Invitae Corp (NVTA) 2015 Q2 法說會逐字稿

Good afternoon, my name is Angel and I will be your conference operator today. At this time I would like to welcome everyone to the Invitae second-quarter 2015 earnings conference call. (Operator Instructions). Thank you. Katherine Stueland from Investor Relations at Invitae, please begin your conference.

Great, thanks and good afternoon, everyone. Thank you for joining us for our Q2 earnings call. Kicking off the call will be Randy Scott, our CEO, then Lee Bendekgey, our CFO, will provide a high-level review of our financial performance.

Sean George, our President and COO, and Lisa Alderson, our Chief Strategic Officer, will then review our four key metrics for measuring Invitae's progress in 2015. These key metrics include: first, reducing the cost of goods or COGS; second, expanding our content; third, increasing volume; and forth, improving reimbursement and cash collection.

Before we begin I'd like to remind you that various remarks that we make on this call that are not historical, including those about our future financial and operating results, our plans and prospects, the focus of our business strategy, market opportunities, future products, services and our product pipeline, demand for and reimbursement of our services, and our investment in our infrastructure and operations constitute forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act.

We refer you to our 10-Q for the quarter ended March 31, 2015, in particular to the section entitled Risk Factors, for additional information on factors that could cause actual results to differ materially from our current expectations. These forward-looking statements speak only as of the date hereof and we disclaim any obligation to update these forward-looking statements. And with that I will turn the call over to Randy.

Thanks, Katherine, and thank you all for joining us. Our mission at Invitae is to improve healthcare by bringing genetics into mainstream medical practice. We are excited about the progress we have made in just two years since the landmark Supreme Court decision. That decision transformed the genetic testing marketplace from a high price patent protected monopoly to a lower price competitive free market.

In addition, major advances in technology are driving a Moore's Law effect in DNA sequencing with costs steadily decreasing over time. Together these two forces for change have enabled Invitae to make high-quality genetic testing more affordable and accessible than ever before.

Invitae is part of a new technology movement to decrease healthcare costs while improving care as we provide more genetic information at lower cost. We are looking forward to sharing our second-quarter progress in detail today. You will hear a few key themes throughout our call: strong volume growth, an acceleration of R&D to expand content, decreased COGS, and continued investment in infrastructure to prepare for expected rapid volume growth with over 1,000 genes of content next year.

Today we are increasing our guidance for billable reports delivered to 16,000 to 18,000 billable reports for the full year 2015, up from the previous guidance of 14,000 to 17,000. This is due to the rapid growth we experienced in the first half of 2015 as well as the expected impact of the expansion in content, our recent price reductions, new scientific publications and the full impact of sales rep growth in the first half of the year.

Lee, Sean and Lisa will get into more detail on our first half review and second half plans in a few minutes, but let me quickly highlight key events since our last call. We continued to rapidly increase our sales volume delivering more than 4,400 billable clinical reports to our customers in the second quarter, a significant increase over Q1 and nearly nine-fold increase over the prior year.

We published clinical data in the Journal of Molecular Diagnostics from our clinical study demonstrating 100% analytical and 99.8% clinical concordance compared to tests from Myriad Genetics. We believe this data will have a significant impact on both adoption and reimbursement of Invitae's tests.

We saw cash collections increase by nearly 50% in Q2 over Q1 due in part to improvements in our internal billing and collection systems. We also saw a significant improvement in COGS from under $1,200 in Q1 to under $850 in Q2.

As you will hear in more detail from Lee, we increased our operating expenses significantly in Q2 as we build for scale in 2016. We added key infrastructure including production, R&D and medical efforts that will be required to support over 1,000 genes of content coming soon. With this investment we believe we are now positioned to enter a new era as we begin to focus on significantly reducing our cash burn in the coming years and drive our core genetic testing business to profitability.

To achieve this we are moving to streamline operations, reduce the rate of expense growth, and increase our focus on driving revenue and positive gross margins. Sean George, our President and COO, has taken on an expanded role and is now responsible for the entire P&L for our genetic testing business from R&D through commercial as we drive to greater cost efficiency, growing volume and improving reimbursement.

