Invitae Corp (NVTA) 2017 Q4 法說會逐字稿

Good afternoon, my name is Christine, and I'll be your conference operator today. At this time, I would like to welcome everyone to Invitae's Fourth Quarter and Year-end 2017 Financial Results Conference Call. (Operator Instructions)

Kate McNeil, Head of Investor Relations, you may begin your conference.

Thank you, operator. And good afternoon, everyone. Thank you for joining us for our fourth quarter and full year 2017 earnings call. Joining us today are Sean George, our CEO; Shelly Guyer, our CFO; Lee Bendekgey, our COO; Katherine Stueland, our Chief Commercial Officer; and Dr. Bob Nussbaum, our Chief Medical Officer. As you listen to today's conference call, we encourage you to have our press release available, which includes our financial results as well as metrics and commentary on the quarter. 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, our plans to integrate and manage businesses we acquire, market opportunities, future products, services or product pipeline and the timing thereof, 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 provision of the Private Securities Litigation Reform Act. It is difficult to accurately predict the demand for our services, and therefore, our actual results could differ materially from our guidance. Our guidance on future company performances, assumes, among other things, that we don't conclude any additional business acquisitions, investments, restructurings or legal settlements. We refer you to our 10-Q for the quarter ended September 30, 2017, in particular, to the section titled 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.

With that, I'll turn the call over to Sean. Sean?

Thank you, Kate. Invitae's mission is to bring comprehensive genetic information in domains for medicine and improve the quality of healthcare for billions of people on the planet. We pursue this mission with a strategy, that we've been pursuing over the past many years, focus on an investment in a technology infrastructure to reap the benefits and advantages of scale.

Our passion for this mission and our focus and execution of this strategy is accelerating our business momentum, and indeed in 2017, we have more so than ever, expanded our product and commercial breadth, investment and enhancement of our user experience, from both our patients and our ordering clinicians, and signed a record number of commercial collaborations, biopharma and health system partnerships. Indeed, we are now partnering with more than 100 advocacy organizations, representing more than 100,000 people. As we have driven in the past, 2017 was no exception, in that, we drove triple-digit volume and revenue growth. And indeed, in 2018, are on track to become the largest provider of inherited genetic cancer testing. It is -- primarily, the cancer business in the past has driven this explosive growth in volume and revenue. And in 2017, for the first time the entire year, we had a positive gross profit. Our business model is working, and we're even more excited as we look forward and expect to reap the benefits of our past investments in cardiovascular, neurological, pediatric, metabolic, exome and our new investments in maternal and reproductive health, as we grow our business further.

Our business success in 2016 and leading into 2017 gave us the confidence to add M&A to our growth strategy. We acquired AltaVoice in January 2017, launching the Invitae patient network in April 2017 as an integrated part of our business development efforts. In June of 2017, we acquired CancerGene Connect, and in September, rolled it out as a part of our customer experience as a platform simplifying data gathering, tracking and analytics for all genetic counselors and their patients. In the fall, we acquired Good Start Genetics and CombiMatrix. And as of January, had combined the sales of innovations and are now approaching with a 100% strong effort, focusing on the most -- on the highest volume oncology, women and reproductive health accounts.

While it's astonishing to me, as I think about the last year, a little over a year ago, we were predominantly in inherited cancer testing and adult inherited testing and a little bit of pediatric testing. We now have broad capabilities for genetics -- genetic information management across all phases in life, and this has not gone unnoticed in the industry. We've attracted a lot of interest from parties expanding the entire spectrum of health care, adding patient advocacy organizations, pharmaceutical collaborations, research and commercial channel partnerships, validating the model that we've been -- the business model we've been pursuing for many years passed, whereby we seek to aggregate the world's genetic information to a single platform. And in doing so, consolidate the current genetic testing industry. With that as a foundation, we believe we can build a networked information management system that will represent a new industry using genetic information that has its foundation. An example of that, an early partnership that we set out on, can be seen in the BioMarin Behind the Seizure program. In this BioMarin, by working with us, gets faster access to more individuals that can benefit from their therapies. The patients benefit by having more individuals than ever before being appropriately, correctly diagnosed with whatever specific form of epilepsy they have. And in the case of those who seal into mediated epilepsy, can immediately be handed to a partner that can do something about it and to having a profound impact on the outcome of these children's lives. The clinicians involved benefit the more patients they send our way, the more information we collectively understand about the underpinnings -- the genetic underpinnings of epilepsy. And of course, Invitae benefits having a partner like BioMarin, living our mission. Taking genetic information into all aspects of mainstream medical care. And in this particular case, in the commercial endeavor that we would otherwise not be focusing on directly.

