Ladies and gentlemen, thank you for standing by. Welcome to the Myriad Genetics Second Quarter 2018 Financial Earnings Conference Call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session. As a reminder, this conference is being recorded Tuesday, February 6, 2018.
I would now like to turn the conference over to Scott Gleason, VP, Investor Relations. Please go ahead.
Thanks, George. Good afternoon, and welcome to the Myriad Genetics fiscal 2nd quarter 2018 earnings call. My name is Scott Gleeson, and I'm the VP of Investor Relations. During the call, we will review the financial results we released today, after which we will host a question and answer session. If you have not had a chance to review the earnings release, it can be found in the Investor Relations of our website at myriad.com.
Presenting for Myriad today will be Mark Capone, President and Chief Executive Officer and Brian Riggsby, Chief Financial Officer. This call can be heard via a live webcast@myriad.com. The call is being recorded and will be archived in the Investors section of our website. In addition, there is 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 ks. 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 its Form 10 ks, its quarterly reports on Form 10 Q and its current reports on Form 8 ks. These documents identify important risk factors that could cause the actual results to differ materially from those contained in our projections and forward looking statements. With that, I'm pleased to turn the call over to Mark.
Thanks, Scott. I would like to start today's call by providing key business and financial highlights from the Q2 of fiscal 2018, after which Brian will provide an overview of our financial results and guidance, and I will finish by providing additional details pertaining to the ongoing execution of our business strategy. In the Q2, we once again exceeded expectations with revenues of $194,000,000 and adjusted earnings per share of $0.31 This performance was a result of outstanding execution of our strategy, which calls for a solid foundation of hereditary cancer revenues and continued growth in our new products. In particular, GeneSight continued to outperform expectations this quarter with revenue increasing 46% on a year over year basis. Based upon the strength in our operating results, we are raising our financial outlook for this fiscal year and are guiding to revenues of $760,000,000 to $770,000,000 which is at the high end of our previous guidance range and adjusted earnings per share of $1.11 to 1 $0.16 compared to our previous range of $1 to 1 $0.05 During the quarter, we continue to significant progress on our 5 critical success factors to build upon a solid hereditary cancer foundation, grow new product volume, expand reimbursement for our new products, increase international RNA kit revenue and improve profitability with ELEVATE 2020.
From a hereditary cancer perspective, revenue was up slightly on a sequential basis as volume growth was offset by the remaining price reductions in our long term contracts. The 2nd quarter fully reflected the pricing in our long term contracts and therefore we anticipate stable pricing for the remaining duration of these 3 year contracts. Importantly, this was the 4th straight quarter with year over year volume growth. We believe the growth in sequential volume was partly attributed to the launch of Risk Score, which was very well received by our customers. Given that the full validation data was presented at the San Antonio Breast Cancer Symposium in December, we would anticipate riskScore playing an even more important role in future quarters.
Related to our new product volume growth, year over year test volume again grew at a double digit rate in the fiscal Q2 with GeneSight leading the way. In total, new product sample volume represented 70% of overall volume and 35% of total revenue, a new record for the company. Additionally, we continue to see positive EndoPredict momentum with test volumes increasing over 70 percent sequentially in the U. S. Market.
Also, our companion diagnostic program made a significant advance as we recently announced that BRACAnalysis CDx was approved by the FDA as a companion diagnostic for olaparib and HER2 negative metastatic breast cancer. This is a major milestone as it represents the first time a PARP inhibitor has been approved outside of ovarian cancer. This quarter, we continue to make strides towards broader reimbursement coverage for our new products. First, the LCD from Noridian for EndoPredict was finalized and effective on January 30, increasing total coverage to approximately 90% of the U. S.
Market. Additionally, Prolaris is now covered by Medicare for favorable intermediate patients and is being evaluated for revised NCCN guidelines. For vector DA, we have identified a pathway for reimbursement and have been diligently addressing data gaps raised by commercial payers in our reimbursement dossier. This includes 2 publications demonstrating the superiority of VECTOR DA to conventional disease activity measures, a study that defines a medical management protocol, a large Medicare decision impact study, retrospective and prospective studies with patient outcomes and the first study to show the vector DA can predict cardiovascular events. With GeneSight, we released top line data demonstrating the ability of the test to improve the gold standard clinical outcomes of remission and response in the largest pharmacogenetics study ever conducted.
This was unprecedented since GeneSight guided arm was compared to an active drug arm optimized by physicians rather than a placebo arm as was used in all FDA antidepressant data set in May. I'm also pleased to announce that another major GeneSight study, publication by the end of the fiscal Q3. This is a 2nd large prospective study with more than 2,000 patients and demonstrated that with GeneSight, primary care physicians had even better outcomes compared to psychiatrists. Finally, we anticipate that an updated NCCN guidelines for mypath melanoma could be issued in the second half of this fiscal year, providing yet another potential reimbursement catalyst. With Elevate 2020, we continue to make significant progress and saw total operating expense decline again sequentially despite higher revenue and product volumes.
This quarter, we made the decision to move the Vector DA laboratory and customer service operations to Salt Lake City to take advantage of lower structural costs. Brian will discuss this in greater detail in his prepared remarks, but in summary, we are well on track to achieving our $17,000,000 target of incremental operating income in fiscal year 2018 and additional significant cost savings in fiscal year 2019. Overall, we continue to exceed financial expectations and more importantly, the transformation of the company is on track to deliver substantial future shareholder value. With a solid hereditary cancer foundation, continued new product growth and increasing reimbursement, we remain confident in our ability to deliver on our long term strategic financial goals. With that, I will now turn the call over to Brian to provide a more detailed assessment of our financial results in the fiscal second quarter and additional commentary on our updated fiscal year 2018 financial guidance.
