Invitae Corporation
Q1 2016 Earnings Call Transcript

Published: 10 May 2016

[Operator:]

Good afternoon. My name is Andrew and I will be your conference operator today. At this time, I would like to welcome everyone to InVitae’s First Quarter 2016 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. Katherine Stueland, you may begin your conference.

[Katherine Stueland:]

Thanks, Andrew and good afternoon, everyone. Thank you for joining us for our first quarter earnings call. Joining us today are Randy Scott, our Chairman and CEO; Sean George, our President and COO; Lee Bendekgey, our CFO and Dr. Robert Nussbaum, our Chief Medical Officer. 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, 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 December 31, 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. And with that, I will turn the call over to Randy.

[Randy Scott:]

Thanks, Katherine. We’re pleased to report that we made significant progress on all four of our key metrics for Q1. We decreased our cost of goods sold to approximately $600 per sample accessioned. We accelerated R&D to put more than a 1,000 genes into production. We expanded our test menu across multiple disease areas. We increased our volume by over 300% year-over-year and we made significant progress on reimbursement with payments initiated from Medicare as well as multiple contracts established with Blue Cross Blue Shield regional plans, consistent with our pricing structure. We believe our coverage decision by Medicare signals the start of a transition in the payer industry toward a more rational billing and payment process reflecting the lower cost of DNA sequencing technology and the adoption of multi-gene panels into clinical guidelines and medical practice. Our coverage decision by the Palmetto MolDX program has three noteworthy components. First, the Palmetto MolDX program expanded patient access to multi-gene testing through revision of their local coverage determination for BRCA 1 and 2 testing to now include multi-gene testing when appropriate conditions are met consistent with practice guidelines. Second, Palmetto established a new billing and covering guideline for NGS test, stating that they’re now considering the NGS panel to be a single test with multiple potential indications. These new guidelines clarify that an NGS test cannot be built under older Tier 1 and Tier 1 CPT codes based on Sanger sequencing even if a single gene or multiple genes are selected for testing. And third, the MolDX program acknowledged the ability of NGS technology to provide more information at lower cost, such as providing deletions and duplications results without the need for a separate Assay. Thus CMS set an initial price for NGS based multi-gene testing at a lower price than historical Sanger sequencing of single genes. Given the scrutiny over the cost of healthcare, we believe CMS and the MolDX program have taken a leadership position in providing significant potential cost savings to the healthcare system. These policy changes are forward thinking and validate the Invitae approach to make genetic testing more affordable and accessible to physicians and their patients. Building on the Medicare news, we also signed agreements with multiple regional Blue Cross Blue Shield affiliates, including Blue Cross Blue Shield of Illinois, Blue Cross Blue Shield of Vermont, and Wal-Mart Blue Cross Blue Shield, which brings our total coverage to five states including Blue Shield of California which was previously announced. In addition, we’ve begun to receive payments under the Blue Cross Blue Shield Federal Employee Plan, together with Medicare and our previous contracts we’ve now boosted our peer network to approximately 70 million covered lives. We continue to work with additional private payers and expect continued progress and support for our value proposition with a more transparent and modern billing and pricing policy based on state of the art technology advances. There is no reason payers should be spending multiple thousands of dollars on genetic tests or paying for code stacking due to serial testing of multiple genes. It’s great to see that peers are now helping us to deliver that promise to clinicians and their patients. With that I’ll hand it over to Dr. Robert Nussbaum, our Chief Medical Officer, who will share more about new clinical studies reported in Q1 that demonstrate the quality of our science. We believe it’s essential to everything we do and it’s been pivotal in our discussion with payers. Bob? Robert Nussbaum Thanks, Randy. Invitae has been one of the leaders in modeling how responsible genetic testing can be both high quality and fairly priced. Introduction of completion into this field by the 2013 Supreme Court decision striking down gene patents as applied to genetic testing of genomic DNA has been instrumental in establishing a long overdue level playing field, where providers and peers can now consider service, quality and price in their decisions on which laboratory to use. Invitae has invested substantially in optimizing lab processes as well as developing and data analysis tools to make high quality clinical grade testing accessible to the patients that need it. Last summer we published a paper in the Journal of Molecular Diagnostics in collaboration with collogues with Massachusetts General Hospital, Stanford and Harvard Medical School that showed that our laboratory methods had very high analytic validity with 100% sensitive and 100% specificity in over 1,100 patients shown previously to have changes in the BRCA 1 or BRCA 2 gene by another laboratory, the one that had been previously been the sole source of such testing in the United States. Over 18% of these changes were pathogenic changes that represent hard to do variants, such as copy number changes and large insertions and deletions that are known to be challenging to analyze by next generation sequencing. Our interpretation of part to dos was equally accurate. When variants was classified as being either clinical actionable, pathogenic relating pathogenic and not clinical actionable, like benign, benign or uncertain significance, our interpretation agreed 99.8% of the time with that of the other laboratory. I’d like to stress that we do not consider the previous assertions as being goal standards that we have to meet, particularly since the lack of transparency in reporting variants and interpretations at a publicly accessible database means that the methods and clinical validity of these assertions can only be glimpsed and not fully analyzed. The follow up study using 1,800 variants from 22,000 patients positive in ClinVar done in collaboration with the highly regarded cancer genomics group at UC Santa Cruz was presented at the meeting of the American College of Medical Genetics in March of this year and is being submitted for peer review publication. We confirmed that the clinical validity of our assertions concerning clinical actionability of variants is highly concordant with those of five other testing laboratories including Myriad as discovered to the sharing clinical reports project. For a variant concordance the clinical actionability between any two of the six laboratories was extremely high, 98.5%. Between Myriad and Invitae in particular, concordance for single variant was even higher, 99.2%. The few discordant variant tend to be rare in the population, which makes them more difficult for anyone to interpret, but this also means that they occur in a small number of patients. So the concordance per patient was even higher than the concordance per variant and was 99.8%. Invitae’s philosophy is that by submitting hard data, our variant interpretations into the public domain, we’re hearing to best ethical practices in medicine that seek to establish standards of care through consensus and peer review. Thus, I believe we are contributing along with other likeminded laboratories to the creation of a new goal standard of variant interpretation and that the goal standard cannot be claimed as being the sole possession of one laboratory, especially a laboratory that does not provide the transparency of peer review. I’m proud of what we in Invitae have accomplished in such a short time and are firmly committed to working with the greater genetics community to share our approaches and demonstrate the quality of what we do. We believe that patient care comes first and sharing data is in the best interest of the patients we serve. I’ll now turn this over to Lee Bendekgey.