Now well the network business, the information business we see contributing an ever-increasing part of our business is important. The primary driver of the number of patients into this network remains today, and will be for some time, the genetic testing business.

To cover the details of our testing business in Q4, Shelly -- sorry, Shelly will cover the financials and the details of our testing business in Q4. Shelly?

Thanks, Sean. As we reported on a preliminary basis in conjunction with the JPMorgan conference last month, Invitae had another incredible year of triple-digit growth in accession volume. Our total accession volume in 2017 on a consolidated basis was nearly 150,000 samples, including over 53,000 samples in the fourth quarter of 2017. Let's break this down. Excluding volumes associated with our acquired businesses we accessioned more than 134,000 samples, including nearly 44,000 in the fourth quarter alone, well exceeding our revised full year guidance of 120,000 to 130,000 samples. This reflects an approximate 130% increase in annual volume compared to the 59,000 samples accessioned in 2016. Fourth quarter 2017 volume included a full quarter of volume from our Good Start acquisition completed in early August. Volume related to this business totaled approximately 7,700 samples. Given the loss of the expanded carrier screen services late in the third quarter, fourth quarter volume was in line with our expectations. As you will recall, we also completed our acquisition of CombiMatrix in mid-November, resulting in nearly 1,600 samples included in our fourth quarter results. On a full quarter basis, CombiMatrix accession doubled that amount, a total of approximately 3,200 samples.

In January, our integrated sales force was trained and hit the street, selling all acquired capabilities. Going forward, our sales force will be working across all clinical areas and practices supported by an internal team of regional and clinical specialists. One rationale for the acquisitions was to provide us a unified product platform with a single offering with broad utility. Consequently, we do not intend to break out future volume or other performance metrics by clinical area or category and less warranted on a limited basis for any future acquisitions.

Last year, management provided detailed insight into reimbursement trends affecting revenue growth and issues related to simultaneously operationalizing a large number of contracts, as we concurrently brought our billing operations in-house. Overall, we saw significant progress across key contracts and a favorable impact of those efforts on 2017 revenue. As with volume, we reported our revenue on a preliminary basis in conjunction with the JPMorgan conference. Again, Invitae had another incredible year of triple-digit growth in revenue. Our revenue grew over 170% during 2017. Full year 2017 revenue on a consolidated basis came in at $68.2 million. With our full year revenue from the base business coming in right at the middle of our guidance estimates at $60 million. Thus, our base business revenue grew 140% over full year 2016 revenue of $25 million. On a quarterly basis, you can see that total fourth quarter revenue of $25.4 million actually exceeded full year 2016 revenue. Breaking this down, revenue for the base business totaled $19.4 million, an increase of over 110% year-over-year and 21%, sequentially. Our Good Start acquisition generated approximately $4 million in revenue for the quarter. This revenue excludes approximately $300,000 related to tests billed prior to the close of the acquisition. As discussed in our last call, U.S. GAAP does not allow us to recognize revenue on these cash collections, associated with tests reported prior to the acquisition's close. This amount was included in the accounts receivable at the time of acquisition and does not count towards our revenue in this quarter or any future period. The go-forward impact of this accounting rule will continue to decrease in the current and coming quarters. CombiMatrix contributed approximately $2 million in revenue to fourth quarter and full year revenue, representing the 6 weeks following the close of the acquisition. As a reference point, full quarter CombiMatrix revenue was approximately $3.6 million.

