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Ladies and gentlemen, thank you for standing by. Welcome to the Myriad Genetics Third Quarter 2018 Financial Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded, Tuesday, May 8, 2018.
I would now like to turn the conference over to Scott Gleason, Vice President, Investor Relations. Please go ahead.
Thanks, Gwenn. Good morning and welcome to the Myriad Genetics fiscal third quarter 2018 earnings call. My name is Scott Gleason, and I am 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; Bryan Riggsbee, Chief Financial Officer and Bryan Dechairo, our Executive Vice President of Clinical Development. 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's a slide presentation pertaining to today's earnings call on the Investors section of our website and which will be filed following the call on 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 documents the company files from time to time with the Securities and Exchange Commission, specifically the company's Annual Report on Form 10-K, its Quarterly Reports on Form 10-Q and its current reports on Form 8-K. These documents identify important risk factors that could cause the actual results to differ materially from those contained in our projections and forward-looking statements.
With that, I'm pleased to turn the call over to Mark.
Thanks, Scott. I would like to start today's call by providing key business and financial highlights from the third quarter of fiscal 2018, after which Bryan Riggsbee will provide an overview of our financial results and guidance and we will finish with the presentation of the GeneSight randomized controlled trial data released yesterday at the American Psychiatric Association meeting by Dr. Bryan Dechairo, Myriad's Executive Vice President of Clinical Development.
In the third quarter, we once again exceeded expectations with revenues of $193.5 million and adjusted earnings per share of $0.31. We are pleased with this strong performance given challenging weather conditions across the United States in the third quarter which we believe negatively impacted test volumes by approximately 1% to 2%.
Based upon the solid quarterly results and strong volume trends heading into the fourth quarter, we are once again raising our financial outlook for this fiscal year and are now guiding to revenues of $771 million to $773 million compared to our previous guidance range of $760 million and $777 million (sic) [$770 million] and adjusted earnings per share of $1.19 to $1.21 compared to our previous range of $1.11 to $1.16.
During the quarter, we continued to make significant progress on our five critical success factors to build upon a solid hereditary cancer foundation, grow new product volume, expand reimbursement for our new products, increase international RNA kit revenue and improve profitability with the Elevate 2020 program.
From a hereditary cancer perspective, we outperformed our expectations in the third quarter, given typical seasonality from co-pay and deductible resets and the challenging winter weather that persisted for the majority of the quarter. Volume grew on a year-over-year basis for the fifth straight quarter and once again exceeded our 3% growth target. Pricing in the third quarter was stable relative to the second quarter.
During normal weather conditions, we saw strong volume trends and remained in – remain encouraged about the opportunity for strategic initiatives including riskScore to drive deeper market penetration. In fact, primarily due to riskScore, we saw accelerating growth in our Preventive Care segment the last two quarters.
With the metastatic breast cancer indication, we saw increasing demand trends following FDA approval of BRACAnalysis CDx and the completion of our sales force training in mid-February. At the end of February, we initiated a targeted rollout of BRACAnalysis CDx to approximately 3,000 oncologists who treat greater than two-thirds of metastatic breast cancer.
As a result, we saw 70% increase in metastatic breast cancer testing in the third quarter compared to the second quarter. We expect this volume to increase in the fiscal fourth quarter based upon our physician education efforts and the launch of our direct-to-patient marketing campaign which we initiated in April.
Moving on to our new product volume growth, year-over-year test volume once again grew at double-digit growth rate and accelerated compared to the second quarter. GeneSight continued its strong demand trajectory with new weekly records at over 6,300 samples per week and a new record month in March. Our positive top-line results from the randomized clinical trial continues to result in increased interest and utilization. Additionally, both Prolaris and Vectra DA showed accelerating trends with double-digit sequential volume growth. In total, new products – new product sample volume represented 71% of the overall volume and 36% of total revenue, both of which were new records for the company.
In the fiscal third quarter, we also continued to make strides toward broader reimbursement coverage for our new products. With Prolaris, new NCCN Guidelines support the test as standard-of-care for treatment decisions in patients with low and favorable intermediate risk prostate cancers. Additionally, the guideline support the broad use of hereditary cancer testing in 40,000 specific prostate cancer patients diagnosed every year and the use of biomarkers such as myChoice HRD Plus to identify prostate cancer patients for targeted therapies.
These NCCN Guidelines were in turn endorsed in a position paper by two major urology physician groups: LUGPA and the American Association of Clinical Urology that represent 70% of urologists in the country. With these new guidelines, we are confident in our ability to expand reimbursement coverage for these tests in the coming quarters. In fact, we have already seen several payers update their policies based upon these guidelines including 14 Medicaid states and a positive Prolaris medical policy decision from our first Blue Cross Blue Shield plan and several regional payers.
With GeneSight, we presented the landmark results from the randomized controlled trial yesterday at the American Psychiatric Association meeting. The data showed the ability of GeneSight to significantly improve outcomes in treatment resistant depressed patients when compared to a physician optimized drug control arm in the largest prospective pharmacogenomics study in history.
We have now submitted our GeneSight RCT manuscript and anticipate publication around the end of fiscal year 2018. Based upon the strength of this data, I am pleased to announce that we have been notified of a commercial coverage decision for GeneSight from a top 20 payer in the Mid-Atlantic region with more details to come this quarter.
Additionally, we continue to have a very productive dialogue with additional payers and believe the upcoming publication of the randomized controlled trial data could be a catalyst for further coverage. We also have additional supporting publications for GeneSight, which have recently been submitted including the additional health economic data based upon the Optum dataset, which we believe will add to the already strong health economic evidence provided by the Medco and Union Health Services studies.
Lastly, we have submitted the IMPACT study for publication which demonstrates that primary care physicians have even better patient results compared to psychiatrists when using GeneSight. We believe the IMPACT publication could ensure broad coverage for tests ordered by primary care physicians that are responsible for more than 50% of antidepressant prescriptions.
