Invitae Corporation
Q3 2017 Earnings Call Transcript

Published: 7 Nov 2017

[Operator:]

Good afternoon. My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to the Invitae's Third Quarter 2017 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Kate McNeil, Head of Investor Relations, you may begin your conference.

[Kate McNeil:]

Thank you, operator, and good afternoon everyone. Thank you for joining us for our third quarter 2017 earnings call. Joining us today are Sean George, our CEO; Shelly Guyer, our CFO; Lee Bendekgey, our COO; Dr. Robert Nussbaum, our CMO; 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 plan to integrate and manage businesses we acquire, our expectations regarding Good Start business and financial results, our proposed acquisition of CombiMatrix, 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. These forward-looking statement involved significant risk and uncertainties that could cause our actual results to 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, 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 will turn the call over to Sean.

[Sean George:]

Thank you, Kate, and thank you again everyone for joining us on the call today. On the heels of a strong second quarter with increased confidence, we made swift move to expand our reach in the family health, namely with the acquisition of Good Start Genetics in August of this year and signing the definitive agreement to acquire CombiMatrix which we expect to close sometime in November. And as we exit Q3, I'm incredibly proud of this team's focus and execution during what turnout to be a very eventful quarter. We did experience a bit of turbulence along the way some of that expected some have been unexpected, namely the beginning of integration activities for Good Start Genetics, the Anthem implementation rollout of AIM; of course CMS pricing, events of the PAMA panel rollout, and then an issue in production with the Boland Inversion. Throughout it all, the team demonstrated focused, swift execution and while managing a lot of moving parts we came out of the quarter with increased momentum as we head to the rounding out at the end of the year. I would like give some management perspective on each of these issues before handling the call over to Shelly to cover the numbers in more depth. Starting with the challenges we anticipated of course the beginning of the integration for Good Start with our primary privatization being focused on the commercial innovation, in particular sales leadership was engaged in integrating the commercial efforts so that we can enter the year, next year with one combined sales force offering all of our services and we even added of some of CombiMatrix services through the strategic distribution agreement. The whole organization is aligned and rapidly integrated with combined day-to-day operations and systems. And indeed just a short two months after closing, we have got full integration of both operating teams. Now, it's going to be expected with often arises in acquisitions sometime the third-party relationships, pre-existing third-party relationships get frayed, and indeed the former Good Start relationships with Semaphore had been terminated. This happened fairly early in the process. It was a termination of the send out agreement for expanded carrier services. So that was something that -- again while not total expected or something that often comes up. When you do these things, it took some time to manage with the clients and of course, we'll accelerate our development to bring up in a detailed version of that expanded carrier screening as soon as possible. So while we said today, the integration is going about as well as when we'd hope. There is still work to do in the following six to nine months particularly in preparing for the transfer of production operations to San Francisco. A couple of things in the quarter that little more challenging than we anticipated. I mentioned Anthem launched the AIM portal is an automated prior authorization portal that happened in July. It did indeed cause a short-term disruption primarily because of some confusion on the client side in the selection and ordering use of the portal. It was frankly a little bit of a rocky rollout. We have been working with the clinical practices starting with the top working through the issues. We've got a good relationship of course with Anthem itself working on issues both in the presentation and implementation of the test in the portal. Overall, it was about $400,000 revenue impact in Q3 of '17. Now the long-term, these -- both of these and other efforts by payers in the long term are actually net positive, a standardizing portion of codes, the use of codes, demands would be increasing the predictability of coverage, and in particular and perhaps most importantly increases the utilization of in-network providers. Therefore as an in and out provider for the largest healthcare insurers provides us with an advantage versus lab out-of-network is something we get volume into clients. Now some good news in all of this is that early indications are the United's Beacon platform, a similar platform is indeed going a little bit smoother. United had launched the version of that in a pilot basis in Florida, had spent a little more time with webinars and client education on how to use the portal, and while it's early -- earlier trends are in it would appear that it's going a lot more smoothly than Anthem. And then of course late in the quarter, CMS released the newly proposed pricing to be rolled out with PAMA next year. Now as we've indicated a while ago, our collective experience with CMS upon new pricing implementation, it's kind of always three things, it's always confusing typically changes over the months to come. And usually while it doesn't start this way, it usually ends up in a fairly rational point that makes sense the most. So while we're expecting a bit of noise from this, from both the announcement and dealing with it, just how confusing and seemingly misconstrued the results were surprised even us, we've commented in the official public commentary period, more importantly we of course are engaged in all manner of conversations through our channels, to help clarify what we think was a misconstrued calculation of the pricing for the code that we've been instructed to use as well as overall some confusion about the use of code more widely. It is our understanding that PAMA is on track to be implemented in January of 2018, and so I'll remind people that the worst case if everything remains as it is today that Medicare accounts for about 8% to 10% of our revenue and the current proposed pricing, again if nothing changes now and then, is a 10% drop on that revenue in 2018. Now one of the biggest challenges that I mentioned in the quarter and certainly the one that we were not expecting, the Boland Inversion issue was brought to our attention. We immediately jumped on it, got in touch with all of clients, communicated completely openly transparently, proactively engaged on understanding more, finding out what the issue was, maintained constant communication as we investigated ourselves and started to clarify what the statement form of the remediation would look like. Good news -- well, I'd say good news, it was about as we expected. And I think also as we stand today we're essentially done with the follow-up on that issue. We began notifying clients with changed results last week and R&D to finish with that. We identified over 50,000 negatives that we did confirm. There were eight patients that had received the false negative results from us, so eight positives that we identified. Again those clients have been followed up with and there were handful of new samples that we're reaching out to collect just to double check. This was in line with our initial expectations including the rest causes impact. We mentioned it would be non-material and indeed causes impact for the quarter came in at less than a $100,000. Overall, the reaction from the clients is positive and any volume headwind that we could try to calculate was pretty much in the noise of both Q3 seasonality and everything else I mentioned -- everything else going on the quarter, that much of which I covered. Most importantly, our clients saw firsthand our commitment to the patients, the quality and integrity of our data. So building on the momentum that we had entered in the quarter and against the backdrop of all of the issues I just went through, this team here at Invitae I feel demonstrated the focus and proficiency of execution that overtime will earn us the right to emerge as a leader in the new age of genetic medicine. So with that, I'll turn the call over to Shelly to walk through the detailed financials for the quarter.