Turning to our cost-per-sample accession. The company continues to make tremendous strides in reducing COGS, thereby enhancing our significant competitive advantage in the market. We ended the year with COGS of $321 per sample on a consolidated basis and $297 for the base business. This compares to COGS of approximately $400 in the fourth quarter of 2016 and $330 in the third quarter of 2017, reflecting a 19% reduction year-over-year on a consolidated basis and 25% reduction for the base business. In addition to a modest sequential decline in COGS on a consolidated basis, the base business achieved a 9% improvement over the third quarter. As we continue to roll out new content including the exome test launch last year, and as we finalize integration of Good Start and CombiMatrix, we expect that our COGS may vary quarter-to-quarter. In the near term, we expect to improve COGS through the full integration of Good Start, including the transfer of lab operations to San Francisco currently underway. Looking longer term, we have opportunities to further reduce COGS and realize significant synergies in the consolidated business.

In sum, we remain confident in our ability to reach our stated long-term target of 50% gross margin. We're pleased that 2017 marks the first full year of positive gross profit. We view increases in our gross profit as a critical indicator that we are on the right track by driving up collections and driving down COGS. Our gross profit on a consolidated basis increased to $18.1 million for the year, a significant increase from a loss of $2.8 million in 2016. This included a gross profit of $15.9 million from Invitae's base business. In the fourth quarter, on a consolidated basis, Invitae achieved a gross profit of $8.3 million. This included $6.3 million gross profit from the base business, up from $1.1 million in the fourth quarter of 2016, translates to a gross margin of 33% of consolidated test revenue as well as a gross margin of 33% of base business test revenue in the fourth quarter, which compares to 27% in the third quarter of 2017. For the full year 2017, we incurred operating expenses of $139.4 million on a consolidated basis, excluding COGS, and $126 million for the base business. This compares to $97.4 million in base business for 2016, a 29% increase against the corresponding increase in volume of approximately 130%. In the fourth quarter, we incurred operating expenses, excluding COGS, of $43.2 million, of which about 31% were research and development expenses, 37% were selling and marketing expenses and 31% were general and administrative expenses. Improvements in operating leverage were offset by nearly $4 million in acquisition costs related to Good Start and CombiMatrix, and an increase in amortization of intangibles related to the AltaVoice burnout. Despite these higher costs, our leverage continued to improve. We drove 154% year-over-year volume growth while limiting the increase in operating expenses to 66%. For the fourth quarter, operating expenses included approximately $8.6 million in noncash expenses, consisting of $4.8 million from stock-based comp, depreciation and amortization of equipment equaling $2.2 million and approximately $1 million in amortization of intangibles due to the 4 acquisitions completed in 2017. We anticipate, beginning in the first quarter of 2018, that amortization of intangibles will increase to $1.3 million, reflecting a full quarter of CombiMatrix. Two final points should be made to understand this quarter's P&L: First, there was a reversal of the $4.8 million tax benefit provisionally recorded in the third quarter due to the Good Start acquisition. In the third quarter, we made an estimate based on the numbers been available. As our tax experts look more closely in the deferred tax assets, Good Start's use of the nonaccrual experience method accelerated deductions. In the fourth quarter, we corrected the deferred tax asset by $4.8 million and adjusted goodwill by an equal $4.8 million; second, the weighted average shares using computing our net loss per share does not include the nonvoting preferred shares due to their dilutive effect. Thus, the weighted average number of shares used for the fourth quarter was 52 million shares, and for the full year, 46.5 million shares.