Overall, we are confident in our ability to continue to expand coverage for GeneSight, a product which is fully reimbursed at current volumes, represents over $500 million per year in annual revenue. Lastly, for EndoPredict, a Medicare LCD became effective at the end of January, increasing total reimbursement coverage to approximately 90% of the U.S. market.
Moving on to our international business, we recently conducted a strategic review under our Elevate 2020 program, and as a result are implementing a significant restructuring of our international operations. As a reminder, we have shifted our international strategy to focus on a kit based strategy and our initial offerings including EndoPredict, Prolaris and myPath Melanoma, can be performed on the QuantStudio 5, which is marketed by our partner, Thermo Fisher.
Consistent with that strategy, in the future our laboratory developed tests including hereditary cancer and companion diagnostic tests will be performed in our U.S. facilities. The extensive ongoing technical development and economies of scale in our U.S. laboratories will provide a more efficient service and reduce costs by avoiding ongoing technical upgrades in multiple laboratories. As a consequence, we will be closing our laboratory in Munich, Germany by the end of the calendar year and selling the German clinic which our goal is to have occur by the end of the first quarter of fiscal year 2019. We will continue to have a laboratory and manufacturing facilities in Cologne, Germany to support our kit products.
From a financial perspective, the clinic generates $23 million per year in revenue and is breakeven in earnings. Therefore, our revenue guidance for 2019, which we will provide in August, will reflect this reduction in pharmaceutical and clinical services revenue. This restructuring will generate some onetime charges. However, we ultimately expect this initiative to improve profitability in our international business, while still providing the infrastructure needed for long-term growth.
Also in our international business, we were pleased to receive pre-market approval in the Japanese market for our BRACAnalysis CDx test for HER2-negative metastatic breast cancer patients. Every year in Japan approximately 15,000 women develop HER2-negative metastatic breast cancer, representing a significant incremental market opportunity. We plan to market the test through our Japanese distributor SRL Inc., one of the largest laboratory distributors in Japan and will perform testing in our Salt Lake City laboratory.
Japan has a strict companion diagnostic regulatory framework similar to the United States which requires regulatory approval from the Ministry of Health, Labour and Welfare prior to commercial launch. Consequently, we believe Myriad's high quality test offering and regulatory expertise give us significant competitive advantages in this market.
Continuing with the international business, we were encouraged that revised draft NICE breast cancer prognostic signature guidance was issued that now list EndoPredict as one of the three approved prognostic tests. We expect this draft to be finalized in the summer and are optimistic that EndoPredict will continue to be included. As a reminder, in the U.K., there are 26,000 breast cancer patients per year that would potentially qualify for breast cancer prognostic signature.
With Elevate 2020, we continue to make significant progress and saw adjusted operating expenses trend down, yet again, with a decline of $7.5 million on a year-over-year basis, despite meaningfully higher testing volumes. As announced last quarter, we have initiated a project to move the Vectra DA laboratory and customer service groups from San Francisco to Salt Lake City. We plan to complete the move of our customer service group by the end of fiscal year 2018 and the laboratory in the second half of fiscal year 2019.
In addition, we are anticipating multiple additional projects, which Bryan will discuss, that will deliver significant cost savings in fiscal 2019. With the projects already implemented in fiscal 2018, additional projects planned for fiscal 2019 and the international and Crescendo restructurings, we remain very confident in our ability to achieve $50 million in improved operating income by fiscal 2020.
Overall, I am extremely pleased with the progress in our business as we continue to exceed financial expectations. As we begin the transition in the fiscal year 2019, we are strongly positioned with a solid hereditary cancer foundation, strong new product volume growth, increasing prospects for expanded reimbursement coverage and significant cost savings from our Elevate 2020 program to further enhance profitability.
With that, I will now turn the call over to Bryan to provide a more detailed assessment of our financial results in the fiscal third quarter and additional commentary on our updated fiscal year 2018 financial guidance and outlook.
Thanks, Mark. I would like to start by providing a more in-depth overview of our fiscal third quarter financial results. Third quarter total revenues of $193.5 million compared to $196.9 million in the same period in the prior year, a decline of 2% year-over-year, with the year-over-year pricing decline in hereditary cancer being mostly offset by new product revenue growth and hereditary cancer volume growth. Hereditary cancer revenue in the quarter was $123.3 million, which exceeded our expectations given typical third quarter seasonality and challenging weather conditions that we believe negatively impacted our test volumes by approximately 1% to 2%.
In the absence of this weather impact, we believe our overall revenue would have been relatively flat on a sequential basis given stable sequential pricing. On a year-over-year basis, we grew volumes for the fifth straight quarter, so the year-over-year decline in revenue was entirely attributable to pricing.
GeneSight revenue in the quarter was $30.4 million, and grew 27% year-over-year. Volume in the quarter achieved a new record and was up sequentially despite the weather headwinds, with modestly lower revenue attributable to less favorable payer mix. We were very pleased with the strong volume trends we saw in the quarter for GeneSight, given typical third quarter seasonality and the impact of severe winter weather in the quarter. This quarter, we once again set a record with an additional 2,300 new ordering physicians and over 11,000 total ordering doctors. Total ordering physicians in the quarter increased 37% year-over-year, which is a strong leading indicator for future demand trend and reflective of the positive physician response we have received in a randomized control trial top-line data.
Vectra DA revenue in the third quarter was $15 million and grew 34% year-over-year. Much of the year-over-year increase was attributable to the new Vectra DA Medicare payment rate under PAMA, but we also saw strong volume growth with test volumes increasing double-digit sequentially. We believe this strong volume growth is reflective of the strong supporting data we received at the American College of Rheumatology meeting in the fall and new sales strategies.
