Invitae Corporation
Q3 2015 Earnings Call Transcript

Published: 6 Nov 2015

[Operator:]

Good afternoon. My name is Jessa and I will be your conference operator today. At this time I would like to welcome everyone to the InVitae’s Third Quarter 2015 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. Ms. Katherine Stueland, you may begin your conference.

[Katherine Stueland:]

Thanks and good afternoon, everyone. Thank you for joining us for our Q3 earnings call. Joining us today are Randy Scott, our Chairman and CEO; Sean George, our President and COO; Lee Bendekgey, our CFO; and Lisa Alderson, our Chief Strategy Officer. Before we begin, I’d like to remind you the 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, market opportunities, feature product services, our product pipeline and the timing thereof demand for and reimbursement of our services. And our investment and our infrastructure and operations constitute forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act. We refer you to our 10-Q for the quarter ended June 30, 2015, in particular to the section entitled Risk Factors, for additional information on factors that could cause actual results to differ materially from our current expectations. These forward-looking statements speak only as of the date hereof and we disclaim any obligation to update these forward-looking statements. With that, I will turn the call over to Randy.

[Randy Scott:]

Thanks, Katherine, and thank you all for joining us for our call. We’re excited to share with you today some of the progress we made in the third quarter. We also want to discuss the launch of our expanded test menu and what we view as increasingly favorable changes in the landscape for hereditary genetic testing. But first, let me welcome Christine Gorjanc to our Board of Directors. Christine is the CFO of NetGear and she brings a wealth of fiduciary experience for our board. She will be taking over as Chairman of the Audit Committee and we look forward to working with her over the years as we grow. When we set guidance for 2015, we asked investors to measure our success based on four key metrics - lowering cost of goods sold, expanding our content, increasing volume, and improving reimbursement. Now, three-quarters of the way through the year, we’re delivering on all four of those metrics. We have significantly driven down the cost of goods by more than 40% from a year ago, we’ve almost tripled our content, our volume has grown by more than fourfold and we’ve added new payer contracts including an agreement with Tufts Health Plan and the Blue Cross Blue Shield Association. We are executing on our plan. Until recently, InVitae was a company that largely focused on hereditary cancer, with a test menu of more than 200 genes in production. As of October 7th, we’ve expanded to more than 600 genes in production, offering more than 120 test panels for hereditary cancer, cardiology, neuromuscular, pediatric and rare diseases. We’re also especially excited about the new opportunity in cardiovascular genetics. Given our volume growth throughout the year and the early response to our expanded test menu, we’re increasing our full year guidance from 16,000 to 18,000 billable tests to 17,000 to 19,000 billable tests delivered for 2015. Progress on our four core metrics are positive signs of success and scale in our business. You can think of them as the four dominos. Knocking down the first domino has a subsequent impact on each of the following dominos. Thus, as we decrease cost, we expect to see an increase in content. As we add more content, we expect to see an uptick in volume. And as volume increases, we’re beginning to see an impact on payer discussions and revenue. We believe these four dominos become an engine for growth as we scale our business and will drive us toward future profitability. Before I hand the call over to Lee and Sean, I want to reiterate our view on the broad landscape of genetic testing and InVitae’s increasing strength in our chosen segment of the market which is the market for mainstream medical genetic testing in symptomatic disease. With technology advances and the Supreme Court decision final, we’re starting to see increases in business model innovation and competition in the field of genetics. The market for genetic testing is virtually unbounded as it comprises billions of people in the developed healthcare systems for whom genetics will become a part of their mainstream medical care over the coming decades. We believe the surest path to be a long term leader in this growing market is to focus on the current multibillion dollar market for symptomatic disease. We believe it’s important to establish medical credibility by focusing on the largest unmet medical needs today and what is also the largest near term financial opportunity. Within this large and growing segment of the market, we believe our value proposition is unmatched. We see strong early signs that providing the best quality content at the lowest prices can serve both patients and the medical community while gaining substantial market share and saving payers money. We believe that our business model will serve as a catalyst for changing the landscape of the genetic testing industry, along with other important catalysts such as the recent proposal by Medicare to decrease prices for hereditary cancer testing. We’re seeing early signs that the days of high-price single-gene tests are phasing out and the era of more affordable and accessible genetic testing is just beginning. Our value proposition is gaining traction and we’re increasingly optimistic that we will see broad adoption of our platform by payers in the coming years. With that, I’ll hand the call over to Lee who will cover our financials.