[Shelly Guyer:]

Thank you, Sean. Before I dive into the details for the quarter, I'd like to remind everyone that our acquisition of Good Start Genetics closed on August 4th. Because our consolidated results in only eight weeks of contribution from Good Start, we believe that for this quarter it is most informative to provide the consolidated financial results for the quarter in addition to breaking out our base business. Additionally, we'll provide some color on what we believe Good Start's fourth quarter results would have looked like so our investors and analysts can better understand how the integration of this business is expected to contribute to Invitae's results in the future. We do not intend to do such a breakout regularly in the future but we thought it would be useful in this quarter given the recent acquisition. With that as background let's take a closer look at the financial results for the quarter. As Sean indicated, it was a strong quarter and our base business performed well. We continued to see solid growth in volume. On a consolidated basis including Good Start volume, we accessioned over 40,000 samples in the quarter. This reflects not only year-over-year growth of approximately 188% but also our 18th consecutive quarter of double digit growth. Looking at our base business, you can see Invitae accessioned more than 34,400 samples reflecting a 122% improvement over the prior year and strong double digit improvement over the second quarter. Importantly, volume growth was seen across all clinical areas and is attributed to growth in new and existing accounts. Ongoing biopharma partnerships continued to drive our non-oncology test volume. Good Start contributed approximately 5,600 samples since August 4th, for the fourth quarter sample volume was approximately 9,250 compared to nearly 9,500 samples accessioned in the second quarter. The biggest factor in passing the Good Start volume in third quarter was Semaphore's termination of an agreement to provide expanded carrier screening services. At the time of acquisition, expanded carrier screening testing or ECS accounted for approximately 15% to 20% of Good Start's volume, while a number of clients that previously relied on Good Start ECS offering have adjusted their ordering habits. We expect them until we're able to introduce an ECS offering. Good Start's overall volume will remain depressed. Revenues for the quarter came in at approximately $18.1 million on a consolidated basis, a 189% increase over the $6.3 million reported during the prior year period. Invitae's base business contributed approximately $16 million reflecting a 122% increase over the prior year period and a 12% increase over the second quarter. Good Start's contribution to the third quarter revenue is a bit more complicated. For the eight weeks following acquisition, we recognized approximately $2.1 million in revenue. In addition to the $2.1 million Invitae received approximately $900,000 of cash related to test build prior to the close of the acquisition; however, U.S. GAAP does not allow us to recognize revenue on these cash collections related to tests reported prior to the close. As a result, this $900,000 increases the accounts receivable at the time of acquisition and does not count towards our revenue in the quarter or any future point. Looking ahead, we expect to collect an additional 1.1 million from cash based customers for test conducted prior to August 4th, with approximately 75% of these remaining collections occurring during the fourth quarter and the rest occurring in the first quarter or two of 2018. So, we anticipate a similar impact on revenue on our fourth quarter results and to a lesser extent our first two quarters of 2018. For reference purposes excluding the impact of acquisition accounting treatment, Good Start revenue for the full quarter would have been approximately $4.9 million down about 6% from second quarter revenue of approximately $5.2 million. Moving to collections, we continue to work through the process of operationalizing a significant number of large payer contract signed late last year. While we see progress on this front, improvements were offset a bit by Anthem's AIM implementation which was rolled at July. As Sean indicated, this is a long-term net positive for us but it did have negative impacts of about $400,000 on the quarter. Finally, you will recall that we brought billing in-house in June. The result of this effort has been impressive. Within the first several