Prolaris' revenue in the fiscal third quarter was $6.5 million and was up 91% relative to the fiscal third quarter of 2017. The increase was attributable to Medicare's recent expansion of coverage to favorable intermediate patients and increasing the Medicare average selling price under PAMA and double-digit volume growth.
EndoPredict revenues in the third quarter were $2.3 million, which was up sequentially 15%. Improved EndoPredict traction in the quarter was reflective of renewed reimbursement in France and improved U.S. revenues.
Lastly, revenue associated with our pharmaceutical and clinical services business was $13.8 million and grew 18% year-over-year. The strong year-over-year growth in pharmaceutical and clinical services revenue was tied to continued strength at our Myriad RBM division, with robust clinical trial activity from our pharmaceutical partners.
I now would like to discuss our financial metrics for the quarter. Gross margins were 77.2% in the fiscal third quarter, which was relatively flat with the third quarter of last year at 77.5%. Once again this quarter, gross margin headwinds from lower hereditary cancer pricing were offset by increased efficiencies in our production process as a result of our Elevate 2020 initiative as well as increased new product reimbursement for Vectra DA and Prolaris.
Moving on to our operating expenses, GAAP research and development expenses were $18.5 million in the fiscal third quarter compared to $17.6 million in the fiscal third quarter of last year. On a non-GAAP basis, our adjusted research and development expense was $17.4 million and was relatively flat compared to $17.5 million last year.
GAAP SG&A expense this quarter was $115.1 million compared to $122.1 million in the third quarter of last year. Adjusted SG&A expense this quarter was $103.6 million compared to $111 million – $111.1 million in the third quarter of fiscal year 2017. This $7.5 million reduction was almost entirely a result of our Elevate 2020 initiative in reducing general and administrative cost. On a sequential basis, our adjusted operating expenses declined again, demonstrating the significant impact of the program.
Adjusted earnings per share were $0.31 for the third quarter compared to $0.27 in the third quarter of last year, an increase of 15%. Our fully diluted share count increased sequentially to 72.4 million shares outstanding. We continue to prioritize debt repayment as a near term use of cash. This quarter the balance on our credit facility increased by $26 million to $69 million as a result of the final $65 million Assurex milestone payment being offset by net debt repayment of $39 million.
We remain on track to have completely paid off our credit facility by the end of calendar year 2018. This will increase our flexibility to deploy capital, including the potential for additional internally developed or acquired new products.
Our cash and cash equivalent balance at the end of the third quarter was $209 million, which compared to $202 million at the end of the second quarter. We continued to generate meaningful free cash flow with adjusted free cash flow in the quarter of approximately $32 million or $0.44 per share, which was significantly higher than our adjusted earnings per share. Historically, our adjusted EPS have significantly understated our free cash flow per share, and in fact, our free cash flow over the trailing 12-month was $1.72 per share.
Moving on to our financial guidance, we are raising guidance for the fiscal year to reflect the strong business trends we saw in the first three quarters of fiscal year 2018 and current strong demand trends. Our new revenue guidance for fiscal year 2018 is $771 million to $773 million, compared to our previous guidance range of $760 million to $770 million.
From an earnings perspective, we are increasing our guidance for adjusted earnings per share to $1.19 to $1.21 from our previous guidance of $1.11 to $1.16. This annual guidance translates to fiscal fourth quarter revenue guidance of approximately $193 million to $195 million and adjusted earnings per share of $0.31 to $0.33.
I would now like to discuss the relevant drivers of our financial guidance. First, from a hereditary cancer perspective, we expect to once again see stable sequential pricing for our hereditary cancer test and expect sequential volume growth, driven by seasonality and modest BRACAnalysis CDx growth for metastatic breast cancer patients. If our digital marketing and sales initiatives are effective, a more significant up-tick in metastatic breast cancer patient testing would reflect upside to our revenue guidance. For GeneSight, Prolaris and Vectra DA, we are anticipating sequential volume and revenue growth given recent demand trends in March and April.
For GeneSight, we are also assuming that commercial coverage decision will impact results in the first quarter of fiscal 2019 when the billing systems at the payer are updated.
For EndoPredict, we anticipate continued improvement in U.S. revenue given the Medicare LCD, which became effective in January and improved reimbursement access in the international markets.
Finally, we are expecting a reduction in pharmaceutical and clinical services segment revenue in the fiscal fourth quarter with lower clinical trial revenues and reduced clinic revenues due to seasonally lower patient visits in the spring versus winter months.
Turning to our progress on Elevate 2020, we are positioned to exceed our $17 million target and increase the operating profit under our Elevate 2020 program for this fiscal year and on track to achieve at least $50 million in cost savings by fiscal year 2020. Beyond the strategic changes to our international operations discussed by Mark and the Vectra DA laboratory and customer service move, we are working on a number of additional cost-saving initiatives. One of the more significant programs we have initiated are major laboratory process improvements for our DNA, RNA and protein laboratory operations. These changes will result in significant production cost saving, lower turnaround times while maintaining our world-class quality levels. We are in the process of implementing these upgrades for commercial laboratories and will phase them into our production process in the fourth quarter of fiscal 2018 and early fiscal year 2019.
Furthermore, we have made the decision to transition our entire sales organization to a single enterprise-wide customer relations management system, or CRM system, salesforce.com. We believe this new best-in-class CRM platform will not only result in cost savings as we no longer have to support multiple software program, but will also increase sales representative productivity. We will be rolling out this new platform throughout fiscal year 2019 and are evaluating other enterprise-wide software initiative, which could lead to greater efficiency and savings.
Finally, I would like to discuss two items that pertain to our fiscal year 2019 financial guidance. First, as Mark mentioned, we plan to pursue sale to German clinic, and our current goal is to complete the sale by first quarter of fiscal year 2019. We estimate that in fiscal year 2018 the clinic will generate approximately $23 million in revenue and will be neutral to earnings.
