Invitae Corp (NVTA) 2018 Q2 法說會逐字稿

Good afternoon. My name is Christina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Invitae Second Quarter 2018 Financial Results Conference Call. (Operator Instructions) Laura D'Angelo with Invitae, you may begin your conference.

Thank you, operator, and good afternoon, everyone. Thank you for joining us for our second quarter 2018 earnings call. Joining us today are Sean George, our CEO; Shelly Guyer, our CFO; Bob Nussbaum, our CMO; Lee Bendekgey, our COO; and Katherine Stueland, our Chief Commercial 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 our 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, our 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 provisions of the Private Securities Litigation Reform Act. It is difficult to accurately predict demand for our services, and therefore, our actual results could differ materially from our guidance. Our guidance on future company performance 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 March 31, 2018, 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 the date hereof.

With that, I will turn the call over to Sean.

Thank you, Laura, and thank you all, again, for joining us.

Here at Invitae, we are well on our way in delivering on our mission to integrate genetic information into mainstream medical practice. With an addressable market of more than 1 billion people in the modern medical systems worldwide, we continue to face a huge opportunity to lead the effort in delivering genetic information to and from health care across all stages of life.

We've maintained momentum across our key performance indicators, showing a nearly 140% year-over-year volume growth and more than 160% growth in revenue and $16.9 million in gross profit. Delivering on all these fundamentals, while continuing to win on multiple competitive fronts and simultaneously integrating several new businesses speaks to the strength of this company and our ability to execute.

We are raising our annual revenue guidance again as a result as a result of our success in the pending payment that were due us from Medicare for deletion and duplication analysis as well as an improvement in collection rates from other third-party payers.

With accelerating momentum on volume, reimbursement, COGS and resulting gross profit, combined with our ability to pull multiple levers to manage OpEx, we are confident that we can exit the year with a 40% to 50% reduction in cash burn compared to Q1. With a more than $110 million in capital available to us, we have all we need to further drive the fundamentals of our business and extend our differentiated ability to lead into the future.

While we've proven is by offering high-quality, comprehensive, affordable genetic testing, we can better serve existing customers while expanding utilization and a number of individuals who can benefit from this information. It is our intent to replicate this model in the reproductive health space.

At the end of June, we were able to leverage our technology infrastructure to introduce an industry-leading expanded carrier screen that we developed in less than 3 quarters. This rounds out our reproductive offering to better serve those starting a family. As is the case with much of Invitae's offerings, it is one of the highest-quality, comprehensive, flexible and lowest-cost carrier screens available today. This development, perhaps more than any of the other business metrics, demonstrates the differential advantage that our past and ongoing investment in infrastructure provides.

I will now turn the call over to Shelly to highlight our financial results for the quarter.

Thank you, Sean. Volume is the best real-time indicator that our business model is working. This marks our 21st consecutive quarter of double-digit volume growth, with more than 73,000 samples accessioned in the second quarter. This is a nearly 140% increase in annual volume compared to the 30,500 samples accessioned in the second quarter of 2017 and a 14% sequential increase from the prior quarter.

Billable tests, now a more relevant metric given that we accrue almost all of our revenue, was more than 72,600 for the quarter, which is a 24% increase from the more than 58,600 billable tests in the first quarter of 2018. We did not report on this metric for 2017.

We continue to drive volume based on our ability to better serve clinicians and their patients with high-quality, comprehensive, affordable genetics as well as a larger suite of offerings across existing accounts as well as new accounts.

A few areas stand out this quarter. First, it was encouraging to see numerous accounts beginning to order both oncology and reproductive health care and to see a pickup as we entered the OB/GYN space. The ratio is about 50:50 of old and new accounts using our carrier screening test.

Second, we had nice growth in international volumes and in our cardio-neuro peds, or CMP volume, from continued success in children's hospitals as well as partnership-sponsored testing programs.

And third, we had a record number of orders from new accounts. We know we can effectively drive same-store sales once we bring on a new account. So this is a key indicator of market growth potential.

