Myriad Genetics, Inc.
Q3 2017 Earnings Call Transcript

Published: 3 May 2017

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Myriad Genetics Third Quarter 2017 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, May 2, 2017. I would now like to turn the conference over to Scott Gleason, Vice President of Investor Relations. Please go ahead.

[Scott Gleason:]

Thanks, Grant, and good afternoon, everyone. And welcome to the Myriad Genetics fiscal third quarter 2017 earnings call. My name is Scott Gleason. I'm the Vice President 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've not had a chance to review the earnings release, it can be found in the Investor Relations section of our website at myriad.com. Presenting from Myriad today will be Mark Capone, President and Chief Executive Officer; and Bryan Riggsbee, Chief Financial Officer. This call can be heard live via webcast at 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 we'll 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 Report 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 pleased to turn the call over to Mark.

[Mark C. Capone:]

Thanks, Scott. I would like to start today's call by providing the key highlights for the quarter, after which Bryan will provide a detailed overview of our financial results, and I will finish by providing additional details pertaining to the ongoing execution of our business strategy. Overall, I am very encouraged by our progress in the fiscal third quarter. All of our products, including hereditary cancer, demonstrated strong sequential volume growth and were able to significantly exceed expectations, with revenues totaling $196.9 million and adjusted earnings per share of $0.27. Based upon the strength in the quarter and our expected continued strong volume trends in the fourth quarter, we are raising our annual guidance by $14 million and we have narrowed our adjusted EPS guidance within the previous range. Importantly, we once again advanced our three strategic imperatives this quarter that include continued leadership in an expanding hereditary cancer market, diversifying our revenue with new products, and growing kit products in major international geographies. This quarter, we broke a five-year trend with hereditary cancer volumes growing on a sequential basis in what is typically a sequentially down quarter. This sequential growth is particularly noteworthy, given the fact that insurance deductibles reset in the third quarter, yet we saw growth in both the oncology and preventive care markets. Combined with the sequential growth in the second quarter, it is evidence that our strategies are working and continue to position Myriad as a clear leader in hereditary cancer testing. In fact, excluding the impact from the Anthem accounting change on revenue recognition, hereditary cancer revenue would have grown on a sequential basis. Our product diversification strategy continued to show significant momentum. This quarter, non- hereditary cancer products and services comprise 68% of total volume and 28% of total revenue. Once again, the Assurex acquisition exceeded our expectations, with quarterly GeneSight volume growing 44% year-over-year and 7% sequentially. Importantly, we completed enrollment in our large 1,200 patient clinical utility study during the third quarter and are ahead of schedule to have data available late in calendar year 2017. This quarter, Vectra DA volumes and revenue returned to sequential growth in the quarter after clarifying misperceptions from the inappropriate analysis in the AMPLE publication. We remain optimistic that the strong clinical evidence for Vectra DA will lead to a favorable resolution for the Medicare draft non-coverage LCD. Prolaris volumes also demonstrated strong growth, increasing 9% sequentially, breaking the 20,000 test annual run rate for the first time. The comment period on the Medicare Favorable Intermediate LCD has concluded. And if Medicare issues a final LCD, it will expand existing reimbursement coverage by 50%. In the third quarter, we received a major boost to our companion diagnostic program in a new cancer indication with the announcement that AstraZeneca achieved clinically and statistically significant results in the OlympiAD metastatic breast cancer study, which utilized BRACAnalysis CDx as the biomarker to select patients. Based upon this positive result, this could represent the first FDA approval for a PARP inhibitor outside of ovarian cancer, and represents an additional 60,000 patient per year testing market for Myriad. In addition, we launched EndoPredict in the U.S. market in the third quarter and continue to expand reimbursement with over 83 million covered lives. We also have submitted our dossier for EndoPredict to Medicare in the third quarter. During the quarter, we reached another important milestone for myPath Melanoma, with the publication of two additional pivotal studies and the submission of the coverage dossier to Medicare and other payers. Finally, international product revenue for the quarter grew 41% year-over-year and represented 5% of total revenue. Overall, we have stabilized our hereditary cancer volumes and simultaneously diversified our portfolio with over two-thirds of our volume now attributed to new products, as we continue to expand our opportunities with pivotal advances from EndoPredict, companion diagnostics and myPath Melanoma. Given the large untapped markets for these new products, we believe increased adoption and expanded reimbursement will fuel significant future growth. With that, I will turn the call over to Bryan to provide a financial overview of the fiscal third quarter and additional details surrounding our fiscal year 2017 financial guidance.

