fair enough. Obligatory question on guideline changes. So one of your peers said yesterday that they would be surprised if ACOG guideline changes got pushed out to '25. Is that sort of your view as well? Now I know the upside from that would layer in over a couple of years, but what's the latest?

Well, it's interesting. My understanding was that they were a little more muted in their response to that question, which we have been, I think, fairly cautious about not predicting what others can do. We still understand the guidelines should be coming out this fall, that's still our understanding. And as you just commented, I think that has in the way to average risk has helped improve NIPS testing. We've seen a nice lift from that over the last 2 years. We think guideline expansion will help adoption and certainly will help ASP. And that part will take longer as we go back to payers with guideline changes and they're not going to be quick to jump on that. But that certainly presents a lift, and I've commented if guideline changes resulted in contractual changes, we have $20 million of no pay right now that would hit the bottom line immediately. So that -- it's a pretty large opportunity for us.

Got it. Would you switch from opt-in to opt-out just to build some momentum into that guideline?

Yes. I mean for 22q, yes. If guidelines change for 22q and the expectation because people want to follow guidelines would be for 22q to be in, we would move to -- it's not an opt-in, it would be it. So that also could be a nice lift for us. And we'll just again have to wait and see. And the team is already preparing for that potential. The main work right now is to make sure that once guidelines come out, that we're -- we pre-launched Foresight Universal Plus with the guidelines that we -- the genes that we expect to be in there. And we wanted to make sure we were in front of customers in terms of where guidelines were going not too far in front because we're not getting paid for that, but not so far behind that our competitors could say, "Oh, there goes Myriad being behind guidelines." So we're trying to thread that needle quite frankly, with all of our product lines, right?

Got it. Carrier screening, same sort of question, when do you expect those guidelines? Is it fair to view that as a more near-term change potentially relative to 22q?

Well, I was really referring to both. So Foresight Universal Plus is a carrier screening product. We think we have everything we need there. Customers are embracing it already. Payers less so yet. But if guidelines are adopted, we will be there for our customers who have an expectation to have carrier screening test that is in guidelines. Similarly, for FirstGene, which we think will be a real accelerator growth for us. We're going through clinical validation now. We're not running the studies until we know what's in guidelines. So we're geared up to do that. As soon as that happens, and very excited to launch FirstGene is a pretty compelling product that offers both carrier screening and NIPS test.

So Paul, on that question, actually, how do you plan to price FirstGene? Talk to us about the benefit from a payer perspective. On the one hand, it will be cheaper than paying for an NIPT plus carrier on a stand-alone basis from a payer perspective. But on the other hand, you might see carrier screening volume spike as well given that you don't need a sample from that.

Yes. I mean, again, I think in terms of the important mission here is only 50% of carrier screening gets done because dad doesn't come in for [indiscernible]. So FirstGene, we'll be able to do it on a maternal blood draw. We'll be able to do it in the turnaround times that our customers are used to. And I think for the payers, I expect us to be fairly novel and aggressive in going to them with a value proposition that they get what's in guidelines, what patients should be getting and that we can do it at a pretty competitive price point. So I'm hoping to flip the tables on this and partner with payers on what they should be doing at a price point that they will find more compelling than the code stacking or getting multiple bills for multiple products.

Got it. Switching to precise tumor in the competitive landscape there, Paul. How do you view your positioning in that market? And are you starting to see any early evidence of cross-selling with myChoice and myRisk?

We are. We came out of ASCO with a fair amount of excitement on the pairing of myRisk, our hereditary cancer product with precise tumor and certainly for oncologists treating ovarian patients where myChoice HRD is the gold standard and the only place to go. We see more opportunities in Japan, quite frankly, for myChoice. We'll be talking about that in the future. Japan is a great market for us. Fortunately, the yen has turned. So that's no longer a headwind. It may be a little bit of a tailwind, but a great deal of excitement, and we had 1 large customer, I think I commented on that came to us at ASCO and said, look, if they have their own EMR, if we build a bridge so that they can order myRisk and precise tumor, and that's going to be effective January 1. There are 80 oncologists who were calling for this out of their 400 oncologists who want to do this. And so that is really the biggest strategic thing I see in our future is the ability to give oncologists the 2 or 3 tools they need for diagnostic treatment selection. Precise Liquid will follow, precise MRD will follow with a single source, not having to send tissue samples to multiple labs and where any discordance in the results can be reconciled by us. So fast turnaround times, easy to understand reporting, a place where they can get the multiple tests for the cancer indications that they need, that's over the next 2 or 3 years, what we think can really help us gain share and have a competitive advantage.

Got it. And what's the latest on Precise Liquid time lines? I think they got delayed a little bit late '25, early '26.

Yes, they got delayed. MolDX had a commentary for us [indiscernible], and we're in the process of moving IPG into the lab here in Q4, and we're trying to compete those moves and make sure the precise tumor continues to succeed because right now, the demand is for precise tumor. And so we just sort of had to prioritize the work, but that work will accelerate in Q1. And again, we think Precise Liquid will come behind pretty quickly. And we met with MolDX and we have a path to respond to some of their questions they had on Precise Liquid.

Got it. Switching to MRD. I think you're targeting an RUO launch by year-end '24. Is that still on track? And in terms of that first half '26 time frame for the clinical launch, is there any sort of possibility of pulling that forward a little bit? I know you recently announced a cross-licensing agreement with Personalis as well. Just talk to us about state of play there in terms of not just the RUO launch but also the path to clinic.