While the leading indicator of our success is volume, the next key indicator is revenue. In this quarter, we've further improved our revenue pull-through. For this quarter, we reported revenue of $37.3 million, representing a more than 160% increase over the second quarter of 2017 revenue of $14.3 million and a 35% sequential increase from the prior quarter. Importantly, for some time, we've been working with Medicare to pay us what they have been regularly paying others for deletion and duplication analysis for breast and ovarian cancer patients using CPT code 81433. This quarter, we recognized $2.3 million in revenue for del/dup analysis for test delivery in 2017. Without this one-time hold in revenue, we would have $35 million in revenue in the second quarter, an increase of 145% from the comparable period in 2017.

We also saw improvement in revenue due to increase in collection rates from other third-party payers, particularly in diagnostic testing and from an increasing mix of institutional and pharma partners, including 7 new partnership programs that went live this quarter.

Recall that under ASC 606, we will need to true-up any over or underestimates in expected collection rates from prior quarters in 2018. These true-ups would hit revenue. There were no such true-ups in this quarter.

Our average revenue per test across all categories of payers and tests was approximately $500 this quarter, up from the approximate $460 in the first quarter. This includes all test revenue and excludes other non-test revenue. Remember this includes the one-time Medicare payment.

This marks the first quarter that we have not seen dramatic decreases in COGS. We held COGS flat as we increased production capacity in anticipation of additional volume growth in the second half of the year. And we focused on the expanded carrier launch rather than in reduction of COGS for the quarter.

Average cost per sample in the second quarter of 2018 of $280 was down 19% from $345 in the second quarter of 2017 and remained essentially flat from the prior quarter. COGS continues to remain a focus in 2018, and we expect to see modest reductions in COGS as we finalize integration efforts of our 2017 acquisition, especially if we complete the transition of production from our Cambridge lab to San Francisco in the second half of the year.

Longer term, while we will focus on controlling costs that comprise COGS and believe that we will continue to benefit from volume-related cost reductions, we do not expect to see dramatic and consistent reductions in COGS. Two factors put countervailing upward pressure on COGS: adding content to our tests and the cost of medical interpretation, which becomes a greater percentage of COGS as we add genes, provide larger panels and experience more novel variants.

In the past, we have noted that increasing our gross profit is a corporate priority and a critical indicator of our business success. Over the quarter, gross profit increased substantially to $16.9 million compared to $3.8 million in the second quarter of 2017 and $9.6 million in the first quarter of 2018.

In a single quarter, our gross profit nearly equals to 2017 full year gross profit. Our business model is working, as we experience increased collection rates while keeping COGS in check.

Our gross margin was 45% in the second quarter compared to 27% in the comparable period in 2017 and 35% in the first quarter of 2018. If one strips out the one-time Medicare, gross margin would have been 42%. We are making continued progress towards our goal of 50% gross margin across the entire Invitae testing platform.

For the second quarter of 2018, we incurred operating expenses, excluding cost of test revenue, of $46.9 million, a 47% increase over $31.9 million in the second quarter of 2017 and only 2% more than in the prior quarter.

We discussed on the last earnings call that we have 4 levers to bring spend and burn down throughout the remainder of the year, and one was controlling OpEx. We are pleased that this quarter, we maintained OpEx growth to 2% versus significant growth in volume, revenue and gross profit. We expect our operating expenses to grow modestly over the next few quarters as the 2017 acquisitions are fully integrated.

At the end of the quarter, we introduced the expanded carrier screen. And last month, we transitioned PGT production to our San Francisco facility.

We will continue to invest in engineers to automate and streamline many aspects of our production processes, billing and other functions, all critical to our being able to handle the rapid volume growth and the addition of new products and content.

For the second quarter, operating expenses included $8.9 million in noncash expenses, including $6.1 million in stock-based compensation.

With the strengthened balance sheet, including a decrease in cash burn and access to capital totaling more than $110 million at June 30, we are positioned to grow and scale the business into the future. We ended the second quarter with $91.4 million in cash, cash equivalents and investments, including restricted cash. This included $53.5 million in net proceeds from the equity financing we closed in early April and $3.1 million in proceeds from foreign exercises. And we extended the time frame in which we can take down $20 million in additional debt, which is now available through year-end 2018.

Our cash burn from operations in the second quarter was $26.5 million compared to $35.1 million in the first quarter. And we are on track with our stated goal to cut cash burn by 40% to 50% from the first quarter as we exit 2018. This reduction in burn was helped by cash of $3.2 million received from Medicare during the quarter for past del/dup testing.

