Invitae Corporation
Q4 2017 Earnings Call Transcript

Published: 13 Feb 2018

[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’s Fourth Quarter and Year-End 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 fourth quarter and full year 2017 earnings call. Joining us today are Sean George, our CEO; Shelly Guyer, our CFO; Lee Bendekgey, our COO; Katherine Stueland, our Chief Commercial Officer and Dr. Robert Nussbaum, our Chief Medical Officer. As you listen to today’s conference call, we encourage you to have our press release available which includes our financial results as well as metrics and commentary on the quarter. Before we begin, I’d like to remind you that various remarks that we make on this call that are not historical, including those about our future financial and operating results, our plans and prospects, the focus of our business strategy, our plan to integrate and manage businesses we acquire, market opportunity, future products, services, our product pipeline and the timing thereof, demand for and reimbursement of our services, and our investment in our infrastructure and operations constitute forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act. It is difficult to accurately predict the demand for our services and therefore our actual results could differ materially from our guidance. Our guidance on future company performances assumes among other things that we don’t conclude any additional business acquisitions, investments, restructurings or legal settlements. We refer you to our 10-Q for the quarter ended September 30, 2017, in particular to the section titled Risk Factors. For additional information on factors that could cause actual results to differ materially from our current expectations. These forward-looking statements speaks only as of the date hereof. With that, I'll turn the call over to Sean. Sean?

[Sean George:]

Thank you, Kate. Invitae's mission is to bring comprehensive genetic information in to mainstream medicine and improve the quality of healthcare for billions of people on the planet. We pursue this mission with the strategy that we've been pursuing over the past many years focused on an investment in the technology infrastructure to reap the benefits and the advantages of scale. Our passion for this mission and our focus on execution of the strategy is accelerating our business momentum and in the year 2017 we have more so than ever expanded our product and commercial breath, invested in enhancement of our user experience from both our patients and our ordering clinicians and signed a record number of commercial collaborations, biopharma and health system partnerships. Indeed, we are now partnering with more than 100 advocacy organizations representing more than 100,000 people. As we have driven in the past 2017 was no exception, in that we drove triple digit volume and revenue growth and indeed in 2018 we're on track to become the largest provider of inherited genetic cancer testing. It is primarily the cancer business in the past has driven this explosive growth in volume and revenue. And in 2017 for the first time the entire year we had a positive gross profit. Our business model is working and we're even more excited as we look forward and expect to reap the benefits of our past investment in cardiovascular, neurological, pediatric, metabolic, exome and our new investments in maternal reproductive health as we grow our business further. Our business success in 2016 leading the 2017 gave us the confidence to add M&A to our growth strategy. We acquired AltaVoice in January 2017, launching the Invitae patient network in April 2017 as an integrated part of our development efforts. In June of 2017, we acquired CancerGene Connect and in September rolled it out as a part of our customer experience as a platform simplifying data gathering tracking and analytics for all genetic counselors and their patients. In the fall we acquired Good Start Genetics and CombiMatrix and as of January combined the sales organizations and are now approaching with 100% strong effort focusing on the most -- on the highest volume oncology, woman and reproductive health accounts. While it's astonishing to me as I think about last year, a little over year ago we were predominantly in inherited cancer testing and adult inherited testing and a little bit of pediatric testing. We now have broad capabilities where genetic information management across all stages in life. And this has not gone in notice in the industry. We've attracted a lot of interest from parties spanning the entire spectrum of healthcare adding patient advocacy organizations, pharmaceutical collaborations, research and commercial channel partnerships. Validating the model, the business model we've been pursuing for many years past, whereby we seek to aggregate the world's genetic information in a single platform and in doing so consolidate the current genetic testing industry. With that there as a foundation we believe we can build a networked information management system that would represent a new industry using genetic information that has a foundation. An example of that in the early partnership that we set out on can be seen in the BioMarin behind the seizer program. In this BioMarin by working with us gets faster access to more individuals that can benefit from the therapies, the patients benefit by having more individuals than ever before being appropriately correctly diagnosed with whatever specific form of the epilepsy they have and in the case of those who seal into mediated epilepsy can immediately be handed to partner that can do something about it, they’re having profound impact on the outcome of the children’s lives. With the clinicians involved, benefit the more patients they send our way, the more information we collectively understand about the underpinnings -- the genetic underpinnings of the epilepsy and of course Invitae benefits, having a partner like BioMarin living our mission, taking genetic information into all aspects of major medical care and in this particular case in the commercial endeavor that we would otherwise not be focusing on directly. Now with the network business, the information business we see contributing an ever-increasing part of our business is important, the primary driver of the number of patients into this network remains today and will be for some time the genetic testing business. To cover the details of our testing business in Q4, Shelly will cover the financials and the details of our testing business in Q4. Shelly?