[Lee Bendekgey:]

Thanks, Randy. On our earnings call last quarter, we said that we expect cash burn to remain more or less constant in 2015 and then start to decline in 2016. Our strategy for moving toward positive gross margins and eventually positive cash flow is to improve collections, drive down COGS and manage our operating expenses carefully to reduce cash burn and over time, generate positive cash flow. We expect the results of this strategy to show substantial benefits in 2016. And in Q3, we began to see early signs of our efforts to improve collections, reduce COGS and manage our operating expenses. The total billable value of tests delivered in Q3 was $6.5 million. Our revenue in the quarter was nearly $2.2 million, an increase of approximately 700% over the same quarter last year. As a reminder, under generally accepted accounting principles, we currently recognize revenue as cash is received from customers. Because we recognize revenue on a cash basis, our revenue in any quarter is derived largely from tests delivered in prior quarters. While we’ve made substantial progress in streamlining our collections from patients and institutional customers, in coming quarters, we’ll focus on improving collections from third party payers as we enter into contracts of private insurers and complete our Medicare tech assessment. With respect to COGS, the aggregate cost of delivering reports based on samples accessioned in Q3 was only about 2% higher than the comparable number in Q2, even though we accessioned about 16% more samples in Q3 than we did in Q2. Our average cost per test report this quarter was under $750 per test compared to a cost of under $850 per test last quarter. These COGS reductions allowed us to reduce the gap between collections which are largely based on tests delivered in prior quarters and the cost to deliver tests in the current quarter even with continued growth in the volume of tests accessioned. In Q3, we accessioned more than 5,400 samples. In the third quarter, we incurred operating expenses, excluding the cost of tests delivered, of $20.6 million, of which 20% were general and administrative expenses, 54% were research and development expenses and 26% were commercial expenses. Our aggregate non-COGS operating expenses this quarter were about $1.4 million lower than in the prior quarter. Having achieved critical mass in our research programs, these savings reflect the early effects of focusing our efforts on key initiatives that should enable us to reduce cash burn and drive towards positive cash flow. As of September 30, 2015, our cash, cash equivalents, restricted cash and marketable securities had a total value of $152.1 million. This represents a reduction of $19 million as compared to the end of Q2. Having raised over $300 million since the company’s inception, we’ve invested heavily in building the infrastructure that we believe is key to our long term success. Going forward, we plan to continue to focus on limiting growth in operating expenses, continuing to drive down our COGS, growing volume and driving revenue. These will be the keys to reducing our cash burn in 2016 and beyond. I’ll now turn the call over to Sean who will describe our progress on our four key metrics.

[Sean George:]

