Invitae Corporation
Q4 2018 Earnings Call Transcript

Published: 20 Feb 2019

[Operator:]

Good afternoon. My name is Christine, and I will be your conference operator today. At this time, I would like to welcome everyone to the Invitae Fourth Quarter and Year-End 2018 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there’ll be a question-and-answer session [Operator Instructions] Thank you. Laura D'Angelo, you may begin your conference.

[Laura D'Angelo:]

Thank you, operator, and good afternoon, everyone. Thank you for joining us for our fourth quarter and year-end 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 products 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 September 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 expectation. 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 in the United States or GAAP, 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.

[Sean George:]

Over the past decade, we've created a new future in genetics, moving from niche, fragmented, and inefficient efforts with expensive test by test, report by report approaches to one where multiple questions involving genetics can now comprehensively be answered on one platform. We're driving an entirely new vision with the most fundamental personal health information is available to everyone across all stages in life. To achieve this, we’ve pursued an innovative business model, novel amongst our peers, albeit one that has been proven out in other industries. And that model is working. When we started the company, the world was skeptical that our approach would work. A single genetic test could cost up to tens of thousands of dollars and few investors thought there was a market beyond 250,000 tests per year, as well incumbents dismissed us as naive new entrants. In the last five years, our customers, the most discerning genetics experts in the world, have spoken. We have grown from just 229 samples five years ago to more than 300,000 samples in the last year alone. We've reduced COGS more than tenfold over that time to less than $250, enabling us to offer the highest quality and the most affordable testing to patients, providers, and payers alike. In challenging the traditional approaches of high price niche market testing, we have demonstrated that we can rapidly gain share, take advantage of a price elasticity to grow the market, and most importantly, increase the number of patients that will have genetic information put to use for their benefit. We've demonstrated our ability to drive the company toward profitability, dramatically reducing burn by managing volume, revenue, COGS, and OpEx, and while the trajectory of the business is more than compelling, we are truly just scratching the surface in terms of our long-term growth potential. We fully intend to reach 1 million people in 2020 alone, and one day, billions of people on the planet. I will now turn the call over to Shelly to highlight our financial results for the quarter.

[Shelly Guyer:]

