Myriad Genetics, Inc.

greetings and welcome to the myriad genetics third quarter 2022 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 at that time if you have a question please press the one followed by the four on your telephone if at any time during the conference you need to reach an operator please press star zero as a reminder this conference is being recorded today Tuesday, November 1st, 2022. I would now like to turn the conference over to Matt Scalo. Please go ahead.

Thanks, Grant, and good afternoon, and welcome to Myriad Genetics' third quarter 2022 earnings call. During the call, we'll review the financial results we released today, and afterwards, we'll host a Q&A session. Our quarterly earnings release was issued this morning in Form 8K and can be found on our website, at investor.myriad.com. I'm Matt Scalo, Senior Vice President of Investor Relations, and on the call with me today is Paul Diaz, our President and Chief Executive Officer, Brian Rigsby, our Chief Financial Officer, and Nicole Lambert, our Chief Operating Officer. This call will be heard via webcast at investor.myriad.com, and a recording will be archived in the investor section of our website along with this slide presentation. Please note that some of the information presented today contains 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 the expectations for a variety of reasons. We refer you to the documents the company files from time to time with the SEC, specifically the company's annual report on Form 10-K, its quarterly reports on Form 10-Q, and the 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'll turn the call over to Paul.

Thanks, Matt. Good afternoon, everyone, and thank you for joining us. On today's call, we will discuss our Q3 results, along with highlights from the quarter and updates on our strategic transformation and growth plan. I want to start by thanking all of our teammates for their hard work and dedication this quarter to advancing our mission and our vision to make genetic testing and precision medicine more accessible to help people take more control of their health and enable providers to better detect, treat, and prevent disease. I also want to thank our healthcare provider partners and their patients for their continued confidence in us 2022 remains a year of strategic investment as we continue to build a foundation for accelerated growth and advance our mission of improving health and well-being for all. This was a challenging quarter for us as we faced external headwinds, including a stronger US dollar, and failed to advance our commercial strategy as quickly as we had hoped. However, we are pleased with our performance in many areas of the business in what is typically our seasonally weakest quarter of the year. After excluding divested businesses, quarterly testing volume grew 12% from the second quarter. Hereditary cancer testing volume returns a positive growth in the third quarter, up 4% year over year. And GeneSight had yet another strong performance with volumes up 34% year over year in Q3. GeneSight continues to produce strong results with two years of consecutive quarterly volume growth, which we believe speaks to GeneSight's market durability. Finally, we saw double-digit quarterly volume growth year-over-year in Polaris, My Choice CDX, and BRAC Analysis CDX. I'm also pleased to report that the Moldex program assigned the My Risk Hereditary Cancer Test CPT code 81479 and provided favorable test-specific pricing for My Risk at $1,743 per test. This action supports longer-term pricing stability from IRIS that some have questioned, and when combined with improving volume growth this quarter, reinforces our positive outlook for our hereditary cancer testing franchise going into Q4 and 2023. Despite significant cost pressures on wages, supply chain, and freight charges, we continue to operate with strong gross margins, which year-to-date are approximately 70%, in line with our long-term guidance range, that we laid out at our investor day back in 2021. Each of our products contributes to this figure, giving us confidence across all of our businesses that we have a solid foundation to accelerate growth for all of our current and new tests. Finally, in a separate press release was issued this morning announcing our acquisition of Gateway Genomics, an example of how Mira Genetics is utilizing a disciplined capital deployment strategy leveraging our strong balance sheet to support longer-term growth. Let me spend a few minutes highlighting the transaction on the next slide. Gateway Genomics represents an exciting addition to Myriad Genetics. Its leading product, SyncPeak, has already helped 750,000 parents learning their baby's fetal sex from home as early as six weeks into pregnancy. And the company's 2022 full-year projected revenues are approximately $20 million. The core Gateway business is expected to grow at more than 20% compounded annually over the next three to five years, excluding synergies, and is expected to be neutral to Myriad's earnings and operating cash flows in 2023. Gateway's business is also expected to be accretive to Myriad's growth rate, earnings, and operating cash flows in 2024. The company's mission, strong reputation, and overall approach to market which is to explore new ways to provide genetic insights to women who are pregnant or planning a family, are well aligned with our vision for our women's health business. And with over 4 million unique visits to Gateway's website year-to-date, we see significant potential synergies across our existing customer bases. As we look to the future, Myriad Genetics is positioning itself to drive 9% to 12% organic revenue growth, with a number of catalysts on the horizon beyond that as we continue to execute on our transformation efforts. We continue to enhance our core commercial organization with prudent investments in technologies and innovations. We are excited about Firstgene, MiraGenetics' next-generation prenatal offering. From broader coverage and faster turnaround time to fewer inconclusive results in certain areas, we expect Firstgene will make a significant impact on the prenatal care of our patients. FirstGene is complementary to our current prenatal portfolio and targets a market of over 1 million patients in the U.S. We are preparing for a second half 2023 commercial launch. We plan to launch our liquid biopsy technology for tumor profiling in the second half of 2023 as well, with this new test offering as part of our suite of precise oncology solutions. Our provider partners will benefit from an overall ease of use and a better understanding of results. We continue to invest in new and emerging technologies to ensure that MiraGenetics remains on the frontier of innovation. Lastly, our proprietary MRD product is on track with a resource use only introduction in the second half of 2023 with our pharma and oncology partners. This will be followed by a commercial launch that we expect to happen in the second half of 2024. We are excited about a number of differentiating features of our liquid and MRD technologies and how we can uniquely position them in this fast-growing market to win significant market share. With that, I'd like to turn it over to Nicole Lambert, our Chief Operating Officer, to discuss our Q3 operating results and new innovations in more detail. Nicole?