Moving to our balance sheet, and noncash items. As expected, we saw an increase in our fourth quarter 2017 burn to $30.5 million. It's worth noting that this included close to $3.9 million in one-time charges related to acquisitions. Adjusting for acquisition-related expenses, our total burn for the fourth quarter was closer to $26.7 million. Looking more closely at the base business, again excluding acquisition and integrated costs, fourth quarter cash burn was approximately $22.7 million versus $20.1 million in the third quarter. While we anticipate the cash burn will decrease modestly in aggregate over the next few quarters, the reduction in burn associated with our base business will be partially offset by continued integration expenses. In the longer term, we believe that the acquisitions of Good Start and CombiMatrix will contribute positively to cash flow, and that our cash burn will be more dramatically reduced. Turning our attention to the year ahead. As previously announced, we anticipate accessioning at least 250,000 samples, reflecting strong double-digit growth over 2017. Likewise, we expect to at least double 2017 revenue and believe we have a clear line of sight to $120 million in revenue in 2018. This reflects continued growth on the run rate achieved in the fourth quarter. There are, of course, numerous variables that could favorably impact our revenue expectations for 2018. However, each are largely externally driven and carry their own calculation of probability, magnitude and timing. As a result, until we have clear visibility on future impact, we are not including these variables in our current guidance for the year. These factors include, but certainly are not limited to, improvements and then reimbursement related to continued implementation of third-party payer contracts, our ability to build CMS for del/dup codes and increases in nontest revenue related to new partners and patient networks. As we have discussed at length over the prior year, we have what we believe is an unpreceded rate of third-party payer contracts signed in 2016. The average contracted price for these contracts is approximately $1,000. That said, we have spent equal amounts of time discussing the complexity of operationalizing this many contracts, covering the breadth of tests and codes reflected on our platform. Over the course of the past year, we have seen average reimbursement under these contracts increase. Improving the rates of reimbursement continues to be a significant priority for us. However, much of this process is out of our hands, and therefore, we are modeling revenue based on current trends rather than forecasting improved reimbursement rates. Similarly, we have historically been prevented from billing CMS for del/dup codes associated with our Lynch and BRCA panel tech. As this is not uniformly applied across all mass, nor apparently, even within our own, we have stepped up efforts to allow billing and reimbursement for del/dup analysis conducted in conjunction with our CMS panel volume. Based on current rates, billing for del/dup would add about $500,000 -- sorry, $500 in revenue per test to our CMS volume, historically, approximately 10% of our revenue. Finally, as Sean has discussed, we are looking to increase the number of partners within our network in the coming year. While this model greatly drives test revenue, we see opportunity to increase the number of partners seeking hybrid solutions that involve both sponsor testing as well as the creation or expansion of patient networks. Depending on the rate at which we see partnership activity accelerate, we could see meaningful upside to currently forecasted revenue, both in the form of increased volume as well as nontest revenue.

Thank you, Shelly. So as we can see, we continue to focus on and are continually optimistic about our ability to drive volume as a real-time and leading indicator of the success of our business. Shelly also covered our efforts to improve the revenue line, and indeed, we worked diligently to drive revenue as an important, albeit trailing indicator, of that volume. And while reimbursement trends, gross profit, COGS and operating expenses may bounce around from quarter-to-quarter, we are 100% confident in our ability to reach and maintain 50% gross margins across the platform. And as such, in the driving of this volume, steadily and truly improve the operating margins of this business, as we approach profitability. Another way to look at how important volume is, is to consider our capabilities across all stages in life, but instead, think of it as a circle of life, as it were. Whereas an individual, whether seeking our information to answer a specific question about a disease or as genetic information important in starting a family, or just generally interested in genetic information in the context of their health and wellness can lead with other information we have till further answers being questioned later in life, informing other stages of life, and in fact, informing and spreading to, the larger context of their family, and with some of our partners, even to the larger context of the population at large. We are indeed seeing the beginning of a two-sided network effect being set up, where these individuals can approach us for the most comprehensive, highest-quality genetic information to be used across all stages in their life. And on the other side, partners can access that wealth of information across the largest set of individuals, largest set of highly-targeted individuals, with the most comprehensive highest-quality data. In the true network effect fashion, the network gets more powerful and more valuable, every individual that enters into it, and importantly, the network becomes more valuable for all participants, certainly for the patients that enter it, the clinicians that are working with them, ourselves at Invitae, and the ever-increasing number of partners accessing that information and working with us. We believe we are at a cusp in an inflection of how the value is calculated in this industry. I have been quoted suggesting that the genetic testing industry, as we all know it, the one that has evolved since the dawn of the Human Genome Project, is dead. I would offer that in its stead, long live a new industry, based on genetic information, where an ever-increasing number of people are served, and ever-increasing amount of high-quality data is generated and can be used by an ever-increasing number of connected partners, who can bring their specific skills and capabilities to improve outcomes across the whole. It is in this way we think the true value of genetic information can be unleashed across the entire of the health care system and personalized medicine.

And with that, we'll go to questions.

(Operator Instructions) Your first question comes from the line of Doug Schenkel from Cowen and Company.