With that, I will turn the call over to Bob to highlight some of the recent data that we've generated, demonstrating our commitment to clinical excellence and advancing the field of genetics.

Thank you, Shelly. Part of Invitae's success is based on the fact that the provider community knows that we are a very reputable company that offers only the highest-quality testing. Being able to deliver quality genetics means we not only understand but also drive clinical excellence in the field.

Although price is important, because it makes testing accessible to many who could not have it before, customers increasingly choose us not simply because of price. They make their decisions based on sound science that supports everything we do.

For example, we conducted and published the largest study to date of patients who have been referred for testing by a wide array of clinical specialists for the prevalence of the important type of difficult to identify disease-causing changes in genes known as copy number variants. Results showed that these copy number variants, or CNVs, make up a significant fraction of all disease-causing mutations. Frequency of CNVs range from over 40% in some areas of neurology to between 10% and 20% in other areas of clinical medicine. Accurate genetic testing is necessary for diagnosis and treatment decisions. Detecting CNVs must, therefore, be a routine part of testing if the testing is to be complete and sensitive. Importantly, not all labs that demonstrate their ability to identify such hard-to-do gene changes reliably, and therefore, avoid false negatives.

Another example of our research is a recently published study involving nearly 4,200 Medicare-eligible patients, in whom we asked if there was a difference in the yield of disease-causing mutations between patients either met or did not meet Medicare's criteria for testing. Among those patients, results showed that there was no statistically significant difference in the yield of disease-causing mutations in patients in or out of criteria, meaning that nearly the same percentage of women with breast cancer are at risk of carrying hereditary breast and ovarian cancer gene mutations regardless of their criteria status.

The

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testing is a holdover from the past when genetic testing was very expensive and payers and governments rationed through that testing. What it only show is that such rationing is clinically harmful and, with our affordable pricing, unnecessary. This study received quite a bit of press and begins to change the conversation about who does or does not need testing to inform health care decisions. Broadening the market to include more people so they may benefit from this information is key to the company's success in bringing high-quality genetic information to mainstream medicine.

In addition to diagnostic health testing, the other area we are driving is proactive testing, which is for everyone in the population. Proactive testing screens individuals for disease causing changes in their DNA they did not suspect they had and therefore, provides information that is valuable for their health. In the collaborative study with Stanford University and Mayo Clinic, among others, we reported on the initial subset of 1,300 patients who had received proactive genetic testing at Invitae through their primary care physicians. More than 16% of those tested were found to have a medically actionable genetic condition that can inform health and perhaps, even death. As demonstrated in this slide, if there are 100 people listening in on this call, that means 16 of you currently have a medically actionable genetic condition that you likely don't know about and could do something about. This study was presented to spring at the American College of Medical Genetics and Genomics Meeting, and a follow-up study will be given as an oral presentation at the American Society of Human Genetics Meeting this fall. We have expanded our study to 2,000 patients with precisely the same findings. This is a game changer and just the tip of the iceberg.

The next step of our proactive offering was the launch last month of our carrier screen for couples contemplating or initiating a pregnancy, where we can identify couples who, unbeknownst to them, are at a substantial increased risk for having a child with a serious medical condition. While others are intent on raising prices, which will only limit the availability of carrier screening, we want to make it available to everyone starting a family.

I practiced medical genetics for 40 years. I was a Branch Chief of the National Human Genome Research Institute at NIH when the genome project was being done. After that, I was the Head of Genetics in the Department of Medicine at UCSF for 9 years before coming to Invitae. And throughout my entire carrier, I've always thought it was unconscionable that the way a couple learns if they're at risk for having a child with a serious genetic illness is by having a child with that illness. Invitae is rising to that call. As we add more and more indications to our offering, the relevance and impact of genomic screening for individuals and family health will increase to the point where essentially everyone will seek to know their genetic information that's clinically useful and actionable.

We are not just paying lip service to a mission statement. This has been our company's relentless focus from the beginning: to increase access to the highest-quality genetics for everyone that may benefit from it. When asked how many people really need genetic testing, we've shown a significantly more people could benefit than are currently tested. For this reason, we're not only focusing on better serving existing patients, but answering the vast unmet need for those who could not get this information before and now have access. We're able to do that in part by providing high-quality testing at more affordable prices.

I'll now turn the call back over to Sean.