Thanks, Lee. As we proposed in the past, the best way for us to mark progress against our model is to measure success and lowering our COGS, increasing content, driving volume and increasing reimbursement and collections. We’ve further reduced our COGS from around $1,250 at the beginning of the year to under $750 in Q3. This came both as a result of volume growth and from our continued investment in production infrastructure to scale effectively, reducing costs in sample processing and medical interpretation, while meeting the highest standards of quality. And as we’ve said in the past, as we release new content, our COGS may increase at first, then drop with increasing volume. We plan to continue driving down COGS in 2016. On content, as Randy mentioned earlier, InVitae now provides a comprehensive cardiology test menu with more than 30 test panels representing more than 190 carefully curated genes. The expanded offering includes large combination panels for multiple conditions, including arrhythmias, cardiomyopathies, aortopathies, familial hypercholesterolemia, pulmonary hypertension and congenital heart disease. For the cancer markets, we now offer more comprehensive high-quality testing with more than 40 test panels comprised of more than 70 carefully curated genes, including the ability to detect the various inversions, segmental duplications, insertions, deletions at the motor [ph] region variance that are important for clinical grade inherited genetic testing. This menu consists of broader tests, as well as smaller focus panels, including a new common hereditary cancers panel, a gastric cancer panel, and expanded breast, gynecologic, colon and pancreatic cancer panels. Before the end of the year, we intend to further expand our cancer offering to include all hereditary cancers, including blood, bone, brain, endocrine, genitourinary, pancreatic and skin cancers, as well as sarcomas. We’ve also expanded our neuromuscular test panels, comprising nearly 100 carefully curated genes for 15 major diagnostic indications, including Duchenne/Becker muscular dystrophy, dystonia, Charcot-Marie-Tooth disease, and hereditary spastic paraplegia. And finally, we’ve expanded our pediatric and rare disorder test menu with more than 40 test panels comprised of more than 140 carefully curated genes for disorders, including the RASopathies and primary ciliary dyskinesia (PCD). One of our goals is to significantly expand our neuromuscular, rare disease and pediatric offerings in early 2016 so we can further help the large number of people who suffer from these rare conditions. All of this content is available under our current price structure with a list price of $1,500 per indication, a contracted rate, as well as $950 and a prompt patient pay rate of $475. Turning to volume, we delivered more than 5,100 billable tests in the quarter, representing a 360% increase over our volume in the Q3 of the past year. Our clients continue to respond favorably to our value proposition and we observe there is plenty of untapped potential in our core market. We plan on increasing our field sales effort to around 30 reps in the first half of 2016, up from 18 reps active in the past quarter. Clients have responded very well to the expansion of our cancer offering. And from recent feedback from clients at ASHG and NSGC, we are expecting our new cardio offering to be well received. Indeed, we have seen daily volume increase in response to our recent menu expansion, thus our increase for yearend guidance. We continue to make progress in reimbursement. And following our publication in the summer, showing 100% analytical concordance and 99.8% clinical concordance with the established standard of care, we’ve been encouraged by our discussions with payers and expect to see steady progress throughout the coming year. In Q3, we signed an agreement with the Blue Cross Blue Shield Association. And while this agreement with the association doesn’t add/cover lives in and of itself, it does provide the framework for contracting on an individual plan basis with the independently operated Blue Cross and Blue Shield member companies, which jointly provide access to over 100 million cover lives. We think this is a significant step forward to engage in the Blue Cross Blue Shield network. In addition, this past quarter, we’ve entered into a new contract with Tufts Health Plan which is a key partner for our business in the northeast. This adds to our current network of payers which includes Capital Health, SelectHealth, Blue Shield of California and others, in addition to a growing number of institutional contracts. As we begin discussions with other key players, we are encouraged to find that both our payer and provider clients are starting to understand and appreciate our transparent pricing and our desire to partner with them in lowering healthcare costs, which is a major point of differentiation in the market today. As many of you know, CMS, the Centers for Medicare & Medicaid Services, has recently proposed pricing for germline genetic testing, including a new CPT code for combined BRCA1 and BRCA2 testing, as well as gap-fill pricing for cancer panels. As we have been predicting, these pricing proposals reflect a competitive environment in which pricing is coming down. We are supportive of CMS efforts to reduce the cost of hereditary genetic testing and have submitted public comments suggesting that all of these codes be priced at $950 per test. We think this represents the changing landscape in hereditary genetic testing, and ultimately, it is an opportunity to expand coverage and increase access for patients while driving down costs for the government and other payers. While others many view these developments as headwinds, we view them as tailwinds for our business and we continue to drive toward this new era of genetics. We continue to believe that the biggest driver for all four of these metrics will be building the best product. What that means is that we need to continue to offer more content at affordable prices, and as such, we continue to march toward our near term goal of offering a test menu that includes more than 1,000 genes for under $1,000 per indication by the middle of 2016. With that, I’ll hand the call back over to Randy who will give us some color on the payer landscape and on some of our data and collaborations.