Thank you, Paul. I'd like to start with our core business unit performances, starting first with our mental health business unit. Mental health, mental illness continues to have a lasting effect on patients and their families in the U.S. as those suffering fail to receive proper medical treatment. Our gene site psychotropic test helps physicians better understand how antidepressants and other drugs will affect their patients. Importantly for this patient group, the test can be performed with just a single cheek swab that can be taken in the privacy of their own home. In this quarter, GeneSight hit yet another all-time quarterly high volume with approximately 97,000 tests performed. Myriad Genetics is proud to be part of the solution to this ongoing mental health crisis by providing physicians with the information that they need to treat their patients. In the third quarter, the mental health business surpassed 2 million patients tested worldwide with the GeneSight test. Quarterly volumes increased 34% year over year, and we are celebrating over two years of consecutive quarterly volume growth from GeneSight. We believe that the performance of GeneSight this quarter demonstrates the effectiveness of our new commercial capabilities, digital marketing strategies, and patient-centric engagement initiatives implemented over this last year. We look forward to bringing these learnings over to our women's health and oncology business units and continuing to accelerate their growth as well. Also in the third quarter, The Center for Medicare and Medicaid Services preliminarily agreed to crosswalk gene site to PLA code 0175U. Myriad Genetics Women's Health Business Unit serves women of all ancestries by assessing their risk of cancer and offers prenatal testing solutions for those who are pregnant or planning a family. In the third quarter, the Women's Health Business reported $54.3 million of revenue with reported quarterly test volumes of roughly 109,000. In the quarter, the Women's Health Team celebrates a return to positive quarterly volume growth for our hereditary cancer test, up 4% year-over-year, in what is typically our seasonally weakest quarter. As Paul mentioned, the Moldex program recently assigned the MyRisk Hereditary Cancer Test CPT code 81479 and provided favorable test-specific pricing at $1,743 per test. Prenatal testing volumes were stable in the third quarter despite it being a seasonally weak period. Prenatal volume growth in the third quarter was also negatively impacted due to the state of California's recent rollout of its revised prenatal screening program. The state of California held a public hearing on October 26th where more than 200 stakeholders and 22 clinicians spoke out to preserve provider and patient choice for prenatal screening. On October 28th, The court granted a preliminary injunction to stay the exclusivity portion of the California prenatal screening program, and we expect to reclaim a portion of our disrupted business in the fourth quarter of this year. Lastly, we continue to progress towards the launch of first gene or combined noninvasive prenatal screen and carrier screening test, which is expected to be available in the second half of next year. Our oncology business delivered 69.2 million in revenue in the third quarter. Reported test volumes were roughly 45,000. Precise tumor volumes continue to grow and are leading to additional orders of other Myriad oncology products, like MyChoice CDX and BRCAnalysis CDX, as our oncology customers seek to use one laboratory that can interpret all of these test results in the context of each other. In the quarter, MyChoice CDX reported its highest quarterly volume level in the U.S. ever. Myriad's Prolaris prostate cancer prognostic test grew in the in the mid-teens compared with the third quarter of 2021. The Polaris test is designed to assess prostate cancer aggressiveness, helping patients and urologists make more personalized treatment plans. We're also excited about our expanded partnership with Intermountain Precision Genomics to offer Precise Liquid, a liquid biopsy therapy selection tool, in 2023. With these new solutions, Myriad Genetics is advancing precision oncology by merging the power of FDA-approved companion diagnostics a broad next-gen tumor sequencing panel, and best-in-class germline testing services. I would now like to turn the call over to Brian to discuss our Q3 financial results in more detail.