Thank you, Bob. As Bob's comments illustrate, the rapid growth and the importance of genetic information of across this landscape is undeniable. The evidence is building that today, many more people and eventually, everyone, can benefit from understanding their genetic information. Our on-the-ground experience across all disease areas and all commercial channels leads us to grow more confidence in the unbound opportunity ahead of us. Invitae is leading the effort to provide complete answers to some of life's most serious and complex questions.

With that, I'll now turn the call over to operator for Q&A.

(Operator Instructions) Your first question comes from Doug Schenkel from Cowen.

This is Adam Wieschhaus on for Doug. Your average revenue per test of $498 was an $81 step up from last quarter. And it looks like based on your prepared remarks, the del/dup reimbursement added about $20 of that increase. Can you provide any color on what the remaining drivers were? So just test maybe mix or improved collections? And just to confirm, it doesn't seem like there were any upward adjustments due to ASC 606. Is that correct?

Let me unpack that a little bit. So no increases due to the true-ups from the prior quarter. That may well happen in the future, but not in this quarter. So you're correct. The ASPs actually went up to about $500 from about $460 before. And a portion of that was from the Medicare, $2.3 million from last year. The other pieces, though, are related to doing better on collections, both from Medicare during this year 2018 through the del/dup and from collections from other third-party payers, mostly those under contracts. And we saw that pretty widely dispersed among the major payers and increased mostly in the oncology area. A little flatter in some of the other areas, but we did see a nice pickup in collections. And that's why we have strength moving forward and have the confidence to be able to increase the guidance to $135 million to $140 million range at this time. Did I catch all of your questions, Adam?

You did, Shelly. And then just one on carrier testing. Can you talk a little bit about how we should think about reimbursement rate of your expanded panel compared to reimbursement rate that could start with receiving? And similarly, how should we think about the COGS between the former product and this newly launched product?

Yes. I think we can answer briefly. Starting out, we entered into the reproductive health market with the expanded carrier screen as a key addition to that, giving us comprehensive capabilities now pretty much across all stages in life. We've mentioned before that the pricing dynamic is similar to our other diagnostic testing. And that our ability to bring COGS in line is very much rested on the last 8 years or so we've been investing in our infrastructure. But I think, I'll let the -- talk specifically about what we do know now, some action in the space around carrier pricing and what we think about COGS.

So as you know, there -- at the 2019 CLFS annual meeting, there was a consideration of the pricing of a new panel code for extended carrier testing, which won't be effective until 2019. And so in the meantime, we, like everyone else, bill third-party payers when we -- when it's a third-party pay, we bill them using the most commonly paid codes, which are, frankly, not very different than how the smaller panels get coded, such as the GeneVu panel, that Good Start was selling. So the pricing today is not that different per ECS compared to the smaller carrier panel. The big difference for us is that we are bringing the cost in line by doing it ourselves and with our more automated infrastructure. So that's where the near-term opportunities for us are, not by raising prices, but by improving our cost margins and driving volume that way.

Your next question comes from Puneet Souda from Leerink Partners.

Sean, I was just hoping to understand better -- in terms of what you had highlighted before consolidation of the space continues to play out. And I just want to get a view from you. With the recent consolidation, does it -- it's obviously, somewhat beneficial to the (technical difficulty)

that's in your position, but at the same time, it creates a more -- a larger competitor. Help us just to understand -- you obviously have taken share as well as the market has grown. What's your expectation here with the competitor in place?

I think, to take a step, again, consolidation is something we've suggested for a while now is kind of a natural order of things in this industry for the years to come. In fact, I would suspect it's going to start picking up. There are incumbents that either will or will not adopt new technologies and broaden the use of genetic information for everybody who can use it. And of course, it attracted interest in the new company formation. I think we're not the only ones at this point that are seeing the massive opportunity in serving up this information to benefit everybody across all of the health care. As to the kind of day-to-day, or I guess, quarter-to-quarter impact of consolidation, in the past, consolidation has worked to our favor. We've always kind of been able to -- or have managed to benefit from other players rationalizing moves. And I think, in general, we've kind of from day 1, went out -- we've gone out with a better product, better service, highest quality, most flexible. And it's a lot of take share (technical difficulty)

Hi, Puneet. This is Lee. So we are just -- we have streamlined our exome process. We have brought our turnaround time back into line with the expectations we sought. And we expect that exome volume will start to grow again as we free up the sales force. But it will continue to be a relatively modest part of our volume and part of our revenue mix. So I think that's what you can expect. It will grow, but as a percentage, it's going to remain small for a while.

