Myriad Genetics Inc Q4 FY2023 Earnings Call

Good day and welcome to the Myriad Genetics Fourth Quarter 2023 Financial Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this call is being recorded. I would now like to turn the call over to Matt Scalo. You may begin. All right. Thanks, Michelle, and good afternoon. Welcome to the Myriad Genetics fourth quarter and full year 2023 earnings call. During the call, we will review the financial results we released today and afterwards, we will host a question-and-answer session. Our quarterly earnings release was issued this afternoon on Form 8-K 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 today are Paul Diaz, our President and Chief Executive Officer; Scott Leffler, our Chief Financial Officer; Sam Raha, our Chief Operating Officer; and Mark Verratti, our Chief Commercial Officer. This call can be heard live via webcast at investor.myriad.com and a recording will be archived in the Investors 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 these expectations for a variety of reasons. We refer you to the documents the company files from time-to-time with the Securities and Exchange Commission, specifically the company's annual report on Form 10-K, its quarterly 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 or forward-looking statements. I'll now turn the call over to Paul.

Thanks, Matt. Good afternoon, everyone, and thank you for joining us. On today's call, we will discuss the highlights from our fourth quarter and year-end performance and provide an update on the progress we continue to make accelerating profitable revenue growth. I want to start by thanking the team here at Myriad Genetics for their efforts this year. Despite the challenges we faced in 2023, our team's commitment to delivering on our mission was evident as we served more patients and added more customers than ever before. Next slide please. Our overarching goals are to continue to develop best-in-class molecular diagnostic tests to better detect disease, support treatment decisions, and improve clinical outcomes. Second, to improve the clinical utility and ease of use for our patients and provider partners and make our genetic tests more accessible and affordable by leveraging technology and scale in our lab and commercial operations. On Slide 5, you'll see that we are not alone in our endeavor to become part of a more patient-centric and integrated health care system, as our industry partners help us create better products and data solutions that allow us to address friction points and expand adoption and access for our genetic tests. Over the next few years, we expect to build on these technology and health care system partnerships to drive continued innovation and growth. Turning now to the quarter and full year results released today on the next slide. We are pleased that we continue to deliver on our commitment to shareholders to achieve double-digit profitable growth as total revenue increased more than 11% in 2023 compared to last year. And we achieved positive adjusted EPS as well as positive adjusted operating cash flow in the fourth quarter. With this strong performance and market share gains in mind, we are raising our full year 2024 revenue guidance and introducing positive adjusted EPS guidance. In November of 2023, we raised $118 million from our successful equity offering, which puts our balance sheet in a strong position to enter 2024 with cash, cash equivalents, and marketable securities of $141 million and no legal overhangs on the business. Next slide please. As we look towards 2024 and beyond, we see adoption in use cases for genomic testing and precision medicine growing, providing strong tailwinds for organic profitable growth across our core products, with an increasing ability to sell across the sales channels that we have deep commercial roots in. At the same time, we would remind investors that not only is it early days for precision medicine, but it is highly fragmented with less than 20% share concentrated among the top players, providing us with significant opportunity for market share gains. We are excited to expand the breadth of our oncology testing options this month with the acquisition of Intermountain Precision Genomics, bringing precise tumor and precise liquid in-house, allows us to capture 100% of the economics that we expect from these products and align these with our strategic priority of unifying our oncology offerings under our precise oncology solutions platform. We plan to launch Precise Liquids from our campus West facility in Q3 of this year, with the rest of the acquired IPG lab operations, including precise tumor, moving by year-end. We are excited to welcome the IPG employees to the Myriad team. Over the course of 2023, we continue to lay the foundation in our lab operations and back office to support accelerated profitable growth at scale in 2024 and beyond. In 2023, we hit our full year revenue and fourth quarter adjusted profitability targets and we did so in a year that saw higher-than-average ASP compression above our pre-stated 3% to 5% range. Due to payer issues and transitioning to GeneSight's PLA code at the start of '23, as well as the transition of multiple Blues health plans and new claims administrative processes that had a negative impact on our collections in ASP in the first half of 2023. Having addressed these issues, we expect improvement in our ASP at or below our pre-stated 3% compression target in 2024. Looking forward, we see the investments that we have made in R&D over the past three years starting to bear fruit with an emerging body of clinical evidence that we believe will support guideline expansion, clinical utility and adoption, and improved reimbursement over the next few years. This morning, we were excited to announce the research collaboration with the National Cancer Center Hospital East in Japan, to use our highly sensitive precise MRD test for patients diagnosed with a wide array of solid tumor hematological cancers. We align with Dr. Yoshino, Deputy Director of Hospital East when he says this study has the potential to revolutionize the scope of WGS-based MRD projects. With a strong 2023 behind us, we look forward to continued growth into 2025 as we launch Foresight Universal Plus, expanded carrier screen, first gene multiple prenatal screen, precise liquid comprehensive genomic panel, and precise MRD for research use with our pharma partners. I'll now turn it over to Mark.