Thanks, Mark. I would like to start by providing a more in-depth overview of our fiscal Q2 financial results. 2nd quarter total revenues were $194,000,000 compared to 196,500,000 in the same period in the prior year, a decline of 1% year over year with the year over year pricing decline in Hereditary Cancer being mostly offset by new product revenue growth and Hereditary Cancer volume growth. Hereditary Cancer revenue in the quarter was 126 $900,000 which was up slightly on a sequential basis and consistent with our expectations as volume increases were offset the remainder of the price reductions in our long term contracts. On a year over year basis, volume growth once again exceeded our 3% growth target.
As a consequence, the 12% year over year hereditary cancer volume revenue decline was driven by the price reductions in our long term contracts. GeneSight revenue in the quarter once again set a record at $31,700,000 and grew 46% year over year and 10% sequentially. Volume in the quarter achieved a new record and was driven entirely through increased sales representative productivity. This quarter, we once again set a record with an additional 2,000 new ordering physicians and a total of 12,500 ordering doctors. In the quarter, approximately 30% of psychiatrists ordered GeneSight.
So even with this record growth, we have significant upside opportunity in the psychiatry market as well as the even larger preventive care market where we have yet to broadly commercialize the test. Vectra DA revenue in the Q2 was $11,100,000 and grew 4% year over year. Given the recent increase in the Medicare rate for Vectra DA on clinical laboratory fee schedule for calendar year 2018, along with our expectation for higher volumes in the second half of fiscal year twenty eighteen, we anticipate a meaningful increase in Vectra DA revenue beginning in the fiscal Q3. Prolaris revenue in the fiscal second quarter was $5,000,000 and was up 61% relative to the fiscal Q2 of 2017. This reflected a double digit increase in volume as well as an increase in average selling price that benefited from the Medicare favorable intermediate LCD, which became effective on September 25.
This quarter's revenue number for Polaris included $900,000 of retrospective revenue from Medicare favorable intermediate patients tested in the fiscal
quarter. EndoPredict revenues in the second
quarter were $2,000,000 and increased 25% year over year led by U. S. Testing volumes which increased over 70% on a sequential basis. International revenue was relatively flat due to reimbursement delays in France. We are positioned for increased revenue in the U.
The Last, revenue associated with our pharmaceutical and clinical services business was $14,800,000 and grew 18% year over year. The higher than anticipated pharmaceutical and services revenue was tied to the timing of some large pharmaceutical contracts with our Myriad RBM business. I now would like to discuss our financial metrics for the quarter. Gross margins were 77.1% in the fiscal Q2, which was relatively flat with the Q2 of last year. Once again this quarter, gross margin headwinds from lower hereditary cancer pricing were offset by increased efficiencies in our production process as a result of our Elevate 2020 initiatives as well as increased new product reimbursement.
Moving on to our operating expenses. GAAP research and development expenses were $16,800,000 in the fiscal Q2 compared to $18,600,000 in the fiscal Q2 of last year. On a non GAAP basis, our adjusted research and development expense was $16,600,000 compared to $18,500,000 last year and declined 10% year over year. The decline in research and development spending was largely due to the completion of the Gene site randomized clinical study and the consolidation of our research programs to focus on broader reimbursement coverage. GAAP SG and A expense this quarter was $115,400,000 compared to $120,300,000 in the Q2 of last year.
Adjusted SG and A expense this quarter was $104,800,000 compared to $110,000,000 in the Q2 of fiscal year 2017. As a reminder, the fiscal Q2 of last year contained a full quarter of GeneSight, so the greater than $5,000,000 reduction in SG and A is a result of our Elevate 2020 initiative. On a sequential basis, adjusted operating expenses were down slightly, demonstrating the continued progress with our Elevate 2020 programs. Adjusted earnings per share were $0.31 for the 2nd quarter compared to $0.26 in the Q2 of last year, an increase of 19%. Our fully diluted share count increased sequentially to 71,900,000 shares outstanding.
We continue to prioritize debt repayment as a near term use of cash. This quarter, we used cash to reduce the balance of our credit facility by $30,000,000 leading to an outstanding balance at the end of the Q2 of $43,000,000 We anticipate paying a $65,000,000 revenue growth milestone associated with the Assurex acquisition during the Q3 and are on track to have completely paid off our credit facility by the end of calendar year 20 18. This will increase our flexibility to deploy capital, including the potential for additionally internally developed or acquired new products. Our cash and cash equivalent balance at the end of the second quarter was $202,000,000 which was consistent with our cash balance at the end of the Q1. We continue to generate meaningful free cash flow with adjusted free cash flow in the quarter of approximately $32,000,000 or 0 point 4 $4 per share, which is significantly higher than our adjusted earnings per share.
Historically, our adjusted EPS have significantly understated our free cash flow per share and in fact, our free cash flow over the trailing 12 months was $1.90 per share. Next, I would like to provide some commentary on the financial impact of the recent tax reform legislation. The legislation will positively benefit our fiscal 2018 full year adjusted earnings per share by approximately $0.06 Based upon accounting rules, that benefit must be accrued across the entire fiscal year, so we recognized a $0.02 tax benefit in the fiscal Q2 and we'll recognize the remaining $0.04 benefit across the second half of fiscal year twenty eighteen. This quarter, we also recognized a $33,000,000 onetime non cash gain associated with the adjustment of our deferred tax liabilities the new statutory rates. Due to the legislation for fiscal year 2018, we now anticipate our non GAAP tax rate will be since we will have the benefit of a full year of the lower tax rates and we anticipate a non GAAP tax rate of approximately 17%.