Thank you, Sean. Volume continues to be the best real time indicator that our business model is working. And we are pleased to have posted another year of triple-digit year over year growth. We reported 102% growth from the previous year, accessioning approximately 303,000 samples in 2018, including approximately 87,000 samples in the fourth quarter. This bested our revised guidance for the year of over 285,000 accessioned samples. Billable tests is an increasingly relevant metric, given that we accrue all of our revenue. During 2018, we reported over 290,000 billable tests, with approximately 86,000 in the fourth quarter. Volume was strong across all diagnostic areas from old and new accounts. Notably, we experienced strong volume from international markets, which now account for about 10% of the total as well as steadily growing testing related to our biopharma partner programs. In reproductive, we saw an uplift in testing volume late in the year. We expect reproductive to grow in 2019 based on the quality of our testing, our strategy on pricing, and the tailwinds of new guidelines and the increasing importance of genetics to payers. A note on seasonality, as with many companies in the diagnostic space, the fourth quarter has traditionally been one of our best quarters in terms of test succession and build. We expect next year to see the same quarterly seasonality as we did in the past two years. The first and the third quarters experienced seasonal declines in growth, while the second and fourth quarters produce more robust growth. While the leading indicator of our success is volume, the next key indicator is revenue. We continue to improve our revenue pull through and achieved 117% revenue growth year over year. We generated revenue of 147.7 million in 2018, including 45.4 million in the fourth quarter, exceeding the revenue we pre announced in early January and our annual updated guidance. As is our habit, we point out when we have experienced one-time upticks in our revenue. In the fourth quarter of 2018, we recognized $1.9 million in revenue from Medicare payments for Lynch syndrome due to catch up payments for tests completed in the first half of 2018. Without this one-time bolus, our revenue would have been approximately $43.5 million in the fourth quarter. We do not expect any additional benefits to revenue from the Medicare Lynch payments in 2019. For the year, our 147.7 million in revenue would have been 143.5 million without the one-time Medicare pickups. We continue to see modest but steady improvements due to increasing collection rates from third-party payers, including Medicare, and from a healthy mix of institutional and pharma partners, which constituted approximately 23% of our revenue in 2018 and typically pay with greater certainty. This quarter's average revenue per test increased to $518 from $490 in the third quarter. And absent the Medicare one-time [indiscernible] payments, our average revenue per test would have been approximately $500. Again, I should mention that seasonality affects our revenue too. First, the seasonality in volume has a direct impact on revenue but also recall that our PAMA rates for cancer testing were reduced by 10% from last year's rates beginning January 1. Finally, as mentioned earlier, we do not expect any boluses from one-time Medicare payments in the first quarter and beyond. COGS was another significant lever that we can pull and we did so this quarter to much success. In the fourth quarter of 2018, we reduced COGS to an average cost per sample of $243, down from $322 in the fourth quarter of 2017, representing a 24% reduction year over year. We continue to invest in automation and other medical interpretation improvements to reduce COGS, and we believe that we still benefit from volume related cost reductions. However, we expect that COGS will fluctuate as we balance the introduction of new content and features with driving down costs per sample. Our suite of products include more tests at the front end of their life cycle. We have less volume throughput of these newly introduced tests and that's relatively higher COGS, until we realize increased test adoption. In the near term, our introduction of non-invasive prenatal screening or an IPS, we would expect COGS may go up with the increased test adoption until we apply our customary practices to increase efficiency and decrease COGS. The amount of gross profit we generate is critical to demonstrating that our business model is working. We were pleased with the significant increase in gross profit in 2018. Gross profit was 67.6 million in 2018, representing a 274% increase from the previous year’s $18.1 million. In the fourth quarter, we reported $24.2 million in gross profit which without the one-time Medicare payments, our gross profit would have been 22.3 million. We neared our stated long-term targets of 50% gross margin for the year. In 2018, our gross margin was 46% and for the fourth quarter, 53%. Without the one-time Medicare payments, the gross margin would have been approximately 45% for the year and approximately 50% for the fourth quarter. This is up markedly from the 27% gross margin for 2017 and 33% in the fourth quarter a year ago. Operating expenses is the fourth lever used to manage the financial health of our business. For the full-year 2018, we incurred operating expenses, which excludes cost of revenue, of $190.2 million, an increase of 36% year over year versus an increase of 117% in our revenue and 274% in our gross profit. Operating expense in the fourth quarter was $50.1 million. The increase from Q3 was primarily associated with investments in selling and marketing and R&D. We increased our headcount in selling and marketing and spent on marketing studies as we prepared for product launches and volume expansion. In R&D, additional headcount hired in the quarter is focused on enabling us to scale our business, preparing for new products, improving customer experience, and driving costs down. In G&A, we took a $1 million charge for impairment of an investment. Our quarterly net loss was also impacted by a $5.3 million expense related to the extinguishment of our prior debt agreement as we put in place our new and expanded deadline. And on the income tax line, a $2.9 million income tax benefit associated with CombiMatrix acquisition was recorded this quarter. As we enter 2019, we anticipate increasing our OpEx spend to foster the growth this year and beyond, reaching 1 million patients. The growth rate of our overall operating expenses will be somewhat below the 36% increase in 2018. First, we will continue to invest in selling and marketing to not only generate volume growth but also to launch patient initiated testing in the second quarter of 2019. We've already added sales personnel and currently have about 140 in our sales force. We would expect the growth rate to exceed the growth rate in 2018. Second, our investments in R&D that began in the fourth quarter will continue into 2019 at similar rates. As we continue to improve our cost structure, expand our [indiscernible], and enable new commercial channel. We would expect the growth rate to be lower than the growth in 2018. And finally, we anticipate that the G&A spend in absolute dollars will increase as we grow but will be in line with or below the recent quarterly growth rates and significantly lower than the 2018 G&A growth, which was high due to the integration of our acquisitions made in the previous year, which are now behind us. Moving onto our cash position, at December 31, 2018, cash, cash equivalents, restricted cash, and marketable securities totaled $131.9 million, almost flat from the prior quarter. During the quarter, we restructured our debt, taking out the old debt and replacing it with debt with a lower fixed rate, a seven-year interest only period and ability to take up to $125 million of additional funds in multiple touches. One of our stated goals for 2018 was to reduce the quarterly cash burn, non-GAAP measure as detailed in our press release by 40% to 50% from the first quarter as we accepted the year. We reached our goal a quarter early, and by the end of the year, we achieved a 52% reduction, exceeding our original goal. The cash burn for the full-year 2018 was $97.6 million, including $17 million in the fourth quarter. We benefited this quarter from the one-time Medicare payments and good cash collections as payers clean the slate at yearend. We anticipate a small additional cash benefit in first quarter of 2019 from Lynch Medicare payments. At this critical juncture, we have shown that we can control the four key levers of our business. We have proven that the model works and we've reached the point where we can make the decision to drive toward breakeven in the near term or continue to invest in our competitive advantage and continue capturing the growth and creating new market potential. We've chosen the ladder. Looking forward, We anticipate that the cadence of 2019 will follow 2018, higher burn in the first two quarters reflecting of deliberate investment in selling and marketing and R&D and then a controlled decrease in the back half as we reap the benefits of these investments. Collections early in the year will be lowers as our Medicare rates have reset down 10%. And our expenses will go up early in the year since annual costs on big ticket items occur in the first quarter. Additionally, our personnel costs will increase. The full effect of bringing on employees late last year and early this year in sales and R&D to hit our aggressive volume and revenue growth goals will impact the first quarter Our 2019 guidance is more than 500,000 samples expected for the year, generating revenue of more than $220 million. As is our practice, we guide to what is within our line of sight. However, as we introduce new products, it's hard to predict how quickly volume will grow and reimbursement will flow. This guidance does anticipate a mix exchange, which includes an increase in reproductive testing volume as well as modest volumes from our new patient initiated testing channel. As many of you may have heard, the coverage group at CMS indicated in early January that it interprets the foundation medicine NCD, as limiting Medicare reimbursement of germline cancer testing to late stage cancer patients. Leading patient advocacy groups, professional societies, and industry groups, including Invitae have expressed the view that this is a mistake. We're optimistic that this will be resolved in a way that reflects the contribution of germline testing to cancer patients among the Medicare population. We are maintaining our 2019 guidance because of our optimism regarding an appropriate resolution of this issue. And because of the growth we anticipate from our recently announced product launches. I will now turn the call over to Bob