(Operator Instructions) Your next question comes from Amanda Murphy from William Blair.

Just a question. So you mentioned in terms of the volume growth that you were getting some decent traction of new accounts. So I was just wondering kind of maybe just give a little bit of a profile who those accounts are? What kind of moved them to you? And then also, you talked about in the past kind of this idea of having a more lean sales effort relatively. And so I'm just curious if you're getting incremental scale and adding tests to the menu, et cetera, and new -- and moving it to new avenues, kind of where do you (technical difficulty)

Amanda, we're no longer able to hear you.

Can you hear me?

Yes. I think -- oh, hey, Amanda. Okay. Sorry.

Sorry. Did you not get that? Okay.

Sorry, but we hear everything...

The question was...

Yes. I think we heard everything from the very, very end, so we'll start -- yes. In general, again, our strategy is very much based on offering [odd] comprehensive set of information genetics that is relevant for all stages in life. We have our focus on the core key decision makers, thought leaders, large-volume accounts in the space as per our sales and marketing strategy. And I'll let Katherine bring a little more detail, but the short of it is indeed, we are seeing some account pickup as a result of having both kind of a reproductive health offering even if it is on the way in early days in addition to oncology, cardiology, proactive health, et cetera. So in general, yes, it -- we're excited about that addition and we expect to work in the future. But I think Katherine can bring in a little more about the -- what accounts and what the dynamic we suspect is going to play out from here on out.

Yes. So I -- as we look at all of the new accounts, they really are across all of the clinicians that we're targeting. So we're seeing it in the oncology setting as well as in the children's hospital setting. And I think what's really encouraging now that we're starting to offer high-quality, comprehensive, affordable carrier testing is that the synergies cancer and carrier are affording us new opportunities in the OB/GYN sector as well. So early days, but certainly what we had hoped to see happen a year ago when we acquired the new technology. So we're really pleased to see new account growth as well as same-store sales continue to increase across all of the clinicians that we're seeing.

Got it. Okay. And then I was wondering if you could speak to the relationship with KEW? And, I guess, effort for -- to move into a more systematic side? And any update on thoughts around FDA -- I guess, FDA approval for that -- for the more comprehensive assay or the prismatic assays? And generally, just where your thoughts are around FDA's involvement in the space more broadly?

Sure. I can do two. So let's start with KEW, and then do PA regulatory. I think KEW -- there's really no material update with KEW. We announced a development collaboration with KEW. Our clients were going on almost a couple years now, asking us to combine somatic testing with our germline of capabilities. I think kind of -- guidelines are pretty quickly moving to where that is going to be the best way to do molecular characterization of tumors. Our view is with our clients -- with input from our clients, this makes a lot of sense to work with KEW and scale up and reduce the cost in kind of the spirit that we often approach things. There are more than 15 million new patients -- new cancer patients worldwide every year, and that is likely, if you view all of the rest of disease areas we serve, that is a lot of people that need that kind of characterization of cancer. And that's the purpose of the development collaboration with KEW. As we continue to push that forward, we hope to commercialize the combination to some extent sometime next year.

On the FDA front, or the regulatory front, I think the recent kind of past few months, I think overall are positive. I think any time, there's a coordinated move to provide a clear regulatory pathway and reimbursement for this kind of molecular characterization that's so important to determine next steps in therapies and care and prevention. It's always a good thing. We, of course -- whichever direction it takes and to what extent, it takes over different indications and different types of testing, we're as prepared or more so than anybody to operate under that whatever form the regulatory regime takes on it. We would say kind of our current business and forecast therein and expectations anticipate a variety of different ways that could go. We are interested in working with FDA and CMS and trying to provide our perspective and help out if we can, on how this would evolve. I think -- very importantly, I think we should just make sure and make clear everybody however, we will not be seeking to deploy a combination of the FDA and CMS in an effort to maintain artificially high price for us, the information that could otherwise, like I said, be useful for 15 million new cancer patients a year.

There are no further questions at this time. I'll turn the call back over to Laura D'Angelo.

Thank you, everyone, for joining us today. We look forward to catching up with you soon at upcoming conferences.

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