Q3 2019 Earnings Call

Continue to standby. Thank you for your patience.

Ladies and gentlemen, thank you for standing by and welcome to wouldn't be taste third quarter financial results third quarter 2019 financial results Conference call. At this time, all participants are not listen only mode. After the speakers presentation will be a question answer session to ask a question.

During this session you'll need to press star one on your telephone if you require further assistance. Please press star Zero I would now like to hand, the conference over to your speaker today, Lord D'angelo within VK. Thank you. Please go ahead.

Thank you operator, and good afternoon, everyone. Thank you for joining us for a third quarter 2019 financial results earnings call joining us today, our shine George our CEO Shelly Guyer, our CFO bottom this on our CMO, we've been Dechy, our COO and.

Katherine Stueland, our chief commercial officer.

Have you listen to today's conference call. We encourage you to have our press release available, which includes our financial results as well as metric in commentary on the corner.

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 strategies, our plans to integrate and managed businesses, we acquired market opportunities future product.

Services, our product pipeline and the timing there as demand for it and reimbursement averse services and our investment in our infrastructure in operation constitute forward looking statements within the meaning of the safe Harbor provision of the private Securities Litigation Reform Act.

It is difficult to accurately predict demand for services and therefore, our actual results could differ materially from our guidance.

Guidance on future company performance assumes among other things that we do not include any additional business acquisition investments restructurings or legal settlement.

We refer you to our 10-Q for the quarter ended June 32018 in particular to this section titled risk factors for additional information on factors that could cause actual results to differ materially from our current expectation.

These forward looking statements speak only as a date hear us.

To supplement our consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States or God, we provide non gap research and development expenses non-GAAP general and administrative expense non-GAAP operating expense non-GAAP net loss and net loss.

We shared and cash very.

We encourage you to review these reconciliations which are available in the press release.

With that I will turn the call over to shine.

Thank you Laura 10 years ago, we started NBT forget genetic information incorporated into mainstream medical use for everyone around the world and modernized economy as well.

Well, we have many years ago, the transformation of the genetics industry is underway and we believe our 26 quarter of on average double digit quarter over quarter growth serves as an indication of a new trajectory and new model for personalized medicine as we move this industry beyond the more than 1.7 million people in the U.S. diagnosed with cancer per year into all.

The equally impactful genetic disorders affecting those we serve as we drive adoption of state of the our genetics to benefit fully healthy mom and baby for the 6 million pregnancies in the U.S. every year.

And as we lead the way into the new but potentially immense opportunity and proactive genetics utilize that the system level.

We are currently investing to position in detail is the only company with a broad capabilities to partner with clinicians and patients to benefit from genetic information throughout all stages of life of note in the third quarter and beauty acquired and integrated jump whose capabilities. In addition to lowering interpretation of reporting costs put us on the cutting edge of interpretation reporting preventive maintenance enough.

Again.

Allowing us to provide the most certainty at the time of testing compared to anybody else.

We have completed the integration of senior bio with our combined development teams, creating a path to drive down costs to a level that will support the adoption of this technology to benefit healthy mom and baby for the 20 to 30 million pregnancies in modern healthcare systems worldwide.

We added nine partnerships to our growing network of nearly 60 partnership programs. The growing genome network allows us to diagnose more patients than ever faster than ever and introduce them to partners across the health care continuum to help with appropriate treatment therapies and clinical trials.

Our Biopharma partners quite simply it allows them to enroll trials faster and pull forward peak your sales for the thousands of important rare often genetic based diseases also it was announced this morning. It program with the University, Vermont Health network to offer genomic DNA testing to vermonters as a part of their routine clinical care.

Well a small first step we feel this is an important side of things to come as health systems around the globe look for a partner to deliver genetic information and manage that information for the benefit of the individual at population scale.

We also added signal 16 million covered lives in network status in rapid succession in VJ has become the leading genetics provider for government and commercial health plans with approximately 295 million covered lives and network.

I think contracted with all national commercial payers and 47 states for Medicaid and VJ services are now in network for the vast majority of Americans. When we started this company many advisors the price doesn't matter in health care.