[R. Bryan Riggsbee:]

Thanks, Mark. I'm pleased to provide an overview of our financial results for the fiscal third quarter of 2017, followed by additional detail on our updated fiscal year 2017 financial guidance. Third quarter total revenues were $196.9 million, compared to $190.5 million in the same period in the prior year, an increase of 3%. This represents our second straight quarter of delivering positive year-over-year revenue growth. Hereditary cancer in the quarter was $141 million and was down 10% on a year-over-year basis. Looking at the components of growth, volume was up slightly on a year-over-year basis. And consequently, the entire year-over-year decline in hereditary cancer revenue this quarter was attributable to pricing and revenue recognition delays from the Anthem out-of-network decision. We expect the accounting impact of the Anthem out-of-network change to be more significant in the fiscal fourth quarter, given the timing of the out-of-network decisions with the various plans within Anthem, and then begin to abate as we move into the first fiscal quarter of next year. GeneSight revenue in the quarter exceeded our expectations, coming in at $23.9 million, and grew 41% year-over-year. GeneSight volume for the third quarter was over 60,000 tests, which was up 44% year-over-year. Once again this quarter, GeneSight was our highest volume test. Vectra DA volume in the quarter was approximately 38,500 tests and grew 5% sequentially. Vectra DA revenue in the third quarter was $11.2 million, which was up 5% sequentially. Importantly, we saw Vectra DA volumes rebound in the third quarter following a challenging second quarter that was impacted by the publication of the AMPLE study. Prolaris revenue in the quarter was $3.4 million. Prolaris test volumes grew 17% year-over-year and 9% sequentially, with total test order coming in at 5,100 tests. EndoPredict revenues in the quarter were $2.3 million and grew 109% year-over-year. U.S. EndoPredict revenue was not a meaningful contributor to total EndoPredict revenue in the quarter, given the launch occurred only two weeks prior to the end of the quarter. Lastly, revenue associated with our pharmaceutical and clinical services business was $11.7 million and declined 11% year-over-year. As a reminder, revenue within our pharmaceutical and clinical services segment varies based upon the timing of pharmaceutical and clinical services contracts. I now would like to discuss our financial metrics for the quarter. Gross margins were 77.5% in the third quarter, compared to 78.9% during the third quarter of last year. The year-over-year decline was primarily attributable to product mix with more revenue from lower margin segments, as well as the impact of pricing in hereditary cancer. Additionally, the change in revenue recognition for Anthem, detrimentally impacted gross margins in the quarter based upon the cost of running samples for which revenue recognition has been delayed. Moving on to our operating expenses. GAAP research and development expenses were $17.6 million in the third quarter, compared to $17.2 million in the fiscal third quarter of last year. Excluding research and development expense tied to the Assurex Health acquisition, total research and development expense declined on a year-over-year basis. GAAP SG&A expense this quarter was $122.1 million, compared to $90.5 million in the third quarter of last year. On a non-GAAP basis, our adjusted research and development expense was $17.5 million, compared to $17.1 million last year and grew 2% year-over-year. Adjusted SG&A expense this quarter was $111.1 million, compared to $87.4 million in the third quarter of fiscal year 2016. Excluding the impact from the Assurex acquisition, total non-GAAP operating expenses increased 3% year-over-year. Adjusted operating income was $24 million in the third quarter and declined 48% relative to the third quarter of last year. The decline in adjusted operating income is based primarily on lower hereditary cancer revenue, the mix of our volume toward products that are not yet fully reimbursed and dilution associated with the recent Assurex acquisition. Adjusted earnings per share were $0.27 for the third quarter, compared to $0.41 in the third quarter of last year. Our fully diluted share count was essentially flat sequentially with 68.3 million shares outstanding. We continue to prioritize debt repayment as a near-term use of capital. This quarter, we repaid $37 million in principle on our existing debt and plan to use our excess free cash flow to pay down debt in coming quarters as we plan to make significant milestone payments over the next 12 months associated with the Assurex and Sividon acquisition. Our cash and cash