This is Adam Wieschhaus on for Doug. For my first question, it seems like Invitae has long been a proponent of price, driving elasticity in the marketplace. I believe you've recently discussed the possibility of lowering your established test prices even further, in certain instances, to help drive volumes in market share, that next step forward. So I guess my question is, is that indeed the case, and if so, can you provide any color on how that approach is being received by payers and providers?

Sure. The short answer is yes, indeed, over the past -- since we've been commercial a little over 4 years. That price as a mechanism to increase the size of market and media, and demand has definitely been a tool. I think probably, most specifically, and perhaps, directly answering your question, is we did make a move this month to lower our patient pay price on panel testing from $475 to $250. This, we think, will -- this as we have scaled our business and enjoying the economies, both on the supply and demand side, scale in our business, this is a move we felt we could make and a move to help expand the access and expand the market for individuals, particularly as we have come to understand and generate data that individuals outside of guidelined, and certainly insurance reimbursement criteria need this information just as much as everybody else, that is becoming more widely understood in the clinical community as well and this pricing move we believe will help bring even more people into our testing services and into our network. On the whole, Shelly mentioned the around $1,000 contracted price for a third-party reimbursement. We feel that is industry-beating at this point in time, and at this point in time, don't have any comments or plans to change that. We have mentioned, kind of, on -- in the past that if a large integrated system or large payer would take us up on expanding reimbursement criteria in exchange for price we'd be interested to do that but have no specific plans to do so at this point in time.

Okay, maybe more specifically, I think you indicated a kind of issue in guidance that you'd be willing to trade price for volume. Has that changed anything in your discussion over the past few weeks, or is it too soon?

No, I think -- and I think, kind of probably worth pointing out that's been a key strategic lever we have been pulling for the last 4.5 years as a commercial entity, so no real change there and no change on our forecasted guidance, accordingly. I think, Shelly covered the details and the things that could happen to the upside case. And again, we want to take this year to, kind of experience that together and inform everybody, as we see it happening as opposed to trying to forecast when and to what magnitude.

Your next question comes from the line of Tycho Peterson from JPMorgan.

This is actually Julia on for Tycho. So my first one is, given the focus on driving volume, and I believe you guys mentioned previously that you're expecting to move increasingly into some of the lower-volume customers like maternal health centers over the next 18 months. So just wondering if you could comment a little bit on the rationale behind to move rather than continuing to focus on the high-volume customers, what sort of competitive forces are at play. And assuming it takes more effort to get over the -- get the customers over the awareness hurdles there, so just if you could comment a little bit on the cost and benefit of -- behind such a move?

Sure, no, thanks for the question. And just to clarify, we -- while we have combined our -- the sales organizations from the reproductive health businesses we have acquired, they are indeed, working in concert together across the highest volume accounts in oncology and women's and reproductive health. So we still feel there is plenty of upside in volume left in those high-volume accounts, where the breadth of our offering now all the way, across all stages in life from the reproductive all the way to the adult inherited. We think will continue to aid us and really augment our direct commercial efforts in the space. So, again, just to restate, we still think there's plenty of market in these high-volume accounts and expect to continue to make headway there.

Okay. Got it. And then my second one on the cost side. So understand, you've been talking about spending a lot to drive down the cost, especially the medical interpretation side, given your recent exome offering. So could you maybe give a little bit more color on the specific investments you're making there and the progress that you're making in terms of how much have you -- how much of the cost reduction has resolved there, and how much runway do you think is still ahead?

So I think the COGS line, actually, I think, if you look at the quarterly COGS drop in the slides associated with this call, it's probably kind of a picture is worth a thousand words. This is against the backdrop of fairly -- very rapid volume growth, a lot growing on the business. We've been taking on a lot the last couple of years, and even as such, our operating teams have been able to really -- our operating and our development teams have really been able to take a lot of the cost out of the business. The specifics on that medical interpretation side, again, are difficult to convey until you can actually see it in action. But I would say, kind of, a long list of highly specialized, very particular and important assessments and evaluations that can be augmented by software and automation that we've been lining up and investing in over the past many years. And it is more of the same, as our volume scales, and as we get into new disease areas, we are presented with an ever-increasing number of challenges in making that process as highest quality as it possibly can be. And at the same time, taking out the cost. And again, I think it's a matter of process and software automation investment that we have been engaging and will continue to engage in.

