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Myriad Genetics Inc (MYGN 0.16%)
Q3Â 2020 Earnings Call
May 5, 2020, 4:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Greetings, and welcome to the Myriad Genetics Third Quarter 2020 Financial Earnings Call. [Operator Instructions] This conference is being recorded Tuesday, May 5, 2020.
And now I'd like to turn the conference over to Scott Gleason. Please go ahead.
Scott Gleason -- Vice President Investor Relations
Thanks, Scott. Good afternoon. Welcome to the Myriad Genetics Third Quarter 2020 Earnings Call. During the call, we will review the financial results we released today, after which we will host a question-and-answer session. If you've not had a chance to review our quarterly earnings release, it can be found on the website at myriad.com.
I am Scott Gleason, the Senior Vice President of Investor Relations and Corporate Strategy; and presenting with me today will be Bryan Riggsbee, Interim Chief Executive Officer and Chief Financial Officer. This call can be heard live via webcast at myriad.com, and a recording will be archived in the Investors section of our website. In addition, there's a slide presentation pertaining to today's earnings call on the Investors section of our website and which will be filed following the call on Form 8-K.
Please note that some of the information presented today may contain projections or other forward-looking statements regarding future events or the future financial performance of the company. These statements are based on management's current expectations, and the actual events or results may differ materially and adversely from these expectations for a variety of reasons. We refer you to the documents the company files from time to time with the Securities and Exchange Commission, specifically the company's annual report on Form 10-K, its quarterly reports on Form 10-Q and its current reports on Form 8-K. These documents identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.
With that, I'm please to turn the call over to Bryan.
Bryan Riggsbee -- Interim President and CEO, Chief Financial Officer
Thank you, everyone, for joining today's call. In the fiscal third quarter, Myriad reported total revenue of $164 million and an adjusted loss per share of $0.08. These results were negatively impacted by the COVID-19 pandemic by approximately $18 million on the top line with earnings reduced by $0.13.
We saw a significant impact to our business beginning in mid-March associated with the global coronavirus pandemic, which has led to reductions in test volumes of between 20% and 75% across our portfolio. Tests that can be deferred saw the greatest reductions in volume, but we have even seen demand for nonelective testing in areas such as oncology testing negatively impacted. While the impact on our business has been significant, we are focused on taking the appropriate steps to ensure the safety of our employees and customers while maintaining business continuity. I'm extremely proud of our team and their dedication to our mission.
Before I discuss the steps we have taken as an organization, I believe it is important to highlight that prior to mid-March, volumes for our products were trending exceptionally well. We were on pace to see strong sequential growth with GeneSight, prenatal testing and Vectra despite typical third quarter seasonality. GeneSight volumes were up 4% sequentially through the first 10 weeks of the quarter, prenatal testing volumes were up an impressive 12% and Vectra volumes were up 10%. Additionally, the hereditary cancer business was trending above our forecasts on a volume basis. In short, the business was performing exceptionally well prior to the crisis.
I would now like to discuss the actions we have taken as a company to respond to the coronavirus pandemic, which are focused on the safety of our employees and customers while continuing to deliver vital information necessary to guide patient care. First, beginning in mid-March, we converted all field sales personnel from selling in physician offices to selling remotely via virtual tools, including Zoom, text, phone and email. Beyond the impact of internal changes, the selling process was further impacted by shelter-in-place orders that resulted in the closure of many physician offices, leading to many patients canceling elective procedures. Obviously, this created significant limitations in our ability to interact and market to physicians. I am but I am proud of how our sales and marketing teams have responded to this challenge.
We have implemented a number of new initiatives, some of which we will continue in the post-pandemic world, including virtual learning videos, virtual meeting programs, direct-to-patient kit shipments and mobile phlebotomy services. We also have taken advantage of this period to undergo substantial sales training to ensure our teams are best prepared to respond when patient and healthcare provider demand return to more normal conditions. We have also implemented a number of initiatives in our laboratories to ensure continuity of lab operations across all product lines. The policies we have implemented are in compliance with CDC and local guidelines. We have also taken additional steps to protect employees, such as implementing isolation shifts to mitigate the risk for large-scale exposure, requiring lab personnel to stay six feet apart, use of protective face shield, an increase in facility cleaning and decontamination and allowing personnel who are not necessary on site to work from home. We also have reviewed all supply chains to ensure we have sufficient laboratory materials and have not identified any potential shortfalls for any of our products.