months, we have already achieved the operational efficiency of the third-party vendor operating for over three years. Over the next few quarters, we expect to see our billing team further improved collection rates and collection amounts. Strong third-quarter volume coupled with some production improvements enabled a continued reduction in cost of goods sold per sample. COGS for consolidated operations including Good Start as well as for Invitae's base business came in at approximately $330 per sample, representing an improvement of 27% year-over-year and about 4% from last quarter. Looking longer-term, we have opportunities to further reduce COGS and realized significant synergies in the consolidated business. In the near term, we expect to improve COGS through the full integration of Good Start including the transfer of production operations next year. On a consolidated basis, our gross profits increased from negative $1 million in the third quarter of 2016 to nearly $5 million in the third quarter of 2017. This includes the gross profit of $4.7 million from Invitae's base business. Our consolidated gross margin was 23% and our Invitae base business achieved a 29% gross margin. It's worth noting that our consolidated gross profit and gross margin calculation excludes the $900,000 of Good Start revenue that was classified as an increase in accounts receivable at the time of acquisition and not revenue. For reference purposes, consolidated gross margin would have been approximately 30% at all Good Start revenue has been recognized. I would reiterate that we remain confident in our ability to reach our long-term target of 50% gross margins across the Invitae platform. We incurred operating expenses excluding the cost of test reported delivered of $35.9 million of which about 32% were research and development expenses, 37% were selling and marketing expenses and 31% were general and administrative expenses. In third quarter of 2017 improvements in operating leverage were offset by nearly $2 million in acquisition costs. Despite these higher costs our leverage continues to improve. We drove 158% year-over-year volume growth while limiting increases in operating expense to 50%. For the third quarter, operating expenses included approximately $9 million in non-cash expenses including $4.8 million in stock-based compensation expense. Of note, this included approximately $1.3 million associated with the Good Start acquisition. Non-cash expenses also included depreciation and amortization of equipment equaling $2.5 million. And due to the three acquisitions completed this year, our amortization of intangibles was approximately $550,000 in the quarter. As this only included the partial quarter for Good Start, we expect this rate to increase to approximately $700,000 in the fourth quarter. Two final points should be made to understand this quarter's P&L. First, there was an income tax benefit due to the Good Start acquisition, concurrent with the acquisition the Company recorded additional goodwill of $4.8 million relating to the tax consequence of recognizing the fair value of the acquisition-related intangibles with an equal offset to deferred tax liability. And second, the weighted average shares used in computing are net loss per share, does not include the non-voting preferred shares due to their dilutive effect, thus the shares used equaled 48.2 million shares principally related to the additional common shares issued during the quarter for the pipe financing. The exclusion of the preferred shares had an approximate $0.03 negative impact on the net loss for the quarter. We ended the quarter with approximately $106.5 million in cash, cash equivalents and marketable securities. This includes net proceeds of approximately $68.8 million from the pipe financing completed in August and reflects the extinguishment of approximately $18.4 million in Good Start debt in conjunction with the closing of that acquisition. As anticipated we continue to see the cash burn related to our base business decrease. Our burn this quarter was $22.6 million on a consolidated basis. The burn for the base business was $20.1 million, a $1 million decrease from the second quarter. In the short term, we anticipate acquisition and integration related expenses to increase burn, longer term we believe that the acquisition of Good Start and proposed acquisition of CombiMatrix will contribute positively to cash flow, allowing us to reach cash flow breakeven by the end of 2018. Sean?