Got it. Very helpful. And then the last one from me you talked about this partnership to kind of -- as an alternative source of revenue for you guys. And understand that you're currently using -- screening out your potential partners by whether or not they agree on data terms and many of the potential partners that may have acquired additional capabilities. So just wondering if you could comment a bit on -- about the hurdles of bringing these partners over to your side and any potential capability gaps that you're looking to fill and how do you address these issues as you -- as we look to potential revenue upside from the partner side.

Yes. I think the bottom line is, with the menu of content we have, there's actually probably more partnerships than we can chase at this point in time. Katherine's on the phone, I think she can concur there's not anything expressly in the way of us pursuing these. I believe you're alluding to, in the past, we have said because our patients do indeed own and control their information, that is a blocker of working with some partners in there. But I think Katherine can give a little more color on our outlook for the partnering space.

I'd be happy to. As of last Spring, when we introduced an even more complete testing menu that really put us in a positive position to be able to start partnering with more biopharma companies, particularly in the rare disease space. So it really comes down to taking a look at our current testing menu, what drugs are in development and being able to find a partner that shares our mission of helping get patients diagnosed sooner. So really, it comes down to content being the key driver of finding the most thriving partnerships for us like BioMarin and AMA and others. So I think we see a lot of opportunity moving forward, as we continue to build out that capability. And as we continue to find ways to work together to raise awareness of the utility of genetics earlier and being able to rule in or rule out a disease based on genetic diagnosis.

And your next question comes from the line of Puneet Souda from Leerink Partners.

So if you could provide me with the -- what's your sense on how much of the base hereditary business, which was trending into contracts last year, is now locked in 3-year commercial contracts? And what's the expectation, how should we think about the current guide? And the second part of the question is, how should we think about the guide in terms of the base business as well as your reproductive business? Could you provide clarity on the volume part of that guide?

Sure. So I think the answer to the first question is, at this point in time -- and I actually appreciate you bringing it up, we don't talk anymore about the covered lives number because we're essentially now approaching more north of 220 million, basically the bulk of it with a few standouts is accomplished from a -- in network perspective. As for -- then what that translates to, for the year's outlook on revenue, I think, Shelly walked through the 4 or 5, kind of, potential upside movers on that. And then, as it relates to the differences in that -- in the momentum in the businesses again, we don't breakout each business line on a kind of an ASP or collectability -- from a ASP or collectability perspective. But I think all told is where we look at the gross profit contribution per -- across the platform and the volume and revenue numbers anticipate all areas experiencing growth throughout the year.

Yes, that's not our intention. Just looking forward, it's not our intention, as I indicated, to break out the different parts of the business moving forward, because we really do view it as a continuum and as all of them are interrelated one sales force to push all products and all content. And so, as Sean explained in his circle and as we've talked before, that is the plan moving forward. And so, we will not be breaking out the volume, if that's what you're asking for 250,000 for next year, how much is attributable to the old business and how much is attributable to the reproductive.

Sure. So -- and maybe if you can help me just understand in terms of the revenue guide, the $120 million. You're giving a number of reasons why that could potentially be conservative here. Help us understand what -- when do you think you'll have the clarity here, maybe from an ASP, maybe from -- more from, I think you have clarity on the volume perspective. Help us just understand when you will have that clarity to provide us more of a realistic range in that rather than the at least $120 million here?

Well, I think our intention this year was not to give specific quarters of guidance on specific numbers because, in fact, last year, that bit us a little bit. And we do anticipate that each of these -- we will work on each of these that we have discussed, and we will tell you when they do occur. We will not project when we hope that they would occur. As indicated, many of them are out of our hands and how fast we can work through the payers, for instance, to work through all of the machinations of how much they can change prior offer, anything related to getting paid from a higher percent under the contracted rates. That is hard to predict, and we will very rigorously continue to exploit each of those and to try as hard as possible to bring those numbers up. But it's very hard to predict when anyone will flip and when anyone that is significant will flip to a higher percentage payment. And so, from that perspective, we don't want to predict any specific time frame. As also mentioned, we are working with CMS on the del/dup situation and that's also very hard to predict when they may have some movement there. So we will let you know when those things happen. We will not project forward on when we would hope that they might happen.