Finally, from a cost perspective, we are taking steps to lower our cash burn as we navigate through this period and ensure we preserve our cash. First, we have amended our credit facility to modify certain covenants, with the amendment period running through fiscal year 2021. We currently have $225 million drawn on our facility on our $350 million credit facility and $224 million in cash and cash equivalents. We have worked diligently on finding ways to mitigate our costs during this crisis to minimize financial losses. We anticipate a meaningful reduction in commissions, marketing, travel and mileage expenses based upon our changes in sales policies as well as lower expenses directly tied to volume. Additionally, we have initiated temporary furloughs and reduced hours for a number of employees in areas such as lab operations, billing and customer service based on lower sample demand. Furthermore, we have implemented temporary pay cuts for senior executives and the Board of Directors. We also have temporarily suspended matching contributions under the company's 401(k) plan. The net impact of all these programs is anticipated to reduce our total operating expenses, including cost of goods sold, by approximately $50 million relative to our third quarter run rate.
Finally, to do our part for the broader community, Myriad is in the process of validating and getting Emergency Use Authorization from the FDA for COVID-19 viral PCR-based testing and serology testing at our CLIA labs across the United States. All of these changes will mitigate our financial losses, but also allow the company to quickly recover when sample demand trends begin to normalize as the period of social distancing comes to an end. This was an important consideration as we evaluated cost reductions to ensure a quick future recovery. Additionally, we are evaluating longer-term structural changes within healthcare delivery, such as telemedicine, direct-to-patient testing models and virtual marketing, which could lead to opportunities for longer-term efficiencies in our business model.
Later in the call, I will discuss a number of positive developments in the quarter which position us for improved revenue and profitability trends when business returns to a normalized environment.
With that, I'm pleased to turn the call over to Scott to discuss our financial trends for the quarter.
Scott Gleason -- Vice President Investor Relations
Thanks, Bryan. I'm pleased to provide more information on our financial trends and outlook. Hereditary cancer revenue in the quarter was $85.2 million versus $117.6 million in the fiscal third quarter of last year.
Looking at the components of revenue growth, test volumes declined 4% and pricing declined by 25% on a year-over-year basis. Prior to the onset of social distancing policies in March, test volumes were growing in the mid-single digits on a year-over-year basis. Pricing declines in the quarter were attributable to hereditary cancer coating changes we discussed in previous quarters, our recently negotiated national payer contracts and the impact of PAMA on a year-over-year basis. In addition, this quarter, we had negative out-of-period adjustments for the hereditary cancer business that negatively impacted average selling price. Part of this was tied to a large national payer that has not paid us on a significant number of claims due to internal system issues. The payer is working diligently to process the claims, all of which have pre-authorization from the payer. However, given the aging of old amounts, we are forced to move them to cash revenue recognition until actual collection. As of April 30, we have already collected a portion of the amounts owed, which will be recognized in Q4.
Moving on to GeneSight. Revenue in the quarter was $20.4 million versus $29.6 million in the fiscal third quarter of last year. Looking at the components of growth, test volumes declined by 33% year-over-year. Importantly, we are on track to have our strongest GeneSight volume quarter this fiscal year, with test volumes up 4% sequentially through mid-March. From a pricing perspective, average selling prices increased 2% year-over-year, and we did see favorable out-of-period adjustments for GeneSight as we continued our efforts to educate physicians on new pre-authorization requirements from UnitedHealthcare and subsequently improved cash collections. This was offset by co-pay and deductible resets at the start of the fiscal year that resulted in higher patient payments.
Prenatal revenue in the quarter was $20.3 million compared to $30.6 million in the fiscal third quarter of last year. Impressively, our test volumes were flat on a year-over-year basis despite the impact of social distancing policies late in the quarter and grew 12% sequentially. Pricing declined 34% in the quarter due to the impact of laboratory benefit management programs, changes in prior authorization policies and continued issues from our billing transition that were largely rectified in the fiscal third quarter. ASP for these products was flat with Q2.