Thanks, Nicole. I'd like to start by reviewing our year-to-date revenue growth. For the nine months of 2022, total revenue of approximately $500 million grew 5% after excluding revenues from divested businesses. We estimate an approximate 2% headwind to year-to-date revenue growth, driven by a $7 million currency translation impact this year and a $4 million non-recurring milestone payment from last year. Year-to-date performance is important as it minimizes the impact of changes in estimates associated with billing collection experience, which can fluctuate from quarter to quarter. Total change in estimates year-to-date represent a positive impact to revenue of $20 million. Revenue growth in 2022 has been driven by a variety of factors. We continue to enjoy strong demand for gene site, generating 40% volume growth year-to-date. Hereditary cancer testing volumes have improved and returned to growth this quarter, increasing 4% year-over-year. In addition, our oncology products are experiencing continued volume growth, with MyChoice CDX testing volumes up 40% year-to-date. On this slide, we present a waterfall showing the drivers of revenue during the second half of 2022. As shown here, revenue is expected to perform consistent with historical seasonal trends with a soft third quarter followed by a sequential increase in the fourth quarter. The chart shows the normalization of the change in estimate highlights the impact of foreign currency, which is a negative headwind to the back half of the year of approximately $7 million. Next, I would like to talk about pricing trends and volume growth in the quarter. As Paul stated earlier, overall volume growth was strong in Q3, up 12% year over year, excluding divested businesses, driven by ongoing demand for gene site, where quarterly volumes grew 34%, and renewed growth in our hereditary cancer testing businesses, where quarterly volumes grew 4%. Continued growth was also experienced for Polaris, My Choice CDX, and BRAC CDX. Underlying pricing of our genetic test products was stable in the quarter, excluding items like currency translation, change of estimates, and a non-recurring milestone payment in the year-ago period. Overall, our blended ASP is consistent with our expectations, and we are encouraged by increased visibility and pricing for our products with recent announcements such as the positive news regarding Moldex and a favorable test-specific price for MyRisk. This next slide details our 2022 adjusted operating expense trend to demonstrate our prudent management of company expenses while investing in core growth initiatives. Consistent with others, we are dealing with an incredibly difficult operating environment that continues to have a significant effect on wage costs, supply costs, freight, etc. We continue to look for opportunities to reduce costs and redeploy operating investments to our growth initiatives. We have raised our adjusted operating expense guidance by $10 million for the remainder of the year to reflect the impact of the inflationary environment, as well as incremental investments in research and development, technology and commercial tools, pipeline development, and sales and marketing programs in an effort to access market share and support various growth initiatives. We are updating our fiscal year 2022 financial guidance to account for third quarter business updates. We are now guiding to revenue of $668 to $672 million and gross margins of 70%. We are increasing our adjusted operating expense guidance by approximately $10 million to reflect inflation and previously mentioned incremental investments. Inclusive of this increase to adjusted operating expense, our updated guidance reflects an approximate 8% year-over-year increase from fiscal year 2021 total operating expenses excluding divested businesses. This increase remains in line with current inflationary trends and demonstrates prudent cost management even as the company invests in growth and innovation. We ended the quarter with approximately $258 million in cash, cash equivalents, and investments as compared to $284 million at the beginning of the quarter. This decrease of approximately $36 million was driven primarily by capital expenditures tied to our investments in Labs of the Future and other technology investments. Operating cash flow was only a negative $2 million in the quarter. Moving forward, we continue to focus on cost management while working to return to positive free cash flow generation. Our cash balance along with having no debt and access to capital markets provides us with a strong capital position. As we continue to execute our strategic transformation and growth plan, we believe that we are well positioned to be a high growth, profitable, free cash flow generating leader in precision medicine, delivering important medical information to health care providers to improve patient care. I'll now turn it back over to Paul for closing remarks.

Thanks, Brian. Before we move into the Q&A portion of the call, I want to summarize five key takeaways in context with our strengths and strategic advantages. First, we are growing volumes consistently every quarter, and we know how to get paid for our tests. Second, pricing for our products is stable, and we have increased visibility into pricing moving forward. Third, we continue to have a disciplined approach to cost management. We expect to maintain our strong 70% growth margins and manage our OpEx with specific targeted opportunity investments that we've laid out to capture market share. Fourth, we are committed to effective capital deployment in key areas that will improve the customer experience, including new tech-enabled tools and capabilities, innovation, commercial capabilities, and our labs of the future. Fifth and finally, our growing catalysts are clear as we continue to elevate our products to their full potential. roll out our new solutions like First Gene, MRD, and Liquid, and opportunistically look for strategic and accretive tuck-in acquisitions like Gateway Genomics. All of this reinforces our position as a trusted, differentiated lab with specialized expertise, best-in-class quality, a strong, scalable commercial engine underpinned by data, research, and technology with industry-leading margins and business management. Now I'll turn it back over to Matt for Q&A.