equivalent balance at the end of the third quarter was approximately $226 million, which increased from our cash balance of $218 million at the end of the second quarter. We continue to generate meaningful free cash flow with non-GAAP free cash flow in the quarter of approximately $41 million. Before I move onto our financial guidance, I wanted to highlight one balance sheet item. Our accounts receivable balance was detrimentally impacted by a system issue at a single payer that delayed payment for approximately $15 million in past claims. The issues have been resolved and we have already begun to see these claims being paid and expect to receive the balance of the cash by the end of May. As these claims are paid, we would expect our accounts receivable balances to return to normal levels. I would now like to discuss our fiscal year 2017 financial guidance. We are increasing our revenue guidance for the full fiscal year and tightening the range on our adjusted earnings per share guidance. We are now forecasting revenue of $763 million to $765 million, which represents a $14 million increase at the midpoint and earnings per share of $1.01 to $1.03. Let me discuss some of the underlying trends supporting our guidance, beginning with hereditary cancer. We saw continued improvement in the trajectory of hereditary cancer sample volumes in the third quarter, and we are anticipating growth in hereditary cancer volumes again in the fourth quarter. However, the accounting impact from the Anthem out-of-network decision will be larger in the fourth quarter. And consequently, from a revenue perspective, we're currently expecting hereditary cancer revenue to be flat to slightly down on a sequential basis. This will also have a disproportionate impact on margins and earnings as we absorb the cost without the corresponding revenue. Moving on to GeneSight with Assurex Health. We continue to be pleased with GeneSight trends as they have consistently outperformed our forecast on both the top and bottom line this fiscal year. Importantly, Assurex's operating loss also narrowed in the third quarter and we believe we remain on track for Assurex to achieve break-even by the end of the fiscal year. For Prolaris, we expect to see continued volume growth in the fourth quarter. However, we are not anticipating the recent Favorable Intermediate LCD from Medicare having any impact in the fourth quarter. For Vector DA, we are forecasting continued improvement in business fundamentals, as we move beyond the AMPLE study. Additionally, our guidance reflects our expectation of having continued Medicare reimbursement, given the strength of the data supporting the clinical validity and clinical utility of the test. Additionally, we are not forecasting any significant U.S. revenue from the recent EndoPredict launch, since we are still in the early stages of the product launch in the U.S. market. In conclusion, we were encouraged by the commercial progress on our strategic imperatives in the third quarter, and I'm proud that we were able to increase revenue guidance for the year despite an unanticipated $10 million headwind from the Anthem out-of-network decision. We continue to believe that our diversification strategy will lead to significant revenue and profitability growth in the coming years, and the company is focused on enhancing that growth through strategically sound capital deployment. With that, I will now turn the call back over to Mark to discuss our key business highlights in the quarter.

[Mark C. Capone:]

Thanks, Bryan. I'm happy to provide some additional details around the execution of our business strategy, starting with our progress in the hereditary cancer market. We were extremely pleased to see strong sequential hereditary cancer volume growth in what is typically a seasonally weak quarter. Importantly, we saw volume growth sequentially in both our preventive care segment, as well as our oncology segment. Oncology is especially noteworthy since this represents the second quarter in a row for sequential growth, which we've not seen since the Supreme Court decision. We also saw volume on a year-over-year basis return to growth this quarter. In fact, this was a near record third quarter for hereditary cancer volumes. We attribute the volume growth to three factors

[Scott Gleason:]

Thanks, Mark. And as a reminder, during today's call we use certain non-GAAP financial measures. A reconciliation of the GAAP financial results to 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 the Q&A session. In order to ensure broad participation in today's Q&A session, we are asking participants to please ask only one question and one follow-up. Operator, we're now ready for the Q&A portion of the call.