Vectra revenue in the third quarter was $10.5 million versus $11.3 million in the same quarter last year. Vectra volumes declined 6% year-over-year but were growing prior to mid-March and were up 10% on a sequential basis prior to social distancing policies being implemented. Vectra's pricing declined by 2% on a year-over-year basis.
Prolaris revenue in the third quarter was $6.8 million compared to $6.9 million in the third quarter of last year. Prolaris volumes increased by 9% year-over-year, however, pricing declined by 10% due primarily to mix changes with physicians increasingly using the test more frequently in higher-risk patients.
EndoPredict revenues were $3.5 million in the fiscal third quarter versus $2.8 million in the same period last year. We saw increases in test volume and revenue in both U.S. and international markets, which drove the increased revenue.
Lastly, revenue associated with our pharmaceutical and clinical services business was $13.5 million versus $16.1 million in the fiscal third quarter of 2019. This quarter, we did have approximately $4 million of revenue and offsetting expense tied to the German clinic. This quarter, we also recorded a reserve of approximately $2.2 million related to patient accounts receivable as we expect the impact of the global pandemic on the unemployment rate will have a negative impact on our ability to collect from patients. This reserve predominantly impacted GeneSight, hereditary cancer and prenatal revenues in the third quarter.
I would now like to discuss our financial metrics for the quarter. Adjusted gross margins were 69.7% compared to 77.8% in the third quarter of last year. Adjusted gross margins were detrimentally impacted by the year-over-year pricing changes, the out-of-period impact in hereditary cancer and lower fixed cost absorption due to lower test volumes from the coronavirus impact to our business late in the quarter.
Adjusted research and development expense was $18.4 million compared to $19.6 million last year. Adjusted SG&A expense this quarter was $108.1 million compared to $111.4 million in the fiscal third quarter of last year.
Adjusted earnings per share were a loss of $0.08 for the third quarter. This quarter, we ended with $225 million outstanding on our credit facility and $224 million in cash and cash equivalents. Our cash position benefited from the sale of the clinic, which brought in $23 million in gross proceeds.
Finally, this quarter, we recorded an impairment charge of $98.4 million. The impairment was primarily precipitated by the reduction in our market capitalization, which required us to reassess the value of certain intangible assets on the balance sheet and resulted in the subsequent charges. $80.7 million of the impairment charge was tied to a writedown of goodwill associated with the Crescendo acquisition and $17.7 million was tied to a writedown of in-process R&D associated with the Sividon acquisition given our decision to no longer pursue FDA approval for the product.
While we have decided not to provide financial guidance for the remainder of the fiscal year 2020 due to the uncertainty in the duration of the coronavirus pandemic and social distancing policies, we wanted to provide some commentary on the potential impact of coronavirus on our business in the fiscal fourth quarter and on into fiscal year 2021. First, from a test volume perspective, we are currently seeing a significant impact in testing volume due to social distancing policies with the most pronounced impact occurring in more elective areas such as hereditary cancer testing in the preventive care market. We have seen volumes for our most elective tests, such as hereditary cancer, GeneSight and Vectra, down approximately 70% to 75%. Cancer tests, such as Prolaris, EndoPredict and myChoice CDx, down 40% to 45%. And our prenatal testing volume is down 20% to 25%. Physicians are typically the gatekeepers for our clinically focused products, and many physician offices are currently closed or only taking patients with medical emergencies. Additionally, the inability to perform in-office physician marketing has clearly impacted test volume trends.
As Bryan previously stated, we have identified approximately $50 million in cost reductions relative to our third quarter 2020 expense run rate that will help to mitigate the financial impact of the coronavirus pandemic. Some of these cost reductions could extend into fiscal year 2021, depending on whether social distancing policies remain prevalent in the next fiscal year. In addition, we are assessing the potential impact of changing business practices on our ability to make longer-term structural changes to our business.