Lisa Alderson has done a tremendous job building out the commercial team and infrastructure to drive our business from pre-product launch to our current rapid growth phase. She has now taking on the role of Chief Strategic Officer to begin laying the foundation for our commercial efforts around our two future businesses, genome management and the genome network.

We are also excited to welcome Dr. Bob Nussbaum who just joined us this week from UCSF as our Chief Medical Officer. As many of you know, Bob is one of the world's renowned geneticists and we are delighted to have him join the team.

We are excited about what we have achieved but we are even more excited about the road ahead as we begin to pave the road to profitability. With that I will turn the call over to Lee to review our financials.

Thanks, Randy. During the second quarter of 2015 we continued to invest aggressively in infrastructure to support the growth of our business and to enable us to drive down COGS, expand our test menu and deliver comprehensive genetic information to a growing set of patients.

In Q2 we continued to see the results of those investments with significant decreases in COGS, a substantial increase in the number of billable test reports delivered, and improvement in cash collections.

During the second half of the year we expect to see a significant slowdown in headcount growth. With continued improvement in COGS and collections our expectation is that our burn rate will remain roughly constant for the balance of this year even as we continue to grow our sales force and expand our production capacity to accommodate anticipated volume growth.

In the second quarter of 2015 we delivered more than 4,400 billable tests. This represents an increase of more than 90% over the previous quarter and about eight times our volume in the year ago quarter. Our revenue in Q2 was about $1.8 million, an increase of approximately 50% over our Q1 2015 revenue.

As a reminder, under generally accepted accounting principles, we currently recognize revenue as cash as received from our customers. The increase in our Q2 revenue as compared to Q1 resulted primarily from process improvements that enabled us to deliver invoices to our institutional clients more quickly, along with improved follow-up to collect accounts receivable from those clients.

For most of the Company's history we have invested in automating our lab medical interpretation and sign out processes to enable the cost effective delivery of high-quality genetic tests. We are now also focusing on automating our business operations, including billing and collections, to help us drive revenues and enable those functions to scale efficiently as we grow our business.

In addition, we are beginning to see early signs of institutional and payment response to the new pricing that we announced in Q2. Any shift in pricing towards institutional and patient pay will improve the timing of collections but it will at the same time reduce the average price per billable test report. The total billable value of test delivery in Q2 was nearly $5.9 million.

In the second quarter we incurred operating expenses of $25.9 million of which about 45% were research and development related, about 24% were sales and marketing, about 16% were general and administrative expenses and about 15% were cost of sales.

With respect to COGS, you may recall that our average cost per test report was essentially flat in the last two quarters at less than $1,200. In the second quarter of 2015 we successfully reduced our average cost per test report to less than $850. This reduction resulted from increased volume and savings from the introduction of a series of process improvements late in the first quarter. These cost savings were partially offset by additional production headcount, lab capacity and costs associated with the transition from our prior lab process.

To help investors understand our COGS calculations, we calculate the average cost per test report delivered based on the total number of commercial samples accession during the quarter. The total number of commercial samples accession also includes examples for which we don't charge, for example under patient financial assistance plans. In Q2 we accessioned more than 4,600 samples.

As of June 30, 2015 our cash, cash equivalents and marketable securities had a total value of $170.9 million. This represents a reduction of $23.4 million as compared to the end of Q1. Having raised over $300 million since the Company's inception, we have invested heavily in building the infrastructure that we believe is key to our long-term success.

Going forward we are focused on constraining growth in operating expenses, continuing to drive down our COGS, growing volume and driving revenue. These will be the keys to reducing our cash burn in 2016 and beyond. I will now turn the call over to Sean who will describe our progress on the COGS and content fronts.

Thanks, Lee. As discussed in our Q1 call, we plan to develop and deploy a series of process and automation advancements, allowing us to provide more content for the same or lower price. We saw the early impact of COGS reduction from process improvements made late in Q1 and were able to successfully reduce COGS from under $1,200 in Q1 to under $850 in Q2.