Thanks, Paul. I'll start on slide 12. We remain focused on women's health, oncology, and pharmacogenomics. On the call, I will share a snapshot of our 2023 performance by business unit, as well as an update on our commercial transformation and product development efforts. On slide 13, we saw strong double-digit growth across all of our core products in 2023. As the commercial leader of Myriad, I want to sincerely thank our commercial teams for their part in delivering this level of company growth and success. In the slides to come, I will share how we plan to continue this momentum in 2024. Now on Slide 14, I want to provide an update on the commercial transformation that has driven our success in 2023. By creating enterprise-wide efficiencies across the company, we have optimized our enterprise and business unit capabilities using data and insights to deliver consistent performance. We've also enhanced our customer targeting, digital marketing, and overall operating model to drive commercial leverage in 2024 and beyond. Next slide. Continued commercial execution led to record-breaking volume growth for our pharmacogenomics business in 2023, as we added approximately 16,000 new providers ordering GeneSight for the first time over the course of the year. In the fourth quarter, GeneSight volumes grew 21% year-over-year, while revenues grew 11% over the same period. We continue to build on GeneSight's strong foundation of clinical data, including a collaboration with Optum to create a multi-phase study design to better understand GeneSight's ability to improve clinical outcomes and reduce overall healthcare costs. We look forward to the updates on the Optum study sometime in the second half of this year. The momentum that our women's health team carried through 2023 is demonstrated by their strong results. In the fourth quarter, women's health grew hereditary cancer testing volumes 10% year-over-year, and after excluding SneakPeek, prenatal volumes grew 17% over the same period. Finally, we eagerly await the upcoming ACOG guidelines to include expanded carrier screening and look forward to rolling out Foresight Universal Plus in response. GeneSight's oncology team ended 2023 on a strong note, as they increased hereditary cancer testing volumes by 7% in the fourth quarter compared to last year. We continue to add depth to our oncology offering with the addition of Precise Liquid to our testing menu. We have also expanded the urology portfolio with Myriad UroSuite, a combination of Prolaris, MyRisk, and Precise Tumor that provides enhanced diagnostic information for prostate cancer patients. The Prolaris revenues increased 14% in the fourth quarter and 21% in 2023 compared to the year prior. Next slide. As Paul spoke earlier to the breadth of our testing menu, which is something that we're always investing in, it's important to note that we are investing in depth, not just chasing our newer products. We develop our tests to compete and win across our different channels while investing in IT, infrastructure, clinical data, and everything else that enhances the clinical utility and use of our tests. Finally, I want to give a brief look at how we see the future of our tests coming together. Our product development is focused on new and innovative products that meet the ongoing needs of our patients and providers. In 2024, we expect to launch Foresight Universal Plus, FirstGene, Precise Liquid, and Precise MRD for research use to address these needs. I want to conclude with how extremely proud we are of every team across the enterprise as they continue to rise to the challenge of reaching more patients, exceeding our goals, and remaining patient and provider-focused. Now I will turn the call over to our new Chief Operating Officer, Sam Raha.