Moving on to our financial guidance. We are raising guidance for the fiscal year to reflect the strong business trends we saw in the first half of fiscal year twenty eighteen and the new tax law. Our new revenue guidance cost for fiscal year 2018 revenue of $760,000,000 to $770,000,000 which is at the high end of our previous range. From an earnings perspective, we are increasing our guidance for adjusted earnings per share to $1.11 to 1 point $1.6 from our previous guidance of $1 to $1.05 As I previously stated, approximately $0.06 of this increase is in our adjusted earnings per share guidance as it's tied to the impact of tax reform and the other $0.05 is tied to improved business fundamentals compared to our original expectations. In addition, we are guiding to fiscal Q3 revenue of $186,000,000 to $188,000,000 and adjusted earnings per share of $0.26 to 0 point 28 dollars I would now like to discuss the relevant drivers of our financial guidance.
1st, from a hereditary cancer perspective, in the fiscal Q3, we typically see a negative impact from co pay and deductible resets, and we did see a slight impact from severe weather winter weather across the country January. In the Q3, we are only assuming a modest contribution to hereditary cancer revenue from the BRACAnalysis CDx metastatic breast cancer indication launch consistent with the ovarian cancer companion diagnostic launch. Admittedly, the breast cancer market and untested patient population is substantially larger than the ovarian cancer market, but it is too early to see a trend with only a few weeks of data. Consequently, consistent with previous years, we are assuming that Hereditary Cancer revenue will be down sequentially in the 3rd quarter with a return to sequential growth in the 4th quarter. GeneSight, like all of our diagnostic tests, faces adverse seasonality in the fiscal Q3, and therefore, we expect sequential revenue to be relatively flat in the fiscal Q3 followed by sequential growth in the fiscal Q4.
For Polaris, we expect sequentially flat revenues in the Q3. As a reminder, the 2nd quarter had some back pay for testing that will not occur in the Q3, but we expect increased volume and increased clinical fee schedule pricing to offset the sequential decline associated with back pay. For Vectra DA, we expect sequential revenue growth in the 3rd and 4th quarters due to increased volumes and increased Medicare pricing associated with the implementation of PAMA. For EndoPredict, the guidance anticipates revenues to increase in the 3rd Q4 due to continued volume growth in the United States and an increase in average selling price due to the Medicare LCD and the implementation of private payer contracts. We also we have not assumed any reimbursement for Mypath Melanoma.
Any positive coverage decisions this fiscal year would represent upside to guidance. Finally, we are expecting a significant reduction in Pharmaceutical and Clinical Services segment revenue in the second half of fiscal year twenty eighteen given the bolus saw in the first half of the fiscal year for some large pharmaceutical contracts. In the Q3 alone, we expect pharmaceutical and clinical services revenue to decline approximately $4,000,000 sequentially. Turning to our progress on expense reduction. We remain on track in terms of achieving our targeted $17,000,000 in increased operating profit under our Elevate 2020 program for this fiscal year.
In terms of new initiatives under the program, in January, we made the operational decision to move the Vector DA laboratory operations and customer service groups to Salt Lake City. This project will result in significant long term cost savings due to lower structural operating costs at our Salt Lake City facility. As part of this transition, we will have some one time expenses and we do not anticipate cost savings from this move to manifest until fiscal year 2019 as the full transition could take up to 18 months. Overall, we remain very pleased with the pace and magnitude of savings generated by the Elevate 2020 program. In conclusion, I am very pleased with the strong first half of fiscal year 2018, which allowed us to increase our guidance for the full year.
We continue to see additional upside potential with key catalysts such as the metastatic breast cancer launch of BRAC CDx. Perhaps more importantly, we remain well positioned to deliver on our long term financial goals given the significant progress we have made on our strategic initiatives. With that, I would like to turn the
call over to Mark. Thanks, Brian. I would now like to provide some additional details on important clinical data and our performance for the hereditary cancer. The 2nd quarter represented our 1st full quarter commercializing risk score and we are exceptionally pleased with the customer feedback. We saw preventive care year over year volume trends accelerate during the fiscal Q2 and believe the impact could be greater in the future given that the full validation data was only presented in December at the San Antonio Breast Cancer Symposium.
The validation data underscored how critical the information from riskScore can be to shaping patient care. Specifically, the data show that the lifetime risks associated with riskScore range widely from 1% to 66%. This dramatic difference in lifetime risk places patients along a continuum from below the general population risk to risks similar to that of high penetrance genes such as BRCA1 or BRCA2. Additionally, 38% of patients had lifetime risks greater than 20%, which is the level of risk where guidelines recommend using more sensitive MRI screening instead of mammography. Moreover, 7% of patients had a lifetime risk greater than 3 times the general population risk.
Putting this in context, riskScore identifies more patients with significantly elevated breast cancer risk in BRCA1 and BRCA2 combined. This is why healthcare providers truly believe we are entering the 4th major epic in hereditary cancer testing. Peter Kraft, an epidemiologist at Harvard, recently stated in the MIT Technology Review and I quote, it's like we've discovered another BRCA, but it's not one gene. Overall, customers are very pleased with Myriad's pioneering riskScore launch and we believe it will continue to be a competitive differentiator and catalyst for growth in our hereditary cancer franchise. We are also seeing a significant increase in hereditary cancer testing among prostate cancer patients.