Yes, and Puneet, I can assure you no one is more frustrated by that than us. Even just the single line item of the CMS reimbursement issue is a multimillion-dollar bluebird that may pop in at any time in the year or as we have become accustomed to realize it may take some time. And so, I think, that's again, why we're kind of in a -- we understand we're in a show-me mode, and we'll keep it to that. We are confident, again, longer term we have absolute confidence that our business model not only works but will dominate the industry in the years to come. And thus, can look to our quarterly performance and continued gross profit on our operating margin improvement as we answer to that in the quarters to come.

Okay. That's very helpful. And the last one that just I have, in terms of things that are under your control, the COGS improvement, the improvements and instrumentation and sample prep and bioinformatics and other parts of the pipeline that you have done. So it looks like you're still very confident with the new business, driving to that 50% gross margin. What's -- help us just understand the timing potentially there, how you're thinking about that. And then just an expectation on profitability, does this new guide push out the profitability somewhat?

Yes, so let's go to the COGS first and then I'll come back to profitability. The -- again, the timing on those COGS improvements and when looking into the platform, the 50% gross margin is there are many moving parts across a lot of our different services there. So we're -- we won't be forecasting the exact timing therein. Lee is managing all that, and perhaps, can just give a general look on our efforts, particularly, on the acquisitions. And then, of course, the balance against the backdrop of the volume in our inherited business.

Sure. In terms of the acquisitions, as I think you know, Puneet, this, in the first half of the year, we're bringing up the -- an extended carrier screen as well as a PGS assay, that had -- the PGS assay had been run in Cambridge at the former Good Start, and we see lots of opportunities. As you're probably aware, the Good Start and CombiMatrix both suffered from a lack of capital. And so there was as well as a kind of they were subscale. And so there are -- as the consolidated sales force drives volume, the opportunities from volume and the opportunities to invest in the scalability of those assays. And in particular consolidating on a single PGS assay, which -- the NGS-based assay, the Good Start runs has considerably lower COGS than the microarray-based PGS assay run in Irvine. So we see lots of opportunities there along with the usual laundry list of both lab costs and nonlab costs to work on. But those are some of the highlights that are acquisition-related.

Your next question comes from the line of Amanda Murphy from William Blair.

This is actually [Max] on for Amanda. Just wanted to ask a little bit about exome sequencing, and in particular how big that represents as a percentage of total volume. Just some general context around reimbursement, whether you're seeing some good reimbursement in particular for exome sequencing and whether your managed care contracts include your tests such as exome sequencing. So -- I know I hit on a few things there but would appreciate just context for exome sequencing in general?

Sure. I can answer pretty quickly at a high level. Again, we won't be breaking out much like our reproductive carrier or whatnot other business, we won't be breaking out exome versus the rest. Again, really because it does follow the policy of the company that we will ever increasingly be answering question for clinicians, patients and not so much having the dialogue be about which particular assay we run in doing so. But with that said, I would say exome volume is advancing, it's coming in advance of our expectation. The reimbursement for exome -- the reimbursement amount set by the payers is actually -- from our perspective, over the last couple of years has come surprisingly fast and is high. So the gross profit per test potential for exome in our platform is great. The contribution -- the gross profit contribution from exome test, that potential is good. With that said, the criteria -- the reimbursement criteria is still being worked out in the details, this is fairly new for a lot of these payers and so I think it's, kind of, you can kind of get a sense that we are optimistic, and we think it'll be a great part of our business going forward but there's still a fair amount to work out with the payers in the meantime. And that's -- I think it's the best description of where we are today with it.

I appreciate the context, that's very helpful. And then following up on a bit of an unrelated and, albeit, a more higher level. I wanted to ask about, whether or not you're seeing any positive or negative ripple effects from the NGS NCD or changes to the Medicare 14-day rule. Those are both things I know, which still kind of look into ourselves, but I wanted to see what your preliminary thoughts were around those 2 key events.