Secondly, like all other businesses, we will be implementing the new accounting standard, ASC 606, which for Myriad will occur in the first quarter of fiscal year 2019. This transition will only impact revenue for our hereditary cancer business since the standard has already been implemented for all other products.
Under ASC 606, revenue will be matched to our historical cash collection experience for claims and bad debt will be eliminated creating a contra-revenue item. For example, in fiscal year 2018, we anticipate approximately $31 million in bad debt and if ASC 606 was applied to fiscal year 2018 financials, our hereditary cancer revenue would have been impacted and would have been approximately $31 million lower with an adjusted $31 million decline in general and administrative expense.
The net impact of these two items will offset and should result in no meaningful change to our adjusted earnings per share. In summary, we expect our fiscal 2019 revenue guidance to be reduced to reflect the sale of the German clinic and the elimination of bad debt expense but we anticipate no impact to our earnings guidance as a result of these changes.
In conclusion, I am exceptionally pleased with our strong financial performance throughout the first nine months of fiscal year 2018. As we transition into fiscal year 2019, we are in excellent position given a solid hereditary cancer foundation, strong new product volume growth, improving reimbursement opportunities and potential for improved operating efficiency with Elevate 2020.
With that, I would like to turn the call over to Dr. Bryan Dechairo to provide a review of the GeneSight RCT data.
Thanks, Bryan. I'm excited to provide the broad results from the GeneSight randomized controlled trial, beginning with some background on the clinical need for the product. As many of you already know, major depressive disorder is one of the most common medical conditions in the United States and currently impacts greater than one in 20 Americans.
Over a lifetime, almost one in five Americans will develop severe depression leading to greater than $100 billion in total economic cost. With antidepressants being the second most prescribed class of drugs in the United States following lipid regulators. The indirect medical cost, depression leads to significant ancillary cost for related medical disorders such as back pain, sleep problems and other physical disabilities as well as significant societal costs in the form of decreased workplace productivity and increased disability. These total costs are increasing dramatically, rising 28% between 2005 and 2010.
Studies have shown that that total cost for treating a depressed patient exceeds $20,000 per year. From a physician perspective, the goal of treatment for depression is to achieve remission which is a healthy state free of depressive symptoms. The American Psychiatric Association Depression Treatment Guidelines directly states and I quote, "Treatment in the acute phase should be aimed at inducing remission of the major depressive episode."
There is strong documented clinical evidence that small changes in symptoms do not necessarily correlate with improved long-term outcomes. Consequently, physicians are focused on achieving remission. Additionally, in our discussions with top national payers, we have received feedback on the importance of remission and response due to the fact that they need to report this data and their health effectiveness data and information set, HEDIS, to the National Committee for Quality Assurance, or NCQA.
The NCQA quality assessment measures are used by more than 90% of U.S. health plans to measure performance. These quality measures are exceptionally important to commercial plans as our healthcare system makes the transition to a value-based care model and used to determine star ratings for Medicare Advantage.
Before I review the actual study result, I wanted to provide some historical clinical context on antidepressants studies. Given the subjective nature of the endpoint in antidepressant studies, it is common for pharmaceutical studies to show inconsistent statistical significance for the three key endpoints of symptom improvement, response and remission. We performed an analysis of the last 40 antidepressant registration studies submitted to the FDA for approved medications during the past 20 years. For these studies – first, these studies only showed statistical significance when compared to placebo, not a physician optimized drug arm like the GeneSight study.
Despite the significantly lower bar for comparison in these FDA approved medications only 13% showed significance in remission. 30% showed significance in response and 70% showed significance in symptom improvement. Lastly, the study drugs were unable to show statistically significant improvement in outcomes against the active drug comparator which was included in most of these studies.
Consequently, the APA guidelines expressly state the effectiveness of antidepressant medication is generally comparable between classes and within classes of medication. So in many ways, the results and hypothesis discussed are unprecedented. Historically, medications have been selected for patients using trial and error methodology. GeneSight is a third generation test, which combines known pharmacodynamic and pharmacokinetic factors associated with genetic mutations and weighs them utilizing a proprietary algorithm. The output to physicians is an easy-to-utilize report that lists medications in a red, yellow and green system where green medications are to be used as directed, yellow medications may require dosing adjustment and red medications are generically inappropriate.
Now, I would like to discuss the details of the GeneSight randomized controlled trial. Importantly, the GeneSight randomized controlled trial was the largest psychiatric pharmacogenomics study ever conducted with approximately 1,200 patients with major depressive disorder who had failed at least one trial line of medication. In order to be enrolled in the study, patients have to have at least moderate depressive symptoms with a score of greater than or equal to 11 on the QIDS-C16 symptom scale at screening and baseline. The study included over 60 sites with the nation's leading academic institutions including key members of the National Network of Depression Centers. Patients were equally randomized into a GeneSight-guided arm or treatment-as-usual and both the central raters performed the primary HAM-D17 symptom assessment from baseline to eight weeks and the patients were blinded as the treatment arm to eliminate any bias.
The study evaluated three key endpoints related to HAM-D17 scores, including remission, which is defined clinically as a patient decreasing their HAM-D17 score to less than or equal to seven; response which is defined as the patient having a reduction of greater than 50% in their HAM-D17 score; and symptom improvement which is defined as the percentage change in a patient's HAM-D17 score. Overall, the design and rigor of this study was similar to that which would be conducted for a pharmaceutical seeking approval from the FDA.
On the next slide, you can see the study enrolment and randomization data. A total of 2,004 patients were screened for eligibility criteria and approximately 1,398 were randomized on a one to one basis into either the treatment-as-usual or GeneSight-guided care arms of the study. There was no statistically significant differences in dropout rates between the two arms over either the blinded period or the open label period of the study.