Consistent with our 4 and 6 strategy, hereditary cancer testing for prostate cancer patients a 10 fold increase in volume and there have been recent catalysts which could further accelerate testing. In October, NCCN updated its guidelines to recommend hereditary cancer testing for all patients with metastatic prostate cancer. Additionally, an expert panel of physicians recently released a consensus statement in the Journal of Clinical Oncology recommending the need for routine assessment of family history and hereditary cancer counseling for men with prostate cancer seen by either or oncologist. In total, there are approximately 46,000 newly diagnosed prostate cancer patients every year that meet professional guidelines. And these patients are motivated not only because their test results could prevent cancers in their children, but because it could actually shape their therapy with targeted pharmaceuticals.
On the companion diagnostic front, we were excited to launch BRACAnalysis CDx for HER2 negative metastatic breast cancer patients as a companion diagnostic for olaparib. As a reminder, there are approximately 155,000 metastatic breast cancer survivors in the United States today, of which we estimate 125,000 do not know their BRCA status. In every year, there are 60,000 new patients diagnosed with metastatic breast cancer. Given the FDA approval of BRACAnalysis CDx, we believe there will now be significant motivation for these patients to be tested to determine if they're eligible for olaparib. Our oncology commercial team is aggressively working to ensure patients and physicians understand this new treatment option.
From a sales perspective, we are collaborating with AstraZeneca and Merck in the United States, which doubles our commercial impact. We are also initiating one of our largest ever direct to patient and direct to provider digital marketing campaigns in support of this important launch, which have historically generated significant returns. Furthermore, we have fine tuned our sales efforts to ensure higher and more frequent call volumes on the 3,300 oncologists treat over 75% of metastatic breast cancer patients in the United States. Also of note, Pfizer presented metastatic breast cancer data associated with the drug, telazoparib in early December. Only patients testing positive with BRACAnalysis CDx were enrolled in this study.
The results were highly statistically significant and demonstrated that telazoparib had median progression free survival of 8 point 6 months compared to only 5.6 months for TRACE patients treated with physicians' choice of therapy. Myriad plans to submit a supplementary premarket approval application to the U. S. Food and Drug Administration under its existing PMA for BRACAnalysis CDx to include talazoparib. Looking into the future, we continue to see opportunities for market with companion diagnostics.
As early as fiscal year 2019, we expect data readouts in first line ovarian cancer and pancreatic cancer. Of note, we recently signed an expanded research collaboration with AstraZeneca using MyChoice HRD plus in first line ovarian cancer. As early as fiscal year 2020, we expect data readouts in adjuvant breast cancer and in prostate cancer. In combination, we believe these indications would represent over $700,000,000 of annual addressable market opportunity. Moving on to GeneSight, we remain excited about the presentation and publication of full data set from our 1200 patient randomized controlled trial by the end of this fiscal year.
Early feedback on the top line data from physicians has been exceptional, with doctors clearly impressed at the statistically significant improvements in the gold standard clinical outcomes of remission and response given the unprecedented comparison to an actively managed optimized drug control arm. Psychiatrists appreciate how difficult psychotropic drug studies are and understand that in registration studies for FDA approved medications compared to placebo, statistically significant improvements in remission and response were only seen 13% 33% of the time, respectively. We have also had very productive dialogue with large payers under non disclosure agreements. As one national payer noted, and I quote, the study design was exceptionally strong with an impressive list of key opinion leaders and the results you demonstrated are real. After review with another technical assessment committee, they noted, This is high quality evidence in a very large study, which addresses the gaps identified in our last review of GeneSight, and we encourage you to resubmit as soon as practical.
Consistent with historical precedent, we have assumed that coverage decisions from payers will occur after publication of the results in a peer reviewed journal, but we believe our early educational efforts will help accelerate the timeline from publication to coverage. Also, we have reached another important milestone of GeneSight related to the Canadian IMPACT study. IMPACT is a major ongoing prospective open label study conducted in conjunction with the Center For Addiction and Mental Health that to date has enrolled over 8,000 patients with a range of mental health conditions. If you recall last quarter, we discussed the positive outcome from the IMPACT study for general anxiety disorder. One of the primary goals for this study was to compare the performance of GeneSight guided arms in depressed patients between primary care physicians and psychiatrists.
The analysis from this subset of the IMPACT study includes outcomes from over 2,000 moderate to severely depressed patients. I am pleased to announce that the top line results from this study show that primary care physicians had even better outcomes than psychiatrists in all three study endpoints: remission, response and symptom improvement. And the results were highly statistically significant with p values less than 0.0005. We anticipate presenting the full data set in an upcoming conference and submitting it for publication by the end of this fiscal year. We believe this data will be pivotal in broadening Medicare coverage to include primary care physicians and we will be presenting this data to the MolDX program before the end of this fiscal year.
Finally, on GeneSight, we have launched another study in conjunction with the Department of Veteran Affairs. The study titled PRIME Care will be a randomized controlled trial, which will enroll over 2,000 patients with major depressive disorder and include 250 healthcare providers at 21 VA Medical Centers. The Department of Veterans Affairs has committed over $12,000,000 to fund the study, which will evaluate how the GeneSight test impacts the key endpoints of remission response and symptom improvement relative to a control group. We are honored to work with the Department of Veteran Affairs initiative. Given that over 20% of the 2,600,000 veterans who are deployed to Iraq and Afghanistan returned with major depressive disorder or a related mental health condition.