[Operator:]

Thank you. One moment please for the first question. Your first question comes from the line of Jack Meehan with Barclays. Please proceed with your question.

[Jack Meehan:]

Thanks. Good afternoon, guys. Mark, I was wondering if you could opine a little bit more on the broad sequential improvement in volumes. I think it's unusual, given the calendar turnover of deductibles, you highlighted a few things with the initiatives you've done, but was there anything that stood out just across the portfolio that's worth highlighting?

[Mark C. Capone:]

Thanks, Jack. You're right, it is very unusual for us to see sequential growth in hereditary cancer. We showed one slide that you can see in the last five years, certainly, we've never seen the magnitude of the growth that we saw this quarter in the last five years. And, in fact, having been here 15 years, it's hard for me to remember actually a third quarter where we saw the type of sequential growth that we did this quarter in hereditary cancer. It's a trend, of course, that started in the second quarter. So we've really seen some strategies and tactics that we began to implement, even in the first quarter, payoff in the second quarter and continue this quarter. And I think there was equal contribution amongst the three things that I spelled out. First, increasing productivity by our sales team, as we filled some of the empty territories, particularly in oncology. Second, we've seen community oncologists nice growth as a result of the initiatives that we have with ION and U.S. oncology to emphasize the quality of our product. And then third thing is in the academic segment where, as you know, historically, we've seen most of the share decline had been isolated in that segment. The introduction of our customized panels have allowed us to win back a business in those academic accounts and begin to see those grow in some circumstances as well and since the Supreme Court, that's a segment that we had been seeing a decline. And so, I think it's the combination of all three of those that have really led to the team's execution in the quarter, which again we felt very pleased with.

[Jack Meehan:]

Great. That's helpful. And then just as a follow-up, I think this is also the first time I can think of where the guidance you laid out for the following quarter is actually higher than our expectations in the Street. It doesn't sound, it's expected Anthem is going to continue to be a headwind, not much build in for EndoPredict. Just what do you think is driving the optimism at this point?

[R. Bryan Riggsbee:]

Hey, Jack. This is Bryan. I think the way I would look at the quarter, and given that we have one quarter left in the year in terms of raising our guidance. If you look at it sequentially, we've said that we would expect that Anthem out-of-network to be greater in Q4. And so, what you see is revenue that's slightly down from where we are today. But consistent performance from products like GeneSight and other parts of the portfolio that really keep us at a level that's slightly lower than where we were in Q4.

[Mark C. Capone:]

The other thing I'd add, Jack, that Bryan highlighted, of course, we're able to look at trends in all the products as we're a month into the quarter. And so, obviously that factors into that. The continued strong trends in hereditary cancer are things, of course, we can factor into the fourth quarter as well. So...

[Jack Meehan:]

Great. Thanks, guys.

[Operator:]

And the next question comes from the line of Tim Evans with Wells Fargo. Please proceed with your question.

[Tim C. Evans:]

Thanks. Did I catch correctly that you said that your GeneSight volume actually exceeds your hereditary test volume? And then, if I did hear that correctly, how did the number of prescribers for GeneSight – how does that compare I guess to, say, a year ago and how does that compare to the broader target pool?