I would like to begin the discussion with GeneSight results starting with the three critical outcomes of remission, response and symptom improvement over the eight-week blinded period of the study. Importantly, the GeneSight-guided arm performed better in all three areas, showing a highly statistically significant improvement in remission and response rates and an improvement in symptoms that was trending towards statistical significance.
Impressively, GeneSight led to a 50% improvement in remission and a 30% improvement in response rate relative to the treatment-as-usual arm. This is the first time to our knowledge that a technology has demonstrated a statistically significant improvement in outcomes relative to an active drug arm for depression. The explanation for symptom improvement trending toward statistical significance can be seen on this slide. The chart on the left shows the relatives symptom improvement after eight-week time point in the GeneSight arm compared to the treatment-as-usual arm based upon the worst color medication the patient was taking when entering the study.
The results are exactly what you would expect. For patients entering the study on a green medication, the GeneSight test provides little benefit because the medications remain unchanged in both arms. For patients entering on a yellow medication, there are improved outcomes in the GeneSight arm, because the test identifies the direction of dose adjustment needed to match the patient's genetic profile. The most significant benefit is for patients entering on red medications, because the GeneSight report will identify the genetic mismatch and recommend other more appropriate medications.
In the study, patients entering on red medication in the GeneSight arm saw a 33% relative improvement in symptoms compared to those entering on red medications in the TAU arm when evaluated at the 8-week time point. However, only 21% of patient entered the study on red medication. As a result, when the entire cohort is analyzed, the significant symptom improvement for patients entering on red medications is diluted by the 79% of patients that enter the study on green or yellow medication.
Now, I would like to look at the deeper analysis for patients who are on genetically incongruent medications at baseline. From a definition perspective, patients on a medication in either the green or yellow bin were considered to be congruent, and patients who are on medication in the red bin were considered to be incongruent.
First, it should be noted that approximately 21% of patients entered the study on incongruent medications. This is actually lower than what we have seen in two previous studies where an average of 27% of patients entered the studies on incongruent medication.
Importantly, from a clinical utility perspective patients in the GeneSight-guided arm saw 57% decrease in incongruent rates, while the treatment-as-usual arm experienced a 9% increase in incongruence rate. This clearly demonstrates that the trial and error methodology did not lead to higher rate of genetic congruence over time. Only when guided by GeneSight were physicians able to increase congruence.
The study data showed that those patients who entered the study on a genetically incongruent medication perform significantly better when switching to a congruent medication. Remission rates among these patients were 153% higher. Response rates were 71% higher and symptoms were improved by 59% and all of these results were statistically significant. In our view, these impressive data establish a clear new standard of care. Physicians should ensure that their patients are taking medications congruent with their genetic profile which can only be determined with the use of a GeneSight test.
Moving on to the next slide, you can see the durability of these results across the open label period of the study. Patients continue to see improvements in all three major clinical endpoints with remission rates at 24 weeks of 30%, response rates of 45% and symptom improvement of 42%. These data are important to payers, because they represent the real-world results that drive health economic benefit.
As a reminder, treatment-resistant depressed patients represent a total cost to the healthcare system of $20,000 per year. Therefore a 30% increase in remission rates for these very difficult-to-treat patients provide a material economic benefit.
Translating these positive clinical trial results into health economic savings is an important step for our payer discussions. As previously published, the combined savings in prescription drugs and healthcare utilization exceeds $2,500 in the first year for patients treated according to GeneSight compared to treatment-as-usual. If workplace productivity savings are included, the savings are even greater at $3,275 in the first year of savings. As mentioned, an additional health economic study will be published in coming months that replicate these findings utilizing the Optum data base.
In conclusion, we are extremely pleased with the results from this landmark randomized controlled trial. The study showed the ability of GeneSight to improve remission and response rates with a durable result that improved over time, and it establishes a new standard of care to identify patients on incongruent medications and switch them to congruent medications. We believe this level one evidence will provide a significant catalyst to broaden payer coverage when combined with the current and future health economic publications. We have already seen this occur with a large national payer ahead of expectations and prior to the publication of the RCT.
Additionally, we believe the study will be instrumental in expanding medical professional society guidelines and deepening adoption from physicians. With that, I am pleased to turn the call back over to Scott for Q&A.
Thanks, Bryan. 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 on the Investor Relations section of our website.
Now, we're ready to begin the Q&A session. Gwenn, we're now ready for the Q&A portion of the call.
Thank you. The first question comes from the line of Doug Schenkel with Cowen. Please go ahead.
Good morning. Thank you for taking my questions. First on GeneSight, I'm just curious based on the data you're presenting this morning. I know this is maybe jumping ahead a little bit, but how are you thinking about potentially expanding the label or coverage to allow for more direct targeting of the PCP market? And would a move into the PCP market impact the health economic calculations that you shared this morning?
Thanks, Doug. This is Mark. I'll answer that and, Bryan, I'll see if you have anything to add. One of the important things from the primary care perspective is that we wanted to generate a data with specifically primary care practitioners. There were some included in the RCT data that we just announced. There were primary care physicians included in that. Probably even more importantly was the IMPACT study that we mentioned in the script again this morning we provided top-line results on that. That was specifically designed to see how well primary care physicians did with the use of GeneSight relative to psychiatrist. That data was very positive. In fact, it showed that the primary care physicians did even better. Both physicians did well. Primary care physicians did even better. A very large study, that study has been submitted for publication. And we are anticipating that can be published potentially around the end of this fiscal year as well.
So we think that's the type of information that if required from payers and specifically Medicare has requested that information, we believe that the magnitude of that study in both scale and quality of the results are sufficient to secure primary care reimbursement. I think from health economic standpoint, I wouldn't expect the differences between psychiatrist and primary care to be any different. I think all the dynamics that drive those health economic savings are fundamentally the same in both of those settings. Bryan, any additional comments from your side?