This study is anticipated to complete by 20 21 and is currently enrolling ahead of schedule. If successful, this study could lead to broad utilization guidelines for Department of Defense personnel. Next, I would like to discuss VECTOR DA starting first with our efforts to broaden commercial coverage. Based upon feedback from commercial payers in the past year, we identified 4 questions to be addressed that would enhance the chain of evidence supporting coverage for VECTOR DA. 1st, payers are interested in any guidelines that include VECTOR DA.
Currently, VECTRA DA is in the United Rheumatology Guidelines, which represent approximately 10% of rheumatologists and is under consideration for ACR guidelines. 2nd, to answer the question of how vector DA compares other measures of disease activity, we presented 2 major studies showing that vector DA is the best predictor of radiographic progression with performance more than 3 times better than conventional disease activity measures. 3rd, to answer the question on how to use vector DA to modify treatment, we recently submitted a manuscript for publication, which determine the magnitude of change in vector DA scores that justify a change in therapy. Report similar to what we have with our hereditary cancer tests. The final request by payers is for data demonstrating the improved outcomes when physicians follow our medical management protocol.
We are currently generating both retrospective and prospective data to answer this request and expect the retrospective data to be available for a completed dossier by the end of this fiscal year. I'm also pleased to announce another advance in the clinical utility of vector DA with recent publication in the annals of rheumatic diseases that demonstrated a strong link between vector DA scores and cardiovascular disease. The study evaluated Medicare claims data from over 70,000 patients and found that for every 10 point change in vector DA score, the hazard ratio for a major coronary event was 1.32 and was statistically significant. Patients with rheumatoid arthritis are at double the risk of heart disease already. And according to this study, a patient with a vector DA score of 60 would have a 3 times greater risk of major coronary event compared to a patient with a vector DA score of 20.
Physicians view this data as adding substantial additional clinical utility for vector DA. As Doctor. Jonathan Graf, a Professor of Medicine at University of California, San Francisco stated, and I quote, this is some of the best data available to suggest a link between RA and heart disease. I think these results prove the hypothesis that inflammation drives cardiac disease. We anticipate future versions of the test report will provide an individualized cardiovascular risk determination.
Moving on to EndoPredict, we presented our 1st chemoPredictive data at the San Antonio Breast Cancer Symposium in December, demonstrating the ability of EndoPredict to predict therapy response in the neoadjuvant setting. Approximately 15% of breast cancer patients received neoadjuvant chemotherapy. The study, which evaluated 217 women with HR positive breast cancer, demonstrated that patients with a low EndoPredict score responded substantially better to endocrine therapy, where patients with a high EndoPredict score responded significantly better to adjuvant chemotherapy. These results of both these outcomes were highly statistically significant. Lastly, I wanted to provide an update on MyPath Melanoma, which increasingly looks like it will add to revenue growth in fiscal 2019.
Every year in the United States, there are approximately 2,000,000 skin biopsies, of which approximately 15% or 300,000 have an uncertain diagnosis. This represents a $500,000,000 total addressable market based upon our $1500 targeted average selling price. Even with efforts limited to select opinion leaders, our small sales team was still able to generate over 300 samples per territory per quarter. When we obtain broader reimbursement, we will expand our sales team and increase our marketing spend to access the entire market of 1,000 financial guidance for this fiscal year. We have a solid hereditary cancer foundation with growing volumes and stable pricing in a hereditary cancer market that still remains less than 10% penetrated.
In addition, we continue to grow new volume at a robust double digit pace in highly underpenetrated markets and we have a number of near term catalysts that can expand reimbursement. Also, we are beginning to see a significant impact from Elevate 2020 initiatives as we build a leaner, more efficient achieving our long while achieving our long term financial goals. With that, I'm pleased to turn the call back over to Scott for Q and A.
Thanks, Mark. As a reminder, during today's call, we use certain non GAAP financial measures. A reconciliation of the GAAP financial results to non GAAP 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 the Q and A session. In order to ensure broad participation in today's Q and A session, we are asking participants to please ask only one question and one follow-up.
George, we're now ready for the Q and A portion of the call.
Our first question is coming from the line of Sung Ji Nam with BTIG. Please go ahead.
Hi, thanks for taking questions. Mark, sorry if I missed it, but what's the expected contribution for BRECAS CDX BDX for the second half of the year? I know I believe Brian mentioned it for Q3. Is there a meaningful contribution for the second half?
Thanks, Sung Ji. We don't provide product specific guidance. So we didn't give anything specifically for Brecon Health CDx. I think our commentary was that for guidance assumptions for Q3, we're really only assuming a modest impact. And I think that's true for the entire second half that would include Q4 as well.
So obviously, if we were to see the performance of BRAC CDx with breast significantly in excess of what we saw with ovarian cancer,
how should think about maybe the 1st year of sales? Do you expect Lynparza for the metastatic breast cancer product to ramp kind of in a similar fashion to how the ovarian product ramped for AstraZeneca?
I don't think AstraZeneca has provided any public commentary on their expectations around LYNPARZA and what that might look like. So I'd hesitate to comment on that. I think that's a commentary that really probably needs to come from AstraZeneca. I could say from our end, from a diagnostic standpoint, obviously, this is a much bigger market that we're addressing than the ovarian cancer market. The prevalence pool is and 25,000 patients, which is substantially larger than the prevalence pool of ovarian cancer patients of 20,000 or so that were eligible when BRACAnalysis CDx was approved for that particular indication.