[Sean George:]

Thank you, Shelly. So, as we can all see the business is a bit more complicated than it used to be, but fundamentally we're achieving our business objectives. I believe we're extending our leadership both cost leadership and execution leadership in the industry, and bringing technology improvements into play in order to get genetic information in the hands of everyone in monetized healthcare systems. At a busy time, we not only continue to extend our growth on the core business and execute against this but we add new assets, new capabilities and increased our strength. In fact I believe we took a quantum leap in our operational excellence, both on the operation side and our commercial execution and every day I am reminded about growing strength, whether it be from new biopharma partners taking us out to work with us for genetic testing expertise or our network of clients both clinicians and patients. Every time, we check in with the field or visit a key client, I'm reminded with new daily high sales volumes that seem to come in on a biweekly basis. As you can look and see the growing scale of our production operations and increasing leverage from our investment into our technology stack, you walk away with a clear distinction, I walk away the clear distinction of our future leadership potential. And indeed as we kick up Q4 with October volumes just on our base business, not including acquired businesses, coming in at nearly 15,000 sample accessioned, I believe that positions us well to achieve our 2017 full year guidance and most importantly set us up for a very exciting 2018. And with that, operator, we'll turn the call over to Q&A.

[Operator:]

Thank you. [Operator Instructions] Your first question comes from Doug Schenkel from Cowen, Doug, you have an open line.

[Doug Schenkel:]

I just want to start on pre-authorization. You quantified the Anthem headwind. You're in network with Anthem, so I just wanted to try to get a better understanding as to whether these were delayed or lost revenue. So really the questions are. First, were these tests done and not reimbursed? Or does this actually holdback volume as well as revenues? That's the first question. The second question is. What with the rationale for the holdback? Were these tests deemed to not be within coverage quality? The third part is. What percentage of Anthem volumes were affected? And the fourth part is. What is the assumption and guidance for Anthem? Do you expect these tests to come back in the revenue, and for that matter, what are you thinking when it comes to United?

[Sean George:]

Right, okay, so we'll do the four -- we'll do the four parter. Clearly, I can start with the last. I think that going forward we would expect to have worked this out. We have been of course on the phone with Anthem for last couple of weeks and I think going forward this should be immaterial, if it continues of course, we will let people know. But it would appear that going forward we've sorted this all out. The nature of it was not so much a volume impact, so I would say kind of delayed is the answer to the first question. We do expect that -- do expect that revenue to come in. It was universally across the platforms, so it's not as if the providers were sending one place versus another based on the rollout. It was just generally confusing, test selection was confused, and in particular the nuances surrounding our specific agreement with Anthem and our menu offered combined with what codes they wanted us to use and how it showed up in the portal that was all very confusing and some tests were ordered for which clinicians were told weren't in acceptance guidelines when in fact we had our work those out with Anthem, and so was merely a matter of reconciling those on the portal as it’s presented to the client ordering. Which like I said I think in the last few weeks, we've got that mostly cleaned up. Our teams are kind of watching it and we're working with Anthem to make sure that it does go more smoothly in the future. And I think the only other question which I didn't answer was the percentage of Anthem business affected, and I don't think we have that up at top of our head.

[Shelly Guyer:]

Just in gen, it doubled basically the denials of the test and so say we were about 25% in our rate, it was something like 50% for the third quarter. And we do expect as Sean said, they have that reversed back to that prior level once we've worked through these issues in coding and such within the system.

[Doug Schenkel:]

Okay, that's really helpful and just to be clear because volumes were above what we expected, but ASPs were less than expected. I just want to be clear were the volumes done, you just going to get reimbursed or were volumes actually impacted here?

[Sean George:]

Yes, so volume as we kind of have said in the past and indeed expected, Q3 tends to be a light quarter relatively to the other quarters and this Q3 was no exception. Now the biggest drivers are, the summer break and then wherever NSGC tends to land at least at this point in the Company's lifespan, a good chunk of our customers go to NSGC and typically takes a good three to four maybe even five selling days out. Those coincided with this quarter. So we were expecting about the volume we got and then the revenue -- on the revenue side again, this is now moving to things like Anthem, but really this is about the execution of our in house billing. As Shelly mentioned, we have now completed bringing it in. We are performing on the core billing metrics. You can think of all manner of looking at speed of billing and flexibility whatnot. We are performing as good as our prior vendor had, and that was after three years working with this. So we are pleased with where stand today on tangible metrics we can look and we would expect -- again we expect that to pick up as time goes on.