[Randy Scott:]

Thanks, Sean. Expanding our test menu is a major milestone for InVitae and one that has the potential to change the way hereditary disease is diagnosed. Historically, the cost of genetic testing has gone up with the number of genes tested. Our investments in technology now allow us to offer a single price based on the clinical indication regardless of how many genes are ordered. This approach enables clinicians to order the right genes to answer the right clinical question without having to worry about the cost of each gene ordered. This also aligns our financial incentives with payers. InVitae is unique in the industry. Unlike many competitors, we don’t stack codes and we don’t get paid more by adding additional genes. We get paid one price for delivering the right answer to the clinical question at hand. At $950 per institutional contracts, we’re delivering on our promise to lower the cost of genetic testing to make a positive impact on the otherwise skyrocketing cost of healthcare. And importantly, we’re bringing genetics to mainstream medicine in a responsible, transparent fashion by working closely with clinicians and researchers and publishing quality data in peer review journals. One of our accomplishments this quarter was a study published in JAMA Oncology from a collaboration between InVitae, Massachusetts General Hospital, Harvard Medical School, Stanford, and Beth Israel Deaconess Hospital that’s one of the first of its kind establishing clinical utility of multi-gene panels based on current clinical guidelines. Similarly, we will continue to expand our clinical data in other disease areas, such as cardiovascular genetics, where we just announced our participation in the sudden death in a young case registry, which is the first ever active surveillance efforts designed to increase understanding of the prevalence, causes and risk factors for sudden death. The registry is funded by the National Heart, Lung, and Blood Institute, the National Institute of Neurological Disorders and Stroke, and the Centers for Disease Control and Prevention. By making progress with our four key metrics and bringing partners into our ecosystem, we believe the flywheel effect will start to accelerate and we will be well positioned to be one of the leaders in providing high quality, low cost genetic testing in an already established and rapidly growing multibillion dollar industry. We’re in the early days of this new era in genetics. The Supreme Court decision is in. The technology revolution is here, prices are coming down. And we’re just getting started. With that, we’ll open up the call for Q&A.

[Operator:]

[Operator Instructions] Your first question comes from the line of Doug Schenkel from Cowen and Company. Please go ahead.

[Doug Schenkel:]

Good afternoon, guys. Thank you for taking my questions. So it’s encouraging to see that you increased full year test volume guidance. What’s driving the upside? You did talk about the expansion in menu into cardio. But are there any specific metrics you can share on repeat orders and penetrated accounts, new account openings, head to headwinds? And how would you describe your utilization rate meeting from a capacity standpoint? How fully utilized are you in terms of say tests accession versus capacity?

[Randy Scott:]

Yes. Well, responding to the last first. We’ve got a lot of capacity, so we’re excited about increasing volumes because obviously, that’s going to drive down COGS. So we built up, over the course of the year, our capacity for all of the aspects of production from the laboratory to medical interpretation. I’ll let Sean give a little bit more detail. But our guidance really simply reflects a strong growth in Q3. And we have seen a response as we expected to the increasing content. So Sean.

[Sean George:]

Sure. I think for the quarter, we saw the same source of growth both in current accounts, deeper penetration as well as new accounts. With that said, with the menu coming out, as I mentioned, kind of early in positive in indications both directly from clients and by looking at the numbers, we expect to see growth in the cardio segment. And also filling in some of the cancer gaps we just filled in, we expect to have a positive effect driving even higher numbers from some of the core accounts that are currently ordering from us today in specific cases. Now, with these cancer gaps filled in, we do expect to see some of these major accounts start switching over.

[Doug Schenkel:]

Okay. Thank you for that. Randy, in your prepared remarks, you talked about prices coming down in the space and the various points of evidence that you see to support that assertion. The largest player in this market has spoken about their ability to lock in pricing in three-year agreements with major payer, does this make it harder for you to use price as a way to at least gain share in the near term?

[Randy Scott:]

No. I think what you’re going to see is almost contracts in this space are non-exclusive in which payers are putting contacts in place with individual companies. And so what I think you’re going to do is see a phasing. I don’t think it’s going to be an overnight that price is just slashed. But as you’ve seen from the Medicare CMS proposal, they’ve introduced a new NGS code for BRCA 1 and BRCA 2 and drop the price of that to around $2,000. And they’re in the process of pricing a panel code for hereditary cancer panels that you’re going to see probably get priced next year. And so as we interact and engage with payers, it simply represents the fact that they see an attractive value proposition here. And we believe over the course of the next couple of years, you are going to see a transition in pricing. It will probably be a phasing phenomenon, but I think important nonetheless.

[Doug Schenkel:]

Okay. And I guess one more. Recognizing that consensus revenue expectations have come in a bit since your February IPO, consensus estimate still reflect an expectation that your revenue will more than quadruple next year based on how you seem to be tracking for this year. Based on what you’ve seen to this point, in 2016, I guess as we sit here in November, are you comfortable based on what you’re seeing in terms volumes and your ability to collect on those volumes and what we just talked about in terms of the reimbursement environment that you can get to something resembling that level?