[Shelly Guyer:]

Thanks, Sean. As we reported on a pulmonary basis in conjunction with J.P. Morgan conference last month, Invitae had another incredible year of triple digit growth in accession volume. Our total accession volume in 2017 on a consolidated basis was nearly 150,000 samples, including over 53,000 samples in the fourth quarter of 2017. Let’s break this down. Excluding volumes associated with our acquired businesses, we’ve accessioned more than 134,000 samples, including nearly 44,000 in the fourth quarter alone, well exceeding our revised full-year guidance of 120,000 to 130,000 samples. This reflects an approximate 130% increase in annual volume compared to the 59,000 samples accession in 2016. Fourth Quarter 2017 volume included full quarter volume from our Good Start acquisition, completed in early August. Volume related to this business totaled approximately 7,700 samples, given a loss of the expanded carrier screening services late in the third quarter, fourth quarter volume was in line with our expectation. As you will recall, we also completed our acquisition of CombiMatrix in mid-November, resulting in nearly 1,600 samples included in our fourth quarter results. On a full quarter basis, CombiMatrix accession doubled that amount, a total of approximately 3,200 samples. In January, our integrated sales force was trained and hit the street, selling all acquired capabilities. Going forward, our sales force will be working across all clinical areas and practices, supported by an internal team of regional and clinical specialists. One rationale for the acquisitions were to provide us a unified product platform with a single offering with broad utility. Consequently, we do not intend to break that future volume or other performance metrics by clinical area or category unless warranted on a limited basis for any future acquisitions. Last year, management provided a detail in savings reimbursement trends effecting revenue growth and issues related to simultaneously operationalizing a large number of contracts as we concurrently brought our billing operations in-house. Overall, we saw significant progress across key contracts and a favorable impact of those efforts on 2017 revenue. As per volume, we reported our revenue on a pulmonary basis in conjunction with the J.P. Morgan conference. Again, Invitae had another incredible year of triple digit growth in revenue. Our revenue grew over 170% during 2017. Full-year 2017 revenue on a consolidated basis came in at $68.2 million. With our full-year from the base business coming in right at the middle of the guidance estimates at $60 million. Thus, our base business revenue grew a 140% over full year 2016 revenue of $25 million. On a quarterly basis, you can see the total revenue fourth quarter of $25.4 million actually exceeded full year 2016 revenue. Breaking this down, revenue for the base business totaled $19.4 million, an increase of over 110% year-over-year and 21% sequentially. Our Good Start acquisition generated approximately $4 million in revenue for the quarter. This revenue excludes approximately 300,000 related to test build prior to the close of the acquisition. As discussed in our last call, U.S. GAAP does not allow us to recognize revenue on these cash collection, associated with test reported prior the acquisition's close. This amount was included in the accounts receivable at the time of acquisition and does not count towards our revenue in this quarter or any future periods. The go forward impact of this accounting rule will continue to decrease in the current and coming quarters. CombiMatrix contributed approximately $2 million from revenue to fourth-quarter and full-year revenue, representing the six weeks following the close of the acquisition. As a reference point full quarter CombiMatrix revenue was approximately $2.6 million. Turning to our cost for sample accessions, the company continue to make tremendous strides in reducing COGS, thereby enhancing our significant competitive advantage in the market. We ended the year with COGS of $321 per sample, on a consolidated basis and $297 for the base business. This compares to COGS of approximately $400 in the fourth quarter 2016 and $330 in the third quarter of 2017, reflecting a 19% reduction year-over-year on a consolidated basis and 25% reduction for the base business. In addition to amounted sequential declines in COGS on a consolidated basis, the base business achieved a 9% improvement over the third quarter. As we continue to roll out new content, including the XM test launched last year and as we finalize integration of Good Start and CombiMatrix, we expect that our COGS may vary quarter to quarter. In the near term, we expect to improve COGS through the full integration of Good Start, including the transfer of lab operations to San Francisco currently under way. Looking longer-term, we have opportunities to further reduce COG and realize significant synergies in the consolidated business. In sum, we remain confident in our ability to reach our stated long-term target, of 50% gross margin. We are pleased that 2017 marks the first full year of positive gross profit. We view increases in our gross profit as a critical indicator, that we are on the right track, by driving up collections and driving down products. Our gross profit on a consolidated basis, increased to $18.1 million for the year, a significant increase from the loss of $2.8 million in 2016, this included a gross profit of $15.9 million from NV test base business. In the fourth quarter on a consolidated basis Invitae achieved the gross profit of $8.3 million, this include a $6.3 million gross profit from the base business, up from $1.1 million in the fourth quarter of 2016. Translates to a gross margin or 33%, of consolidated test revenue as well as a gross margin 33% of base business test revenue, in the fourth quarter, which compares to 27% in the