[Bob Nussbaum:]

Every year, just in the United States, more than 1.7 million people are diagnosed with cancer. But only a fraction of them are getting the genetic information they need to guide their care. We're very proud of the recent progress we've made in demonstrating the importance of offering generic testing for all women with breast cancer. The American Society of breast surgeons announced last week that genetic testing guidelines for hereditary breast cancer need to be revised and call for genetic testing to be available to all patients with a personal history of breast cancer. These revised guidelines are based largely on data we generated in collaboration with the TMP breast care network. Data had showed that clinical guidelines designed to limit genetic testing to only a subset of patients based on personal or family history were unnecessarily restrictive. Additionally, the guidelines suggest that patients who previously had genetic testing may benefit from updated testing. Our results were recently published in the Journal of Clinical Oncology. The Office of the guidelines specifically state that “genetic testing has expanded in scope and availability since the Supreme Court decision in 2013. The decision overturning the patent contesting and increased competition has helped to lower the cost.” This is a direct reflection of the work that Invitae has done to lower the cost and increase access for not only every woman with breast cancer but also for every patient with cancer. In fact, while historically can take years for clinical practice to catch up with revised guidelines, I'll note that we're working today with one of the country's leading cancer centers to provide inherited cancer testing for every cancer patient who walks through their doors. Similarly, we're working with clinicians to generate new data that shows the utility of genetic testing and other cancers. According to a recent study of the largest data set of prostate cancer patients published to-date in JAMA Oncology, researchers from Tulane Cancer Center and Invitae showed that 17% of prostate cancer patients carry genetic variants associated with higher risk of various cancers. The analysis found that guidelines in place at the time of the study regarding which prostate cancer patients should receive genetic testing missed actionable genetic variants that would alter management or would indicate a need for genetic counseling for family members, suggesting broader testing is warranted. As we continue to develop and publish data in support of broadening who should be offered genetic testing for hereditary cancer syndromes, we see the number of oncology patients that can benefit from genetic testing will continue to grow, we have found exactly the same to be true in other areas, for example, epilepsy in early childhood, it is inevitable that there will be a significant and sustained increase a number of patients for whom we provide testing in all the areas we cover. As we have driven prices down, while maintaining only the highest quality and full transparency in everything we do, the clinical world has responded. And the impact of Invitae’s approach to testing will only continue to grow. This marks the end of the era of artificially high prices and restrictive policies for genetic testing that ultimately limit the number of people that benefit when the technology should be available to benefit so many more. We are now actively building out our reproductive health offerings. In the US alone, there are more than 6 million pregnancies per year and only a small percentage of those currently benefit from the full suite of genetic information that is of great value for the health and wellbeing of both the mother and baby. With the recent launch of non-invasive prenatal screening or NIPS, added to Invitae’s comprehensive women's health genetic testing menu, we are now able to provide patients with easier access to affordable genetic testing in early pregnancy and across all stages of life. While some refer to the screening as non-invasive prenatal testing, or NIPT, we think it's important to be clear about the distinction between screening and diagnostic testing. Prenatal genetic screening is designed to assess whether a patient is at increased risk of having a fetus affected with certain genetic disorders caused by chromosome imbalances. In contrast, prenatal genetic diagnostic testing is intended to diagnose with as much certainty as possible whether a specific genetic disorder or condition is present in the fetus. Women with a positive screening result for fetal genetic disorders should always be offered further counseling and more sensitive and specific diagnostic testing. From carrier screening, preferably done before but at least during pregnancy, to NIPS, to follow up diagnostic prenatal testing, Invitae is well positioned to provide these 6 million women who are either contemplating or carrying a pregnancy with the comprehensive clinical grade genetic information needed to guide their health decisions. Invitae also believes there's a clear need to offer genetic health screening to those without a strong personal or family history that would warrant the diagnostic test. A number of years ago, we launched what we refer to as our proactive test consisting of a large panel of genes that are analyzed for individuals without a personal or family history indication for genetic testing. We recently reported data showing that one in six healthy individuals tested with our proactive test had a genetic condition they did not previously know about and for which there were clear next steps in order to prevent or mitigate disease. With our proactive offering, we opened up genetic testing to a completely new set of customers we are beginning to serve. Finally, in an effort to increase access to the highest quality genetic testing, Invitae announced the launch of a new patient initiated testing channel in the second quarter of 2019 that will allow consumers to order the same testing that experts have been able to access through Invitae across our entire clinical test menu, making it easier than ever before to get the information needed to inform health decisions across all stages of life. We consistently hear from genetic counselors, clinicians, and patients about the roadblocks they face when seeking clinical grade genetic testing, including high cost, insurance barriers, provider scarcity, and restrictive outdated testing guidelines. Too often these barriers prevent patients from receiving the clinical testing they need. At the same time, direct to consumer genetic test have continued to grow in popularity, with patients turning to them for health information despite the limitations, higher rates of both clinical false positives and negatives and the need for clinical confirmatory testing. This new channel provide access for anyone seeking genetic information when facing the many obstacles thrown at them by our healthcare system. For example, people who seek to be proactive about their health, who wish to understand their inherited risk of cancer or cardiovascular disease for example, even with no personal or family history of disease present. Or families of immediate family member or close relative with an undiagnosed disease, they suspect could be hereditary but who are frustrated by not having answers because of the lack of access to clinical expertise and an inability to obtain third party payment for testing or women considering having a family who are seeking an expanded carrier screen before pregnancy, in order to keep open the greatest number of reproductive options available to them. I personally find it tragic and incomprehensible that more often than not the first time a couple learns that their risk of having a baby with a severe life limiting disease is when their child is born with the condition. With this new testing channel for patients and with growing data supporting the broader utility and value genetic information, the market for genetic testing will indeed one day include everyone.