We expect to continue reducing COGS into alignment with our gross margin target of 50% although we expect to see quarter-to-quarter variation as we scale of production capacity and release additional content.

As we projected in Q1, our PMS2 copy number detection capabilities are in the final stages of validation. With our sequencing capabilities already online for this gene, our clients are anticipating the addition of PMS2 deletion duplication detection to the menu which we expect to make available within the coming weeks.

The investment we have made into being able to call at industry-standard sensitivity and specificity, read through and deletion duplication variance in the PMS2 gene resolving the confounding pseudogene is a great example of how our infrastructure investments allow us to bring online clinically important hard to do variants in genes which are the major cost drivers in the utilization of next-generation sequencing technologies for clinical testing.

We believe that this, in addition to our recent inclusion of CHEK2, and upcoming release of additional rare cancer genes this year puts us in a position of offering the lowest priced, highest quality, most flexible and comprehensive cancer offering for inherited genetic testing on the market.

As Lee indicated, with our investments to date we are now poised to bring the same high-quality high-value genetic testing to multiple disease areas beyond hereditary cancer. A few specific examples include cardiology tests such as familial hypercholesterolemia and arrhythmias, neurology tests such as epilepsy and dystonia, and pediatric tests such as [rasopathies] and primary ciliary dyskinesia.

Based on customer feedback and the experience of our medical genetics team, we believe the unmet need in the majority of these disease areas is high. They have historically been burdened with limited access to testing, high prices and long turnaround times. With Invitae's offering we will be able to meet those needs more effectively.

Beyond the more than 500 genes that we expect to reach this year, we are bringing forward our plans to release an additional 500 genes to the first half of 2016 resulting in a menu of more than 1,000 genes from which our clients can order tests for under $1,000 per indication by the middle of next year, thus accelerating our path to become a leader in comprehensive genetic testing and genetic information services.

Given the significant commercial opportunity we see an increased investment to accelerate the size of a menu of genes available for clinical reporting at decreasing prices continues to be a driving component of our business model. We continue to invest heavily in this strategy, gaining scale and differentiating our platform. And in doing so we are adding to our competitive advantage and separating ourselves from the hundreds of other incumbents and new entrants into this field.

With the infrastructure we have built we believe we are well-positioned to be one of the leading players in multiple markets at multiple price points serving a multibillion-dollar industry, ultimately addressing the opportunity to bring genetics into mainstream care for 1 billion people in modern healthcare systems around the world. With that I will turn the call over to Lisa to review our Q2 commercial achievements.

Thanks, Sean. I am pleased to report strong commercial results this last quarter. As you have heard, we saw a rapid growth in volume with more than 4,400 clinical reports delivered in Q2, resulting in more than 90% quarter-over-quarter growth. We saw volume growth across all markets and all disease areas and continue to drive growth in both new accounts and repeat customers. The majority of our growth in Q2 came from repeat customers with an increase in samples ordered per account.

We remain focused on the genetics community, targeting clinical geneticists and genetic counselors. The Invitae advantage, delivering fast affordable and reliable genetic testing, resonates with this target market. We have demonstrated there is clear and growing demand.

We added Full CHEK2 with deletion and duplication analysis to our test menu in March and saw this translate into volume increases from select accounts during Q2. With the expansion of additional content in the second half of this year we see an opportunity to more deeply penetrate existing accounts to drive further volume increases while also reaching new accounts.

On June 1 we initiated an upfront patient pay price of $475 in order to increase patient access to genetic testing. To support this new price point we launched a new patient focused website and augmented our patient portal, including enhanced consent and recontact preferences for patients, as we believe every patient should own and control their own genetic information. We believe these efforts will enable us to drive increased volume from patient pay markets over time.

Additionally, we launched an expanded feature set for the Invitae Family History Tool, which is available for free in the Apple App Store. The Invitae Family History Tool saves clinicians time and is another example of how we are lowering cost to the healthcare system and how we are bringing genetic information into mainstream medical practice in a medically responsible way.