So this is certainly a much larger market, very motivated group of patients and that's why we've always pointed to this as a potential catalyst. And so that's what we're focused on. Our teams are very keen on making sure that we can get those patients into the office as quickly as possible to at least get them tested and facilitate their ability to take olaparib. So it's significant opportunity, but I don't think either one of us is necessarily opined on
Our next question is from the line of Amanda Murphy with William Blair. Please go ahead.
Hi, yes. This is actually Matt on behalf of Amanda. Thank you for taking our questions. Just wanted to follow-up around the impact that you're estimating as a result of the proposed Medicare coding changes and how you expect that to impact the business in terms of your vector test?
Yes. Thanks, Matt. So I think from a vector perspective, we've obviously seen a significant increase in price for Medicare effective January 1. So that price is now $8.60 which that's increased from the $5.60 that it was previously. So obviously that's going to have a significant impact on Vector.
We don't provide product specific guidance, so we didn't necessarily call out that Vector revenue, but I think Brian pointed out our expectation that of course you're going to see a nice year over year volume growth in Vectra given the fact that we've got volumes increasing plus a higher ASP. I think the other thing just to note in that is that typically the Medicare volume is about 40% of vector volume. So it is a very significant component
of vector
testing. Perfect. Yes, that was actually my follow-up question. I wanted to get a better sense of exactly the percentage of testing that related to. So I appreciate the context there.
And then I know this has kind of been discussed already, obviously, but I just wanted to get some more commentary around readout opportunities for GeneSight and if you have just any updated thoughts around timing for potentially getting coverage?
Yes. I think, at this point, as we said, from a guidance perspective, our assumption is that coverage decisions would occur after publication of peer reviewed journal articles. That's at least historically what we've seen. And so as always, as Brian and I provide guidance, it's really based on historical precedent. And so that's the assumption that we've used.
The data still is expected to be presented fully in May. And our goal still remains to have a publication available by the end of this fiscal year, which would then allow us to be considered for coverage decisions as we enter into the next fiscal year starting with July. The timing as to when those additional coverage decisions might happen is something that we wouldn't necessarily try to predict because there's no statutory requirement for a timeline on those coverage decisions. But obviously, our discussions have gone well so far with payers and we're laying the educational foundation such that when those peer reviews happen, we've at least positioned all the appropriate people within the payer organizations to have already digested the information. And in fact, we can get back to them and answer any other questions they may have on the data even before the data gets published.
So that's our strategy here over the next 6 months.
Great. That's helpful. Thank you.
Our next question is from the line of Tycho Peterson with JPMorgan. Please go ahead.
Hey, thanks. Mark, I just want to understand the guidance. You guys posted pretty strong beats in the first half of the year. You obviously have the companion diagnostics approval and better reimbursement from PAMA for Polaris and Vectra. You're only raising guidance here marginally.
Are there offsets here we should be factoring in terms of why you're not increasing the guide more?
Yes, Tycho, this is Brian. I'll take the question. I think as we look at the front half versus the back half, I think there are a couple of things that are important at a high level. One is we had the Vectra positive from the accrual transition to accrual accounting that was in Q1. We had the Prolaris back pay.
We've had RBM, our clinical pharma clinical services business as I mentioned. We expect that business to be down $4,000,000 sequentially from the 2nd quarter. So I think there are some things there that you can't necessarily extrapolate. I think in terms of the guide, what we've said is that we're very happy with the first half of the year, especially from a hereditary perspective. We've seen nice volume there and expect to have stable pricing and expect that business to move to more seasonal trends in the back half.
Of note, typically we see in Q3 for that business, historically we've seen up to a 5 percent sequential decline from the December quarter to the March quarter for reasons that we mentioned on the call. So I think we as Mark said, we look at our business, we didn't we thought about BRAC CDX and the impact that could have. But again, we don't have a lot of data to look at to know how much we should build in there. Ovarian cancer was a small market. So I think we put out guidance again that we feel is but there is it is difficult to look at the front half and necessarily extrapolate that to
the back. Okay. And Brian, can you comment on accounts receivable? DSOs, I think, went up again sequentially. Any color you can provide there?
Yes. We look at that every month, obviously. I think there were some things that were unique to the end of the year, especially as I mentioned, the large RBM deliveries during December. And obviously and normally December is a month where you have very little time to collect. You have the holidays in there and we typically see lower collections during that period.
So I think as we look at it relative to historical, it looks in line. When you see the growth in GeneSight, that's another area where we have higher DSO in that business. But there's nothing of concern for us there relative to the change in the December quarter.
Okay. Thank you.
You're welcome.
Our next question is from the line of Brandon Couillard with Jefferies. Please go ahead.
Great. Thanks. Good afternoon. Mark, I'd be curious if you could elaborate a little bit on the risk score and perhaps the halo effect that that's having on the hereditary cancer business and if you're actually able to measure in any way the impact of that on volumes yet?
Yes. Thanks, Brandon. As I mentioned in general, certainly from a qualitative standpoint, our customers have been very excited about this data. They've known about the potential impact for SNPs and family history for quite some time. But to be able to have such a highly validated test that definitively quantifies that for them, so they can have a very straightforward conversations with patients.
It's really something they've been looking for quite a while. And obviously, they trust Myriad to do that validation in a way that others cannot. Plus, frankly, just the level of statistical significance when you start talking about p values 10 to the minus 30, it's pretty impactful to people. As I noted, we did see an acceleration of the hereditary cancer volumes in preventive care segment, the segment where, of course, you would expect risk score to have an impact, because it's delivered to patients that obviously haven't had cancer. And so that's one indication.