[Shelly Guyer:]

The only thing I would add is that we do not try to predict and give guidance on a quarterly basis and I would say that our second quarter was a little higher than we would have anticipated. And we probably pulled a little bit of that revenue in for the second quarter as opposed to having it fallen the third-quarter. And so it's very tough when you try to judge these things on a quarterly basis, we look at it more as a trend. And so we believe it's all based on improving the collections overtime and that we are on track to do so.

[Doug Schenkel:]

Last one and recognizing what you just said Shelly and recognizing that you don’t guide by quarter, but implicitly you did because from where we are in the year. At the midpoint of guidance, it appears that your expectations for core ASPs in the fourth quarter basically that you are assuming a jump back into the low to mid 600s. Is that right and if so, what drives that increase because mathematically if we just look at your volume and your revenue guidance that's where we come out?

[Sean George:]

Yes, I think in general that’s right the neighborhood Doug. I mean that’s like you said, we are now implicitly in our annual guidance you know how our Q4 guidance and that sounds about right to us.

[Doug Schenkel:]

Okay and that’s just based on typical seasonality and timing and collections?

[Sean George:]

That’s right. The volume is mostly seasonality and then all I guess had the improvements on in-house billing operations deeply with -- there is also just a little bit of patching up, Doug. So some of what resulted from the implementation of in-house billing resulted in some timing issues with revenue that might have come in Q3, getting pushed into early Q4. So, this is a function of the fact that we are still largely cash. So I think that’s the other -- the other factor that will get us into the range that we have guided to.

[Operator:]

Your next question comes from Puneet Souda from Leerink Partners. Puneet, your line is open.

[Puneet Souda:]

Sean, the ECS offering when can you introduce that into market? And what do you think, what would it take to get back the market share there?

[Sean George:]

Right, so we expect -- we are obviously working -- we are working at in Invitae speed on this and we would expect in the first half of next year to have an Invitae version which will be broader, faster, less expensive, all of whole things as clients have come to expect from us. The Good Start commercial team has great relationships with these clients. They have built really -- again, they have built a real quality business, high business with area of clinics. As Shelly mentioned, we are expecting for a period of time not to have that ECS volume. The rest of the volume that we acquired from the Good Start business it's unclear at this point what exactly is going to happen. I think optimistically we are holding it and keeping it. It will be challenging until we have a replacement for that. I would -- I think macro level this is kind of the stuff you expect you know and I think of course our path forward with the Company and decision making has a stuff kind of pre-priced as it were. But again we expect to get an Invitate version of this early in the year and we'll continue on the swift commercial execution that we've got up with the Good Start on.

[Puneet Souda:]

And then on the pre-ops headwind that you're going to have here, I mean just help me understand, obviously you have Anthem and United now and then, and number of major payers. So help us understand if that it continues to expand here into next year, how should we be thinking about the overall macro impact on genetic testing here?

[Sean George:]

Yes, so I think kind of -- again, the macro impact is as we have kind of postulated in and I think stated over the last 18 months to years, the insurers are kind of coming around to genetic testing, I mean it is obviously one of the fastest growing line items which has caught their attention, historical prices, second, kind of sharpen their focus and attention. And now you see them putting in place similar mechanisms that they have, it's very common these kind of automated pre-ops with many pharmaceuticals and high growth or high value line items for the insurers. So on a macro level if you take a step back, the biggest implication is that it -- as we have suspected and suggested, life as an out of network provider will get harder, and life as an in-network trusted provider of goods and services will get a little bit easier. And we'll continue working with them as much as we can to make sure the Invitae is the preferred partner therein.

[Shelly Guyer:]

The one thing I would add that we're able since the billing is in-house, we're able to improve upon our automation of those prior ops, not only through the existing systems like an AIM or Beacon, but also improving our prior-op across the rest of the industry and the third party payers. And so that helps us to ensure that more of the paths will actually be collected on the backend, so the improvement on the front end that yields good results on the back end. So we like using technology to enable us to continue to automate that prior-ops process, not only through them when they're forced to upon us, but also on our own.