[Lee Bendekgey:]

Thanks, Bob. I’ll now summarize our financial results for Q1. In the first quarter we continued to make progress on reducing our average cost per test report and improving our reimbursement and collections through the key elements and our drive towards positive gross margins and positive cash flow. Our average cost per test report this quarter was about this quarter was about $600 per test, compared to a cost of about $700 per test last quarter. As a reminder our calculation of the average cost per test report was based on the number of samples accessioned in the quarter. In Q1 we accessioned close to 10,000 commercial samples. The total billable value of tests delivered in Q1 was $11.8 million. Our revenue in the quarter was $4 million, an increase of about 222% over the same quarter last year. It’s worth pointing out that this revenue does not include any Medicare revenue as we did not start getting paid for any Medicare patients until April, even though we were approved to begin billing for reports delivered as of January 1, 2016. Revenue for these reports will begin to be included in our Q2 revenue. Our revenue in Q1 includes an accrual of about $500,000 representing the continuation of our transition to recognizing revenue on an accrual rather than a cash basis. As a reminder under Generally Accepted Accounting Principles we’ve historically recognized revenue as cash has been received from our customers. When recognized on a cash basis, our revenue in any quarter is derived largely from tests delivered in prior quarter. Under our revenue recognition policy we began accruing revenue when we’ve established a history of collecting material payments from a customer. In Q4, we began to recognize revenues from a small segment of our institutional customer base and in Q1, we added to the list of institutional customers for whom we accrue revenue. Over the coming quarters, we expect to begin recognizing revenue on an accrual basis from additional customers. In addition to the private insurance payers with whom we’ve began to contract, as of March 31, we had active contracts with 70 institutional customers. In the first quarter, we incurred operating expenses excluding the cost of tests delivered of $23.3 million of which about 24% were General and Administrative expenses, 46% were Research and Development expenses and 30% were commercial expenses. Included in our operating expenses this quarter were about $900,000 in cost incurred to streamline and to focus our organization. These expenses were incurred in connection with the closure of our facility in San Diego, Chile and the elimination of a number of positions primarily in our international and business development functions. Also included in our operating expenses were non-cash expenses of approximately $3.7 million, including depreciation, equity compensation and non-cash rent expense for our new lab facility, which we expect to occupy later this year. As of March 31, 2016, our cash, cash equivalents, restricted cash and marketable securities had a total value of $108.7 million. This represents a reduction of $23.1 million compared to the end of 2015. Going forward, we plan to continue to focus on limiting growth on operating expenses driving down our COGS, drawing volume and driving revenue. These will be the keys to beginning the January positive gross margins and reducing cash burn in the second half of 2016, enabling us to reach the inflection point and with the scale of our business drives more rapid reductions in cash burn as we virtually to reach positive cash flow with our current capital. I’ll now turn the call over to Sean, who’ll describe our progress on our four key metrics in Q1.

[Sean George:]

