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Myriad Genetics Fiscal Q1 Revenues Drop 8 Percent on Hereditary Cancer Testing Coding Challenges

NEW YORK – Myriad Genetics reported after the close of the market on Monday that its fiscal first quarter 2020 revenues declined by 8 percent year over year, mainly due to changes in CPT codes for hereditary cancer testing.

For the three months ended Sept. 30, revenues decreased to $186.3 million from $202.3 million in the year-ago quarter, well below analysts' average estimate of $202.1 million. Based on the Q1 performance, Myriad lowered its fiscal year 2020 revenue expectations.

Molecular diagnostic testing revenues went down by 9 percent to $172.0 million from $189.0 million. Within the firm's molecular diagnostics business, its hereditary cancer testing revenues fell 10 percent to $104.5 million from $116.3 million; GeneSight revenues fell 22 percent to $22.7 million from $29.3 million; Vectra revenues came down 15 percent to $11.0 million from $13.0 million; EndoPredict revenues dipped 4 percent to $2.3 million from $2.4 million; and other test revenues fell 60 percent to $1.5 million from $3.7 million. The company's revenues from prenatal testing grew 30 percent to $23.5 million from $18.1 million in the year-ago period, while its Prolaris revenues rose 5 percent to $6.5 million from $6.2 million. Pharmaceutical and clinical service revenues during the quarter rose 8 percent to $14.3 million from $13.3 million a year ago.

"We had a challenging start to fiscal year 2020," Myriad CEO Mark Capone acknowledged in a statement, attributing the revenue hit to the deletion of CPT codes that payors had used to reimburse for hereditary cancer testing. "We had assumed this administrative change would have a minor impact to cash collections, but unfortunately, that has not proven to be the case." During a conference call with analysts to discuss the financial results, he estimated that this issue reduced the company's revenues by around $100 million per year.

"The root cause of this shortfall was the deletion of the 81211 and 81213 [CPT] codes beginning on Jan. 1, 2019," Capone said.  The crosswalking of old CPT codes to new codes was particularly difficult to manage with small, non-contracted payors, he explained.

The older codes, which describe sequencing and large rearrangement analysis of BRCA1 and BRCA2 genes, had been included in Myriad's payor contracts since 2012. Around 300 payor contracts make up 85 percent of the company's hereditary cancer revenues. The rest is reliant upon more than 1,000 payors that on average reimburse around four tests per month, and many of which don't have a contract with Myriad.

Anticipating the coding change, Myriad had revised its contracts with payors that contributed heavily to revenues, informed smaller contracted payors of the revisions, and assumed that non-contracted payors would use the new crosswalked codes. These assumptions were reasonable, according to Capone, based on past experiences when coding changes disrupted revenue accrual, but the company was able to eventually resolve those issues.

In this case, however, Myriad has determined that it will not be able to correct these administrative issues. "Our lowered revenue accrual rate is consistent with our actual cash collection rate," Capone said. "Having now adjudicated claims for nine months after the coding change, cash collection rates from these small payors are predictable."

Capone noted that despite these coding challenges, hereditary cancer testing volumes grew by double digits year over year during the quarter. "We are aggressively pursuing new approaches to increase our collections rates to the levels that are appropriate for the services we are providing," he said, noting that there may be opportunities to positively impact revenues in the future.

Myriad executives also highlighted that a recent positive decision from UnitedHealthcare for coverage of its GeneSight pharmacogenetics test could have a positive impact on future revenues. Additionally, the company signed a master service agreement with a large pharmacy benefit manager to offer GeneSight to its commercial payor and self-funded employer customers. Capone said that a Fortune 50 firm has already opted into the agreement.

He added during the call that pharmacy benefit managers have expressed interest in both GeneSight and rheumatoid arthritis test Vectra DA. "We're currently engaged in discussions with other pharmacy benefit managers for both products and expect that we can see additional positive development in this channel during the fiscal year," he said.

Myriad reported a net loss of $20.6 in fiscal Q1, or $.28 per share, compared to a net loss of $700,000, or $.01 per share, in the prior year period. On an adjusted basis, the company reported earnings per share of $.08 for the quarter, down from $.43 a year ago and missing the Wall Street estimate of $.32 per share.

The company's fiscal Q1 2020 R&D expenses remained essentially flat at $21.3 million compared to $21.1 million in fiscal Q1 2019, and its SG&A costs for the quarter rose 4 percent to $135.5 million from $129.9 million a year ago.

Myriad ended the quarter with $89.9 million in cash and cash equivalents and $52.7 million in marketable investment securities.

The reduced Q1 revenue resulted in the company lowering its financial outlook for the year. In fiscal year 2020, Myriad is now expecting revenues in the range of $800 million to $810 million and adjusted EPS of $1.00 to $1.10. The firm had previously guided to revenues of $865 million to $875 million and adjusted EPS of $1.80 to $1.90.

"Despite this [Q1 revenue] setback, we expect earnings to be significantly higher in the second half of the fiscal year and believe that a number of important upsides will materialize during the fiscal year generating momentum as we transition into fiscal year 2021," Capone said.

For fiscal Q2 2020, Myriad raised it revenue expectations to between $210 million and $212 million, from previously projected revenues of $200 million to $202 million, but it maintained adjusted EPS projections of between $.30 and $.32.

After Myriad released its earnings, several market analysts adjusted their stock price targets for the company in notes to investors. Jack Meehan from Barclays maintained an underweight rating but lowered the stock price target to $18 from $22. Puneet Souda from SVB Leerink kept his market perform rating but adjusted the price target to $28 from $37. William Quirk from Piper Jaffray revised his price target to $22 from $40, but maintained a neutral rating.

Brandon Couillard from Jeffries lowered his price target to $23 from $35, and wrote in a note that Myriad's latest negative financial performance added to uncertainty around the growth of several of its tests, and impaired management's credibility.

Doug Schenkel from Cowen lowered his price target to $21 from $30. "While there are sources of potential upside that could still drive share appreciation (especially off a lowered price), the issues continue to grow for Myriad and keep us on the sidelines," he wrote.

In early morning trading on Nov. 5, Myriad's stock price had dropped around 39 percent on the Nasdaq to $21.50.