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

And as a reminder to register for a question, please press the one followed by the four on your top. And the first question comes from the line of Dan Brennan. Please proceed with your question.

Great.

Thank you.

Thanks for taking it. Hey, Paul. How you doing? Good. Maybe just starting off with the new MyRisk code. Can you just give us a sense how we should interpret that in terms of what impact it will have on pricing going forward to your hereditary cancer business?

Well, I think it's further evidence. I'll let Brian dig into it deeper, Dan, of the commitment we've had to stability for investors and for the company in terms of pricing and our strategy around pricing engaging both with Medicare government payers and commercial payers to bring more transparency and more stability to the pricing. So we see it as a pretty significant step forward. We know that there have been a fair number of questions about this, and some expected a much bigger drop. So we were pleased with the outcome. And our team worked really hard with Moldex to recognize the unique characteristics of MyRisk, and that's part of why we think we're enjoying this price That bodes well for our continued discussions with commercial payers and I think supports our long-term guidance of 3% to 5% pricing pressure in this portfolio going forward. And so that's kind of how we see it. We see it's a really great step forward in terms of stability and transparency.

Got it. So in terms of the 3% to 5% down, this kind of gets you into that zip code to feel comfortable with the zip code as opposed to giving you any kind of upward, kind of upside to that number?

Yeah, I don't think this is the quarter to get ahead on anything. So, I would say it maintains our confidence in that three to five, Dan, for sure.

Yeah, and Dan, just to add, I mean, the pricing for the MyRisk code is slightly below where it was priced historically, so in the 5% downrange. So it's more of avoiding a more significant price decrease than sort of additive to where we were before, if that makes sense. Got it.

No, that makes sense. And then maybe just as a follow-up just on GeneSight, just give us a sense of the coding update there, kind of how that filters through into the business and the numbers as we look out. And then as you kind of look forward, maybe just give us an update on kind of what you're seeing in the field now that we've had some time with the VA study. Just give us any kind of update on kind of impact of that study in terms of adoption rates and things of that nature.

I'll speak first to the gene site code. So, the process is still wrapping up with respect to, you know, final Medicare pricing, but the rate is known, I believe it's $13.36, and it's consistent with what we've, what's been in the market historic and talked about. So, I think there's really no update there. We would expect it to be finalized and effective Jan 1, and and it'll be reflected when we give an update after the first of the year.

Yeah, Dan, so kind of consistent with our strategy around all our codings, we think code-specific eliminates the confusion around miscellaneous codes or things like code stacking that I think the industry is sometimes challenged with and gives us a much better conversation with commercial payers. We're having really good discussions leveraging not only the VA study but others. And we have some other clinical and health economic studies underway. And I would again point to the underlying trends and demand for GeneSight as strong market evidence of the demand for this product. And that is leading to good discussions with various commercial payers. And we continue to reduce our no pay. and improve our execution under the contracts that we have to reduce no pay. And again, just a shout out to our RevCycle team for all the great work they've done there.

Great. Thanks, Paul. Thanks, Brian.

Thanks, Dan. And the next question comes from the line of Matt Sykes with Goldman Sachs. Please proceed with your question. Hey, Matt.

Hey, guys. Thanks for taking my questions. Maybe my first question is just kind of, Talking a little more broadly about hereditary cancer, you guys have shown continuing improvement throughout this year. I'm just curious about the competitive landscape and how you see it now. I mean, a lot of your peers in that sector, there's some differences in sort of financial and operating situations there. And so, is part of some of the recovery that you're seeing or the improvement you're seeing the result of share gains in any way you can kind of characterize competitive landscape today versus, say, a year and a half ago?

Yeah, I think I'm disappointed that we haven't seen more gains, quite frankly, Matt. But what we're finding, and Nicole can add, we're having kinds of conversations the last few months that we haven't had in at least the two years I've been here with big customers, big academic medical centers, and a whole wide range of participants in the hereditary cancer market. And I think those will take the next few quarters to run forward and to convert from good conversations to contracts and then from contracts that do system conversions to our EMR and portal. But we're really encouraged by the field-based activity and certainly the distress in the marketplace that others are facing has enabled us to have new and fresh conversations. But it's also what we've done with MyRisk in terms of expanding the gene panel, expanding the financial access, and improving ease of use, which continues to be a big focal point. So we're encouraged by the 4%, but at the same time would have hoped to have seen more progress, but really seeing a lot of activity accelerating here going into Q4, and I think bodes well for next year. So, Nicole, I don't know if you want to add any color to that.