Thank you, Mark. I'm excited to be here today for my first earnings call since joining Myriad in December. I believe in this company's mission to advance health and well-being for all, and I'm energized with the significant opportunity we have to shape the molecular diagnostics market and positively impact patient lives. Moving to Slide 21. Let me start with our enterprise-level strategic measures tied to driving near and long-term profitable growth. We actively measure and track key performance indicators for five important categories: people, quality, growth, productivity, and finance, doing so on a quarterly and annual basis. Our analytical capabilities are improving as we continue to mature into a high-performing business. We are increasing our focus on customer-centric initiatives and expanding how we track productivity gains in our commercial, lab operations, and technology functions. Turning now to the next slide. Let me touch on select operational highlights from 2023. We are proud to have a high level of organizational engagement across the company. We have been designated a great place to work, with 86% of our team indicating their strong endorsement of Myriad. We also significantly improved our employee turnover in 2023 at just 9%. Healthcare providers are among our most important constituents, and their satisfaction led to a Net Promoter Score of 70 for 2023, a figure that has improved over the past few years as a testament to the focus on ongoing investments we have made in the patient and provider experience. We continue to see rapid test turnaround times in our labs while reducing operating costs and actively identifying opportunities to improve and differentiate ourselves. Notably with credit to Mark and his team, we increased sales productivity by 12% in 2023 compared to last year and saw an increase of $45 million in revenue in excess of expectations in 2021 through 2023 delivered by our revenue cycle team. Moving to the next slide. One of my highest priorities is to ensure that Myriad continues to improve the patient provider experience. Industry surveys and focus groups tell us that the healthcare provider's decision to work with a diagnostic testing lab is based on five requirements. First, tests need to be backed by strong clinical validity and utility. Second, providers want a comprehensive product offering in menu, which we see as an opportunity to differentiate ourselves from our competitors. Third, they require fast turnaround times; and fourth, ease of use on ordering a test with results that are readily interpretable. Finally, providers want testing options that are affordable to their patients. We are taking a structured approach to address these requirements, coordinating across the company to ensure that we are all working towards the same goal. While ensuring individual patient identity is protected, we believe in freely sharing our data with the broader scientific and medical community for the betterment of healthcare rather than to monetize such patient-related information. On that note, we recently launched the Myriad Collaborative research registry that includes data across term line and tumor testing results for Myriad Genetics Precision Oncology Solutions products on more than one million patients. Moving now to slide 24. Digital technologies are foundational to improving the customer experience, and we have invested significantly to deliver value to patient providers in real-world clinical settings to enable better treatment decisions for patients. This slide illustrates technology-enabled projects that are actively being implemented at Myriad. Again, our focus is to invest in projects that make it easier to do business with us, from learning about our products to ordering tests and receiving easy-to-understand results supported by ongoing investments in EMR integration, enhanced patient provider portals, and our unified order management system. Finally, let me update you on our roadmap of enterprise-wide infrastructure and capability programs we have been focused on. We made significant progress in 2023, including the completion of our new facilities in South San Francisco and Salt Lake City. Earlier this month, we hosted investors for a tour at our new Salt Lake City facility and hope to see more investors who want to visit us. We also completed the transition of our prenatal products to the NovaSeq 6000 sequencing platform in 2023. Our 2024 focus includes moving over the recently acquired Precise Tumor, Precise Liquid Tests, as well as our Precise MRD assay to our Salt Lake City West facility and also building on our EMR integrations from the 1,200 locations that we successfully added in 2023, with more than an additional 1,900 locations expected in 2024. All of these programs require significant investment, and we are confident that we will see a positive return in the form of improved test turnaround times, lowered operating costs, and improved customer experience, which will continue to differentiate us from our competitors. And now let me turn it over to our newest executive, Scott Leffler, our Chief Financial Officer.