Thanks, Lee. I’ll now cover our progress in building our COGS, increasing content, driving volume and increasing reimbursement collections. We’ve offered these four key metrics as a way for investors to measure progress in the execution of our business model against a backdrop of a complex and rapidly evolving landscape. We believe that as the market for genetic testing and associated services expands rapidly in the coming years, the key driving force will be rapid cost reductions. This is a fundamental premise of our business model. Consistent with recent developments in the technology sector, the declining cost of sequencing and the state of gene patent intellectual property. It is our view that as these markets expand the competitive landscape will reflect the margins, operations and commercial tactics and more closely resemble those of retailers and consumer product companies today than those of early stage industries where niche players drive relatively small volumes operating at very high margins. The reason we focus on COGS as the first of our four key metrics is because our ability to lower them is fundamental to our ability to scale a business in the coming evolution of this industry. As we mentioned, this past quarter we reduced our cost of goods sold to around $600 per sample. This represents a 50% reduction from our COGS in Q1 of the prior year. As scale across existing infrastructure plays a large role in reducing COGS, we continue to invest in our ability to reduce cost in the sample preparation, sequencing and most importantly medical interpretation, which quickly becomes a driving factor at the volume and birth of disease areas we now cover. We plan to continue driving down COGS for panel testing to below $500 by the end of this year. Given our ambitious content goals for the year, we do not expect this to be a linear path, but given our line of improvements to our production process, we expect to exit 2016 at this level or below, enabling across the gross margin point kind of a point and keeping us on a clear path to positive cash flow. The reason we focus on content next is because we predict that as this industry expands rapidly in the coming years, it will also consolidate. As the genetic testing landscape has in fact begun to consolidate, our comprehensive offering is becoming a key factor in the ability to serve customer demand. We stated in this in the past, there’s a concept that more content leads to more volume and indeed we’ve seen this dynamic play out with our provider clients for whom the daily testing, decision making logistics are constant pain points. We are now also seeing the effects of consolidated menu options as a benefit to our payer clients. Especially in the evolving insurance climate, we’re increasing pressures applied to administrative overhead and cost containment is becoming a primary concern. For content this quarter, we added a pediatric genetic Assay bringing our production capabilities to 1,000 genes, three months in advance of our previous expectations. In addition to our broad, high quality and most affordable cancer and cardiovascular offering, we now offer more than 30 neurological disorders including muscular dystrophies, myopathies as well as congenital myasthenic syndrome and malignant hyperthermia susceptibility. We’ve expanded our pediatric and rare disease offering to more than 60 disorders including severe combined immunodeficiency periodic fever syndromes and 20 additional rare diseases. And we have introduced our first set of inherited metabolic disorders and newborn screening confirmation test. Our offering now covers the majority of metabolic diseases for which over 4 million U.S. newborns are screened each year, plus a panel covering the common congenital disorders of glycosylation. We believe that family and newborn health setting is an arena where genetics will have a major impact in main stream medical care in the near future and we look forward to rounding up this offering throughout the coming year. We’re excited and continue increasing the number of people we can serve who suffer from these genetic conditions and we believe that our high quality, comprehensive, affordable offering will continue to put us in a strong position to serve as the provider and payer organizations preferred partner for inherited genetic testing and associated services. The reason we next focus on volume apart from its obvious measure of commercial success is because our business model is built on an assumption of scale. We think the current market is growing rapidly and volume should increase as we consolidate our position