third quarter of 2017. For the full year 2017, we incurred operating expenses of $139.4 million on a consolidated basis excluding COGS and a $126 million for the base business This compared to $97.4 million in base business for 2016, a 29% increase against the corresponding increase in volume of approximately 130%. In the fourth quarter, we incurred operating expenses excluding COGS and $43.2 million of which about 31% were research and development expenses, 37% were selling and marketing expenses and 31% were general and administrative expenses. Improvements in operating leverage were offset by nearly $4 million in acquisition costs related to Good Start and CombiMatrix and an increase in amortization of intangible related to the AltaVoice earnout. Despite these higher costs our leverage continues to improve. We drove 154% year-over-year volume growth while limiting the increases in operating expense to 66%. For the fourth quarter, operating expenses included approximately $8.6 million in non-cash expenses consisting of $4.8 million in stock-based comp. Depreciation and amortization equipment equaling 2.2 million and approximately $1 million in amortization of intangibles due to the four acquisitions completed in 2017. We anticipate beginning in the first quarter of 2018 that amortization of intangibles will increase to $1.3 million reflecting a full quarter of CombiMatrix. Two final point should be make understand this quarter’s P&L. First, there was a reversal of the $4.8 million tax benefit provisionally recorded in the third quarter due to the Good Start acquisition. In the third quarter, we made an estimate based on the numbers been available. As our tax experts look more closely in the deferred tax assets. This start to use of the non-accrual experience method accelerated deductions. In the fourth quarter, we corrected deferred tax assets by $4.8 million and adjusted goodwill by an equal $4.8 million. Second, the weighted average share used and competing our net loss per share does not include the non-voting preferred shares due to their dilutive effects, thus the weighted average number of shares used for the fourth quarter were 52 million shares and for the full year 46.5 million shares. Moving to our balance sheet and non-cash items. As expected, we saw an increase in our fourth quarter 2017 burn to $30.5 million. It’s worth noting that this included close to $3.9 million in one-time charges related to acquisition. Adjusting for acquisition related expenses, our total burn for the fourth quarter which closer to $26.7 million. Looking more closely at the base business again excluding acquisition integrated costs, fourth quarter cash burn was approximately $22.7 million versus $20.1 million in the third quarter. While, we anticipate the cash burn will decrease modestly and aggregate over the next few quarters, the reduction in burn associate with our base business will by partially offset by continued integration expenses. In the longer term, we believe that the acquisitions of Good Start and CombiMatrix will contribute positively to the cash flow and that our cash burn will be more dramatically reduced. Turning our attention to the year ahead. As previously announced, we anticipate accessioning at least 250,000 samples reflecting strong double-digit growth over 2017. Likewise, we expect to at least double 2017 revenue and believe we have a clear line of sight to 120 million in revenue in 2018. This reflects continued growth on the run rate achieved in the fourth quarter. There is of course numerous variable that could favorably impact our revenue expectations for 2018. However, each or largely externally driven in care of the own calculation of probability, magnitude and timing. As a result, until we have clear visibility on future impact, we are not including these our current guidance for the year. These factors include, but certainly are limited to, improvements and reimbursement related to continued implementation of third party payer contracts. Our ability to build CMS for del dup codes and increases in non-test revenue related to new partners and patient networks. As we have discussed the length of the prior year, we have what we believe is an unprecedented rate of third party payer contract signed in 2016. The average contracted price for these contracts is approximately a $1000. That said, we have spent equal amounts of time discussing the complexity of operationalizing these many contracts covering the breadth of the test and codes reflected on our platform. Over the course of the past year, we have seen average reimbursement under these contracts increased, improving the rates of reimbursement continues to be a significant priority for us. However much of this practice out of our hand, and therefore we are modeling revenue based on current trends rather than forecasting improved reimbursement rates. Similarly, we historically been prevented from building CMS for del dup codes associated with our mentioned breadth of panel test. As this is not uniformly of size across all mass nor apparently even within our own mass, we have stepped up efforts to allow billing and reimbursement for del dup analysis conducted in conjunction with our CMS panel volume. Based on current rates, billings for del dup would add about $500in revenue per test to our CMS volume historically approximately 10% of our revenue. Finally, as Sean have discussed, we are looking to increase the number of partners within our network in the coming year. While this model greatly drives test revenue, we see opportunity to increase the number of partners seeking hybrid solutions that involve both sponsor testing as well as the creation or expansion of patient networks. Depending on the rate at which we see partnership activity accelerate, we could see meaningful upside to currently forecasted revenue both in the form of increased volume as well as non-test revenue.