Thanks, Sam. I'm also excited to be here for my first earnings call with Myriad Genetics. Like Sam, I was attracted to Myriad because of the company's mission to advance health and well-being for all and for the opportunity to leverage my own experiences with both payers and lab services to drive profitable and sustainable growth. We'll begin on slide 27 with a review of key volume growth drivers. In 2023, we delivered double-digit volume growth year-over-year across hereditary cancer, prenatal, and pharmacogenomics. This performance speaks to several factors such as an improving customer experience that Sam talked about and the strong execution from our commercial team that Mark discussed. This most recent quarter marked Myriad's sixth consecutive quarter of positive volume growth year-over-year in hereditary cancer testing, and we continue to grow at the high end of our market growth estimates. On slide 28, I want to highlight our financial performance by quarter throughout 2023. As Paul mentioned, full-year 2023 financial results hit the high end of our financial guidance, and we achieved our goal to generate profitability on an adjusted basis in the fourth quarter. We delivered revenue growth in all three of our business units compared to 2022 and remain disciplined in our cost management, which contributed to our adjusted EPS of positive $0.04 and adjusted operating cash flow of positive $14 million in the quarter. While revenue progression during the year typically follows a seasonal pattern, we benefited from a concentration of biopharma revenue in Q1 of 2023. That being the case, we expect only mid-to-high single-digit percentage growth for revenue in Q1 of this year compared to last year. We then expect year-over-year growth rates to increase in subsequent quarters. Also, as a reminder, adjusted operating expenses tend to be seasonally higher in Q1 due to timing of certain commercial spend, resulting in negative EPS in the first quarter of this year. Our balance sheet finished 2023 in a strong position with approximately $141 million in cash, cash equivalents, and marketable securities. This balance includes $40 million drawn from our asset-based facility as we borrowed ahead of expected seasonal working capital outflows in Q1. We have made a step change improvement in adjusted operating cash flow in 2023 compared to 2022, especially during Q4 when adjusted operating cash flow was positive $14 million. Additionally, as Sam mentioned, we are excited by the progress of our transformation and real estate initiatives, and are pleased to have the lion's share of the investment behind us. That being the case, we should see significant reductions in those categories of cash costs that have been adjusted out of our non-GAAP metrics, beginning with 2024. Most importantly, we believe that we have line of sight to realizing the benefits of those investments beginning in 2025 as those assets are more fully operationalized. On Slide 29, we compare actual full-year 2023 results to our initial 2023 financial guidance offered in February of last year. Actual 2023 revenue exceeded the initial revenue range, with gross margin and adjusted operating expense within the initial ranges provided a year ago. This positive overall financial performance for full-year 2023 reflects the significant progress Myriad has made on all fronts discussed here today. On Slide 30, looking forward, we are optimistic regarding the overall business trends and the company's ability to grow at or above industry growth rates, which is why we are increasing our full-year 2024 revenue guidance. As mentioned earlier, Q1 of 2023 was an unseasonably strong comp. So first quarter 2024 revenue is expected to grow at a mid-to-high single-digit percentage rate over the prior year period, and accelerate through the rest of 2024. 2024 gross margin is expected to improve between 50 and 150 basis points over 2023 given expected volume growth, product mix, pricing trends, and our ongoing focus on operational excellence. For the first quarter, gross margins are expected to be lower than fourth-quarter levels reflecting typical seasonality and are expected to ramp up throughout the year. With adjusted operating expense expected to grow between 5% and 7% in 2024, we expect to see operating leverage drop to the bottom line, with 2024 adjusted EPS expected to be positive, versus a loss of $0.27 for full-year 2023. This year, we are also introducing adjusted EBITDA as a new metric in our guidance for 2024, which we believe will be a useful metric for investors in understanding Myriad's trajectory with respect to both underlying profitability and cash-generating potential. For full-year 2024, adjusted EBITDA is expected to be between $20 million and $30 million. While we aren't formally including CapEx in our guidance, I'll note that capital expenditures are expected to return closer to normal levels in 2024, projected at approximately $20 million to $25 million for the year and consistent with commentary made at our September 2023 investor event. Now, let me turn the call back to Paul.

Thanks, Scott, and welcome. We continue to build on the pillars of long-term growth and profitability that have delivered our strong results this year. Our clinically differentiated products supported by technology deliver value in real-world clinical settings and enable early detection and better treatment decisions for providers and their patients. Our modernized lab and commercial engine are examples of where investments in automation and advanced technology are yielding improved workflows, faster turnaround times, and reduced operating costs. Looking forward, we will deploy our strong balance sheet in a disciplined manner in ways to support the enterprise in our shared mission and vision to make genetic testing and precision medicine more accessible. With that, I will turn it over for Q&A.

All right. 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 in our earnings release and 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. Michelle, we are now ready for the Q&A portion of the call.

Our first question comes from Doug Schenkel with Wolfe Research. Your line is open.

Hi, this is actually Collin Babington in for Doug Schenkel. I've got a question about MRD. Could you give any updates on the timing of new data releases and the path forward for reimbursement?

Yes. We're really proud of the progress that we're making in the study. We mentioned the study this morning in the press release. We have the study with Memorial Sloan Kettering as well as MD Anderson advancing pretty quickly, not really ready to call out sort of the expected readout of those studies, but from all indications they're progressing well. And all the analytical validation in our labs are also progressing really well to the specs that we expect. In terms of reimbursement, to some extent we're going to take advantage of the progress that others have made here and be a fast follower. We're building those use cases and working on the clinical utility studies, which I think are going to be really important to reimbursement. And so there are a number of different efforts in that regard that we'll be talking about. So we're expecting a commercial launch following the research studies that we'll do later this year with pharma going into 2025 as well. But we'll have more to update on MRD including our freedom to operate and the IP in the months to come.