Yeah, I would agree completely. And I think what we're seeing in our market research is a significant improvement in customer perceptions of, you know, our reputation and the engagement that they have with us. And that's leading some large customers to really take another look at Marriott and giving us opportunity to gain access in places we haven't had for a while, to have, you know, higher level conversations. And we're just seeing across the market that people are taking another look at us and they're having a positive experience.

Got it. Thanks very much for that. And then maybe the second one for my follow-up, just Brian, you talked about the increase in the OPEX and obviously understandable given some of the inflation and freight logistics, et cetera, but you're also continuing to invest in the business. As you're making those decisions and balancing the two, how are you thinking about sort of the inevitable path to profitability and balancing that OPEX versus making sure you're investing in growth at the same time of taking care of some of the constraints that are in the supply chain and other things. I'm just curious about the thought process there with a view towards profitability.

Yeah, I think two comments there and then Paul can chime in as well. First and foremost, to your point around ultimately getting to profitability, we want to position the business and the cost structure in a way that is long-term sustainable and really supports the business and generates free cash flow sort of on a standalone basis as you would look at it separate and apart sort of from the capital and the investments that we're making to really drive our growth acceleration. And then secondly, at the same time that we're doing that, we're also every day going through, because it is a difficult operating environment, as you've noted, and looking for ways that, even in this current circumstance, that we can save money in certain places and utilize that money to reallocate more towards things that are going to help to drive growth. As you would see with a company that's 25 or 30 years, a lot of times you can build up some cost in the organization that you really need to take a look at to see if it's really driving the type of benefit that the company needs. I just want to highlight the fact that I'm really proud of the team and the work that they've done in order to be able to, one, handle the current environment and, two, be able to focus on the types of long-term, you know, innovation that, you know, Dale talked about at our investor day with MRD and Liquid, et cetera. You know, I think it just really puts us in a great position, not only in terms of innovation, but also in terms of a, you know, a cash flow generation, you know, at some point in the future.

Yeah, and just tying back to your first question, we just see a lot of market opportunity, and we're making up for deficits of investments that we had not made, and so we're aggressively pursuing those because we do see those opportunities, and that happens routinely. We're just redeploying, as Brian said, aggressively to the things and the customers. So, for example, we've just signed a pretty big customer, and they required about a half a million dollars of IT investment and a chatbot and different things for them. And we said yes. And so we are making the moves in real time to respond to what customers are looking for. and going through a pilot with that customer, hoping to talk about it more next year as we move from pilot to operationalizing it. But that's a good example of the kinds of real-time investments we're making in response to market opportunities.

Thanks for the call. I appreciate it. Sure.

Thank you.

And the next question comes from the line of Jack Meehan with Nefron Research. Please proceed with your questions.

Thank you. Good afternoon on the gateway acquisition. Paul, can you talk about just the background on the deal? How long have you known them? Um, and just talk about the value proposition. So you're getting gender information at six weeks and IPT. You can get that at nine weeks. Just how do you get comfort? You know, the 20% growth they've been putting up is going to be sustainable moving forward.

Well, thank you, Jack. And first, a big welcome to the Gateway team. That's a big part of the opportunity as we see it. This is a team that has really demonstrated over the last three or four years an ability to engage with customers in the way that we have with Genesight and that we want to populate our women's health business more broadly with. You know, we're quite confident, and Jack, you've seen my discipline around M&A on the underlying assumptions on the core growth of the business. And we'll talk more in the quarters to come about the synergy opportunities across the portfolio. But we see a pretty significant opportunity to re-energize our engagement with with OBGYNs and others. So you think about their 1,850 discrete customers in the channel, in the commercial channel, complemented with our 7,500 and very little overlap there. And their own data suggests that almost 60% of the people that access a sneak peak test go on to get an IPS testing. and look to Gateway for information and education. So we see it building on the kind of strengths we've built in GeneSight and accelerating that process in our women's health business to engage with women, engage with OBGYNs and others in the channel in a differentiating way and are pretty excited about both the core and what we can do from a synergy perspective.

Great. And then I also wanted to clarify on the hereditary coding. I know in our conversations back in August, I was under the assumption you'd be migrating the 81432, 81433 for hereditary. So I guess I'm just curious, is that no longer happening? What portion of your hereditary claims are my risk that are going to move to this new 81479 code? Well,

Yeah, our plan going forward would be the appropriate code for us to use would be the miscellaneous code as opposed to the 81432 and 433.