[Sean George:]

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

[Operator:]

Thank you. [Operator Instructions] Your first question comes from the line of Doug Schenkel from Cowen & Company. Your line is open.

[Adam Wieschhaus:]

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

[Sean George:]

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

[Adam Wieschhaus:]

Okay, thank you. Maybe more specifically, I think you indicated kind of issuing guidance, that you will be willing to trade price for volume, has that changed anything in your discussion, over the past few weeks, or is the same?

[Sean George:]

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

[Operator:]

Your next question comes from the Tycho Peterson from JPMorgan, your line is open.

[Unidentified Analyst:]

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

[Sean George:]

Sure, thanks for the question, and just to clarify, while we have combined the sales organizations from the reproductive health businesses we acquired. They are indeed working in concert together across the highest volume accounts in oncology and women's and reproductive health. So, we still feel there is plenty of upside and volume left in those high-volume accounts where the breadth of our offering all the way across all stages in life from the reproductive all the way to the adult inherited, we think will continue to continue to aid us and really augment our direct commercial efforts in this space. So, again just to restate, we still think there's plenty of market in these high-volume accounts and expect to continue to make headway there.

[Unidentified Analyst:]

Okay, got it. And then my second one on the cost side, so understand, you have been talking about spending a lot to drive down the COGS especially on the medical interpretation side, given your recent XM offering. So, could you maybe give a little bit more color on the specific investments you are making there and the progress that you are making in terms of how much of the COGS reduction has resulted and how much wrong way do you think it will go ahead?