[Sean George:]

Thank you, Bob. With the recent and continued expansion of our menu and our dedication to clinical excellence, we are creating a network wherein we can bring in partners from the broader healthcare industry who have capabilities to bring additional value to our customers. Together, we can remove barriers, so patients get more accurate diagnosis faster, provide information to researchers and drug developers to bring therapies to market sooner, and enroll trials faster. Since the beginning of Q4, we've added 11 biopharma health system, national physician network, and hospital partnerships. We will continue to invest in broadening this network and deepening the capabilities of our platform within it. In summary, we've demonstrated our ability to recap the genetic testing industry over the past five years. And as we look to the future, we remain steadfast in our commitment to ensuring genetic information enters mainstream medicine to better health care for everyone. With that, I'll now turn the call over to the operator for Q&A.

[Operator:]

[Operator Instructions] Your first question comes from the line of Tycho Peterson from JP Morgan.

[Tycho Peterson:]

Hey, thanks. Sean, maybe just to start, wondering, if you can talk about what's embedded in guidance for NIPS and then also the patient initiated testing initiative?

[Sean George:]

Sure. So or our guidance anticipates some contribution from both the, as of today launched NIPS offering and our development of patient initiated capabilities. With that said, I would say that it really is mostly anticipating a relatively slow burn in for both of those, their entrenched competitors in the reproductive health space. We certainly don't assume it's going to be easy and there really is nothing known – well, nothing at scale known about a comprehensive genetics being offered like this in that direct channel. So it's -- we're anticipating some volume there, but really view this year as really kind of the initial days of this and we will keep everyone posted, if we see anything advancing faster than that.

[Tycho Peterson:]

Okay. And then on [indiscernible] in terms of what's embedded in guidance and are they still accepting claims at this point? Can you clarify that?

[Sean George:]

Yeah. So I'll just go briefly on guidance. We are, at this point, we're assuming no change on the guidance. I think frankly regardless what happens, we think there's going to be enough tailwind from the, kind of the guidelines will change, undoubtedly change over the year and the general interest in genetics picks up, we think we'd be able to absorb that one way or the other, but more to the point on the details, Lee is here and can kind of go into more depth of what's happening, or what is not happening.