[Randy Scott:]

Yes. We have not given financial guidance on either top end or on the earnings and not planning to do so on this call. So I won’t give you any guidance with regard to specific numbers. But it suffices to say that we do see volume continuing to grow, we see COGS continuing to come down. We’re very encouraged by the progress we’re making on the payer front. And as I’ve often said, that is a process. It will take time. We just got our data published. We just got the Blue Cross Blue Shield Association contract put in place, so now we can begin discussions with individual blues [ph] plans and other payers. And so we do expect to see significant improvements in cash collections next year, but I won’t try to quantify those for you and Lee, do you want to -

[Lee Bendekgey:]

No. I think I’ll say, Doug, is that we are increasingly confident in how this is going both on the COGS front and the collections front. And we are, we think, proving our thesis that as we increase content, that increases demand. So we’re very positive on how things are going and feel like our path towards improving our cash position in becoming increasingly clear. Beyond that, it would be pretty immature for us to give you specific targets for next year.

[Doug Schenkel:]

Okay. But with that said, Lee, it’s fair to assume that the operating expense range that we’ve seen in the last few quarters of $20 million to $25 million factoring in SG&A and R&D, keeping in mind as was noted earlier by Sean that you will be expanding the sales force, that that operating expense line is unlikely to come in over the next few quarters, correct?

[Lee Bendekgey:]

Well, you will certainly see it constrained in terms of growth. It may come down slightly in various respects. As you saw, it came down about $1.5 million this quarter. So we’re looking for ways to focus our resources and to bring those down. But I would say, you should be looking to the top two lines, the revenue line and reductions in the cost per test to provide the bulk of the improvement in the cash flow.

[Doug Schenkel:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of Tycho Peterson from JP Morgan. Please go ahead.

[Unidentified Analyst:]

Hey guys, it’s P Jess [ph] on for Tycho. Just following up on one of Doug’s earlier questions, can you share some color on reorder rates and how that metric has evolved over the last few quarters for you and how you see it evolving through 2016? One of your peers on the somatic side blamed slowdown in repeat orders and kind of had a wall in terms of clinical volume. What’s the possibility that this could be an issue for you at some point down the road? Obviously, you are expanding into new market, so that should help in terms of bringing new customers onboard. But just in terms of your existing user base, how do you think about it?

[Randy Scott:]

All right. So the short answer is our reorder rates for current clients, in particular, the ones that order a significant volume per month has steadily been increasing and continue to increase and with new content both filling the gaps in cancer and adding cardio, we would expect to continue to increase. I would leave it at that. I think everything looks strong for current clients that are reordering. We have a kind of a predictable influx of new clientele in a very good turnover rate vis-à-vis the ones that turned into repeat order in clients in a very, very low drop off rate following that. And it looks to that like that trend will continue.

[Sean George:]

Yes. I would just add that what we are providing is a replacement test for that clinicians are already doing in the market that is well-established and is in guidance and is paid for by third parties which really differentiates from the class of what are very exciting but still very, very new tests that are still working their way through the market and have not yet entered into guidelines or have brought coverage in the payer system. So I think there’s a substantial difference there.

[Unidentified Analyst:]

Got it. And then in terms of just updating on some of the business process automation that you are putting in place to keep COGS down, how much more room do you see on that front? And how much more cost do you envision falling out of things like sample prep and sequencing?

[Randy Scott:]

I think you just said one of Sean’s favorite topics, so I’ll let him take it on.

[Sean George:]

Well, I think this is where we have a very, very long list of each individually small, but collectively significant improvement we think we can make to that COGS line. All the COGS spread across as we’ve discussed in the past between sample prep sequencing and the medical interpretation. As our menu grows and certainly as we look at this last release, it does push the cost in the complexity [ph] towards the medical interpretation piece. We continue to invest heavily across all of it, the sample preparation piece, we expect to get gains and to enjoy gains in COGS from improvements there. On the sequencing technology, while the sequencing tool provision landscape, it seems really set, there are half a dozen efforts that we’re going into to reduce throughput requirements and will allow us to effectively reduce our sequencing cost and of course, continued investment into the system, the Bloomberg terminal if you will for our medical genetics team, clinical genomics team. We’ll continue investing in that to improve throughput and reduce labor requirements for the medical interpretation and report generation. So we’re feeling very good about that and as Randy pointed out, we’re very excited to continue rolling those things up and lowering our COGS.