Yeah. I will just add that in our Medco study that we did with 13,000 patients, we also saw better healthcare savings with primary care physicians versus psychiatrists again, because they utilize the test more congruently, and therefore had higher outcomes. In addition, because they treat patients' comorbidities like cardiovascular and diabetes illness, which is very comorbid with depression, we are able to see even greater savings across the healthcare system.
Great. That's very helpful. And then, if I could just ask one more, I guess, unrelated follow-up. You guys indicated that HCT volume growth was stronger than expected. I believe you said at 3%. That said, HCT revenue declined 12% year-over-year. Can you just refresh us on the outlook for year-over-year ASP stabilization? It seems like mathematically ASPs dropped 15% year-over-year, but you did indicate that they moved sideways sequentially. So given the annualization of Anthem and the agreements you entered into in the second half of last year, is next quarter the quarter where we should expect ASP stabilization, and then from there overall HCT revenue growth to resume?
Yeah. Thanks, Doug. As you mentioned, yeah, those were the numbers 12% year-over-year revenue decline. We did indicate volume was exceeding – the volume growth exceeded our 3% target for the year. And that is a reflection of the fact that in our long-term contracts we had taken some price decreases. For us what's important was to look at how this – how ASP looks on a sequential basis. And as we mentioned, ASP in the third quarter was flat with ASP in the second quarter. So we have seen stabilization of pricing. We're anticipating that we'll continue into the fourth quarter that we stabilize that pricing at this point.
So from our perspective, when you're looking at growing volumes five quarters in a row of volume growth and we've got stable pricing on a sequential basis, I think for us that provides really strong conviction that the hereditary cancer business is one that we continue to feel very good about as we move into fiscal year 2019.
Okay. Thanks, guys. Appreciate it.
Thanks, Doug.
Thank you. The next question comes from the line of Jack Meehan with Barclays. Please go ahead.
Thanks. Good morning. So I had a few questions related to health economics of GeneSight. I'm curious what feedback you've gotten from payers related to that. The workplace productivity is something that you think has been well received? And then, just your appetite related to the price point of the test, whether you'd be willing to accept anything less than $2,000 to drive commercial coverage?
Thanks, Jack. Again, I'll make a few comments and then, Bryan, by all means, you can fill in as well. Obviously, we've had a chance to have discussion with multiple payers at this point. We've secured coverage already, even before the publication which was ahead of schedule. And I think that's a result of both the strong health economic arguments that exist for GeneSight as well as the very strong clinical data that Bryan has gone through.
So with the health economic data $3,275 first year savings, this – that's a number that's very impressive to payers. We have discussed the fact that we have a second publication that is consistent with that. That is working its way through the publication process at this point and that's on the Optum data, which again is very strong dataset and a well respected organization. So I think in that regard, both of those numbers are impressive to payers.
I think the workplace productivity number is very important to employers and we've had very successful conversations with employers. So this is typically an avenue that we haven't pursued for historical products but one for this – for GeneSight, we think is particularly productive. And there has been strong interest from the employer groups, particularly those that are self-funded, which is about half of the managed life in the country. They're very interested in anything they can do to affect workplace productivity.
As a result of that, payers are very interested in anything they can do to appeal to that interest so that they can retain and increase their market share with employers. So that's – although that doesn't necessarily accrued directly to the payer, it does impact their ability to gain share against others. And so they had been very interested because employers consistently are looking for ways to address the large health economic costs associated with workplace productivity. So we found out to be very productive conversation as we've entered into our payers.
From the standpoint of price point, we've noted that our target is $2,000 ASP. We have signed contracts with multiple payers. Those have been consistent with that $2,000 price point. We think the value the product offers is consistent with that pricing and that's at this point where we are in our conversation with payers. Bryan, what else would you add?
The only thing I'll add is that depression is a chronic disorder. And we've shown in both the Medco and UHS studies that we save indirect cost over $2,500 per patient, per year. And what we're able to show in our landmark randomized controlled trial is that not only do we have strong results for improving the remission and response but it's durable and further increases over time. So when you look at a payer, these health economics savings are realized in that first year but then continued as an annuity year-over-year for the payer – for the health economic system.
Great. That was all very helpful. And, Mark and Bryan Riggsbee, could you just give an update on the international strategy? So, do you think the clinic sale, what drove the sale? Do you think it could impact your ability to get reimbursement for any of the new products? And then just to make sure we're thinking about it right for 2019, should we pull that revenue stream out starting July 1?
Thanks, Jack. We don't – because of our shift strategically towards a kit based strategy, that's really what ultimately led to the decision that it wasn't necessary to have the clinic. I think we believe there's other better places for us to put capital at this point and so we wanted to deploy that capital to the best uses. That clinic was originally designed to be part of our laboratory developed testing strategy. And again, as we shifted the kit, it's just not necessary. So we don't think it will have any impact on our ability to grow the international business to get reimbursement for our kit based products. And so, again, it was a decision to shift capital. So, Bryan, other comments?
Yes. I would just add relative to the timing I would say, while we said by the end of the first quarter of next fiscal year, we've already started the process of project managing both the sale of the clinic as well as the closure of the lab. And so that's sort of a backstop relative to the clinic piece of that with the closure of the lab coming by the end of the current calendar year. So that's our best estimate at this point.
Thank you. The next question comes from the line of Bill Quirk with Piper Jaffray. Please go ahead.
Great. Thanks. Good morning, everybody. Mark, appreciate the details around the GeneSight volumes in the quarter. Can you just help us think about the sequential volume trends, just given the puts and takes between the higher volume, yet the lower revenue?
Yeah. Thanks, Bill. So we were very pleased with the volume in the quarter. Of course, it was impacted like all products from weather conditions in the first quarter. But it was interesting to note in weeks where we had clean weeks without weather impacts, we saw record weeks, we saw record month in March. So the volumes remained very strong.