Just to clarify, there's some BRCA that goes under different codes, correct? Like the BRCA CDX?

Yes, that's correct. Maybe offline we can break that down for you further. The point I was going to make, Jack, just more broadly is the diversification in our hereditary cancer pricing profile as we've grown MyChoice, as we've grown BRAC Analysis, CDX, and we've grown our international business. So when I think about the exposure we had on hereditary cancer commercial pricing and Medicare pricing versus where we are today, and as I referred to earlier, are very deliberate efforts to de-risk that business so we can grow it. It's changed pretty drastically both in terms of business mix as well as this improvement and transparency around coding. So it gives us, as previously discussed, just a higher level of confidence in the 3% to 5% range that we've talked about in terms of pricing pressure And now it's about growing and gaining market share, which is really where our commercial efforts are focused. And we're, you know, as I've acknowledged, we're a quarter or two quarters behind where I hoped we would be on our commercial transformation. But Mark and Nicole and the team are getting there. It's just taking longer to deploy and operationalize some of the new initiatives. And, you know, that's often the case, but we're feeling really good about what we're doing and the ability to gain share in the broader market, as we discussed earlier. Thank you, Paul. Thank you, Jack.

And the next question comes from the line of Mason Carrico with Stevens Incorporated. Please proceed with your question.

Hey, guys. Maybe just two quick ones for me, starting with Gene's site. Could you provide some detail on the Medicaid opportunity, any color around gene site volumes that are coming from these patients now? And do you think the PLA code in combination with the PRIME study is enough to begin winning coverage of those plans in 2023?

Yeah, great question. A lot of energy in and around that. It's a significant amount of our no pay for gene site, like 85%, 87%, something like that. And there are at least three Really good discussions going on including some discussions around value-based contracting with various states That the team is advancing and we're also advancing discussions with the VA on the heels of the prime study Where there's a tremendous amount of interest given the mental health challenges of our veterans And we we hope to help solve that problem more directly as well but we would certainly hope next year to announce some wins on the Medicaid side and both on the managed Medicaid side and with state programs directly on the heels of the VA study and the transparency around this code. And most importantly, the mental health crisis these states are turning their attention to coming out of the pandemic, which we're actively in discussions with. So, yeah, there's a lot more work to do, but there's a lot of opportunity there as we see Genesight going forward.

Got it. And on Polaris, could you just talk about what's driving the volume growth there over the past few quarters, and what sort of tailwinds do you see for that test going forward, maybe from a volume as well as incremental coverage standpoint?

Yeah, Nicole, why don't you jump in? I'm actually going to the Ludpug conference here next week to meet with some big customers. We've been doing more of that, as we've mentioned. Nicole, you want to speak to our URG team and specifically what's going on?

Sure, absolutely. So I think a couple of things are going on there, but they're consistent with what we're seeing in other parts of the business in that we're getting better at winning bigger. And so we have a number of partnerships in that space with, you know, uropathology groups that allow us to create a very user-centric, easy, you know, sort of easy experience for those customers to order the test, which just makes it a much more streamlined process. And I think, you know, urologists are really seeing the value of the test. And so across that call point, we're seeing great access. We're seeing, as Paul mentioned, access to larger customers, whether that's in large urology group practices, Lugpa practices, or whether that's on the pathology side. We're just getting better at winning the bigger customers.

And it's a good example of... The portal will be up early next year, which isn't available. And I'd also mention the cross-selling opportunity with MyRisk in that channel as well. That's starting to happen as well.

Got it. Thank you, guys. Thank you.

And the next question comes from the line of Derek DeBrun with Bank of America. Please proceed with your question.

Hey, Derek. Hey, guys. This is Nisargan for Derek. So why don't we start off on prenatal, a little bit of weakness there sequentially. How should we kind of view the new run rate for the segment? Or do you think this was caused by more specific headwinds to the quarter?

