Invitae Corp (NVTA) 2018 Q3 法說會逐字稿

My name is Denise, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Invitae Third Quarter 2018 Financial Results Conference Call. (Operator Instructions) Thank you. Laura D'Angelo, you may begin your conference.

Thank you, operator, and good afternoon, everyone. Thank you for joining us for our third 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 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 June 30, 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 of the date hereof.

To supplement our consolidated financial statements prepared in accordance with generally accepted accounting principles, or GAAP, in the United States, we monitor and consider cash burn. We encourage you to review reconciliations which are available in the press release.

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

Thank you, Laura, and thank you all again for joining us. Momentum accelerates as we continue driving growth while at the same time investing in our differentiated ability to bring genetic information into mainstream medical practice.

This quarter, we reported 95% volume growth, 106% revenue growth and are raising our 2018 annual guidance on both. Our continued investment in technology infrastructure delivered another decrease in COGS to around $260 per sample. Net increase in cash, cash equivalents and restricted cash was $52.6 million for the quarter.

Especially worth noting, we reduced our cash burn by almost 50% from the first quarter to $18.4 million, further demonstrating our ability to drive expansive growth paired with the operating execution required to achieve success in Invitae's mission. Now with increased strength on the balance sheet and access to more than $250 million in capital, we are as confident as ever in our ability to continue providing leadership in genetics in the future of personalized health care.

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

Thank you, Sean. As Sean indicated, we are raising both our volume and revenue guidance again as a result of continued growth and execution across our business indicators. We are increasing volume guidance from more than 275,000 samples to more than 285,000 samples accessioned in 2018. Additionally, we are increasing our annual revenue guidance from $135 million to $140 million up to $140 million to $145 million. This is due to strength in our volume and continued success in reimbursement. In fact, we were recently notified we would be paid by Medicare for del/dup for colon cancer as well as improvement in collection rates from other third-party payers.

Volume is the best real-time indicator that our business model is working. For the third quarter of 2018, we accessioned approximately 78,000 samples. This is a 95% increase in annual volume compared to 40,000 samples accessioned in the third quarter of 2017. This quarter, we reported approximately 75,000 billable tests, representing a 92% increase from the 39,000 billable tests in the third quarter of 2017. Billable tests is now a more relevant metric given that we accrue almost all of our revenue.

We continue to drive volume based on our ability to better serve clinicians and their patients with high-quality, comprehensive, affordable genetics in an expanding suite of products. Again this quarter, we saw success across existing accounts as well as new accounts. While we are just beginning to build our brand with OB/GYNs and IVF centers, we continue to see growth from genetics experts, including genetic counselors, medical geneticists and specialists. We saw nice growth in international volumes and in our cardio neuro piece, or CNP, volume from continued success in children's hospitals. Additionally, we have tripled our volume from biopharma partnership sponsored testing programs and institutions in the past year.

While the leading indicator of our success is volume, the next key indicator is revenue, and this quarter, we further improved our revenue pull-through. For the third quarter of 2018, we generated revenue of $37.4 million, a 106% increase over the third quarter of 2017. As a reminder, in the second quarter of 2018, we recognized $2.3 million in revenue for del/dup analysis for hereditary breast and ovarian cancer tests delivered in 2017. Without this one-time bolus, our revenue would have been approximately $35 million in the second quarter and thus, the $37.4 million in revenue represents a $2.4 million increase in revenue quarter-over-quarter.

Additionally, we saw improvement in revenue due to increasing collection rates from other third-party payers, and from a healthy mix of institutional and pharma partners, which constitute approximately 25% of our revenue. This quarter's average revenue per test increased to $490 from just under $470 in the second quarter after stripping out the one-time Medicare payment for del/dup for hereditary breast and ovarian cancer tests, which we received in second quarter. In the fourth quarter, we expect to see a one-time payment by Medicare for del/dup analysis for colon cancer tests.

In the third quarter of 2018, we reduced COGS to an average cost per sample about $260, representing a 21% reduction year-over-year. While we continue to invest in our ability to reduce COGS and believe we will benefit from volume-related cost reduction, we expect to see COGS fluctuate as we balance introducing new content and features for our customers and driving down cost per sample.

Gross profit was $16.9 million in the quarter, up from nearly $5 million in the third quarter of 2017. Without the one-time Medicare del/dup bolus for HBOC testing, our gross profit would have been $14.6 million in the second quarter and, thus, the $16.9 million in gross profit represents a $2.3 million increase in gross profit quarter-over-quarter. Our gross margin was 45% in the third quarter compared to 27% in the comparable period in 2017. We continue to progress towards our goal of 50% gross margins across the entire Invitae testing platform.