Increasing volume is an important step toward enabling us to increase reimbursement and cash collection. We saw cash collections grow to approximately $1.8 million in revenue for the quarter, representing almost 50% growth over Q1. We have consistently received positive responses to our new contracted rate of $950 for payers who bring Invitae in network and work with us to streamline billing operations.

We are also seeing receptivity from institutions around our $950 contracted rate and have signed multiple institutional agreements this quarter to receive payment directly for tests we deliver. Driving increased payment from institutions should accelerate our time to collection.

Additionally, ordering clinicians have provided positive feedback on our prompt pay price of $475 for patients. We see this as an attractive payment option when there is a clear indication for testing, but where insurance coverage policies are either not well-established or not met by the patient. These new price points were a contributing factor to driving growth towards the end of Q2.

We now have strong analytical and clinical data that will help us advance our discussions with payers. We know that data drives volume and volume drives reimbursement. I am therefore pleased to highlight two important studies.

The first study, published by the Journal of Molecular Diagnostics, demonstrates that Invitae meets the highest quality standards required for payers and healthcare providers. This study of approximately 1,000 patients examined the performance of Invitae's methods of 29 cancer risk genes and was performed in collaboration with Massachusetts General Hospital, Harvard Medical School and the Stanford University School of Medicine.

The study shows 100% analytical concordance and 99.8% clinical interpretation concordance compared to blinded data from Myriad Genetics. Importantly, this included a large number of copy number deletions and duplications as well as other complex sequence changes. This study demonstrates Invitae's commitment to delivering the highest quality test results at a far more affordable price than competitors in the market.

Additionally, we presented a clinical impact study in collaboration with Massachusetts General Hospital, Stanford University Cancer Institute and Beth Israel Deaconess Medical Center at the American Society of Clinical Oncology annual meeting.

This study showed that greater than 50% of non-BRCA positive results would warrant consideration of a change in care for the patient over and above any actions that would be considered based on family history alone. This is an important study to demonstrate to payers the value of genetic testing beyond BRCA. With that I will turn the call back over to Randy.

Thanks, Lisa. We have a significant opportunity to transform the way genetics is used in medicine. Invitae's business model is unique, one that we think is attractive to both customers and payers. We have proved that our tests provide the same quality results as those generated by others in the field but at significantly lower prices. And what that means is that more people can gain access to genetic testing and that our healthcare system, payers, institutions and governments can save a significant amount of money by using Invitae's test.

We are on a mission to help billions of people around the world manage their healthcare through the data generated by their own genome. And the only way to make that happen is to provide high-quality low-cost genetic testing. Given our team, our investment in infrastructure, and our progress to date we expect to be the leader in this new competitive marketplace. With that we will open up the call for questions.

(Operator Instructions). Tycho Peterson, JPMorgan.

Wondering maybe, Randy, if you can just talk a little bit about traction you are seeing in the field from the price adjustment and how that is resonating with the sales force and ultimately the physicians?

Yes, and I think probably on two fronts, Tycho, I think Invitae continues to be branded very strongly within our provider community and the medical community has really aligned with the interest of physicians and their patients.

So this has been a long standing issue within the genetic testing community as the frustration of affordability and accessibility of genetic testing. And so, it I think it has had a significant impact both in continuing to drive a brand of Invitae as finally delivering the promise of genetics at lower cost.

And secondly, obviously we are also getting some very positive feedback from payers as well and we can talk about that perhaps a little bit in more detail later during the Q&A session. But it is obviously attractive for payers that we are coming in offering a replacement test at a lower cost.

And now with the data that we have got from the Journal of Molecular Diagnostics paper and the data that we presented at ASCO, we think we have some of the peer review publications that kind of hit that first checkbox on the payer list that now allow them to start moving forward towards more formal contracting processes.

And I guess on the payer front, one thing that you have talked about in the past is the United pilot study. I know it has been going almost a year I guess. I mean are we at a point now where you have better visibility there?

Well, there's probably kind of two questions. I will let Lisa kind of take the United question specifically. But I think in general on the payer question I would like to add this has been kind of a mission of mine personally for the first half of the year.