Great. Thank you. Just one quick follow-up there. Are there any concerns given the patent landscape in MRD?

We are quite confident in our freedom to operate. And as we've spoken to before. We've built these technologies on existing platforms and systems and processes that have been in existence and are patent protected for a way back. So we're very confident when we come to market we're going to have a highly accurate and sensitive MRD assay and that we'll be able to participate in what is a large market and a great opportunity for patients most of all.

Thank you. Our next question comes from Rachel Vatnsdal with JPMorgan. Your line is open.

Hi. This is Casey on for Rachel. Thanks for taking our questions. So I wanted to start on prenatal. Curious how sustainable the strength is that you guys have been seeing another strong quarter in 4Q with 17% volume growth outside of SneakPeek. What does that runway look like in terms of share gains in 2024? And how much upside would the carrier screening guideline updates potentially later this year provide?

Yes. Our women's health team and Mark can dive into this some more. We're really pleased about the progress that we're making both in terms of wallet share and new customers. Obviously, there's been a lot of dislocation in the women's health space and we are certainly seeing our fair share of new customers and market share gains. So we do expect those gains to continue. And as you noted, we see significant upside both in terms of volume and ASP as guidelines come out for expanded carrier screening and that will also be supportive of our FirstGene launch hopefully later this year as well. Mark, would you add?

No. I think Paul said it best. I don't think when we think about the momentum coming out of 2023, we really don't see any headwinds in 2024. I think we’ve stated before it actually is an under-penetrated market, and awareness in many cases still seems to be low. And so, especially when you think about the unaffected in the Hereditary Cancer side that is in the OB/GYN channel. And so we expect this continued momentum going into 2024 both in driving depth as well as earning back from new customers due to the dislocation.

Thank you. Our next question comes from Andrew Cooper with Raymond James. Your line is open.

Hi everybody. Thanks for the question. Maybe first I appreciate the comment on pricing being at the low-end or a little bit better for 2024. I was hoping you could maybe just break that down a little bit more in terms of is it largely Hereditary where you continue to see the headwinds and GeneSight gets a lot more stable after a bit more challenged of 2023? Just kind of how do we think across the segments about what pricing maybe looks like as part of that build for 2024?

Yeah. Andrew, I mean, again despite those headwinds we had a really good year. And again, hats off to Mark and the commercial teams and our folks in lab operations that kept up with the volumes. So the volume more than made up for a tough year on ASP. And we made up the cash collection piece in the back half of the year. I would say that obviously the low-hanging fruit is with FirstGene. I mean with GeneSight we see a lot of opportunity for improvement and coverage there. It's market-by-market, blues plans-by-blues plans, but the biomarker laws have given us another ability, in 14 states now to look to expand coverage. But the transition issues we had with the payers, we don't see any of that dislocation going into 2024. So really across the product portfolio, probably less than Prolaris, we saw a really strong ASP year in Prolaris, but both for Hereditary Cancer, Prenatal, and especially for GeneSight, we see ASP opportunities here in 2024 and 2025.

Okay. Helpful. And then, maybe just I did notice I forget if it was in the slide deck or the press release the word relaunch next to Precise Tumor. Just maybe a little bit of color on kind of some of the moving parts there? And then, how do you think about the opportunity and how it changes when you do have that broader set of Tumor and Liquid and MRD and kind of the rest of the portfolio together being ideally more than the sum of the parts. So I just would love sort of your latest thinking on how much of a step-up can that broader portfolio really mean as opposed to some individual pieces that are there today?

Yeah. Thanks. I think it's an excellent question. This is Mark. Historically, Myriad has always been known for having the gold standard when it comes to the Germline Test. And I think more and more, especially as you think of health systems, where you think of larger accounts, they are really looking for a single provider because it makes their workflows easier. And ultimately, they want as many answers or all the answers that they can, at the same time when they're making treatment decisions for their patients. So bringing Precise Tumor, bringing Precise Liquid, and eventually MRD, that's going to round out the Myriad portfolio, combined with what we're doing on the Operational side that Sam will talk to in terms of that ease of use is really first in mind for all of the health care systems that we talk to. Sam, do you want to add to that?