in it and more importantly we think the number of individuals who can benefit from genetic information used in their mainstream medical care is far larger than the less than 1% of people benefiting from this information today. Lowering prices and increasing our menu combined with our relatively modest commercial activities should lead to the volume increased essential for our business model to play out. We maintained the momentum coming out of 2015 and delivered around 9,700 reports in Q1, this represents over 300% growth from the same period of 2015. From another perspective, we delivered half of last year’s volume in the first three months of this year. We continue to see a strong growth in our cancer offering and clients continue to start using us for cardio, neuro, pediatric and the other disease areas we are beginning to serve. In addition to prices and more content writing volume, we’ve also benefited from investment in other key components of our service. We push in on times even though from an industry leading two to three weeks average, recently delivering more than 50% of reports in two weeks or less and around 90% in another three weeks. We’ve added saliva capabilities to allow our clients to choose an alternative sample type where more convenient and we continue to support our clients in their day to day work with risk assessment and patient education tools as well as online work for improvement, such as the Invitae Digital Family History tool. Both existing and new clients continue to respond favorably to our comprehensive high quality affordable offering and we continue to believe that we should be able to sell a superior service with a smaller commercial effort. We now have the 30 reps active in the field as per our first half 2016 target, up from 18 reps active through Q4 of last year. Our early experience with the recent menu expansion combined with content plans continue to support our guidance of somewhere between 50,000 and 70,000 delivered tests for 2016. For our final key metric, cash, this was a pivotal quarter. It’s worth mentioning again that the reason this key metric is the last one is because we expect government and commercial insurance reimbursement to be a trailing indicator of success, provide that COGS, content and volume are all headed in the right direction. Our collective experience in the third party payer system leads us to believe that given the value proposition of our offering; our getting paid is simply a matter of when and not if. And importantly, while conventionalism as a price is not a large factor, healthcare like any other industry is a market for goods and services and price matters. It isn’t in no way the only driver and in no way is healthcare an efficient market, but in addition to quality, meeting and exceeding the standard of care and a comprehensive offering, price is a very important factor. We now see our progress with payers starting to pick up, importantly for our institutional counts, we increased the number of contracts from 41 at the end of 2015 to 70 by the end of Q1 and as Randy covered, we now have Blue Shield coverage in four additional states adding to California and we’re beginning to receive payments under the Blue Cross Blue Shield Federal Employee plan. Of course the major news for our payer outlook is that we now have a positive coverage decision from Medicare and are getting paid for our services under a new and by comparison the pass coding broad NGS Panel Testing code. The details of this development are important obviously for our cash flow outlook, but also for the overall development of the genetic testing landscape. In a relatively short period of time we’ve become a cover provider for over 70 million lives in the United States. Building on this momentum, our projected wins with third party payers this year in combination with our institutional and patient paid sample volume should put us in a position to cross over the positive gross margins by the end of this year and begin using our volume as a key drive to positive cash flow. We view 2016 as a pivotal year for Invitae, building on a foundation laid in 2015, we will continue executing against our core measure of success with the conviction that our ability to drive them forward puts us in a leadership position to serve the 10% of the population for whom inherited genetics is the major driver of their health outcomes, as well as the much larger group of individuals for whom genetic information will be an invaluable component for the overall health and wellbeing for the individual and their family. We like to now open the lines for Q&A.