As you probably noticed, we decided early in the year to be very aggressive in terms of expanding our content with a view that 2016 is really going to be a pivotal year for us. And as part of that I wanted to go out and personally get involved with a number of the payers to really ensure to myself that our value proposition is in fact as positive as we think it is. And that has been a great experience.

I have met individually or in group settings with over a dozen medical directors from a variety of different payers. And what I can tell you is that our business model is truly unique. They always start out skeptical and by the end of the conversations they really begin to understand that we are fundamentally focused on driving down prices and treating them like a true customer including embracing things like pre-authorizations and working with them around utilization management.

And there -- one of the funny things about the pricing is that I had at least a couple payers mention to me that, boy, at these prices we just -- we actually don't worry as much about utilization management as we had in the past at multi-thousand dollar price tests and stack codes that sometimes get into the tens of thousands of dollars. So our overall experience with payers has been very positive through the first half of the year.

Now, having said that I think as everybody who knows the payer system realizes that there is a process you must go through getting to the medical directors, getting data published is just the first step. And then getting into the queue and getting through contracting and pull through, having enough volume and enough content for them to justify in an ever more complex healthcare environment that it is worthwhile, contracting that all takes time.

But we are now well on our way there with the process. So with that kind of intro maybe, Lisa, you can just highlight the United pilot study.

Sure. Tycho, the United healthcare pilot is going really quite well. This is a demonstration study to help measure the feedback really qualitatively from clinicians. And it is primarily OB/GYNs and internists on their use of multi-gene panels versus ordering the RCA alone. And we are also measuring the feedback from patients similarly with their experience with multi-gene panels.

And I would look at this as really a study to help us help payers understand our technology and gain a better understanding of multi-gene panels broadly. To be clear, the pilot has been designed as more of an independent research study and is not specifically designed to move us towards contracting. But we are of course striving to gain in network status with United as we are with other payers.

Okay. And then maybe just one last one for Sean. Nice improvement on the COGS, as you talked about. I guess how much room is there left for improvement maybe in the next year or two or have you taken a lot of the steps that you need to take at this point?

Oh, no, look Tyco I think there is -- we look forward to a lot of improvement over the next year. First, just as we have talked about our investment in the first half of this year, it was extensive. Really getting us to a point to service ahead of volume, get the infrastructure to the point where we can launch the new content by the end of the year.

So as our volume continues to grow that alone takes care of many months to come of continued COGS decrease. And then we are -- while we are slowing the pace of our increased investment, we are still [deploying] a sizable amount of investment into our infrastructure both on the automation and the assay front to reduce the cost of sample preparation and sequencing.

And then of course as we add more content and as we increase our scale, again the bottleneck becomes medical interpretation. And we expect continued investment in making that process more efficient and more cost effective. So we expect continued decrease in COGS throughout the years to come, certainly getting under our 50% gross margin target.

With that said, it won't be a linear path. As we drop the COGS we of course will occasionally take it back up in new content releases. Or as from time to time we need to increase capacity anticipation of increased volume in the future.

Okay, great, thank you.

Dan Leonard.

Hi, this is [Mike Sarcone] in for Dan Leonard. So Lee or Sean, this one is for one of you. You spoke about higher OpEx from R&D and headcount even though that is going to be slowing. But also streamlining and automation. Can you kind of square that ramp investment spending and the streamlining for us in terms of how it will play out for OpEx? Like will we see this $22 million run rate for a few quarters before we reach our 1,000 content?

Yes, so, this is Lee and the way I would put it, as I mentioned in the scripted portion of the presentation, while it is a little bit hard to predict burn, particularly in the context of cash revenue accounting, right now we are we think at a more or less steady-state quarterly burn rate for the balance of this year.

We will be increasing OpEx at a slower rate, but we expect continued decreases in COGS and improvement in cash collection to hold that burn rate more or less steady this year. And then next year we expect the burn to begin to decrease as we continue to drive COGS as the effect of the automation that you referred to, Steve, continues to play out and as cash collections improve.

So that is kind of the trajectory we are on. Driving towards long-term profitability in this first phase of our business.

Okay, thanks. And second question for me, just in your conversations with commercial payers, can you elaborate on any pushback that you may receive when talking with them?