Thank you, Mark. Continuing from one of the slides I presented, we clearly understand that a key factor for our customers, the healthcare providers, is the comprehensive nature of our offerings. This enables us to engage throughout the entire process, from hereditary cancer assessment all the way to therapy selection and monitoring with Precise MRD. We believe we have a distinct advantage here, as liquid biopsy has become a significant topic in our industry. Myriad has been a pioneer in this area for nearly three decades, starting with our myRisk tests, which are founded on liquid biopsies. This experience has equipped us with the capability and infrastructure needed for sample collection and processing at scale with excellence, which we consider a vital differentiator across our portfolio.

And lastly, Andrew, I would just say we're having a meeting with health systems now that wouldn't talk to us six months ago. And so we really see an emerging health system strategy. That's a world that I come from, as you know. And so we've built up a whole infrastructure and team to really across our portfolio from oncology to prenatal to pharmacogenomics. And Intermountain, LifePoint, specialty providers like Simon Med are just the first of what we think will be a much bigger opportunity for us. And also in academic medical centers that, quite frankly, we've been shut out for many years because some of our own self-inflicted wounds. Those doors are opening up, and we're having some really great conversations in a lot of systems across the country.

Thank you. Our next question comes from Matt Sykes with Goldman Sachs. Your line is open.

Hey, guys. Congrats on the quarter. This is Prashant Kota for Matt. Could you provide some color on OpEx cadence throughout the year?

Sorry, that was OpEx. What?

2024.

Yeah, we made some reference in the prepared comments about the fact that seasonally Q1 does typically have an elevated level of CapEx and certainly elevated relative to Q4 2023 on a sequential basis. And then you could see it follow normal seasonal patterns from there as well throughout the year. But beyond that, we're not going to provide a specific quarterly guidance.

Yeah. I think the only thing I would add is that I think you've seen the team just do a really great job in the lab on COGS as well as managing OpEx. You really saw us bring that down actually over the course of the year, even as we address wage rate issues and other things, and we're committed to continuing to do that for our teammates to keep people competitive. So we've just continued to build more discipline on the OpEx even as we're investing more in R&D. So as we find productivity gains, we're investing more in Dale shop in clinical studies and other things to advance the portfolio. So it will continue to be a focus of ours, but a real disciplined approach, as Sam talked about.

Got it. And then can you just provide some color on revenue contribution, cost implications in 2024 from the acquisition of Intermountain for both 1Q 2024 and for the year?

I'm sorry, you're going to have to speak up because we really can't hear you.

Sorry about that. Can you hear me now?

A little better. Go ahead.

So can you provide color on revenue contribution and cost implications in 2024 from the acquisition of Intermountain for both 1Q 2024 and for 2024 full year?

Let me see if I can provide you with the specific number. I think it's modest. We will definitely incur transition and integration costs that are included in our guidance. As Scott mentioned, we expect a larger impact on operational expenses in the first quarter due to the influx of new business we are onboarding. We anticipate spending an additional $2 million on EMR integrations for new customers in order to maintain our presence in the large market. I hope that provides some clarity. We are seeing high returns on investment for the operational expenses we are allocating, whether it involves acquiring new customers or integrating Intermountain Precision Genomics.

Thank you.

Thank you. Our next question comes from Jack Meehan with Nephron Research. Your line is open.

Thank you. Good afternoon. I wanted to ask about hereditary cancer testing. So historically the fourth quarter is a pretty seasonally strong volume quarter. Not sure if this is right, but I'm calculating a sequential decline in the fourth quarter this year though. Can you just talk about the sequential trends you're seeing in the hereditary cancer testing?

That's incorrect, Jack. And seasonally, hereditary cancer is pretty strong in Q4, and it was off a pretty big base from the prior year in 2023, and you saw really strong growth in women's health as well. So depending on work in process and lots of different factors but let me just underscore very clearly that we are very excited about both the organic growth of myRisk hereditary cancer test as a highly differentiated product, ASP opportunities there. That was a bigger challenge in 2023, quite frankly, was not volume with ASP and having addressed those issues with a couple of our payers as we work through some of the coding issues. And we see accelerated market share gains. So, when I joined the company, everybody thought hereditary cancer just like GeneSight should be put out to pasture. I think we've proven that now to be an incorrect set of assumptions here.