[Operator:]

[Operator Instructions] Your first question comes from the line of Doug Schenkel with Cowen. Your line is open.

[Doug Schenkel:]

Hi, good afternoon guys. My question is on the mix of volume in the quarter, I don’t think you said anything about that in your prepared remarks, any notable changes in terms of cancer, cardio, neuro or pediatric mix in the quarter?

[Lee Bendekgey:]

Yeah, Doug, we saw basically growth across the board. I think when we exited last year we were roughly 80% cancer, cancer volume continues to grow at a pre-rapid clip so we kept those ratios obviously because cardio and neuro are starting from a smaller base. Their individual growth rates are higher, but we saw a growth across the board in all areas including cancer.

[Doug Schenkel:]

Okay, thank you for that. On reimbursement, congratulations on the CMS code and getting reimbursed there. I believe if my notes are correct, that the reimbursement rate is about $622 per test. Could you just talk through steps you’re taking to improve that and also talk about how you’re mitigating any risk that commercial payers see it as coming at a similar rate.

[Randy Scott:]

Sure, so we’ve been very interactive with Medicare and Palmetto and by the way the 622 price because we’re one of the first to come out under the new code has not even been published yet as a temporary code. So from a process standpoint we expect that temporary price should be published shortly. In fact, we thought it would be probably published by now, but is should soon be published. And then Medicare will go through a process and later in the year they’ll reset that price after they’ve done some further investigation of the pricing structure within industry. We think there are obviously great arguments for why the price should be in the $1,000 to $1,500 range that we’ve put out there as our list price. And in fact we believe the 622 price more reflects historical somatic mutation esteem prices where commonly it’s point mutation done by PCR and kind of an aggregate of multiple point mutations resulted in aggregate price of around that $600 range, where in genuine mutation testing we’re actually sequencing the entire gene and looking for loss of function mutation, so we are sequencing literally thousands of bases, not four or five point mutations. So we think the scientific arguments for why the price should be above the $622 range are pretty straight forward. We would be surprised if Medicare doesn’t bring the price up into a range that’s similar to industry standard for a genuine sequencing, but of course that’s - ultimately it’s out of our control, but we certainly expect the price to be higher than the 622 price, but we’ll have to wait and see.

[Doug Schenkel:]

And Randy, I guess the second part is, do you have concerns that at least in the near term that the rate attached to that could negatively or may get harder for you in your discussions with commercial payers?

[Randy Scott:]

No, not at all, as you see in my sort of remarks we brought several payers on in our price range. We don’t give out payer specific, but we’re averaging above the $1,000 in the contracts that we just signed. I think it’s pretty well understood and if you look at the last couple of years history, in multiple times where - so prices have been adjusted by Medicare back and forth, so I think the private payers certainly take that into account and frankly they don’t have that option, we would not surprise with private payers at that level.