As part of the CARES Act, we have also received $8 million in nonrefundable stimulus cash from the government in the fiscal fourth quarter and $30 million in accelerated payments from Medicare against anticipated future claims. Combined, these will help mitigate our anticipated cash burn in the fiscal fourth quarter. When social distancing restrictions are relaxed, we expect to see an associated recovery in test volumes. If current guidelines are eased prior to the end of the quarter, this would lead to improved test volume and revenue trends. What is unknown is whether we will have an extended period of social distancing into fiscal year 2021. Additionally, we anticipate some lingering effects from the coronavirus following social distancing as patients may be afraid to go to the doctor for elective procedures in the short term. Consequently, while we expect a recovery as people return to work, it may take some time to get back to fully normalized demand trends.
While we are clearly seeing a dramatic impact on our business due to global pandemic, ultimately, this will be a transient event. We believe Myriad is well positioned given our strong balance sheet, scale within the personalized medicine industry and given a number of pending business catalysts that could further improve our profitability profile.
With that, I'll turn the call back over to Bryan to discuss some of the key business highlights from the quarter.
Bryan Riggsbee -- Interim President and CEO, Chief Financial Officer
Thanks, Scott. Now I would like to discuss some of the key business highlights in the quarter, beginning with our progress in GeneSight. We continue to anticipate a final LCD in the near-term on GeneSight, but we believe the process has been delayed due to the global pandemic based upon the volume of LCDs which have been issued by Medicare.
As a reminder, based upon our pre-pandemic test volume, we believe this new LCD would add approximately $7 million in incremental quarterly revenue based upon a higher percentage of our existing test volumes getting reimbursed. In the third quarter, we began initiating our expansion plans into the primary care channel, including an extension of our GeneSight sales team and making plans for direct-to-consumer test cases in select markets with high rates of reimbursement. Due to the current pandemic conditions, which have dramatically lowered demand for elective testing such as GeneSight, we have slowed our planned rollout of these programs with plans to begin to ramp them once again when market conditions return to a more normalized level. We remain exceptionally optimistic surrounding this opportunity and the positive impact it could have on GeneSight revenue in fiscal year 2021.
With GeneSight, we also recently published our meta-analysis of multiple studies, covering four major clinical studies and 1,556 patients. Across the patient populations, patients who received guided care with GeneSight saw a 10% improvement in symptoms on average, a 40% improvement in response rates and a 49% improvement in remission rates, all of which were highly statistically significant. Many payers have expressed interest in this data as part of our expanding clinical dossier supporting the clinical benefits of GeneSight when combined with the recent publications of our precision medicine analysis and our HAM-D6 data set.
We also saw some significant advancements with Prolaris this quarter following the presentation of our data at the ASCO GU cancer symposium in February, demonstrating the ability of Prolaris to predict which unfavorable intermediate and high-risk cancer patients will respond to multi-modality therapy in which patients can safely avoid the additional morbidity associated with increased treatment. In the study of 718 men, patients who were above the risk threshold saw a statistically significant reduction in metastases when receiving multi-modality therapy. The hazard ratio for Prolaris for predicting metastasis in these patients was 3.75 and was highly statistically significant even after taking into account the impact of standard pathological features. Based upon this data set and others, the National Comprehensive Cancer Network updated their professional guidelines to include Prolaris across all major risk categories, making our guidelines as or more expansive than any test on the market. We believe the NCCN recommendation will be influential as Medicare evaluates a revision to coverage for Prolaris in both unfavorable intermediate and high-risk patients.
As a reminder, based upon our pre-pandemic test volume run rate for Prolaris, expanded Medicare coverage for these new indications would result in almost $20 million in incremental annual revenue for Polaris as the mix and testing for prognostic biomarkers in prostate cancer has increasingly moved to higher-risk patients.
We also saw significant progress with our companion diagnostic programs this quarter, including significant advancements with our myChoice CDx product. First, we are currently in discussions with the FDA regarding our submission of a supplementary PMA for myChoice CDx in the first-line ovarian cancer setting with several of our pharma partners. Based upon these discussions, we believe there is a significant probability myChoice CDx may receive companion diagnostic status in at least one indication. Coupled with the recent FDA label change for myChoice CDx that expands testing to patients who may become eligible for a PARP inhibitor versus older criteria that required patients to be in the fourth-line setting, we believe we are potentially on the cusp of seeing a meaningful increase in myChoice CDX revenue.