From a sequential standpoint, we did see a shift in mix. And as you know, for the private payer segment, we're not fully reimbursed in that segment. And so, as you see a shift more towards private payer mix, you're going to ultimately at least in the short-term see a reduction in ASP as a result of that. And that's really the phenomenon we saw in the quarter. But the fundamentals of the business and the growth that we're seeing in GeneSight, we're very pleased with, we think the event this week and having full disclosure now on the data is only going to put us in a stronger position to have continual very productive conversations.
As Bryan mentioned, we also saw record additions of physician testers in the quarter as well, which, as you're well aware, is the bellwether for continued growth in the future. So, overall, really strong volume shift in mix led to a little lower ASP, but that's to be expected.
Okay. And then, just thinking about some of the early payer decisions around GeneSight, I guess, Mark, can you help kind of frame the discussions that are going on in the background? I guess what I'm getting at is have the payers that you're speaking with and/or made a decision already seen the data that you presented yesterday, presumably under a CDA? I'm just trying to figure out kind of how impactful the actual data presentation will be compared to the discussions? And associated with that, eventual publication as well, if they've already had a chance to review everything? Thank you.
Yeah. Thanks, Bill. You're correct. So under NDA, we were able to show the data that we released yesterday to payers in our discussions over the last few months. And so, they have seen what you have now seen. And I think as a result of that is why we've already seen the first coverage decision. There will be additional data that comes out in the publication, as you also know that, and you need to make sure that you've got some other non-public data in publications. And we mentioned that there were other secondary endpoints all of which were analyzed and we haven't presented yet. Those will be in the publication. We're excited to discuss those results with you as well when those are published. And so, to the extent that any of that was important to payers, we've been able to disclose all of that in our discussion with payers.
Conversations have gone very well. I think this is exactly what payers were hoping for. It was a very large prospective double-blind study that showed both statistically significant results in eight weeks and showed a durability of response. And so it's exactly what we've been asking to provide, and so they've been very impressed with the data. A couple other anecdotes I can provide. It's been interesting in all of those that symptom improvement is virtually not even a part of the discussion at all. I think the most recent discussion we had with a Medical Officer from a very large payer organization asked in the middle of the presentation to cease with any discussion of symptom improvement and please only discuss remission and response.
Of course, we were delighted to do so. And the rationale behind that is that from a HEDIS perspective, what they're asked to do is produce evidence that their programs can drive down remission and response. Those are the two endpoints they have to report on. HEDIS ratings are very important. They are like Morningstar ratings for investors. They dictate – help dictate share. They help increase reimbursement for Medicare Advantage programs. Anything we can do to help them, not only generate savings which GeneSight will do but it potentially impacts the revenue overall with higher reimbursement and share.
And so, they've been very interested in seeing all the details of the remission and the response data and so we've got a chance to spend some lengthy time going through those discussions with them.
So I think, we had suggested in our earlier discussions, I believe, that payers in general would wait until the publication, so they would have a reference for their coverage decisions. And obviously, we continue to believe that. We have seen, of course, one payer that has moved prematurely to that. We continue to expect mostly wait until after the publication which we believe is on track for publication around the end of the fiscal year.
Got it. And if I could just sneak one follow-up in there. Bryan Riggsbee, just to follow up to Jack's question, the $23 million in – or excuse me, $24 million in German clinic revenue. Can you just clarify, is that – should we just take that out of the 2019 numbers? I realize it started – it should start to go down in the fourth quarter as you winded up, but just trying to get some clarification there? Thanks.
Yes, I think – Bill, thanks for the question. Yeah, we are not prepared to give guidance for 2019 at this point. So all I would say is, what I said during the remarks, which is, we are active in the process currently. We expect it to close by the end of the first fiscal quarter of our year but it could be sooner as well. We're moving aggressively with that.
Thank you.
Thank you. The next question comes from the line of Amanda Murphy with William Blair. Please go ahead.
Hi. Good morning. So I just have a few more on GeneSight. I guess, first, obviously, you've been at the APA conference the last couple of days, so I'm just curious what – how the docs themselves are reacting to data? And just in terms of the subset data that you presented, is that something that they are focused on in terms of the three different buckets of endpoints?
There were some trusts out there that sort of discussions, some reactions from physicians and some were saying, yes, this is great. And some were saying, maybe we prefer to be told this medicine to use, so I was just curious kind of on the ground what the reaction was there?
Yes. Thank you. Amanda. Bryan, you were there for – as were most of us but you are probably closer to some of the psychiatrists, so thoughts from you?
Yes, I think, that – we have a lot of users. We saw that right now, with 11,000 users right now on this quarter for GeneSight. A lot of them were at the meeting. For them, this is just compelling data that supports the decision that they've already made to fully implement GeneSight into their practices. But we also had physicians who were skeptical. They really wanted the same level of evidence that you would have for FDA approval of a medication. And since this trial was larger and longer than FDA approval phase for antidepressant, they found this very impressive and actually have changed their mind on the genetics.
The one piece that you asked as well that have been resonating with the physician is the sub-analysis on congruent because overall with our 50% improvement in remission and 30% improvement in response in the total population, that's great clinical utility. But people want to understand where does that utility come from and it comes from the GeneSight test. And so by being able to show them that 21% of patients who were incongruent basically on a genetically inappropriate medication coming in who switched off of it had the largest improvement in symptom improvement, response and remission, and drove the overall benefit in the total population, that proves the clinical validity of the test that it's the genetics that drives it.
And I think that type of sub-data has really moved the needle on the physician. And again, a lot of physicians have been waiting for this type of study that has never been conducted in pharmacogenomics. And with the positive result, it's really turning the minds of a lot of individuals.