We do have other metrics. We measure, Bran, and we look at frequency of testing by doctors. We can correlate that to the number of risk score results they've got. So there's actually quite a few analytics we can do. I think everything is positive from that regard as we would have expected.
As I also mentioned, because the full data wasn't available until December, there certainly were customers that were anxiously awaiting that presentation in order to get awaiting that presentation in order to get the full understanding of the validation. And so that happened right at the very end of the quarter. So our expectation is that the interest will just continue to build now that the data is out there. And also we've got a number of other things in the pipeline as we evolve riskScore for other applications that will continue to interest customers. So I think so far everything's gone exactly as we would hope.
Our next question is from the line of Dan Leonard with Deutsche Bank. Please go ahead.
Thank you. So I had a couple of follow-up questions on GeneSight. First off, on your assumption that revenues would be down sequentially in the March quarter, why would that be given the low penetration rates for the product? And I do believe that is not consistent with the historical seasonality in GeneSight. So I hope to understand that better.
Yes. To be clear, I think as Brian mentioned, Dan, our assumption for guidance was that it would be flat Q2 to Q3 just because of some of that that we would expect that to we would expect that to be flat. Again, the same weather conditions that affected Hereditary has affected all of our products and frankly, the whole industry. And so we have at least visibility into that as we look at the Q3 as January is behind overall, the volume trends for GeneSight continue to be ones that we are very pleased with. The reception that we've gotten from doctors to the top line results has been very positive.
I think doctors have recognized this is something they need to be doing a lot more of and not less. And so I think the overall trends of the business are ones that we feel very good about. We've just provide guidance based on the assumption that we've got a weather impact and seasonality for a business that's now bigger and does face the same concerns from patients about the resets of deductibles and co pays that we see in our other businesses.
Okay. That's helpful color. And then my follow-up for Brian on GeneSight is a follow-up to Tycho's question. So Brian, why would GeneSight have higher DSOs? My understanding is historically these emerging growth diagnostic companies recognize most of the revenue based on cash versus accrual.
And I wouldn't think the Medicare portion of GeneSight would lag from a DSO standpoint.
Yes. I think that we may have talked about this a little bit on the Q1 call as we talked about Vectra and the transition to an accrual basis of accounting that's really consistent with ASC 606 and that's the case. It's really consistent with what the way we account for GeneSight revenue. So we actually do see some level of DSO impact there because it is a longer collection cycle related to that business as compared to say a business like our hereditary cancer business.
Our next question is from the line of Bill Quirk with Piper Jaffray. Please go ahead.
Great. Thanks. Good afternoon, everybody. A couple of questions, Mark. I guess, a couple of clarifications really on reimbursement.
So first off, on Vectra, you mentioned that a number of the studies you've undertaken were on feedback from payers. Does that include feedback from CMS as well?
Well, we've been in discussion with CMS. I think, obviously from a CMS perspective, we already have coverage. So it's I think that commentary is a little different. We do provide them updates on all the plethora of utility data that we generated over the last year. So every time there's new data, this is something that we feed into the process.
So they continue to get updates on any of that material. But from their perspective, these questions were not gaps that were identified by CMS. These were things identified by commercial payers.
Okay, got it. The clarification. And then just on GeneSight, I appreciate the comment about the publication timing and then the expectation that we could start to see some private payer momentum thereafter. Just given the timing, safe to assume that that should be probably more of a fiscal 2019 phenomena. I'm assuming you're not you're still continuing to not assume any incremental GeneSight reimbursement in the current fiscal year, correct?
Yes, that's correct, Bill. So our guidance assumes no additional reimbursement for GeneSight that based on our assumption that publication will not be out before the end of the fiscal year and assuming historical practice that coverage would wait for that, it will be a fiscal 2019 event. That's at least what our assumptions are based on. Were payers in a position where they wanted to act prior to that just based on the data we're providing that would be upside to guidance.
And then just I guess as a quick follow-up to that recognizing that obviously picking the timing of reimbursement is one of the more difficult things to do in this business. That said, it sounds like you're getting some pretty good feedback from some of your conversations with payers. So how quickly do you think they could move following publication of that study?
Yes, it's a great question, Bill. I can't answer that specifically. I can say the feedback has been very positive and very consistent with what we heard when the study was designed 4 or 5 years ago. We asked payers exactly how the study should be designed, what are the things they most want to see. We designed it according to that.
So it's encouraging that we go back with that data and it's answered the exact question they wanted us to answer. Their focus really has been on remission and response. They've really wanted to understand that data because they understand that the cost savings that are going to accrue to them are based on improvements in remission and response. And so that's really where their focus has been on understanding some of that additional data. So I think that the conversations have been very positive.
How quickly they'll want to move on that? Again, we're going to show them and have shown them health economic data that it is in their financial interest to move quickly, because the savings for this will pay for itself within the 1st year. And so that's what we're trying to set up as a scenario where the data is strong, the health economics are in their advantage to act quickly. Projecting exactly when that will happen is really difficult as you've mentioned and we would agree, Bill. But we're trying to do things differently so that we can speed that up.
Got it. Appreciate all the color. Thanks, Mark.
You bet.
Our next question is from the line of Doug Schenkel with Cowen. Please go ahead.
Hey, good afternoon guys. I guess I just want to start with a guidance question. Did you reduce your expectations for the year for HCT revenue? I guess I asked because it seems like you're expecting second half revenue at least for that category, to be a bit less than what I was looking for based on previous guidance. I might be doing something wrong, but I mean, we now have Q1 HCT revenue, which actually beat expectations.