[Doug Schenkel:]

Okay and one last one, using your comments on the additional payer contracts that you entered into is kind or a segue to this question. These contracts - either the contract you’ve entered into or the contracts that we would expect you to enter into over the coming quarters or with payers that also have contracts with Myriad and other large complex genetic testing labs, contracts will presumably be at very different price points for each payer and even within a single payer they may have contracts to pay much different rates to you or Myriad or somebody else. Have any other payers that you’ve contracted with or that you anticipate contracting with indicated that they will treat you preferentially, economically because of your lower cost and/or broad content? Or effectively are you going to be forced to compete with doctors and patients in the community truly on the attributes that you bring to the table other than economics?

[Randy Scott:]

Well, first of all I should say we’re quite comfortable competing based on what we bring to the table, so our first message to payers is, simply bring us into network where we think we will compete very favorably. But of course our second part of the message is that if you’re paying more than $2,000 for any genetic panel, not just hereditary cancer, but across all of neurology, cardiology then you’re substantially overpaying. And we think that’s a very strong message when put together with both the quality of our testing and the peer review publications as well as the fact that we’re putting all of our variants into the public domain for peer review in scrutiny, we think we really are taking the lead in terms of quality standards and we hope that that influences payers over time. But at this point we’re quite happy just to be at network and compete and we think our price in terms are going to speak for themselves and that will make us a very attractive partner for the payers.

[Doug Schenkel:]

No, and that all makes sense Randy. I guess what I’m getting at is, recognizing you guys are doing a great job and you have a great product, you don’t have the commercial reach as some of your competitors, so that does make a difference at least well for some period of time. So really what I’m getting at is, would have any other peers indicated that they may change really the economics for patients to put you in a better position and that’s not something that has come up in your discussions thus far.

[Randy Scott:]

No, I think it absolutely will come out. I mean it’s a simple business model, our view is that prices are going to come down in this space like they do in any generic industry where there is competition. And so our view is that business models that are focused on a 80% gross margin are absolutely dependent on those very high gross margins and prices to support the commercial infrastructure and so our concept is very simple rather than going out and competing, on hiring hundreds and hundreds of sales reps, let’s simply build a better product and drive prices down so that the whole world eventually will be focused on a business model that’s at 50% gross margin business model rather than the current 80% gross margin business. So we think that’s attractive to payers. We certainly are arguing loudly with payers for why prices should be coming down and I think that very much resonates with theirs.

[Doug Schenkel:]

Okay, thanks for taking all the questions.

[Operator:]

Your next question comes from the line of Tycho Peterson with JP Morgan. Your line is open.

[Patrick Dennehy:]

Hi, guys. This is actually Patrick Dennehy in for Tycho. Thanks for taking my question. Yeah, obviously getting CMS reimbursement was a nice accomplishment. Can you just update us on the progress with some of the other larger private players, I know you mentioned some of the Blue’s this quarter and maybe just what when we could see some additional amounts from that front? And do you view that receiving the positive CMS decision as kind of a validating event, where you feel private players will follow a lead there?

[Randy Scott:]

Yes, absolutely we do see Medicare as a leader and as I mentioned in my points in the script, it’s a pretty significant impact for Medicare to first of all step up and embrace multi-gene panel testing, which many private players still have marked that as experimental even though multiple genes are now in current clinical guidelines. So we think that’s a big impact of Medicare that opens up for multi-gene testing, but also makes a point that just because you do multi-gene testing prices don’t have to go up, they can come down and so we think that those steps by Medicare will be influential for the private payers. Of course we continue to work with the private Blue Cross Blue Shield plans and with the larger private payers as well, so we would certainly expect to have at least one more large payer on board this year, but we’ll be working diligently across the board to expand coverage.

[Patrick Dennehy:]

Okay and do you ultimately see your competition have any use the CMS 81432 code rather than billing on some those legacy could pay for the higher amounts they are doing now? And how do you think that would impact that competitive landscape of those items?