Okay. So I mean, just looking at your women's health volume in the fourth quarter in the deck it was $191,000. Last quarter, it was $190,000. But I assume prenatal…

Let's discuss your numbers in private, Jack, and also address some strategic issues for the company. If you have questions about specific volume figures or your model, the team can assist with that after the call.

Sure. Yes. I just wanted to address the financial questions here on your fourth quarter earnings call. Maybe one guidance question for you? Can you talk about what gives you the confidence in 50 to 150 basis points of gross margin expansion in 2024? Just considering, they've been on the downslope since 2013. So what's going to move this back to expansion?

I don't think that's correct. We've maintained there's quarterly volatility in gross margins depending on product mix, and we always see that in. But we have maintained within our guidance range of 68% to 70% gross margins for the last two and a half years. So, again, I'm not sure what numbers you're looking at Jack but they're not the same numbers that we're reporting. Again, we're happy to go through those offline with you.

Thank you. Our next question comes from David Westenberg with Piper Sandler. Your line is open.

Hi, thank you for taking questions. I have two questions. I'll ask them both at once. Can you quantify or discuss the potential exits in BRCA within women's health and non-invasive prenatal testing? Did you consider a major competitor exiting in your guidance, or is that an upside to your guidance? Secondly, when should we expect expanded carrier screening in ACOG, and can you provide details on whether that is included in guidance and how quickly you can secure coverage for expanded carrier screening? Thank you. I realize that was a lot to ask at once.

Those are really very thoughtful questions. As we mentioned before, we see a lot of disruption in the marketplace. It is not something we are celebrating that some of our peers are struggling, and we all want to ensure that patients have access to both our hereditary cancer and prenatal testing. Everyone is working hard to make that happen. Unfortunately, several companies have struggled over the last year, especially smaller, less visible ones in this still fractured market. We certainly expect to continue gaining market share, but we have kept our guidance for market share gains quite conservative. While this disruption presents more opportunities for us, we do not want to get ahead of ourselves, and we know we are not the only ones aiming to support patients. Regarding ACOG, we have all been anticipating the expansion of ACOG guidelines, which we think could happen this spring. As we've discussed in previous calls, it will take 12 to 18 months for payers to adapt, so we are not factoring that into our volume or ASP expectations for 2024. However, we believe it could provide significant support for Foresight Universal Plus and FirstGene in 2025, but these are not included in our current guidance.

Thank you very much.

Thank you.

Thank you. Our next question comes from Mason Carrico with Stephens. Your line is open.

Hey guys. Congrats on the quarter and the year. First, could you talk about the opportunity to begin capturing some incremental hereditary cancer volumes this year given the disruptions with the key competitor. I think at least in the near-term, they'll continue to operate. So, I guess the question is what do you think has to play out? Or what do you think the catalyst will be for clinicians to begin shifting volumes away from them? Is it turnaround times get impacted? Or how are you thinking about that?

Well, look, I think over the last year, we've been talking about increased wallet share gains. In part, as I mentioned earlier, we had lost fellowship with genetic counselors and others. And so we've continued to see wallet share gains and more recently an acceleration in new customers, Mason. So we certainly believe that those trends will accelerate in 2024 even as we're signing some of these customers it will take a quarter or so to onboard them. And even a couple of quarters to transition to the EMRs that they're hopefully we can transition to. Those will not happen overnight. But we do see both prenatal and hereditary cancer volume opportunities because of the dislocation in the marketplace among a number of different providers and one obviously big one that again we are hoping is lifting our assets.

Got it. And then maybe a follow-up here. I know it was still relatively recent, but just given what you're seeing from hereditary cancer and the opportunity there has it changed your view at all around the mid single-digit growth in hereditary implied in your 2026 target?

We are pretty excited about our core MyRisk, with risk core product. It's clinically differentiated. We see guideline expansions for the use cases for hereditary cancer. So we do see probably upside in the size of the market, and we certainly see upside in terms of our ability to win market share gains. And as Sam and Mark both talked about, that precise oncology solutions for affected patients including MyChoice HRD and on the unaffected side where it's only 15% penetrated, and you've seen again 17% growth in women's health this quarter, I think 20% last quarter. So again, quarter-to-quarter, I'll just remind everybody the volumes can be choppy. But we have a high degree of confidence in our 2024 annual guidance that we've given you this afternoon.

Thank you. Our next question comes from Kyle Boucher with TD Cowen. Your line is open.