[Mark C. Capone:]

Yeah. Thanks, Tim. You are correct, the volume for GeneSight is actually our largest volume product. It was in the second quarter as well. I think it's a real testament to Gina Drosos and her team and how much progress they've made in penetrating the market. Largely, the focus has been in the psychiatrist market, although we also do get some volume from primary care market. We've had – over 10,000 physicians have ordered GeneSight, and that continues to grow. I don't have the year-over-year numbers on hand, but that continues to grow very robustly. There are about 16,000 psychiatrists that are really the high-volume psychiatrists that account for about 80% of the volume. And we've seen over 10,000 physicians that have ordered GeneSight. So there's actually been very nice penetration into the psychiatry market, which is where traditionally most of the focus has been. And we continue to grow, continue to see new psychiatrists added in. And we also continue to see increasing depth in those psychiatrists after they use the test, which are all positive signs for a product that's bringing value to that. I will add that we, of course, also launched a small pilot in the preventive care segment, because we know the majority of the market for antidepressants is actually in the primary care segment and we wanted to begin to get some experience in how to penetrate that market. That exceeded our expectations. We were very pleased to see the volume samples that those sales people were able to generate as they were now carrying two products in their bag. And so, that will be another focus for ours as we increase reimbursement, because there is also somewhere around 18,000 high-volume prescribers in the primary care market, and those ultimately are ones that we will be able to target with our preventive care sales team. And so, increasing over time with reimbursement, we'll be able to even begin to access that broader market, which we really only scratched the surface in.

[Tim C. Evans:]

Okay. And just a quick housekeeping question for Bryan. Can you quantify the impact of ASU 2016-09 to your tax rate in the quarter? Thanks.

[R. Bryan Riggsbee:]

Yeah. Tim, I believe we have that – you should be able to look when we file the 10-Q tomorrow and get that piece of information.

[Scott Gleason:]

Tim, we break that out in our non-GAAP earnings. So the non-GAAP earnings exclude any changes associated with ASU 2016-09.

[Tim C. Evans:]

Okay. Got it. Thanks.

[Operator:]

And the next question comes from the line of Drew Jones with Stephens, Incorporated. Please go proceed with your question.

[Drew Jones:]

Thanks. Mark, I was going to follow-up on the question on GeneSight. Given the cost benefit data that you kind of walked through and some of the things you're seeing in the United database, what should be the timeline as far as seeking that indication for the GP market?

[Mark C. Capone:]

Yeah. Thanks, Drew. Obviously, the data was very strong and we're in active discussion with private payers to be able to show them the health economic data, the clinical utility and validity data, and we're very aggressively pursuing that. We're not necessarily waiting on the larger study, because we think there is ample data without that. And so, we're in the middle of those discussions now and we'll continue to aggressively pursue that. We do think it's compelling information. I think payers are very interested in this, because antidepressants are a very big portion of their spend. And particularly for these patients that are treatment-resistant depressed patients, generally, they begin an odyssey after their first failed antidepressant that is extraordinarily expensive for a payer. And so, they're very interested in this discussion and in the data, and we're going to aggressively pursue that. Our belief is that, from a commercial payer perspective, they're not going to draw a distinction between the psychiatric market and the primary care market like we've seen in Medicare. I think private payers are well aware that the majority of patients are being treated in the primary care market. And, in fact, the benefit of the test is actually probably even higher in that particular segment of the market, not only the financial benefits which you can see in the data that we've shown, but also even in helping a very busy primary care physician avoid that medical odyssey. So we don't believe there will be a distinction between the two markets. And that when coverage comes in the private pay commercial payers, that it will be for both primary care and the psychiatric market.

[Drew Jones:]

Okay. And then jumping over to hereditary cancer really quickly. Understanding you're in the midst of a transition with the Anthem relationship, if you look back over the past three quarters, how have Anthem volumes trended here recently?

[Mark C. Capone:]

Yeah. I think one of the things that we saw in this quarter is that we actually – all of our network – out-of-network providers, which is primarily Anthem, a few smaller ones, we actually saw sequential volume growth in the third quarter with all of our out-of-network providers. And since most of the out-of-network decisions really were fully impacted in the third quarter, that was the quarter that's probably the most relevant. So seeing sequential volume growth I think is an indication that the out-of-network status hasn't dissuaded physicians and patients from seeking out the best test, the highest quality test for what is an extraordinarily important decision that will impact not only the patient, but generations of family members to come. So we have seen strong volume growth there, very consistent with what we saw throughout the nation. And so, I think, it's encouraging that that out-of-network situation really hasn't affected that.