[Randy Scott:]

Yes, we do although we can’t say over what time period this will all become effective and it’s fairly straight forward, you can Google the term next generation sequencing billing guideline document M00130, it’s a very specific document on the Palmetto website which puts out there new guidance policy. We think that’s a pretty straight forward policy and very forward thinking. Now you have to remember that Palmetto historically started out as providing coverage support for a small number of regions in the Medicare Administrative Centers that’s been expanded over last year, but a number of those regions are just now really starting to come under Palmetto, so it may take a little bit of time for that to work through the process.

[Patrick Dennehy:]

Okay, great. And maybe one last one, you guys expanded the test menu in late March a bit ahead of expectations and received the positive Medicare decision in late April. How do these two factors play into the guidance and I think initially you kind of left the range intentionally wide for variables, such as timing of these kind of events. So, I mean, now that those are behind your accomplishment are you feeling a little more confident about moving towards the higher end or tightening the range at some point or may be just update the thoughts now you have few those things?

[Randy Scott:]

It’s still early in the year, we gave a broad range because it’s still very early in our business model and a lot of our expansion are into areas like neurology and pediatric genetics, where historically prices have been so high that it’s actually constrained volumes. And so we’re still learning a lot and I think very much in the infancy of this business even though our volumes have been growing rapidly, so we’re not prepared to give any further tightening on guidance. I think that’s a reasonable range and obviously we’re pleased as we got to close to 10,000 in accession samples for the quarter that means we’re already at a run rate that’s in the 40,000 with a lot of new content that’s just come online. So Sean, do you want to say anything more about the new content?

[Sean George:]

No, I think that’s right. A lot of it is early days for a lot of these areas. A reminder that the kind of the state of market development and the roster of competition in each disease area is completely different, we’re really focused on medical genetesis and genetic councilors to really help us learn the dynamics and kind of uncover some of the numbers that are hard to get at and most importantly faster they key up in your leader support. We would not be shocked at all if our mix stayed about the same, it is still pretty early for us in just a cancer testing, so we see a lot of growth ahead of us on that. On the other hand we are very optimistic about these other disease areas and with that it’s really hard for us to predict the mix of that. Again we would be happy if our mix remained the same and regarding guidance, we would be happy if some of the newer disease areas started really taking off kind of as price and locks new volume. But right now it is a little early to start to forecast how that will play out.

[Patrick Dennehy:]

Understood, thanks for taking the questions.

[Operator:]

Your next question comes from the line of Dan Leonard with Leerink. Your line is open.

[Dan Leonard:]

Thank you, this is related to Patrick’s first question on the CMS event, but can you offer up the timing of when you signed these Blue Cross Blue Shield contracts. I’m wondering if they were - if timing was independent of the CMS decision or if it all followed the CMS decision.

[Randy Scott:]

They were in discussions during that decision most of those contracts signed after the CMS announcement, but obviously we signed our care sourcing agreement last fall with the Blue Cross Blue Shield association and so we’ve been working with groups and continue to work with the original affiliates throughout the year.

[Dan Leonard:]

Okay and secondly on the impact of the Medicare reimbursement, what impact is that going to have on your average selling price and realizes a lag, but if I take quarterly revenue divided by quarterly volume, does that number go up or down with the $620 Medicare price?

[Randy Scott:]

Well, let Lee take that. But remember that historically we didn’t get paid anything from Medicare, so our revenue from Medicare was zero, this means that will now start to receive $622 per sample across, roughly 10% of our volume, so it’s a nice positive impact. Lee, do you want to comment on that one?

[Lee Bendekgey:]

I think - no, I just - I agree with that and would just elaborate. One is that, we started to get paid quite quickly after the positive Medicare decision and we are now going back to the first of the year and beginning to get paid. We are, as in a side still talking to Medicare about our 2015 claims for which we’ve not yet gotten paid and trying to agree with them on what code to use and what price we would get paid. But looking forward, even at the 622 price as Randal says, 622 is a substantial increase from zero, which is what we’ve seen since we started billing last spring. And if you fast forward to the end of this year, in the unlikely event that the price remains 622 at under $500 average cost per test, we are now then seeing around 20% gross margins, which is not our 50% model, but it’s pretty easy to imagine with modest price increases by Medicare, we get around our 50% gross margin by the end of the year on Medicare claims which tend to be paid quite promptly once you set up your system under a billing realm. So, you should see that improving the average revenue per test in a fairly short order.