Yeah, I mean, clearly we're disappointed that we haven't made more progress in prenatal. I mean, we have a really differentiated test in prequel in particular. We mentioned some disruption of service and confusion in the marketplace in California. That certainly didn't help. We'll be able to work through that now as the state of California is revisiting its program. But more importantly, as the judges ruled against the exclusivity part of the program, which just limited access and choice, which we just thought was bad policy. And again, we're hoping to join that program and are engaged constructively with the state. Beyond that, A big challenge we've had in ease of use has been the portal to be able to sell MyRisk and our prenatal products. That's going to be another quarter before we roll it out. We thought we were going to have it up and running here in Q3. It's going to be distributed in Q4 and probably not fully operationalized until Q1. Again, the sales enablement process is a little behind where Mark and I and Nicole would like it to be. But Melissa is bringing the team together. I think people are really excited about Gateway and SyncPeak and what that can do to the business as well going into next year. And the teams are meeting as we speak about cross-selling opportunities and And so a couple of quarters behind where I had hoped we would be in prenatal, but really excited about the future there. And again, we just need to execute better over the next few quarters to get the growth that we would expect there. Gotcha.

That makes sense. One more. So I know you guys have a lot of new products launching around the same time, mid-23, later in 23. Are we going to see an increased operating expense for the commercial scaling in the back half of 23 or, you know, Salesforce expansion or anything like that to note?

No, you will not. I mean, the work, as Brian articulated, is to leverage and convert the rest of our business to the to the model that Mark built in our mental health business and the one that we see at Gateway, which is much more consumer influenced and driven, enabled by inside sales and technology. And again, I think one of the strengths of the company that we will hopefully prove to investors over the next couple of years is that we have a scalable commercial engine. And so we, We do not expect to be adding to our Salesforce going into next year or in the launch of these new products. In fact, we're going to continue to improve upon the execution of our Salesforce and the use of the tools like Salesforce, et cetera, which is part of what Mark and the team are working on.

Got it. Thank you.

Sure. And the next question comes from the line of Brandon Couillard. with Jeffries. Please proceed with your question.

Hey, thanks. Good afternoon. Paul, just starting with the gateway asset, I'm curious if there was a COVID benefit over the last couple of years. Is the top line consistent, you know, 20% growth this year as well? And any comment you can share with us in terms of the P&L profile between gross and operating expenses?

Yeah, I mean, you know, the business has been growing, you know, well in excess of 20%. But, you know, transactions and integrations can be distracting. So we're trying to make sure we get through that. And, you know, rule number one is don't break what you buy. And this is a really good team. We're really excited that Chris Jacob and the team are going to be part of our team. He's an excellent executive director. and is really going to contribute to our strategic thinking in a lot of different ways, product development as well as our go-to-market strategy. The economics of the business are pretty straightforward. It is direct to consumers, so no reimbursement risk, which Brian likes. Healthy margins, 55% gross margins, and a scalable OpEx platform. We'll make some investments there next year as we talked about to really accelerate growth in that business and get the cross-channel opportunities. But we like the characteristics of the deal, both the return characteristics in the core and the upside synergies that it provides across our women's health portfolio. So it's just a kind of synergistic, accretive bolt-ons that we want to continue to look at across our business units.

Okay, then just one for Brian. Was there a prior period revenue adjustment in third quarter? I don't see one in the release on GAC. I just want to make sure it was zero. Is that true?

Yeah, I think in the waterfall chart is probably the best way to kind of look at where we show the revenue estimate change that we had in Q2 of around $12 million positive, and it was a negative $5.3 million, I believe, in the current quarter or thereabouts. But I think it's in the slide presentation and in their earnings release.

And that's the $12 million swing.

Correct.

So that's, you know, as Ryan pointed out, $20 million net to date, and that cash and the negative $1.8 million of operating cash flow, we feel really good about the sustainability and our ability to self-fund when we're running the business as efficiently as we are. Got it. Thanks.

And the next question comes from the line of Julia Kin with JP Morgan, please proceed with your question.

Hi, good afternoon. Thanks for taking the question. So I appreciate all the sales and marketing initiatives and revenue synergy opportunities you highlighted throughout the call and at your annual stay. I was just wondering if you could give us more color on the timeframe of implementing these opportunities. so that, you know, we can have a sense of when you might be able to reach full potential of driving all these revenue synergy opportunities.

Yeah. Are you speaking about gateway genomics specifically or just the broader commercial transformation initiatives?

More broadly, including gateway integration, but also, you know, replicating the new sales and marketing model to oncology and women's health.

Yeah, no, it's a good question and the right question. I think it's going to take several more quarters. You know, implementation and operationalizing these things are always harder. There's culture change, there's process change, and good discussions to actually convert a customer and have them make a change is always harder than one thinks. Nonetheless, I think Mark and Nicole and the team over the next several quarters will have many of our initiatives implemented. And certainly by the, you know, I would expect that 80% of the initiatives will be in place by the middle of next year. And then we're really executing on new product launches on that, going back to the prior question about new product launches. So I think it's the next several quarters will be pretty telling about how we can continue to roll our technology solutions out, but have them embraced and implemented in the field. And that's where, quite frankly, we could have done a better job this year on some of the rollouts. And we'll get better as we continue to execute and we'll learn from our mistakes as well as the things that have gone well.