And then finally, I would say that, by working with the National Network of Depression Centers and some of the key investigators who were site investigators on the study also wrote the current treatment guideline. Again, that has moved the needle significantly. One of our doctors at the symposium last night said, they felt like this was the change in tide and the needle has now moved.
Okay. Bryan, that's – go ahead. Sorry.
Yeah. I would just add, Amanda, your last question about the physicians are asking for even more guidance as to which medication. I think, generally, what we hear is that, it would be very helpful to know even more in the green category which of the medications are most likely to be appropriate and particularly given the fact that many of these patients may be on polypharmacy.
And so, I think, from our perspective, we're working on additional tools to help physicians understand even better. But the very fact that they're asking that question, which is, this is great, I know how to look in the green category now. Can you give me more information? That's all encouraging to us, because that really says they already see utility in the test now and they would like to see continued utility which we're working on. So for us, that's a good bellwether for its future use.
Okay. Yeah. That makes sense. And then, I guess, on a similar vein on the payer side, obviously, it's early with the data on the subset side. And you've talked a lot about how they're more focused on remission and response. But how do you think the subset data will resonate with payers? And, I mean, assuming there's no way you can sort of stratify the population, because obviously you don't know if a patient's incongruent before you do the test. I'm just wondering if there's any argument that it becomes sort of a reflex test in some fashion. But I guess, yeah, that's just a question on that side.
Yeah. I think that data was, as Bryan mentioned, to psychiatrist, to the payers and remember the discussions really having are on the medical side of the payer. As you know, there's two sides. There's the payer organization, there's the medical side and then the contracting side. And the coverage decisions are made by the medical side. So these are all physicians, healthcare providers that are looking at this data. I can tell you and I've said personally in some of those meetings that subset data is extraordinarily impactful to them. When you talk about this type of improvement by switching patients off of red medications, you don't need a lot of words for them to understand immediately how impactful this is.
I think I was in one meeting with the payer that was musing, how could you even let them fail one medication knowing this type of information that a patient on a red medication can do so much better. How could we let them even fail one medication? Wouldn't we want to know that information from the very beginning? So that's the type of response we're getting about that.
It really, as Bryan suggested, establishes a new standard of care that you've got to know. And to your point, Amanda, there's no way to know whether or not they're on a red or yellow medication in the absence of doing a genetic test. And so I think it's been very well received at this point.
Got it. Thanks very much.
Thank you. Our last question for today comes from the line of Steve Beuchaw with Morgan Stanley. Please go ahead.
Hi. Good morning. Just a couple of housekeeping ones for me. Maybe first, I'll start actually with Bryan. Bryan, in your discussion around in the prepared remarks on ASC 606, and thanks for the heads-up, you mentioned that there would be some bad debt dynamics that will impact the way we see HCT trend. I wonder if you could give us any more history on that figure so that when the time comes, we'll be able to look at the underlying trends in the model for fiscal 2018 to fiscal 2019. What did that $31 million look like in prior periods?
Yes, sure, Steve. And I think this, as I think about, ASC 606 and we'll present, it will be apples-to-apples year-over-year when you look at the comparison. But the $31 million that I referenced is simply our bad debt. Historically, when you look at other parts of our business and we move to an ASC 606 compliant revenue recognition methodology we did that for Vectra DA at the beginning of the year. That's always been that way. But I think the simplest way to do it would just be to go back and look at our historical cash flow statements where you can pick off the bad debt expense and use that against our hereditary revenue numbers. That will be the mechanics of how I would suggest looking at that.
Steve, that number has been very consistent around 5% of our history and so it hasn't really changed much over time.
Okay. Perfect. Thanks for that. And then for Mark, just to tie up the conversation around – on GeneSight, there seems to be, obviously, a lot of focus on it and people are trying to figure out how this gets deployed, how the payers are thinking about it. I wonder if you wouldn't mind giving us any more insight into the outcome with the top 20 Mid-Atlantic payer that you mentioned. If we were to see that policy, would that be perfectly consistent with what we've been looking for, broad reimbursement, reimbursement in the neighborhood in terms of pricing of your target amount or were there any nuances there that might be worth calling out to understand how this is all playing out? Thanks so much.
Yes, thanks, Steve. As you know, we don't comment specifically on pricing for individual payers. I can tell you our discussion around the value, the test has been consistent with all the payers on, here's what the value is, here's how it can help your plan. And so, I don't think there's any differences from that type value discussion.
I think as we've seen with most of the commercial payers, their view is that the physicians that probably can benefit from the most and the numbers that can benefit from the most are probably in the primary care setting, because most mental health is treated in the primary care setting. And so, that's really the dialogue we've had and the recognition that this is – that's really probably where we need even more help in the psychiatric setting. So I think it's been an all-encompassing conversation that there are definitely benefits to be had across all prescribers for this. So I think that's one of the tenors of that.
I think the other thing that we have seen are interest from payers as they contemplate this on exactly what programs could we work together on to try to ensure that this gets broad scale adoption. And so we're in really value-added discussions with what are the resources we bring, what are the resources they bring and how can we collectively ensure that this gets implemented the right way. One of the things you'll note in this study is that even after, in the GeneSight arm, after we gave, there were still 9% of patients that were on incongruent medications. Payers want to work with us to make sure that's 0%. Because if in fact those 9% had all been on congruent medications, you would have seen significantly better results than we did. So the results are excellent as they are, but if all of those had been on congruent medications, you would have seen even better results across the board and likely even statistical significance for symptom improvement across the whole cohort. So that's one of their focus is, how do we get that to zero, that's been a very specific conversation that we've had with them and there are ways we can do that together.
So I think the nature of the discussion has been fulsome across all healthcare providers and productive across interventions that we can do together.
Great. Thanks for the color, guys.
Thanks. This concludes our earnings call. A replay will be available via webcast on our website for one week. Thanks again for joining us this morning.
Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you and have a good day.