[Puneet Souda:]

Okay, and then on the quality control. I just want to understand, what are the steps you've taken and where do you stand right now? And what's -- help us understand and help us get a comfort around, how these QC issues can happen in the future? I mean this a fast-evolving landscape and I know you're adding test to the menu all the time. So what are new practices in place that can potentially prevent this in future again?

[Sean George:]

I've said that to summarize that we've basically tripled down on the documentation and any kind of implementation of revisions in the kind of target areas of the genome. I guess best way to put kind of without getting too much in the nitty-gritty about the base tests and the pro-borders and what not, essentially we kind of acknowledging that we're now getting to a scale where these issues are kind of have these kind of ramifications. We've always been there. We're there now. We've implemented additional quality control checks, implemented and are implementing additional documentation and change control management that certainly for this issue and just about every issue kind of in relation to this kind of thing will prevent that from happening again.

[Operator:]

Your next question comes from Tycho Peterson from JP Morgan. Tycho, your line is open.

[Tycho Peterson:]

Couple of follow ups, I hate to hit on the pre-ops and again, I just want to be sure I'm clear. On the fourth quarter, you are seeing kind of no residual impact does that right and then. I think if I interpret your comments right, Sean, you're assuming that other payers kind of follow the lead of Anthem and United next year. So should we think about more of an impact in 2018?

[Sean George:]

I think 2018 the impact is probably neutral, right. I think each payer by payer there's going to be some rollout and follow up. Again, we believe the Anthem AIM rollout, we think of all the issues there we believe we'll work through most of them, so we don't expect a material Q4 impact on revenue from Anthem. United is going well enough that we don't -- we're not calling out anything specifically foresee in United. The others I think are plans and you can kind of see the third party vendors that when this kind of thing together getting ready to implement, I believe there probably has been an industry-wide kind of lessons learned between both the Anthem and the United rollout, and so I don't think there's, at this point of time we're certainly not going to call out any difference in our view of revenue based on these. We really do think I think as Shelly mentioned the key second point is, once they're up and running billing velocity and mechanics go much-much better, so it actually -- once they're up and running, it actually is better for us. So I think it kind of net net on the 2018 perspective this is a non story at least as we sit today.

[Tycho Peterson:]

Okay and then on PAMA, I appreciate you guys sending out the letter to us as well. And just two weeks ago you sent it in and I guess any feedback from CMS? And what gives you confidence that particularly those two codes 81432 and 81435 do get overturned?

[Sean George:]

Yes, so we have been in constant communication with CMS amongst others. We've kind of gotten what you would expect in terms of exchange, acknowledgement of receipts and interest in working towards the correct outcome. We are generally under the impression that the good big folks at CMS are indeed scrambling the figure that's out, that's our general understanding. With that said, we haven't got any clear indication of finer resolution. So we're kind of in a wait and see mode at this point, which is why I point out you know worst case here what the expectation could be. But again, it seems so obvious to most involve that we're optimistic there will be some kind of resolution to iron this out.

[Tycho Peterson:]

Okay, and then you guys mentioned you began cross selling Good Start and CombiMatrix in September. Any you know early feedback from some of the initial rollouts?

[Shelly Guyer:]

Tycho, we did roll that out in October and what I would tell is that, it's really signal based on that the feedback that we've got from customers that the common incentive testing revenue moving forward is going to play really well for us. And some of the thing able to be the comprehensive provider to these clinicians and I think that really sets us up well for 2018. And plans are moving ahead nicely in terms of sales force, integrating and training, so I would say that all this feedback is a really good signal for what's to come.

[Tycho Peterson:]

Alright, and then just last one on the Lynch syndrome retesting, now that that's complete looking back any implications in terms of ordering physician relationships any kind of ancillary damage controlling you need to think about now that you've kind of resolved the issue?

[Sean George:]

No, yes, that's a good question, glad you asked. In fact you know honestly coming into Q4, I actually feel our brand has actually been not only preserving being enhanced, this is some pretty direct and frank feedback from clients about what their expectations are in the industry kind of that these things can they happen and that the way we handled it, they felt was exemplary. And again like I mentioned, I'm incredibly proud of the team's response. I am kind of proud of our latent technical capabilities to get on top of these things, and quickly the expertise of our medical staff I believe is unparalleled in the space. And as you work through this kind of issue with our clients one by one by one, I walk away with the perspective that there is there -- I mean sure there some cautionary points and make sure you guys don’t mess this up and that I think, but on the whole of walk away from this experience feeling that we certainly did the right thing by the patients and indeed as everyone would expect, our clinics and clients have also gone positive in their regard for us. So I think while -- of course, we would never indicate this is a positive development, this was a manufacturing mishap. So it's our first one that was really publicly on display. With that said, I think the team and our approach just demonstrated exactly what Invitae is made of and I think it just really harvest good things with future.