[Lee Bendekgey:]

Sure. Thanks, Sean. So Tycho, the Medicare date of service is the date that the sample is taken. So assuming that the currency and that’s interpretation of the foundation, national coverage decision remains in effect, it would only start applying to claims that we submit based on samples drawn, frankly starting today. So, we wouldn't expect to start seeing it until the end of March, basically, because the sample has to get to us and then the report goes out and then we bill. So we still have some time and as you can imagine, we are along with the advocacy groups, all of the professional societies, most of the industry are working hard to explain to the folks that CMS as well as the legislative committees that have oversight responsibility that this is based on a misunderstanding, that really the utility of germline testing is to -- in cancer patients, is to identify those patients with the hereditary syndromes because they have the greatest risk of metastasis and recurrence. So really the value in germline testing is primarily in the earlier stage patients and we think they -- this is just a misunderstanding and we're sure that given the opportunities to submit evidence, we and the rest of the community can submit plenty to convince them that this was a mistake and that in fact, along the lines of some of the research that Bob outlined, if anything, cover to be moving in the other direction.

[Tycho Peterson:]

Okay. And then just lastly on NIPS, can you maybe just talk about how you plan to differentiate in the market, given the number of vendors that are out there, is it solely on price? Or are there other angles you're taking?

[Shelly Guyer:]

Sure. Thanks, Tycho. So, as Sean mentioned, last week, we announced that we are going to start providing NIPS to OBGYN customer segment and that is utilizing luminous verify, which is a standard market leading technology. I think the big difference here is twofold. One, what we intend to do in the OB space is what we've done in the oncology space. And that is make it easier to access, easier to use, more affordable and more accessible for more people. And so that is one of the big differentiators that we know, we've proven we can deploy that strategy and open up a market so that's first. Second, being able to offer a comprehensive suite of products to an OBGYN office is critical. So, being able to build on our carrier offering to pair that with NIPS is something that we've heard from OBs. They would like to be able to utilize. And then going beyond that, we know that there's quite a bit of cancer testing that does occur in that OBGYN setting, so being able to offer both our diagnostic as well as our proactive cancer screen is something that we believe is going to help us further differentiate. So those are the two ways that we intend to be providing what we believe is a better approach to genetic testing and screening in the OB setting.

[Operator:]

Your next question comes from the line of Doug Schenkel from Cowen and Company.

[Unidentified Analyst:]

This is Adam on Doug. Thanks for taking my questions. You know you now have 140 person sales force, how many of those reps are selling your productive health products and what percent of the addressable NIPS market do you think this team can cover?

[Shelly Guyer:]

Sure. So the 140 reps, the vast majority of them are selling in the cancer setting to oncologists as well as to genetics experts as well as to OBs. So the majority of those are focused on that setting. And realistically, I think we see this market significantly opening up in the same way that we're seeing the cancer market open up and so the way that we think about this, our ability to serve women who are thinking about having a family or women who are pregnant is really being able to sell through that channel to OBs, but then also be able to start providing carrier testing through our direct channel, which as Sean and Bob mentioned, we're going to be turning on in the second quarter. So as we see the opportunity to be able to provide genetic information to the women who -- there are 6 million pregnancies a year, we see that both through the direct selling channel to OBs as well as the direct channel through our patient initiated testing and screening.

[Unidentified Analyst:]

Thank you. And what's the commercial status at your NIPS today and does your guys assume any kind of issue, more favorable average endorsement in the near term?

[Sean George:]

Commercial statuses has been quite literally, we announced it last week and we are beginning -- commencing today and as I mentioned, I think we expect -- we're not expecting to blow volume right out of the gate. As for changes in guidance, it would appear lately, kind of with the expanded carrier screen recommendations coming out. And what we've heard, I think along with everybody else about how ACOG and the like are considering expanding the risk criteria for non-invasive prenatal screening, I think we would probably expect it to expand, which seems to make a lot of sense. On the other hand, the real question is whether third-party payers will pay for it, which I think we're probably going to wait and see before we get too excited about suggesting revenue growth as a result of that, which also, however, is kind of -- is what informs our strategy of being able to offer the breadth of genetic services from start to finish, as well as a very solid patient pay option for a woman who would like to get that information and currently falls outside of one of the risk categories that her payer may consider needed for reimbursement.

[Unidentified Analyst:]

Maybe if I get one more in. It was roughly a year ago that you guided to 1 million tax and 500 million in revenue in 2020. Sounds like you still hit -- expect to hit that 1 million customer mark in 2020. What does that mean, do you also believe the 500 million revenue target is achievable as well? Thanks.

[Sean George:]

The short answer is yes. And again, I think kind of look, we also want to always not to put too fine a point on, our guidance is fairly specific for this year. The 1 million and 500 million for next year I think we’ll call kind of more aspirational than anything else, more as a view from our perspective as where do we think this business is going. And to that end, no, our view has not changed. In fact, we continue to think that the world is a bit of a tipping point here where medical genetics is coming into the mainstream and I think that’s kind of a lot of the different players in the healthcare space are coming around to that point of view. And as such, the investment we've made over the last decade, we think is going to be a very important factor in the years to come. So, yes, I think we’ll consider that still the way we view it playing out.