This quarter, myChoice CDx exceeded $10 million in revenue on a run rate basis for the first time. And we believe recent and future catalysts, including U.S. FDA approval in first-line ovarian cancer, international regulatory approvals and expansion into additional cancer indications such as breast and pancreatic cancer, where we have a number of ongoing discussions, could lead to further growth for this product.
This quarter, we launched BRACAnalysis CDx in pancreatic cancer in conjunction with our recent FDA approval in this indication. Based upon the launch, we saw pancreatic cancer volumes increase by over 40% sequentially in the fiscal third quarter. We continue to expect FDA approval for BRACAnalysis CDx in prostate cancer by the end of this fiscal year and anticipate data from the OlympiAD study in the near term, which could provide a pathway to BRACAnalysis CDx being a companion diagnostic in HER2-adjuvant breast cancer. This indication would provide for testing opportunities with the majority of breast cancer patients in the United States.
We also continue to make progress with self-funded employer contracting. This quarter, we engaged with six new major employers in discussions on GeneSight coverage. We began negotiations with two major insurance brokerage consulting firms with 30 million lives under coverage, and initiated strategic discussions with four additional pharmacy benefit managers.
In the prenatal business, we saw strong volume trends in the quarter with 12% sequential growth in testing volumes in the fiscal third quarter, our strongest sequential growth rate since the acquisition. In the first half of fiscal year 2021, we plan to begin marketing our branded amplify technology, which provides the unique ability to have a no call rate of one in 1,000 for Prequel versus up to 5% for array-based competitors. We believe this technology will be a significant point of competitive differentiation within the noninvasive prenatal screening market.
Next fiscal year, we will also launch our new microdeletion technology for Prequel that utilizes what we believe will be the most accurate technology which we derive from our technological experience in hereditary cancer testing.
In conclusion, while we currently face some significant headwinds from the global coronavirus pandemic, as a company, we have responded to this challenge and will emerge in a strong financial position, ready to continue our leadership position in molecular diagnostics and precision medicine. We remain focused on maximizing revenue and driving growth across our business units, optimizing cash collections and pursuing appropriate reimbursement for our new products.
We also have a number of potential business catalysts emerging, which could lead to improved revenue and profitability trends as we transition into fiscal year 2021.
With that, I'm pleased to turn the call back over to Scott for our Q&A session.
Scott Gleason -- Vice President Investor Relations
Thanks, Bryan. As a reminder, during today's call, we use certain non-GAAP financial measures. A reconciliation of the GAAP financial results to the non-GAAP financial results and a reconciliation of GAAP to non-GAAP financial guidance can be found under the Investor Relations section of our website.
Now we are ready to begin our Q&A session. [Operator Instructions] Operator, we're now ready for the Q&A portion of the call.
Questions and Answers:
Operator
[Operator Instructions] And we do have a question from Puneet Souda with SVB Leerink. Please go ahead.
Westley Adam Dupray -- SVB Leerink LLC -- Analyst
Hey guys. Good afternoon. This is actually Westley on for Puneet. I want to start on Counsyl. I appreciate that the headwinds experienced here from COVID-19 aren't as bad as other segments of the business. Just wondering if you could provide any commentary on the expected recovery for the business itself and kind of the puts and takes of the bounce back when that does come.
Bryan Riggsbee -- Interim President and CEO, Chief Financial Officer
Sure. Thanks, Westley. Yes, I think we obviously, we didn't give forward guidance in terms of talking about what we expect the recovery to look like. I think the thing I would highlight in terms of the Counsyl business for the current quarter is that we were extremely pleased with the sequential growth in volumes for that business, being the strongest that we've seen since the time of the acquisition. As well, I think our commentary around the fact that our ASP was flat with Q2, I feel like we've made a lot of progress relative to some of the challenges that we had noted on our last call in terms of the billing conversion. So I think overall, we feel really good about that business.
We did highlight the fact that we've seen less of an impact on the prenatal business from COVID than we've seen on some of the more elective areas of our business. But I think that's about that's the commentary we would have in terms of an update for that business.
Westley Adam Dupray -- SVB Leerink LLC -- Analyst
Okay. And then just as a follow-up, sticking on COVID. I know you mentioned some testing capacity that's ramping up. I'm just wondering if you could provide any color on that, maybe potential volumes that can be run for both molecular and serology testing and any sort of inclinations on what kind of impact that will have moving forward?