You were about in line in the Q2. So when I take your full year guidance and then factor in what you said about GeneSight, now you said that's going to be flat sequentially and up in Q4. You told us Polaris is essentially going to move sideways and then up a little bit in Q4. EndoPredict, you indicated, would improve a bit based on coverage in ASPs. And you reiterated that full year pharma and clinical service revenue is going to be about flat year over year.
So I think we have enough data points to back into at least in the right neighborhood what you're expecting for HCT revenue in the second half and for the year I'm coming up with something like above 10% declines year over year. I may just be making a mistake recognizing there's a lot of moving parts here. So I guess back to the simple question, did you change your HCT guidance?
Yes. Thanks, Doug. And you're right. Those are definitely a lot of moving parts. I think what I can do, as we said, we're not providing additional guidance on products for the rest of the year.
We've obviously raised to $7.60 to $7.70 which is top end of the guidance that we provided before. So I think it's a signal overall that we feel like the business is performing quite well. And for hereditary cancer, we actually feel very good about how that business is performing overall. We've got 4 quarters in a row of year over year growth and stable pricing. And so when you put those 2 components together, that's a business that's certainly a solid foundation and opportunity for significant continued improvement in that business.
So overall, I think we're very pleased with how the year has shaped up. We did raise the guidance to the higher end of the range from a revenue perspective. And so, I think that's probably the commentary I can provide since we're not going to provide necessarily product specific guide.
Okay, understood and thank you for that. Just a quick cleanup on Vector and I apologize if I missed this in your prepared remarks. I think you were about $1,000,000 light of your target on the quarter. Was that pricing or volume driven? It sounds like you're pretty enthused about the outlook for the second half.
I'm just wondering what happened in the quarter just so we can think about that right as we're contemplating our model updates tonight?
Yes. Thanks, Doug. We didn't provide Vector a vector specific guidance for the quarter as we don't for any products. I think overall, vector performance was in line with our So that was pretty much in line with what we had expected. You're right, the back half is going to be a different story for Vectrus since 40% of the business is Medicare and we saw a significant price increase in that portion of the business.
So we do expect significant revenue growth for Vectra in the second half of the year. But I would characterize the performance in Q2 as pretty much in line with our
And our last question for today will be from Drew Jones with Stephens Inc. Please go ahead.
Hey, good afternoon. This is James Rutherford on for Drew. A couple of questions for me. In terms of your opportunity for the BRAD companion diagnostic for Lynparza, can you give some insight into the split between patients who are treated in a community, oncologist setting versus an academic hospital? And how your go to market strategy might change for each of those groups?
Yes. Thanks, James. So breast cancer is a little different and I'm sure that's what you're reflecting of those patients are really treated out in the community medical oncology segment. Whereas ovarian cancer, generally more of that is treated in academic centers. Obviously, we have presence in both of those settings.
Our market shares are higher in the community oncology setting than they necessarily are in the academic settings. And so that positions us very well for those conversations out there in the medical oncologist office in the community. I think it's interesting to note that that 3,300, it's a relatively concentrated set of physicians that handle 75% of that. So even when we say out in the if they're mostly treated in the community setting, it's actually mostly in a subset of physicians that do the largest volume in those community settings located in places where you would expect the higher density areas. And so we've made sure from a sales execution standpoint that we're going to change the way they target and call on those physicians to ensure that we get much higher frequencies with those physicians that are treating a higher number of those metastatic breast cancer patients.
So I think that gives us an opportunity to penetrate this market in a way that we may not necessarily have seen with the original with the ovarian cancer launch of BRACAnalysis CDx.
Okay, very helpful. And then on ACR guidelines for Vectra, can you just give an update on the timing for that and the potential for inclusion of Vectra in those guidelines and how that might impact
expectation is that the ACR guideline revisions would be out before the end of the fiscal year certainly. And so that's something that could come any month. We know that Vectra was being considered for inclusion in those as one of the disease activity measures. There's a lot of community support for that. As we've mentioned, 75% of rheumatologists in the country order Vectra.
So and over 300,000 patients have been tested. So there's been quite a groundswell of utilization of vectors. So there's a lot of physicians that certainly are very supportive of that and they've had opportunities to provide comments to the guideline setting committee that was considering its inclusion, Vectrus inclusion in those. So we'll have to see how that plays out here over the next few months. To your point, those are very important because typically for commercial payers, they follow those medical society guidelines, because it's important as it enters a guideline, it's now considered standard of care.
And obviously, payers need to and want to follow anything that's deemed as standard of care. And so historically, inclusion in guidelines has really been a catalyst for us to be able to broaden commercial payer coverage. And so those are things you certainly should look for is Vectra and is that included. And just as a reminder, there are other potential guidelines coming on things like Prolaris and mypath melanoma in NCCN guidelines. Any of those types of guidelines should be viewed as a significant step forward as far as a reimbursement catalyst as well.
So those are all events here that can happen over the next few months.
Great. Thanks for the color.
That's all the time that we had for today. I will now turn the call back to the presenters for their closing remarks.
Thanks, George. This concludes our earnings call. A replay will be available via webcast on our website for 1 week. Thank you again for joining us this afternoon.
Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.
That can happen over the next few months.
Great. Thanks for the color.
That's all the time that we had for today. I will now turn the call back to the presenters for their closing remarks.
Thanks, George. This concludes our earnings call. A replay will be available via webcast on our website for 1 week. Thank you again for joining us this afternoon.
Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.