Yes, I'd say, neither of those have had neither an immediate nor a discernible effect in our, kind of, day-to-day business. Those 2 are, I think, things that we -- well one, the dual track entity, that's something that is in flux, we understand is changing rapidly and we'll kind of hear with everybody else -- when it finally comes out and continue that conversation there. So that one I'd say is, kind of, not going to -- not had, nor do I think it's going to have, an immediate impact in our day-to-day business. The Medicare 14-day rule that's -- again, that's kind of a -- that's a lot of inside ball for a lot of our clients. It mostly has an effect on the operating in the billing side and like all of the other puts and takes on that aspect of our business, it's something they contend with but not something that -- it's not something that's got a material impact on our business at this point in time.

Your next question comes from the line of Kevin DeGeeter from Ladenburg.

With regard to the CombiMatrix business, which historically, has reported gross margins on the microarray side, they are somewhat higher than both the target and the reported level for Invitae's hereditary cancer. Do you see an opportunity in that business to use price as a way to accelerate the drive to reaching scale or should we think about that market having different elasticity characteristics and hereditary cancer?

No, in fact, I think that's the right way to look at it. And, in fact, I think kind of -- when we first pursued CombiMatrix, we had made note of a technology that we are bringing online, which is, essentially, an NGS replacement for cytogenic microarrays. In which we will be -- we -- according to our current development, we'll be able to produce better sensitivity, better specificity, all while driving COGS down and even increase the number of individuals that will benefit from a CMA-type analysis, particularly in pediatric disorders and in exome testing. So I've taken an -- overall, I think the answer there is, yes, in general, we do think that dynamic exists. And I think this is -- maybe if Dr. Nussbaum is available, can just comment. Just a very high level of the potential of that, kind of, combination of panel exome and CMA-type testing. I think he has some particular personal experience there and, of course, a broad view of how that's utilized in the disease markets today.

Yes. So both tests are extremely important for the evaluation of -- particularly, children who have developmental delay or intellectual disabilities. They ask very different questions and give different answers. Together, they complement each other, and I'm very pleased that Invitae's plan, going forward, is going to be to provide testing for developmental delay or intellectual disability that includes the full range of testing both at the CMA level and the whole exome level.

Sure. If I can -- and then maybe just one more related follow-on. Can you just provide an update with regard to -- how to think about when we may hear more about menu expansion for the women's health and prenatal side of the business?

Yes. I think, we've talked about the ECS fill in and then kind of potentially adding NIPT as a -- kind of a table stakes offer in this space. As of this year, I think we've mentioned our aspirations. Of course, we're working as quickly as possible to get in the first half of this year. There's nothing that, at this point in time, we would indicate any, kind of, refinement of that statement or external messaging.

There are no further audio questions at this time. Kate McNeil, I'll turn the call back over to you.

Thank you. Just quickly before we wrap up. We did get a couple of questions submitted online in advance of the call this afternoon. Several of which have already been covered through the Q&A from our analysts including questions like some details around the new -- the recently -- introduced $250 patient pay pricing. However, just for clarity's sake, we do have 2 related questions that also came in that asking, how do we turn our test volume into income within the next 3 months, with the follow-on question that inquiring about as we run more tests, does that mean more losses for us in the year. So, Sean, maybe you can?

Sure, absolutely. And I think this -- I will fully admit, I certainly don’t, and our leadership team doesn't intend to think about the business in 3-month increments. That's something that we have, kind of, made very clear from day one. On the other hand, we are aggressively driving the profitability of the business and I think the simplest way to look at this is to take a step back and just take a -- watch the gross profit line and indeed, because we are making a positive gross margin on every test. Volume by definition drives profitability and contributes to the overall gross profit. And then as we have demonstrated in the past, as we can grow that gross profit faster than we're growing operating expenses that will drive the profitability of the business. And I think, kind of, inherent in a lot of interesting questions as well, when will that happen? And, again, that is something that we balance against what we see in incredible opportunity to build an immensely valuable company, pull forward that inflection point with a variety of investment opportunities in front of us, balance against that equation of utilizing volume and the subsequent positive gross profit on a per test basis to get us to profitability. So I think in short, the effective volume helps so long as we can maintain a gross profit, and we've kind of discussed a little bit at length here that our continued efforts and confidence in being able to do so.

Great. It looks like that actually covers all the questions that we received online. So...

Great. With that, we'll close the call. Thank you, again, for the participation. Thank you all for your questions, and we look forward to seeing you at upcoming conferences.

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