Yes. We hope to have some preliminary study readouts here this fall. We've got a great collaboration with MD Anderson and Memorial Sloan Kettering with the Japan Institute. We have a number of different things in the works. When they actually read out all the analytical validation work is coming out really strong. We'll announce here in the next day or two, the date of our Investor Day, which will really be focused on science and sharing the data that we have on MRD as well as some of our other products. So we'll have more to talk about then, believe me. Anything we can do to move things forward, we're going to do. But we need to have the 2 or 3 studies that MolDX has suggested to us that they want to see. And the trick in this industry, as I've learned painfully, is you don't want to be too far behind, but you don't want to be too far ahead either. And so clinical utility is still not proven for MRD. Lots of people are ordering it. It's great. It's a very exciting technology, but I was with 2 cancer institutes a couple of weeks ago, they say their docs are ordering it and they have no idea what they're doing with it. And so I think it's really important for the industry for this great opportunity for patients to kind of catch up on what MRD is going to mean in clinic, how is it going to guide treatment decisions particularly if you're going to deescalate care or in cases where you think the care is not their escalate chemo treatments. We really need to know how this thing is going to work. And payers are really going to want to know that. So a lot of interest for our highly ultrasensitive tests like the Personalis test from payers. And we do think the tumor-informed approach with whole genome sequencing for low shedding cancers like breast and prostate where we're kind of focused is going to make a difference. So we understand that we're a fast follower to one of our competitors. They've done a great job. We're going to dovetail on much of the work that they've done and not spend $500 million to do it, and we think that, that will be a great return for our shareholders.

Got it. Two more quick ones in the portfolio, and then I want to switch to the long-term targets. So are you still on track to launch a post RP version of your Polaris assay in 2025? And how do you see that offering expanding the opportunity for you there?

Yes. We've got a number of different things we're working on for Polaris. It continues to do well, but it is clearly a product that I inherited where the cupboard was -- we were not doing enough work in terms of clinical validation studies to get it to level 1. And similarly, to do post RP. Those are still things that we're working on. We're also looking at some other more innovative technologies in the AI front in terms of how to position Polaris. We've had some leadership changes in the sales force there because we were not executing as well as I think we could have. But there's more work to be done with respect to Polaris.

Got it. And on that the...

In the mean time, it's approaching $100 million. It makes a lot of money. I mean if that matters for anybody.

So on that AI comment, Paul, is what you're referring to essentially like an imaging-based approach?

There's a number of novel technologies, and we're talking to a number of different companies that can really change pathology. And it has implications for things like Polaris and potentially other things. And so while we're not an AI company, whether it's in rev cycle, lab operations, customer service, we have a whole team working on what are the real opportunities for AI and certainly, in the pathology space, there's a lot of innovative things going on and we're having some really interesting discussions with a number of private companies to see if there's some work to do together.

Got it. All right. So on the long-term revenue growth target, you bumped it to 12%. And I think with Street is only giving you sort of partial credit for it at this stage.

Yes, off of a 15% quarter, but who's counting?

So you've taken a portfolio view of that growth target rather than sort of the -- get to the underlying drivers, right? So to make it a little bit more believable, can you just lay out your assumptions for the increase at franchise level? I mean you talked about HCT pricing flip into 0 to 2% growth and so on. But as you think about women's health, oncology, GeneSight, any guardrails around those?

Yes, I think we have multiple levers to get there. So 10% volume growth and 2% ASP growth gets you to 12%, 12% volume growth and 2% ASP growth gets you to 14%. That's what we're aiming for. So we have a high confidence in the 14% that whether it's flat ASP or 12% volume growth or you look at what we have done over the last 2 years and the momentum we have in the business across our products. And still the work that we've done on some of the things that have underperformed like our international operations. We're highly confident that there are a number of different levers to get there, 13% year-to-date, 11% growth last year. And I guess the market has us at like 9.6% right now. But I think we're going to be demonstrating why 12% is a highly achievable number. And if you look at what's happening across our portfolio, hereditary cancer, GeneSight, the progress we're making in precise tumor, everything that's happened in women's health for the last 2 quarters. Unlike some of our competitors, we have multiple ways to get there, and we're doing it in a very disciplined way.

Got it. Does that 12% bake in an uplift from guideline changes and the MRD and liquid launch? Or would all those 3 be applied?

The path to mid-teens is guideline expansions, new product launches. So when we talk about 12%, it's continued commercial execution, market penetration, win shares, ASP growth in the core products you see today.

Got it. Fair enough. What does that mean for that operating income guide of around 10%, Paul? I mean, presumably, there's more leverage now if you're growing faster. So...

Yes, it was a little early to get all the way down the P&L. But we have demonstrated through all the transformation initiatives and all the inflationary pressures, the ability to maintain and build on 70% gross margins. We're managing our OpEx and R&D investments pretty judiciously. You've seen that for the last 6 quarters. But in order to be successful with the MRD launch, in order to be successful in improving clinical utility studies and clinical validity for all of our products, I would expect to see an increase in R&D spend. And similarly, an increase in IT expense to further integrate with our customers through EMR. Not $300 million, but where I think you'll see double-digit growth in those cost centers. And you'll see our OpEx probably grow 6.5%, maybe 7% all in, which still means, to your point, 12% top line growth, 70-plus percent gross margin particularly as we come out of the lab of the future. Right now, we're running a lot of redundant costs with multiple labs until we get all that done. We certainly think we can do better than the 70% and 70.5%, 71%, 72% over time. So even with a 6% OpEx growth, that EBITDA growth is going to accelerate and the EPS will grow as well. And so we think that's the path for the next couple of years.

Perfect. That's a great place to leave it at, and we look forward to hearing more from you at the Investor Day on precise MRD and the rest of the portfolio.

Great. Thank you. Appreciate it.

Yes, of course.

Early morning for everyone this morning. Thank you.