Yes, that is a great question. I mean so frankly, every conversation starts with some level of skepticism because I think they face the fact that almost everybody coming to them claims they can reduce cost, etc. But the positive nature of what we are doing and the fact that we are simply offering replacement tests for things that are in their process today at lower prices. And the fact that we are actually aligned on helping them around utilization management.

Because in our low cost genetic testing infrastructure we can't afford or don't want to spend time in denials and appeals any more than they do. And we have alternative for patients with $475.00 patient -- prompt patient pay. All of those components actually are real positives for payers because they see a mechanism by which we are not trying to just jam as much volume through them and get paid as much as possible. We can actually work with them and have alternatives around patient pay and institutional pay.

So we really have not seen a sort of pushback. What I will say as kind of I guess my internal joke is that it is a little bit like going to the Department of Motor Vehicles -- no matter who you think you are at the end of the day you have got to get in the queue and wait your turn.

And so one of the biggest criticisms we will get is just that simply this is not the highest thing on their priority list and it is going to have to go through contracting processes and we know that that takes time. In the first half of the year we also -- there's often comments of well, you've got some nice data out there, we'd like to see that in peer review publications.

So for us the JMD paper was actually quite a big deal internally because now we can point to that and our former JCO paper. And then we will be working with our collaborators to also publish clinical utility data. So we think we will have the full suite of publications in place for payers as well to move from the medical director review stage into the contracting process.

So I guess that is a very long-winded way of saying we really have not seen pushback and that is largely because we are a bit unique. We are not bringing in new tests, we are simply replacing things that they are currently paying for at lower prices.

Great that is (multiple speakers).

I would add to that, Randy, if I could briefly. It's just that as we expand our content I think our value proposition get even stronger with payers. And so, if anything with our current test menu we are still looked at or viewed as a bit of the new guy with a limited test offering. And so, extension of content will definitely help.

Yes, that is a great point. They really want -- they don't want a lot of niche players. They don't want a contract with 500 different genetic companies each with their own sort of test. So that is another reason why we want to really accelerate and move to drive more content faster. Because more content that we cover that is on their menu the easier it becomes for them to want to contract with us as well.

Great, thank you.

Doug Schenkel, Cowen & Company.

Hi, this is Adam Wieschhaus on for Doug. Thanks for taking my questions. For my first one, your accession test, the test delivered rate was particularly strong this quarter. I think it was 96% compared to 82% last quarter. What do you attribute this to and what level should we expect going forward?

Yes, you are going to see those sort of bounce around from quarter to quarter. A lot of it just has to do with the timing of the reports deliverer and whether the quarter starts with more volume growth or finishes with more volume growth. So I wouldn't actually say that that has any real meaning or impact.

And obviously one of the biggest impacts is just the rapid growth that we are seeing. When you see almost 100% doubling quarter over quarter in tests delivered you are going to see some variability there between the test accession and tests delivered.

Okay, that is helpful. And for my second question, how much revenue was recognized in Q2 from tests that were actually performed in Q2 versus those performed in previous periods?

This is Lee. I don't have that precise number. Since it was mostly -- the big uptick was in institutional revenue and a big chunk of that came in in the quarter in which the tests are delivered. In fact, we typically collect from institutions within 60 days or less.

And so, certainly our institutional customers for tests delivered in the first month of the quarter the vast preponderance of them would have paid by the end of the quarter.

Okay, and maybe one last one. I might have missed it, but did you provide international revenues for this quarter?

No, we haven't been breaking that out separately. But you can see from the quarters we saw very large growth and that was across all segments. So fairly proportional across both international and US as well as within the patient pay, institutional and third-party.

Okay, thank you.

International revenue -- or international requisitions this year -- this quarter were about 15% of the total. And we saw the strongest growth in Latin America and in Canada.

Okay, great.

There are no further questions at this time. I turn the call back to Katherine Stueland.

Thank you all for joining us for our call. We will be at some upcoming investor and medical conferences, so we the forward to seeing many of you sometime soon. Have a good day.

This concludes today's conference call. You may now disconnect.