This year, we have integrated 4 companies and doubled our volumes, all while maintaining flat OpEx. For the third quarter of 2018, we incurred operating expenses, excluding cost of test revenue, of $47 million, a 31% increase over the third quarter of 2017. In the third quarter, operating expenses included a $1.9 million impairment charge and $5.2 million in stock-based compensation.

At September 30, 2018, cash, cash equivalents, restricted cash and marketable securities totaled $134.6 million. This includes an equity financing where we took down $59 million net proceeds off of our ATM during the quarter. This quarter, we achieved a cash burn of $18.4 million compared to $35.6 million in the first quarter, representing a nearly 50% reduction in burn from the first quarter of 2018, successfully reaching our stated goal one quarter ahead of time. Given the timing of the Q3 and Q4 puts and takes, we would expect our burn in the fourth quarter to be slightly higher than the $18.4 million. Cash burn is a non-GAAP measure as noted in our press release.

We are excited to announce that we have entered into a new financing arrangement for up to $200 million in debt and $5 million in equity from funds managed by Overland Capital. The 7-year interest-only debt facility has a fixed rate of 8.75%, and annual revenue participation component with an annual cap that starts in 2020, reduced covenants and expanded capacity for future business needs. This new debt facility has a total rate of return of 11% compared to the nearly 14% under our prior facility. We took down $75 million at close, and a portion of the proceeds were used to pay down our prior debt facility. We also received $5 million equity investment from Overland.

Thus, with this new capital added to our cash on hand at quarter's end, we have approximately $150 million in cash on a pro forma basis with access to another $125 million from our new debt facility. Given our ability to control burn and over $250 million in capital at our disposal, we are well-positioned to drive the business forward to realize our mission of bringing genetics into mainstream medicine.

We have talked previously about the 4 levers in our business that enable us to manage the spend and drive the burn down: volume, collections, COGS and operating expenses. We have demonstrated our ability to pull each of these 4 levers as needed to meet our goals. In any 1 quarter, we may focus more or less on any one of these levers. Volume remains the key indicator of the health of our business and there will be trade-offs. For instance, we may accept volume that impacts our revenue, but the flip side is that, that volume helps drive down our COGS. Within COGS, we face similar trade-offs. As we add more content, COGS may be impacted in the near term. In terms of OpEx, we plan to continue investing in technology infrastructure and improving the customer experience. We will make the best choice for the long-term health of the business.

As this year has shown, our business model is working. This did not happen overnight. If we look back 5 years, we have grown our revenues at remarkable rates due to our focus on driving volumes and improving our collections. Revenues grew from under $2 million a quarter in 2014 to this quarter's $37.4 million. Equally important has been our ability to dramatically decrease COGS from nearly $1,300 in 2014 to under $300 today. While volume helps, we have also made the investments in equipment, automation, personnel and business processes to drive down COGS. Success in these 2 areas has enabled us now to begin seeing the payoff in terms of significant and growing gross profits. We have turned from a negative $1.4 million in 2014 to $16.9 million in this quarter. These gross profits will enable us to cover OpEx and drive towards our midterm goal of generating operating cash flow.

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

Thank you, Shelly. After years of continued execution, investment in technology infrastructure, expansion of our offering and integration of new capabilities, we can now see the stage clearly set for migration away from the test-by-test, report-by-report, rationed world of genetics today to a future where this information can be utilized by customers widely across all stages of life, regardless of what health care challenges they face or setting they face them in. Given our increasing strength as a business and continued relentless focus and our customers, we look forward to demonstrating in the year to come how these capabilities can be offered to the patient's benefit in the broader mainstream of health care.

Taking in account the combined industry developments over the past year, I believe it's fair to say that the potential for genetic information to improve patients' lives has never been so visible to so many. Even so, we believe that this broad and growing perception only scratches the surface of the world of possibilities we see in front of us. With that, I will now turn the call over to the operator for Q&A.

(Operator Instructions) Your first question comes from Tycho Peterson with JPMorgan.

It's Julia on for Tycho today. So maybe on the volume, I know you mentioned that your pharma volume grew very strongly this quarter. So could you maybe give us a rough sense of how much of the test volume is currently from your direct-to-patient versus your pharma partners? And how do you see that mix evolving over time? And then to the extent possible, can you talk about any pricing differences between the 2 segments?