Bryan Riggsbee -- Interim President and CEO, Chief Financial Officer
Yes, thanks. I guess in terms of the last part of the question, I wouldn't be prepared at this point to provide an update relative to what we would anticipate for volume. I think where we're at in the process right now is that we're just very focused on validating and understanding which technology or how we would deploy the technology, and also how we would handle that from a commercial perspective in terms of sample collection, getting it to the lab, etc. So I think we're that's the point at which we are in the process. I think in terms of the capacity, it's probably too early to make a characterization on that front. But as I said on the call, we sincerely believe that as a CLIA lab in the U.S., we have an obligation to bring up this testing and make it available to support the broader effort, and that's what we're working hard every day to do.
Operator
[Operator Instructions] And we do have a question from Derik De Bruin with Bank of America. Please go ahead.
Xiaoxiao Ma -- BofA Merrill Lynch -- Analyst
This is Ivy Ma on for Derik today. This is a question on employment rates. So beyond COVID, given the significant volume declines during the financial crisis you mentioned associated with lower OB-GYN visits and the fewer asymptomatic testing. So I wonder what your thoughts on how will the high unemployment rate flow through to FY 2021?
Bryan Riggsbee -- Interim President and CEO, Chief Financial Officer
Yes, thanks. I think the where we've seen the it's obviously has an impact in terms of both in terms of the procurement of services as well as the payment by the patient. As we said on the call earlier, we did record a reserve in the current period based on our expectation for a significantly higher unemployment rate. And then with respect to what we might see in terms of an impact on demand, I think at this point, we're not providing any forward commentary, both with respect to what the unemployment rate, how that might impact sample demand, but also in terms of what any recovery from COVID might do.
Scott Gleason -- Vice President Investor Relations
Yes. And Ivy, I think the one thing I would just add to that is if you looked at the last experience that Myriad had going through a period of extended financial hardship with the great depression through the 2008, 2009 period, the company actually grew its volume. So we tend to be a pretty defensive sector relative to the broader industry. And so while you typically would see some you have seen increased kind of consumerism with patients, we don't see financial changes usually having large impacts on testing demand across the industry.
Xiaoxiao Ma -- BofA Merrill Lynch -- Analyst
And just one follow-up on I know you are not commenting on specifically just maybe directionally, do you expect GeneSight and Vectra more or less at risk from unemployment rates compared to your oncology-related business?
Bryan Riggsbee -- Interim President and CEO, Chief Financial Officer
Yes. I mean I don't know that I would characterize them any differently. I think that we made some commentary with respect to tests within our portfolio that are more elective. And so I think what we've seen with respect to GeneSight and Vectra is just the fact that they tend to be more elective. And in the case of Vectra, you're dealing with immunocompromised patients, there's obviously some probably some hesitancy to go and see their physician. But I don't think I would characterize them any differently from an employment standpoint, but more so from the fact that they tend to be more active.
Scott Gleason -- Vice President Investor Relations
Yes. I think, Ivy, also, it's important to point out that one of the unfortunate result of the extended period of isolation here that many folks have faced that we have seen a pretty significant increase in rates of depression across the country. You saw CVS roll out a significant program this morning tied to depression. And so I think as we do get back to a more normalized environment, we're looking at ways to partner with folks around GeneSight testing because we do think that is going to be a very important part of the solution. And so I think, actually, when you look at that test, recent conditions could lead to some positive trends relative to demand.
Operator
[Operator Instructions]
Scott Gleason -- Vice President Investor Relations
Operator, do we have any further questions?
Operator
One moment. I'll turn the call back to you.
Scott Gleason -- Vice President Investor Relations
All right. Well, I want to thank everybody for joining us today. This concludes our earnings call. A replay will be available via webcast on our website for one week. Thanks again.
Operator
[Operator Closing Remarks]
Duration: 31 minutes
Call participants:
Scott Gleason -- Vice President Investor Relations
Bryan Riggsbee -- Interim President and CEO, Chief Financial Officer
Westley Adam Dupray -- SVB Leerink LLC -- Analyst
Xiaoxiao Ma -- BofA Merrill Lynch -- Analyst