[Sean George:]

So, I think the COGS line, actually I think if you look at the quarterly COGS drop in the slides associated with this call, it's probably kind of a picture's worth a 1,000 words, this is against the backdrop of very rapid volume growth a lot growing on the business, we have been taking on a lot the last couple of years and even as such, our operating teams have been able to really operating on our development teams have really been able to take a lot of the COGS out of business. The specifics on that medical interpretation side, again are difficult to convey until you can actually see it in action, but I would say kind of a long list of highly specialized very, very particular and important assessments and evaluations that can be augmented by software and automation that we’ve been lining up and investing in over the past many years. And it is more the same as our volume scales and as we get into new disease areas we are presented with an ever-increasing number of challenges in making that processes as high a quality as it possibly can be and at the same time taking out the costs and again I think it’s a matter of process and software automation investment that we have been engaging and will continue to engage in.

[Unidentified Analyst:]

And last one for me. You talk about this partnership growth to kind of as alternative source of revenue for you guys and understand that you’re currently using screening out your potential partners by whether or not they agree and many of the potential partners may require additional capability. So just wondering if you could comment a bit about the hurdles of bringing these partners over to your side and any potential capability gaps that you’re looking to fill and how do you address these issues as we look to potential revenue upside from the partner side?

[Sean George:]

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

[Katherine Stueland:]

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

[Operator:]

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

[Puneet Souda:]

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

[Sean George:]

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

[Shelly Guyer:]

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

[Puneet Souda:]

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

[Shelly Guyer:]

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

[Sean George:]

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

[Puneet Souda:]

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

[Sean George:]

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

[Lee Bendekgey:]

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

[Operator:]

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

[Unidentified Analyst:]

Hi, this is actually Max on for Amanda. Thank you for taking my question. Just wanted to ask a little bit about Exon sequencing, and in particular how big that represents as a percentage of total volume, just some general context to the reimbursement, whether it seems good reimbursement in particular for Exome sequencing and whether your managed care contracts include new tests such as Exome sequencing. So, a few things there, I would appreciate that just context for Exome sequencing in general?

[Sean George:]

I can answer pretty quickly, as a high level. Again, we won't be breaking out much like our reproductive or carrier or what no other business we won't be breaking out Exome versus the rest. Again, really because it does looks like a company that we will you ever increasingly be answering questions for clinicians, patients and not so much having the dialogue which particularly ask that you run in doing so. But, with that said, I would say Exome volume is advancing, its coming an advent to our expectation. The reimbursement for Exome, the reimbursement amounts set by the payers, is actually from our perspective over the last couple of years has come surprisingly fast and is high, so the gross profit potential for Exome, in our platform is great, contributes the gross profit contribution from Exome test that potential is good. With that said, the criteria, the reimbursement criteria are still being worked out in the details, this is fairly new for a lot of these payers and so I think you can kind a get sense that we are optimistic and we think it will be great part of the business going forward, but there is still fair amount to work out, with the payers in the meantime and I think it's the best description of where we are today with it.

[Unidentified Analyst:]

Appreciate the context, that's very helpful. And then following up, on a bit of an unrelated and probably at a more higher level. I want to ask about, whether or not, you have seen any positive or negative ripple effects from the NGS NDS or changes to the Medicare's 14-day rule, those are both things are now still kind of look into ourselves, but I wanted to see what your preliminary thoughts were around this the key events?

[Sean George:]

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

[Operator:]

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

[Kevin DeGeeter:]

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

[Sean George:]

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

[Robert Nussbaum:]

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

[Kevin DeGeeter:]

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

[Sean George:]

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

[Operator:]

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

[Kate McNeil:]

Thank you. Just quickly before we ramp up, we had get a couple of questions submitted online and advance of the call this afternoon. Couple of which have already been covered through the Q&A from our analyst including questions like some details around the new, the recently introduced $206 patient pay pricing. However, just for clarity’s sake, we do have two related questions that also came in that are asking how do we turn our test volume in to income within the next three months with the follow-on question that inquiring about if we want more tests, does that mean more losses for us in the year. So, Sean, maybe you can...

[Sean George:]

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

[Shelly Guyer:]

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

[Sean George:]

Great. Well that will close the call. Thank you again for participation thank you all for your questions. And we look forward to seeing you at upcoming conferences.

[Operator:]

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