Sure. So we're not breaking out customer segments explicitly. We did note that, in our pharma business, grew a little more rapidly relative to the others. But again, I think kind of in the -- against the backdrop of around 100% growth, it's frankly all kind of within the noise. Our -- same with our patient pay. Over time, that's been going up particularly as pricing has allowed elasticity to start to show up in the market. Our patient-pay price is publicly noted at $250 and of course our institutional insurance contracts are around $1,000 and the mix of all of that leads -- the mix of those prices and volume lead to, you know, what are slightly-under-$500 ASP today. So that's -- so yes, we are happy with the quarter. We're happy with the growth of each segment. But yes, going forward we're not really breaking out each.

The only thing I would add to that is that when we are seeing clinicians ordering through the pharma programs, we're seeing additional volume come through those clinicians beyond the pharma program. So it's opening up stickiness with these customers to ensure that we are able to pull through a longer-term relationship with them beyond the pharma program itself.

And then -- actually I just thought about 1 more thing to mention about the patient-pay volume is with the prices available now -- and we do see more interest direct from patients, it does remind me to mention that the study we published this year showing that a lot of -- basically patients out of criteria for hereditary breast and ovarian cancer testing have essentially the same diagnostic yield with our services as patients within criteria. for Medicare and third-party reimbursement and I think that that's going to continue to be an important factor for our decision making about patients and certainly we would hope for professional societies guidelines and committee guidelines development perhaps it will speed up in the years to come.

Great. And then just a follow-up on expanded carrier screening I believe this is the full first full quarter since you are -- relaunched the ECS test. So could you maybe talk about how much of the strong volume growth was attributed to that? And any sort of developments in market share dynamics that you've seen lately.

And then regarding the new code for ECS that's effective 2019, what is your latest sort of expectation on the pricing?

Sure. So it's early days. I'd say it's still early days for us in the -- particularly in the OB segment. With the businesses we're in now, I'd say we're kind of still catching our footing and learning in the IVF sector. We know that there are some product introductions that will dramatically help what we think next year will be a strong year in the OB sector, namely noninvasive prenatal screening, which we mentioned before. And so I think it's safe to say it certainly wasn't a massive contributor to the growth. But we like what we see in that segment, really like the opportunity there particularly with our broad range of offering in it.

As for the code, the ACT code, I think obviously we're interested. We're watching that development, we're participating in it, but we're also of the mind that actually the payment rates now suit us just fine with our cost infrastructure we can easily foresee a 40% gross margin in the OB and IVF segment receipt or perhaps even more, that could help balance out our platform. So we're happy with where it is and if it improves, that will only be upside on our cash flow generation and we'll invest that elsewhere in the business.

Your next question comes from Doug Schenkel with Cowen and Company.

This is Adam Wieschhaus on for Doug. Your full year revised volume guidance implies you'll approximate 70,000 samples or more in Q4. Acknowledging it was an upward revision for the year, I think that volume would be a step down sequentially. So I just want to make sure my math was right. And if so, could you provide some color on how your arrived on that revised guidance?

Yes. Not going to challenge your math. I think the -- that my -- yes, my arithmetic checks out there as well. I think like we have said all year, we really want to guide to that which we absolutely see in front of us. And just make sure that we're -- that we all don't get too far ahead of ourselves. And in particular, Q4, of course, is typically the largest quarter, relative, by far. And in this particular quarter, you've got NSGC and Thanksgiving right next to each other. And so, kind of all told, just want to make sure we don't get too far ahead of ourselves. We are -- we are feeling great about the business. We think -- feeling bullish about the future growth but that's -- so we just decided to set guidance in that range for good measure.

Okay. Great. And could you provide any update on the development of your in-house and NIPT product, such as when do you expect to launch that and what the remaining hurdle there before it could be commercially available?

Yes. So as we mentioned we've been working on that. The idea there is to have it -- get it out for commercialization in the beginning of next year. Let's say, at this point, we're still on track to do so. And again, with the -- even today, only 1.5 to 2 million women getting NIPS services every year in the U.S., we're pretty excited about what that can do in combination with the other service offerings in our reproductive health portfolio.

(Operator Instructions) Your next question comes from who Puneet Souda with Leerink.