Good afternoon. This is Kyle filling in for Dan. I would like to request more detail about the announcement made this morning at the National Cancer Center Hospital East in Japan. What are the key milestones we should watch for as this progresses?

Yes. It's like 2000 patients across a broad array of indications the industry leader right now did a lot of their seminal work with this institution. So we're quite proud that they've chosen our highly accurate MRD assay to follow. But it's really too early to talk about readouts, but they are an incredibly efficient organization and we've had great success in Japan and with MyChoice and other products. So we're quite excited about the study. And the fact that it does cover a broad array of cancers really will help us advance our MRD strategy again to be among the leaders in MRD. It will also help, I think, as we work with Optum Genomics and others on clinical utility. I'm as enthusiastic about MRD as anyone, but it is early days here for adoption and use in clinic. A lot of the docs that we talk to at San Antonio Breast and other places. We're really excited about this but not quite know what to do with it. And I think that's on us to figure that out. And the payers are certainly looking for us to figure out how and when to pay for MRD and how often, et cetera.

Got it. Got it. Thank you. So moving back to the disruption in the hereditary cancer testing market, I guess conceptually, how should we think about maybe ASPs on hereditary cancer going forward? If share gains come from, I think a bit of this market is maybe in a lower-priced space? How should we think about that?

Well, we're not taking on lower price profit-losing business that has not been the strategy here, which is why we kind of stand alone as the only profitable company in our space with the gross margins that we have, again, right around 69%, 70% depending on the quarter. And as I stated earlier, we do see improvements in ASP. We had some disruptions for hereditary cancer ASP this year because of some payer issues. So we're not going to be taking on business to go downstream in terms of pricing, which is why we don't buy customer lists and pursue the opportunity that way. So people are moving to our products on our contracts. And as you know we signed a four-year contract with United, we've got a lot more visibility on ASP than we've had in a long time despite some of the things that we went through in 2023, because of the things we went through 2023. So again we're very excited about the opportunities for hereditary cancer and that's a sustainable growth part of the business.

Thank you. Our last question comes from Brandon Kramer with Guggenheim Securities. Your line is open.

Hi guys. Can you hear me okay?

Yeah.

Awesome. Thank you. This is Brandon on for Subbu and Andy. I just had a quick follow-up on the unaffected market. That 15% market share, do you have any levers that you're looking to push over the next one to two years that could help you grow that penetration?

Yeah. No, the market is only 15% penetrated. That's what I meant. That's not our... But that's what I'm saying there's a lot of white space there. But Mark why don't you take this.

I believe one of the challenges in the unaffected market is the customer journey that patients experience. Many women who visit OBGYNs and receive mammograms are unaware that they qualify for hereditary cancer tests simply because they haven't been asked about their family risk. The key challenge for healthcare systems is how to efficiently gather that information at the intake stage in a user-friendly and digital manner. We have developed a digital solution that we are eager to introduce to various health systems, and we are currently in discussions with many of them. This is a significant opportunity for us to raise awareness and integrate this process into the existing customer journey, especially as patients visit imaging centers for mammograms. We will share more details on this as the year goes on.

Great. Thanks. And then just one quick follow-up on the margin outlook. You said that the first quarter expects a bit of a step down then a ramp up in the second half. Is there anything strategically, you would point out in the second half like cost of goods sold per test or lab automation that you want us to focus on moving into the second half to help that margin boost?

I mean, we're in the middle of our lab moves. So the fact that we are maintaining the volume and gross margins that we have while we're flying the airplane and changing the engines on the airplane in the air are a big testament to our team, and that we continue to get through FDA approvals and CLIA certification. There's a lot of moving parts here that Sam and the team are working through. So, I think as we go into 2025, as we finish these moves into the new facilities, as we continue to automate and our Archer system, and essentially, we've moved the robots or built them and moved them from South San Francisco into campus West. For those of you that toured a few weeks ago, got to see that. So, as we're standing that up and as we continue to move to new sequencing technology like XPlus, we see a lot of opportunity with that to improve margins over the next couple of years. But believe me, Sam has a supply chain $200 million target that he is responsible for going after. So, we do see near-term opportunities in the supply chain that he has, and the team is going after today, even while the automation and the new lab of the future stuff takes more time.

Great. Thanks again.

Great, well, thank you very much, Matt.

Yeah. Thank you very much. This concludes our earnings call. A replay will be available via webcast on our website for one week. Thanks again for joining us, and have a good afternoon.

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