Great. That's very helpful. And then specifically on the crop selling for prenatal testing and hereditary cancer, how much incremental revenue synergy do you expect at run rate? And what percentage of women's health accounts do you target to achieve this bundled orders in the run rate?

I think the best way I can answer that question is generally, and then maybe Nicole can add some more color. I mean, I'm not sure we're prepared to give you that full breakout. I would say that historically, Many of the customers have been primarily prenatal or primarily hereditary cancer, and not having a portal to enable cross-selling has been a big challenge. We'll begin to address that as we roll out the portal in Q4 and fully implement it in Q1. But the goal is, and certainly going into next year, we need to be able to chew gum and walk at the same time. We need to be able to sell both products effectively in each of the offices. But it's a mixed bag of the historical penetration we've had. Nicole, I don't know, you can probably give some better color than I can around that question.

Yes, absolutely. And so with all of our women's health customers that are just ordering one or two of our products, we always will talk to them about the second or third product and the opportunities that there are there. I think there are a lot of ways where our customer experience sort of got in our way because of the not full integration of Council versus Myriad where there are still places in the organization where a customer has to interact with someone in Salt Lake City when they're talking about hereditary cancer and interact with a customer service employee out in San Francisco. when they're talking about prenatal testing. And so we didn't have that seamless customer experience. And what we are investing in as part of technology solutions is that even if our back-end operations are still located in two different places, it all feels seamless to the customer. They have one place where they can go to order multiple products. They have one customer service person that they can check on The status of test orders, they have one clinical team that can talk to if a clinician has a question or if a patient calls in, everybody is cross-trained. And I think that this is a place where we continue to improve, right? Where our clinical teams are all cross-trained, but sometimes there's still a gap across customer service, or sometimes the technology tools are not integrated. And so we continue to make those cross-selling experiences better for the customer, right? if it still feels like two different companies, it's difficult to cross out. Whereas when you have a great experience with one, and it's very easy to just order a second or third product in the same portal or with the same workflow, you're more likely to do that.

And that's the hope for gateway genomics as well, right? To engage with customers much earlier and have them have a more seamless experience. And again, Kevin and the technology team are working hard We just have to implement better in the field.

Great. Appreciate it, Collin.

Thank you.

Thanks, Nicole. And then the next question comes from the line of Munith Sudha with SVP Securities. Please proceed.

Yeah. Hi, Paul. Thanks for taking the question. So first one on MRD, just wanted to get any updated thoughts on positioning for that product. you know, recently Maldi X asked one of your peers to do a comparative study in CRC or submit, you know, publications to support that test. How are you thinking about, you know, getting ready to sort of address all that Maldi X or your MAC is going to ask in terms of indication expansion and sort of, you know, how are you thinking about patients potentially already getting locked into these assays for the next two to three years? You know, there are already two commercial tests on the market, and these tests are recurring every three to four months. So just wanted to get a sense of sort of how are you thinking about the competitive positioning in this market and entry into it?

Yeah, a great question. Look, I think we're, and the oncologists that we speak to, We're very much in the early days of liquid NMRD, and Dale and the team have really, even since our investor day, have made really great progress on advancing clinical trials and our own internal analytical validation on the samples that we have been running, and really pleased with the outcomes there. We're in discussions with several academic medical centers as well as some large oncology groups to partner on not only the validation around MRD, but quite frankly, the commercial implementation in advance of that. And so, yeah, look, we're trying to learn from our own successes and failures. But, you know, even since our investor day, I would say our confidence level has has increased and our path to reimbursement, and I understand what happened with our competitors in terms of their submission, we'll learn from that and as we're learning from the success that others have had, which I think will make the path easier for us. But as you've seen, we have a history of success and we talked about it earlier today with MyRisk and with our FDA approval of MyChoice and moving to new sequencing technology and other things, of navigating the regulatory and reimbursement paths pretty successfully. And that's a core capability of the company that I think you'll see bring to bear as we come to market with liquid and MRD.

Okay, great. And then maybe this is for Brian. Should we imagine any pressure or my risk being subject to PAMA down the road? Thank you.

Yes, so I believe the 81479, it would not be subject to PAMA going forward.

One of the big benefits is it's already incorporated in, so it is excluded from PAMA.

And there are no further questions at this time.

Okay, this concludes our earnings call. A replay will be available via webcast on our website for one week. Thank you again for joining us this afternoon. Thanks everyone.

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