[Operator:]

Your next question comes from the line of Puneet Souda from Leerink. Your line is open.

[Puneet Souda:]

So first one, just wanted to touch on the Medicare billing questions. I just wanted to make sure, can you give us a sense of Medicare as a mix of revenue for you right now? And with the expected decline in PAMA coming, could you maybe give us your visibility into commercial payer contracts and pricing both on hereditary and reproductive end?

[Sean George:]

Yeah, absolutely. Let's do the first, how about – Shelly will cover the first, which is the Medicare kind of percentage and payment impact. And then I'll cover the kind of crystal ball on the payer side of things.

[Shelly Guyer:]

So volumes on Medicare are probably more like 10% to 12% these days as opposed to the traditional 8% to 10%. We did get a nice uptick this year from the [indiscernible] both in HBOC and in Lynch, which hit in the second quarter and fourth quarters primarily in that one time pick up. And so those were helpful to us in our ASPs increasing. We did also have third-party payers though increase last quarter. And so it was not just the Medicare improvement. I think as we look to the New Year, as you know, PAMA reduces our payments by 10% each year for three years. And as of January 1, we did have a decrease in our HBOC to the tune of 10%. So that will have an impact. We do believe that as we move through the year, we'll be able to make up for that with the other payers coming on and continuing to be able to increase those collections from all third -- other third party payers. So I think that's it from the Medicare side and –

[Sean George:]

Yeah. On the commercial, on the US, the private -- the commercial insurers, I think this is where we have the majority of lives covered now in contract and worth noting, yet still we have some to go and in all those conversations, we still are discussing contracted rate of around $1,000. So, that hasn't changed. We've had a little bit more experience now, being a network and under contract with some payers and kind of have -- kind of checked and double checked what the coming rates for this kind of testing is and our understanding is that in contracts going forward, that is the rate for everyone, around $1,000, even if it's taken many years to kind of come around, come around to what the -- what the new pricing tiers can offer these payers. So we don't see a whole lot changing on that front there. I think there are certainly the occasional exception that we deal with of payers thinking about pulling back coverage or limiting, for example, paying for deletion duplication testing, those seem to be one-offs and seem to be working very much against the broader trend represented in the data, the data that Dr. Nussbaum covered, this kind of data and these kind of studies we think is going to begin pushing the conversation the other way and that is actually -- that however is very difficult to predict when that starts making its way into third-party criteria for payment for testing. We would imagine it would expand over time, but again, these things seem to take longer than they should. So we aren't necessarily betting on that in the near term.

[Shelly Guyer:]

Yeah. The one footnote I would give to that is that we are seeing positive signs in the marketplace and from payers that we will be able to increase probably on the reproductive side. So those are newer into our contracts. And we are seeing that there's an appreciation for what those tests can mean to a payer’s population. And so we are positive from that perspective that we will have some uptick this year across many of the payers, even without new guidelines, but that would also help in that perspective.

[Puneet Souda:]

And let me touch on COGS reduction a bit and you guys have steadily declined the COGS here consistently. Can you give us a sense of, with NIPS coming on board, maybe a different turnaround time is needed for that, just give us a sense of COGS reduction sort of in the near term and the longer term and maybe where that's coming from as a sample prep or sequencing or bioinformatics, medical interpretation, where do you see the -- which parts of the COGS stack do you think can move here longer term and how should we think about the -- obviously, you're close to the 50% gross margin target already?

[Sean George:]

Yes. Sure. So, there's a handful of things I think, well cover in turn some of the key elements baked into an answer that I think you can get at what you're going for. I’ll just start with overall, yes, we are targeting long term 50% gross margins. And again, as you know, as management, we think of it as the platform COGS. So across all offerings, all services, platform COGS, which of course then, introduction of new offerings, new service levels, new features, we’ll start bouncing COGS around away from our historical kind of consistent and rapid decline in COGS. So, we remain focused on 50% gross margin in the long term. We still will always view COGS as overall platform COGS across the entire offering and continue to run the business accordingly. I think to go into a little more detail, Shelly will cover the NIPS side and then Lee can cover kind of the ongoing efforts, some of which you point to.

[Shelly Guyer:]

So, as I mentioned briefly during my prepared comments that when we do introduce new products, we would anticipate that our COGS would have upward pressure, so the volume and all of the savings we have from automation, et cetera, drive it down, but new products have traditionally increased COGS and had a pressure upward. So the introduction this year of the NIPS will likely have an upward pressure, as we begin that send out process and we would anticipate that with time and with volume and as we are able to sort of do our magic on bringing those costs down over several quarters, we should be able to bring those back in line with sort of what we're used to. So we will have that NIPS and also introduction of the patient initiated testing. That's a new model for us, that's going to have some costs and we will just be ramping up on that. And so with both of those early volumes, with lower amounts tend to be higher cost to us just per se, until we hit those volumes that get us that efficiency in terms of volume. And why don’t I hand it over to Lee?