[Dan Leonard:]

There is no meaningful amount of revenue coming from Medicare damage [ph] plans last year they were being paid at higher rates?

[Lee Bendekgey:]

There was nothing really to pick up. There is a handful, but really it was effectively zero.

[Dan Leonard:]

Okay. And then my final question on the content expansions. You talked about the newborn screening effort. Can you help us better understand, where newborn screening with your test fits into the existing, testing modality with the tandem mass spect as a message, does this complement this message or is it used to replacement?

[Robert Nussbaum:]

This is Bob Nussbaum. At this point it’s not at all designed to be a replacement, tandem mass spect is a very inexpensive and highly automated method for doing an initial screen. The problem that there is a lot of patients where you have false positive, false positive rate is actually quite high, particularly among premature infants and we think our test will play a significant role as a secondary tier test in illuminating false positives quickly, so that these children and their parents are not kept in limbo worrying about whether the child does or does not have a disorder having to remain on high alert, having to remain on special diet et cetera. I think that’s the main impact of this test right now in our current clinical guideline.

[Dan Leonard:]

Okay, this is for Dr. Nussbaum is this a circumstance where you would have to do a bit of machinery sale to prove value to folks or are there existing guidelines which talk about next gen sequencing methods as a second tier for tandem mass spect based I think.

[Robert Nussbaum:]

For tandem mass spect, yes, we’re going to have to do some education, but I should say the cannels nose is already under the wall of the tent in cystic fibrosis and I think everybody recognizes in the newborn metabolic area, that we need to do better in cutting down the number of process. I mean the screening test is designed, not to miss anybody and so the sensitivity is very high, but the specificity is not that high and anything that can contribute to not having a child and his parents unhook for two, three, four, five months trying to figure out whether they have a disorder or not, I think it would be view very positive in the newborn screening community.

[Dan Leonard:]

Understood, thank you.

[Operator:]

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

[Unidentified Analyst:]

Hi, this is [indiscernible] in for Amanda. I just had a quick question on payer break down. I was wondering if there has any meaningful change in institutional inner work and other inner work and whether those are having consistent for the CMS vision. And my second thing was especially spoke about different color about this with the CMS payments, but have there been changes in the amount of revenue you expect to recognize from previous quarters? Thanks.

[Randy Scott:]

Yeah, so with regard to the distribution, we have been pretty much in the 25% to 30% range of patient pay and private institution pay versus third party payer. The private and patient crept up a little but not statistically significant in the last quarter and we do believe that there is some volume now with some of the content release which just happened at the very end of the quarter, they could try, trigger some higher institutional volume especially in pediatric area.

[Lee Bendekgey:]

So, in terms of the Medicare, just as a remainder our revenue comes in on a cash basis at least for now as far as Medicare is concerned. And so, as I indicated we were approved to get paid already for tests build beginning January 1. And those payments have started coming in and they will show up in the quarter in which they are received. So there will be a bit of a catch up, but the revenue will show up as current quarter revenue when it’s received. And then as I indicated we are still determining with the CMS, what we would get paid - what rate and how we should code for the test that were delivered in 2015. So stay tuned for that.

[Unidentified Analyst:]

Thanks.

[Operator:]

There are no further questions at this time. I will now turn the call back over to Katherine Stueland for closing remarks.

[Katherine Stueland:]

Well, thank you all for joining us. We will be presenting this week at the Bank of America Merrill Lynch Healthcare Conference in Las Vegas and in a few weeks at the UBS Healthcare Conference in New York. Hope to see you at one of those upcoming conferences. Have a great afternoon. Bye, bye.

[Operator:]

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