[Drew Jones:]

Thanks, guys.

[Operator:]

And the next question comes from the line of Amanda Murphy with William Blair. Please proceed with your question.

[Amanda Louise Murphy:]

Thanks. So I just had a couple more on hereditary cancer. I guess, first, we've at least gotten a lot of questions around some of the, I guess, contracts that are coming up for renewal. I think those are all starting in fiscal 2018 for you. So I just was wondering if you had an update there. And then, I had a question around broader growth, but I guess starting with the payer question?

[Mark C. Capone:]

Sure. Thanks, Amanda. I think the contract probably we've gotten the most questions on is really the United contract that is up for renewal beginning in fiscal year 2018. I think all we can say is that we continue to have very productive discussions with United about hereditary cancer and the value that Myriad's hereditary cancer products can bring to their members. So those discussions are productive and ongoing. And, I think, when that contract is ultimately signed, we'll, of course, make a public announcement given the materiality of that contract. So everybody will be aware when that occurs.

[Amanda Louise Murphy:]

Okay. Got it. And then just thinking longer term, just factoring all the dynamics that you've spoken to, so obviously you're seeing the sequential growth in volume within hereditary cancer, you've got the CDx side of that as well, customized panels, et cetera. Do you think that we could see growth in this business from a revenue perspective in 2018, or I guess you're thinking more 12 months to 24 months, recognizing you're not giving guidance, per se. But going back to some of the commentary you've made historically about market growth, expansion opportunities, et cetera, getting a sense of your thoughts there would be helpful?

[Mark C. Capone:]

Yeah. Thanks, Amanda. I don't think we're quite prepared to make comments about fiscal 2018 yet and what type of guidance that we're going to provide for fiscal year 2018. So that's something that, August, we'll obviously give a fulsome discussion about where that might be. Obviously, as you mentioned, I think what is important is that two-thirds of the volume of this business now is in products other than hereditary cancer. These products continue to grow very nicely from a volume perspective. And, of course, as soon as we secure reimbursement for those products, that's going to ultimately flow directly to the bottom line, which is going to provide some significant leverage from an earnings perspective. So long-term, we continue to see those new products as significant opportunities for growth. And from an hereditary cancer standpoint, we still continue to see that as an underpenetrated market that's got opportunity for long-term growth with the market as currently defined. But as we expand indications, which we've talked about we continue to work on, it provides even a larger potential market for us to work on. So we think long-term this is a business that certainly has significant growth potential. I think, to the specifics of 2018, we'll outline all the puts and takes on 2018 when we give guidance in August.

[Amanda Louise Murphy:]

Got it. Thanks very much.

[Operator:]

And the next question comes from the line of Bill Quirk with Piper Jaffray. Please proceed with your question.

[William R. Quirk:]

Great. Thanks. Good afternoon, everybody. Three which should be really quick ones from me. First is, when do you anticipate hearing an update on the draft LCDs. A question for Bryan on the tax rate. Even when we back it out, it still looks like it's just a shade over 20%. And then a second question for Bryan. And forgive me if there's a really simple answer to this, but why should Anthem have a more significant impact in the fourth quarter versus the third quarter? Thanks, guys.