Let me ask the first question a bit on the components of the growth. I just want -- if you could provide any high-level picture of hereditary growth versus reproductive growth. Anything there? And then just on COGS reduction, just trying to understand where are you seeing the most COGS reduction? You've done a good job of COGS reduction through the last year. Where are you seeing the most growth? Is it in sample prep sequencing versus bioinformatics versus medical interpretation, where are you seeing the growth? And how should we think about the COGS reduction going forward?

Great. So let's do the first, I mean, as we mentioned we won't be breaking out the segments going forward. And again, just to remind everybody, it's not -- that's not our obstinance nor desire to help everybody understand our business. It's simply that as we begin bundling all of these content together, depending on whether you're diagnosing disease, screening for diseases in a reproductive health setting or answering simple questions in preventive or proactive genetics, it's going to become increasingly difficult for us to communicate around the business looking at kind of the more traditional product segments. So that -- just to kind of talk about the rationale.

With that said, at the high level, we kind of -- we saw growth across-the-board on all our disease areas. And as I've mentioned, kind of early days for reproductive and so kind of -- we're kind of looking at the front end of the ramp on that from our perspective.

On the COGS, I think Lee can go into more detail, but I do think worth mentioning particularly at this point in the business and we'd look forward toward our operating cash flow, this is where the short answer is a relentless focus on reducing COGS so that the end-market pricing, no matter where it went, really works for this business, has been kind of the day-to-day of life at Invitae for the last 8 years. And as Shelly mentioned, we'll continue to focus on it. Albeit there will be continue to be a balance of new content, new capabilities versus the COGS per sample or perhaps we'll begin thinking about thinking COGS per patient per year going forward. We'll figure that out in the next few months. But Lee, you want to just talk about some of the specifics on the 3 main buckets and future outlook?

Yes, just by way of -- maybe I'll just give you some examples. As Sean said, there's -- last quarter we mentioned that we hadn't particularly been focusing on COGS reductions because we were really focusing on getting our reproductive assays up and running in San Francisco, which we've done. And now we've turned our attention back to the relatively long list of whether now kind of small -- individually small dollar amount savings. In general, our COGS stack for our reproductive offerings, PGT and extended carrier, are smaller. We have a better COGS stack profile than the assays that we -- than the entities that we acquired, so that's one thing. We're starting to see real progress in varying interpretation and report writing, which, as you know, was always going to be sort of the long pole as we reduced lab expenses. And so we're working our way through that. And then there are things, as prosaic shipping cost and kit pricing that we continue to do everything we can to bring down. And so you can expect to see us continue working the list in these small increments quarter-over-quarter.

Okay. That's very helpful. Just last one on -- a bit on lab consolidation, has everything moved to the West Coast lab? If you can confirm that. And then, Sean, just wanted to get a view on somatic testing. We've seen significant market growth there. Obviously a number of companies coming to the market. Just trying to understand how do you view the somatic opportunity now versus a year ago? And if that market -- is there opportunity there for bringing the cost down and opportunity there to drive value?

So I'll take the first question in terms of the lab. Yes, we're running both preimplantation genetic testing assay as well as our carrier screen assay here in San Francisco. We've not yet completed decommissioning the lab in Cambridge, but we expect to do that either by the end of this quarter or perhaps beginning of next quarter. So, we're still wrapping up the Cambridge end. But yes, we have completed the integration of those assays into our San Francisco operation.

Okay. And then on the somatic, I think again, with 1.6 million people just in the U.S. that come down with cancer, our view is in the future, when we are the leader in identifying the people at risk, when those -- when, unfortunately, those individuals do come down with cancer, we think that it is pretty clear now that genetic information about the tumor has impact for patient's outcome prognosis and therapy decisions. And consistent with the way that we view the world, there are ways that we think that can be done at prices that will really open up that information to all 1.6 million or so people who come down with cancer. And then, of course, especially in news of late, obviously using a variety of technologies for liquid biopsy monitoring as it were, seemed like that is certainly going to be a part of the patient's journey as we move forward. We can see kind of identification of all individuals at high risk, full micro characterizations of the cancer they develop it and really effective and efficient monitoring for recurrence and progression of the disease. And this is a -- maybe this is a more of a personal note than a -- than perhaps rooted deeply in the clinical outlook today but I think given the molecular nature of cancer and the number of therapies that are coming to market today, I really do believe that in our lifetime, we will be able to manage and treat cancer, much like successful strategies against fighting HIV infections provide a near-natural life for victims of that disease today. And I actually can -- I, and I think many others, can actually see that as a reality in our lifetime and it's pretty exciting to be a part of it and really exciting to see what's going on in the industry around us.

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

Thank you 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.