[Operator:]

Your next question comes from Raymond Myers from Benchmark. Raymond your line is open.

[Raymond Myers:]

I want to first ask you Sean about the effect of prior authorization on physician prescribing behavior and has that had any impact on shifting which companies test they are completing the order for?

[Sean George:]

Right, so I think I would break this down in the two timeframes. One, in the timeframe we were talking about which I would just call it, general confusion and physicians just trying to figure out how that order the test that they want to order. And in that timeframe, I don’t think it shifts from one provider to another. There is a slowdown in the whole thing. There is a lot more phone calls. There is a lot more client service impact. There is a lot more field reps going into the accounts and hand holding trying to figure out what's going on. And ultimately -- again, it's not like who-ever they were going to order from its not that they shifted it, it's just there was a ton of confusion around it. And then whoever got the order couldn’t get it paid for because as it came through which essentially wasn’t the clean bill from the beginning. And so, let's call that in the Q3 timeframe, I don’t think it shifts a lot between competing companies. I think it just barge everything down and of course as we indicated, it was likely a revenue hit all and -- to the extent we could quantify that was around 400K for us. Now going forward, this is where I think going forward as we get all cleaned up and in fact if you kind of use the Beacon example, as perhaps a little more illustrative of how this will work in the future, only in network companies are listed and they are listed by the volumes their order, the value received by the insurance -- the commercial insurance organization. And so, I think overtime this serves indeed as we have been suggesting for a while, this will serve with a tool for the insurers to indeed divert volume to the labs that as a most comprehensive highest quality and best value for the dollar, and we think that overtime this benefits us above most.

[Raymond Myers:]

How many sales people does Invitae have today?

[Shelly Guyer:]

We -- our sales force is about 50 folks today including our inside sales team. So from January 1st, we'll have a fully integrated sale force of about a 100 individuals. So that is what the team will look like for 2018. We're beginning to do our sales force training to ensure that all of them are up to speed in terms of how to talk clinically about our cancer operating, our reproductive health offering, and then we'll continue to have a team focused on children's hospitals. So they're all very excited about the new content that's something that they see a kind of enthusiasm about their clinicians as they started talking about the future of Invitae. So, I'll say the enthusiasm on the part of the sales force is really high for 2018.

[Raymond Myers:]

I understand that you've made a lot of improvements and continue to in your lab to keep driving your down your cost per test, we saw more progress in third quarter. How much more progress do you expect throughout say the course of 2018 in the driving down the cost per test?

[Sean George:]

Right, so, this is one that I think we guys we've begun indicating and I think would kind of reiterate today. We continue to invest in our technology leadership in particularly the ability to extend our cost advantage. With that said, as that proceeds we're also bringing online other tests and other operational requirements that come into play and maybe Lee can kind of give a kind of a view of what 2018 and beyond would look like in regard to GOGS and the operations of the Company.

[Lee Bendekgey:]

So, there're a number of opportunities ahead of us to reduce the average cost per test. We're for example just now implementing NovaSeq across our entire test menu. The real thing that we're debating right now honestly is and I think you started to see a little bit in this quarter, we've now gotten to a place where as we approach our 50% gross margin target. The choice will be to whether to continue to drive down the average cost per test or to make our answers more comprehensive and add content in ways that will be useful to clinicians without increasing the average cost per test and while maintaining our target margin. And so in each case, it'll be kind of tactical decision about what is best for the patient and what enhances our lead over the competition. So you can expect to see both which is volume as well as continued focus on things like NovaSeq and other technology enhancements to see COGS go down, but I think that it'll frankly start to slow as we look at opportunities to add more content and provide more comprehensive and more useful information to clinicians and their patients.

[Operator:]

At this time, I'd like to turn the call back over to Sean George for closing remarks.

[Sean George:]

Again, thank you everybody for joining us for the Q3 call, and we look forward to catching up everybody in future conferences and excited to get our annual call in February of next year. Thanks again.

[Operator:]

This concludes today's conference call. Thank you for participating. You may now disconnect.