[Mark C. Capone:]

So I'll take the first, and then Bryan can take the other two. Thanks, Bill. From a draft LCD perspective, so we obviously have a couple in play right now. We've got the Prolaris. And the open comment period has ended for the Prolaris draft LCD for favorable intermediate, and the draft non-coverage for Vectra. So the public common period is over. At this point, Medicare is assimilating all those comments. There is no statutory timeline for that, Bill. So presumably they can take whatever time they believe is necessary to fully evaluate any of the public comments that they've received. So it's hard to give any sort of guidance on when we might hear about those. We do know, of course, for Vectra that there was pretty substantial comments received because of the very high level of interest in patients and providers continuing to maintain access to that. And so, we would expect that will take some additional time to vet through all those positive comments. So that's a significant amount of work. And that may delay the final decision until those comments can be fully reviewed and assimilated. So, obviously, that something could happen anytime and we'll just have to standby and wait for Medicare to make a final determination. Bryan, you want to take the others?

[R. Bryan Riggsbee:]

Yeah. So for the other two questions, in terms of the tax rate, again, it's hard to predict in terms of the non-GAAP tax rate, so we continue to guide to a GAAP tax rate of around 38%. Given the large component of our non-GAAP net income, that's non-cash amortization, which is not deductible for tax purposes, our non-GAAP rate tends to be significantly lower than that statutory rate. So, again, I can understand how it's difficult sometimes to reconcile that. But it's a function of the – really primarily driven by the non-cash amortization expense. In terms of your second question related to Anthem and why we're being more pronounced in the fourth quarter than the third quarter, it really just relates to the timing of the plans and when some of those plans went out of network through the third quarter and fourth quarter. So that's really the driving factor of that difference.

[William R. Quirk:]

Got it. Thank you.

[R. Bryan Riggsbee:]

You're welcome.

[Operator:]

And the next question comes from the line of Tycho Peterson with JPMorgan. Please proceed with your question.

[Tycho W. Peterson:]

Hey, thanks. First on Assurex. Just given the Medicaid exposure there, I think, around 37%, can you just talk on potential risk of ACA repeal given the original Obamacare, Medicare extension that the business saw?

[Mark C. Capone:]

Yeah. Thanks, Tycho. You're right, in mental health in general Medicaid is a disproportionate portion of the market. I think the reality is that because reimbursement for Medicaid for GeneSight is in its infancies and I know the Myriad team is starting to work on that. The reality is, there is a very small portion of revenue or volume currently that for GeneSight that comes from Medicaid or from patients that are signed up through the exchanges. I think we're talking about less than a couple percent of revenue that would be tied to patients in the ACA exchanges. So right now that's not a significant component of the business. And wherever that lands, we don't really see a material impact from that.

[Tycho W. Peterson:]

And then on pricing dynamics for hereditary, I mean backing out some of the Anthem noise, it still seems like you had some erosion there. Can you maybe just talk a little about the dynamics there? I know you've talked in the past about new contracts taking effect in the rollover impact, but can you maybe just quantify how much price declines contributed to the 10% year-over-year decline in hereditary?

[Mark C. Capone:]

Yeah. It's one that, as we stated, the year-over-year decline was really two components

[Tycho W. Peterson:]

Okay. And then, just two quick accounting ones. On account receivable, I know you called out the system glitch at a payer and quantified that, but DSOs did go up from last year I think around to 52 days or so. Can you maybe just talk on dynamics there. And then, separately on the tax rate. You are coming in at 20%. I think you guided to 38%. Can you just clarify the delta there?

[R. Bryan Riggsbee:]

Yes. So first on the tax rate question, we had guided to 38% on a GAAP basis and where we're coming out more around 20% is on a non-GAAP basis. So I think that's really the difference there. In terms of the other – what was, can you repeat the first question, Tycho?

[Tycho W. Peterson:]

Yeah. Just on the DSOs. I know you quantified the system glitch at your payer, but they did – they're up I think around 52 days versus 43 days or so a year ago?

[R. Bryan Riggsbee:]

Yeah. I think, as I said before, that issue has already been corrected. We've started to see the cash come in. So we would expect to see our AR and DSO numbers come more in line with where they've been. I think when you look at the year-over-year, the one thing you have to appreciate is the impact of the Assurex acquisition and the fact that typically business like that would have a longer DSO than what you would, given their non-contracted status in a lot of cases given – versus what you would see in terms of our hereditary cancer business there. But I guess the point would be, we would expect to see those numbers return to more normal levels.