[Lee Bendekgey:]

And in terms of -- what Sean described as the platform COGS, Puneet, we have the usual list of about 100 things to work on that will improve turnaround time, lower cost and improved quality. And as you might -- as you intuited in your question, a significant percentage of them are in varying interpretation and report writing, which now is the single biggest element of our COGS stack. But there are plenty of -- there's a long list of things in the lab that we can do to streamline and improve turnaround time in particular, which typically also has a benefit for our costs. So the only difference is compared to a couple of years ago, each one of these, whereas in the old days, we could do something and it would save us 50 bucks. Now, we're doing things to kits that will save us 5 bucks and things in the lab that will save us a couple of bucks, but the list hasn't grown any shorter.

[Puneet Souda:]

And just last one, if I can squeeze it in, the patient initiative, do you expect any contribution from those patients eventually turning towards their own payers or how are you thinking about the patient pay as a model longer term? Do you think it would be more along the lines of the, starting out in DTC and then converging over to more diagnostic type of avenues later on, is that the thinking here longer term and maybe Bob can -- Dr. Nussbaum can elaborate on that?

[Sean George:]

Yeah. So actually I’d love for Bob to go into that. Just really, I'll do a few minutes upfront, just let's make sure we'll keep clear that the payment type could be third-party insurance, it could be institutional like our pharma partners or hospital or it could be patient pay. The channel, we have -- the majority, all of our efforts today commercially has been on the sales channel to these genetic experts and these high volume accounts and we are initiating a new channel, which is the direct channels. So two patients and also clinicians by the way that we don't have enough, we don't have the thousands of sales reps to go reach, directly marketing and selling directly to those individuals. And those are two distinct commercial channels. The offering in itself -- the patient initiated offering is actually our standard – it’s our entire menu and what happens to those patients is the same that happens to any other patients by way of clinician review. If they insurance criteria, we can take the insurance route at their behest, just like any other patient that comes in their front door. So keeping the channels and the payments types separate will, I think will be key for all of us over the years to come. But in terms of the type of testing, and you kind of versus DTC, for sure, it's worth Bob pointing out a few things on that.

[Bob Nussbaum:]

Yeah. So I think Sean has made most of the important points, so I can just add a couple of things. First, just to reiterate, make sure everybody understands that our patient initiated testing is not a DTC offering. It's a channel that allows patients to initiate the testing. But there's still a provider involved in finalizing the order and making sure that there is professional, clinical support for that individual when that person initiates test. The other big thing, of course, is that the direct to consumer test offerings are really quite limited in terms of their ability to detect abnormalities. They have a very high clinical false negative rate. They also -- when some of them have been misused, it results in a lot of false positives. We've had a number of patients that have had samples sent to us for confirmation of what they thought they found in a direct to consumer test, and it turns out that it was incorrect, more than half of the ones that are sent to us turn out just not to be there at all. They're just errors. And so we really don't believe that our patient initiated testing channel really bears any relationship with direct to consumer. It's a completely different species. And I think that what we're doing will really advance the availability of high quality genetic testing across our entire menu to patients in a way that direct to consumer testing simply does not do.

[Operator:]

Your next question comes from of the line of Jeffrey Cohen from Ladenburg Thalmann.

[Jeffrey Cohen:]

Hi and thanks for taking the question. So I guess just to follow-on on the patient initiated testing as far as describing it, so I guess the question is going at payments and reimbursements first, these types of channels, would you expect a lot of that would be falling under existing codes or would you rather be cash paying, or is it too early to make a determination?

[Sean George:]

Yeah. So I think the short and probably unsatisfying answer is, it greatly depends. I think it's fair to assume that people who for some reason aren't getting served by the medical system and find access to these tests in this channel, I think that’s going to be more weighted towards patient direct pay than in our direct sales, kind of our direct sales channel. So I think that's certainly our expectation. I think we'll see more patient pay. With that said, if the individual does qualify for insurance reimbursement, we will be having that discussion with them. So we would expect some non -- insignificant amount of insurance build paying to be driven by that -- through that channel as well. But yes, I think given the nature of it and the people, we imagine will be initially there, it will be patient pay oriented. Again, I want to point out there are plenty of clinicians that we will be reaching out through that channel and their business coming through will be the exact same mix of payment as our current business.

[Jeffrey Cohen:]

And then secondly, could you talk a little bit about your ex-US business, and I know and it's become premature in nature and types of tests, which are predominantly gaining traction out there and any -- specifically and then lastly if you could talk about any areas of current focus, both US and ex-US on testing areas and business lines, which appear interesting to the company right now?