[Unidentified Analyst:]

And then just following up on that, I mean is there anything you can do in terms of further automating or at least partially automating the genetic sampling component of the process?

[Sean George:]

The short answer is yes. There are plenty of - there are surveys you can do. There are questionnaires up front, there are - there’s various amounts of information that comes along vis-à-vis family history. We have an electronic family history tool that provides a lot of the work that - a lot of the data that’s currently collected in the genetic counseling session. With that said, when you’re talking about a clinical consult session, you are talking about a clinician with an individual. We’ll continue providing the tools to support clinicians, support our genetic counselors, support our client genetic counselors as they interact with patients. I don’t suspect you’ll be able to automate all of it. Because at the end of the day, it’s a clinical evaluation and very much between a clinician and the patient that is in their charge.

[Unidentified Analyst:]

Got it. Thanks, guys.

[Operator:]

Your next question comes from the line of Amanda Murphy from William Blair and Company. Please go ahead.

[Unidentified Analyst:]

Hi, guys. This is Keith Overton [ph] for Amanda. I guess one thing I was wondering is, could you provide us a little bit of level breakdown between what you saw this quarter with third party and network and patient pay. And I guess, with that, as you’re trying to push more from a third party pay to getting people to pay out of pocket. Do you see that ability to continue to see this decline in COGS over the coming quarters?

[Lee Bendekgey:]

Sure. This is Lee. So last quarter, the third party pay was roughly consistent with what it’s been for a while. It was around 75%. The institutional pay was around 18% of our total orders and patient pay was up at 7%. So we are seeing uptake on the patient pay. We don’t see them in sort of really as competitive. In fact, one of the things when we talk to payers, one of the points that we make is that the important thing for us to get paid and have agreed upon criteria. And if there are patients who are out of criteria, we have a very attractive patient pay alternative for them. So we don’t see it as the patient pay allows us to avoid payer, but rather that they’re complementary and that collectively, they help us to expand access.

[Unidentified Analyst:]

All right. That makes sense. And then I guess I wondering if you could provide us also a little bit of color between of like the $2.2 million you had in revenue in the quarter. What roughly percent of your sales from current quarter billable test and then what was collections from the previous quarters?

[Lee Bendekgey:]

The only revenue that would be in this quarter would basically have been the first month and a little bit of the second month payment from institutional customers as well as the 7% patient pay was all current quarter because they give us credit card essentially when they place the requisition or when a doctor places the requisition. So that probably amounts to what was in the current quarter. And then the rest of it would be third party pay and institutional pay from prior quarters.

[Unidentified Analyst:]

Okay. That makes sense. And I guess just one last question. I guess are you seeing more growth coming from I guess pharma and clinical? Because I know you’re primarily focusing on genetic counselors in United so that you’re going to have to use potentially independent counselors going forward. So I was wondering how this potentially helps you and where you’re mainly seeing this demand come from right now.

[Randy Scott:]

Yes. We continue to focus our commercial efforts on the core medical genetics and genetic counseling business. So the bigger part of our volume is coming in through that community which is already providing independent genetic counseling. So we don’t see in those from some of the payers of wanting independent genetic counselors involved in the ordering of test is really having a significant impact one way or the other on our particular business. We are really excited about the role of genetic counselors. And I think having genetic counselors broadly engaged in ordering genetic test is appropriate and encouraged. Now having said that, there aren’t enough genetic counselors in the world to actually deal with the volumes even today that are being processed. So that means we all need to be also educating the broader medical community around genetic testing. So we don’t see that as necessarily a drag or impact on our business.

[Unidentified Analyst:]

All right. Thank you.

[Operator:]

There are no further questions at this time. I turn the call back over to the presenters.

[Katherine Stueland:]

Great. Well, thank you all for joining us this afternoon for our call. And we look forward to seeing you at upcoming conferences. Take care.