[Tycho W. Peterson:]

Okay. Thank you.

[R. Bryan Riggsbee:]

You're welcome.

[Operator:]

And the next question is from the line of Isaac Ro with Goldman Sachs. Please proceed with your question.

[Isaac Ro:]

Good afternoon. Thanks, guys. The first one had to do with a little bit of a longer term topic, which is, the FDA has recently allowed direct-to-consumer sales of some genetic tests or risk assessment that includes I think things like BRCA and related conditions. So I'm just curious how you're thinking about the long-term impact of that trend? Do you think it will help draw more patients into the testing market and, therefore, you can sort of benefit indirectly or could you see some kind of near term disruption as patients try to kind of go out there and explore their own risk for themselves, I'd be interested in your views there?

[Mark C. Capone:]

Thanks, Isaac. Yeah, I think the decision obviously for the 23andMe, in particular, consumer by the FDA was a step forward from their viewpoint of where they were a couple of years ago. I think one of the things they've been very careful to call out is that it would not in their mind include things like BRCA testing, which requires supervision of a physician; and from a clinical perspective is obviously a very serious decision that would be made as a result of that. So they specifically called out germline testing for BRCA as something that would not fall under this view of something that might be appropriate for consumer testing. So I think they are trying to accommodate a segment of test that have been used probably more for informational purposes and less for diagnostic and clinical treatment. I think we continue to believe that for those that they believe are associated with either high or moderate risk, which would include our entire portfolio, that their view is that those should be mediated by doctors. And FDA certainly believes they should have to be reviewed by the FDA for those moderate and high-risk tests. Obviously, as you've seen, there is a legislation that's been introduced in the house to do exactly that, to have the FDA regulate both high, moderate risk. We'll see how that progresses through the legislative process, but we certainly know the FDA position continues to be that it is appropriate for them to have a role in those. And so, long-term, all of our tests we think will continue to remain in that category as opposed to probably the consumer mediated. I think to your point though, I think any awareness on this is helpful for all of us in this business. I think patient awareness, getting patients to the window of physicians office and ask about these test is a good thing for our business. I think it's a good thing for this entire industry. So, I think, patient awareness is something we've always invested in and we've always seen benefit from that.

[Isaac Ro:]

Great. And then a quick follow-up on Vectra. Can you just talk about the percent of rheumatologists out there that are now using the test and maybe talk a little bit about the distribution of heavy users versus new physicians, because as I recall the number of doctors out there to target with that product is not massive. So I'd be interested in just how far along you are in at least getting all docs sort of at least aware and hopefully on board with some level of testing?

[Mark C. Capone:]

Yeah. Thanks, Isaac. You're right, there is about 3,500 rheumatologists in the country. So it doesn't take a very substantial sales team to cover all of those rheumatologists. And we're sized, at this point, to really target the vast majority of the rheumatologists that at least sufficient patient population to make it an appropriate thing to target. We've seen about 75% of our rheumatologists in the country have ordered Vectra. So overall awareness is quite high. And on any given quarter that may be somewhere 50% to 60% of rheumatologists may order on any given quarter. And so, we still see a distribution though. And part of the reason you don't this market as highly penetrated is while a number rheumatologists have ordered the test, the numbers that are ordering at the frequency which would be appropriate is still a relatively small number. So most of the opportunity we have with Vectra DA is really depth of utilization within their practices. And those are things that we're working on with programs like practice integration, things that we've done elsewhere in Myriad. So good breadth, still significant opportunity for depth.

[Isaac Ro:]

Got it. Thank you.

[Scott Gleason:]

This concludes our earnings call. A replay will be available via webcast on our website for one week. Thanks again for joining us this afternoon.

[Operator:]

Ladies and gentlemen, that does conclude today's call. We thank you for your participation, and ask that you please disconnect your line.