[Sean George:]

Okay. Sure. On international, it's interesting. There's not -- the international landscape project testing is very different than the US one. There aren't a lot of players at any appreciable scale and breadth around the world. There's a lot of reasons for that, it's not worth going into now, but at the price points we can now offer and the comprehensive menu we have, we are seeing increasing interest internationally. It tends to match kind of what people know about us here in the states. It’s heavy heavily focused on cancer, albeit there's a lot of children's hospitals and hospital systems globally that just don't have access to any of this testing in any appreciable price point. That's a different contributor, the international volume than the US volume and also this patient pay offering, in many parts of the world, there is only a patient payoff option, does our international businesses weighted heavily towards patient pay than our US business. In terms of areas of focus in the future, I think we've kind of covered a lot of it on this call. Our reproductive health offering now with non-invasive prenatal screening added, we will – what we're suggesting to expect from us as a, beginning the world where an individual, a woman thinking of starting a family, before she conceives can access the entire suite of testing all the way from the very beginning up until the two year pediatric check in of genetic information that will ensure the maximum health for herself and her child. That'll be a major focus for the next couple of years. And then as we've mentioned before, further expanding and deepening our menu across all the other disease areas, oncology, cardiovascular, neuro, pediatric, et cetera.

[Operator:]

[Operator Instructions] Your next question comes from the line of Kevin DeGeeter from Oppenheimer.

[Unidentified Analyst:]

This is Laila [ph] on for Kevin. There is a recent study in JAMA Oncology that noted higher rates of genetic variants and prostate cancer patients than previously reported. And so we'd like you to provide some input on what you think potential actionable commercial opportunity from this data could be?

[Bob Nussbaum:]

This is Bob. That study was a collaboration between researchers at Tulane and Invitae. So we are co-authors and collaborators on that study. We think the opportunity is really quite substantial, prostate cancer is common. And I think that it has been under appreciated, the extent to which there are hereditary cancer syndrome genes altered in patients with prostate cancer. There are implications for treatment, for example, there are certain germline tests, which make it more or less possible to use certain kinds of chemo therapeutic agents or checkpoint inhibitor agents to try to treat metastatic prostate cancer. There's also the entire issue of finding one of these right there, a cancer syndrome gene changes in a man with prostate cancer having substantial implications for that man’s sisters, that man's daughters, that man’s sons, but in particular, I can't tell you how many families I've seen where there's a woman who was presented with breast cancer and it turns out that her father and uncle had prostate cancer, nobody appreciated the possibility this could be an hereditary cancer syndrome. It wasn't picked up and the only way that we figured it out in the family was because a woman had to have breast cancer without having had surveillance and other opportunities. So I think the possibilities, the opportunities are really quite substantial, because of the frequency of prostate cancer and because of the ability to do what we call cascade testing that flows from the first affected individual to other people at risk in the family.

[Unidentified Analyst:]

And do you think this will lead to any opportunity to update the screening guidelines?

[Bob Nussbaum:]

Oh, absolutely. They are already changing. They are already changing from the time when we started the study with Tulane to now the NCCN guidelines of prostate cancer had already changed and I think they will change again.

[Operator:]

Your next question comes from the line of Bruce Jackson from Benchmark Company.

[Bruce Jackson:]

Taking a look at your new product pipeline, can you give us a rough idea of how everything is queued up and what the next couple of tests are that might be launched?

[Sean George:]

I think again, I think the way that we are managing the platform now, it's actually a little difficult to kind of point specific, other than things like NIPS. I mean, that's an obvious addition. The things that we’ll expect to then see coming forward are the combination of offering of NIPS with carrier with cancer screen or cancer test, depending on the patient's family history, even going ahead of time, fertility and other complications with conceiving in general, pregnancy complications and then going the other direction, a newborn ex-genetic checkup, a newborn genome kind of check-up, the first two years of life pediatric offering and all of that combined. So that's a good example of where, as the quarters go on and we make it easier and easier to access all that information. That's more what our menu is going to evolve as and then the same on the cancer side. We've indicated we're working on kind of as we become the world's leading tester of individuals for the risk of cancer that the next step will be to then molecular characterize the cancer itself and then monitor for recurrence and the migration, evolution of the cancer thereafter. And, so over the next 18, 24 months, we will continue down that path and on and on, disease area by disease area, adding panels, adding genes, up to and including exomes and genomes, however, kind of specific one-off product launches, there will be fewer and fewer of those kind of like NIPS and we certainly don't have any specific dates on them now, but further evolution, making it easier to order, a combination of the testing to answers, simply answer questions for clinicians and their patients. And then of course continue to expand new content, the continued menu expansion as we continue in all disease areas.

[Operator:]

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

[Laura D'Angelo:]

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

[Operator:]

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