And that the historical institutionalize game, hi, pricing or peak coating aggressive selling and aggressive billing was the only way to win.

We feel that this recent milestone achieved by the newest of the company's landscape is an important indicator of the future evolution of the space.

In six short years, Nvidia has grown from 229 samples and a few hundred thousand dollars in revenue in 2013 to tracking toward our 2019 annual guidance of more than 500000 samples and $220 million in revenue.

While the investment in our broad capabilities to deliver that outcome was determined years ago consistent with a long term strategy. It is now of course, the focus for commercial and operating functions. The pace out the remainder of the year as we continue to invest in technologies that enable NBT scale, we deepened in widen their competitive mode. As we now make it easier than ever to access genetic information needed across all.

Stages in life.

I'll now turn the call over to show you know highlight our financial results for the quarter.

Thank you Sean.

For some time, we have noted that volume as a key metric by which we judge the velocity of the growth of our business again, we have seen strong growth this quarter exceptionally more than 129000 samples, 65% increase this quarter over the third quarter of last year.

Third quarters normally one of our slower growth quarters, we achieved 16% sequential growth from the second quarter higher than last years, 7% sequential growth.

Notably we experienced growth across all segments, especially strong volume from international markets, which again accounted for over 10% of the total accession volume and we saw a pick up and our reproductive test volume in general led by increases in our NPS testing and our pharma testing, including detect programs.

We reported billable volume of approximately 124000 in prior calls we've made comments about the relationship between Accessioned in billable volumes. This quarter. There was a 4% difference between Accessioned and billable volumes, which is in line with our historical experience in the third quarter and what we suggested in our.

Last earnings call, we expect that due to seasonality there'll be a smaller gap between accessioned in billable volumes in the fourth quarter.

And how are we talking to our guidance.

With approximately 334000 accessions year to date, we standards about 67% of our annual guidance and the first nine months of the year typically fourth quarter volumes, our highest due to seasonality. Despite the timing of some key medical meetings for customers. This year, we expect further strengthening due to.

Several additional factors the newly introduced and I P. S products are increasing recently launched partnering program and the timing of Salesforce adds throughout the year, we reiterate our guidance for the year of over 500000 Accessioned samples.

Now turning to revenue, we generated $56.5 million in revenue third quarter, which represents a 51% growth in quarterly revenue year over year as with last quarter over 70% of our revenue came from third party payers and just under 30% from both institutions, including partners.

And patient Okay. The continued high percentage from third party payers is largely due to higher Medicare payments on our cancer tests and better payments for commercial third party payers as we continue to get more tests into contract and collect more on each test from these payers as a group.

Consistent with our discussion of ASP trends last quarter, and our express goal of bringing testing to more patients we realized an ASP a $448. This quarter down from 471 in the second quarter and 490 in last year's third quarter. The decrease was primarily attributable to payer and product mix changes.

Well third party payers again contributed more than 70% of revenue. This quarter. There was a 4% decrease in third party billable test volume.

Strong increases in billable volumes for both institutions and patient pays made up the difference.

This trend was expected due to our introduction of it detects testing programs part of a farmer efforts and the uptake of art and I pass product line, both of which enable more patients to have access to testing and both of which carry lower ASP.

Movement in our ASP was also due to how much we picked up in the quarter due to revenue recognition guidelines, we have an increase of 1.2 million additional benefit from our change in estimate on excess cash collections during third quarter compared to $2.4 million in the second quarter as.

We gained more history under the six so six standards, we expect that the magnitude of future benefits in any quarter will decrease with time.

Taking these changes into account, we believe that our asps will bounce around a bit but that we will see the ASP trend lower in the near term as our payer and product mix changes as we continue to get more tests into contract and collect more from third party payers, we expect small quarterly increases at NASS piece, but these will be offset.

Hi, lower pricing in areas that are growing like our patient pay and international businesses. We also expect that are changing product mix will put downward pressure on our asps in the near term.

So in summary, we are on track with our annual revenue guidance our year to date revenue is over 68% over full year revenue guidance consistent with our historical experience, we expect a strong fourth quarter due to seasonality in both the underlying billable volumes and collections from payers, we reiterate our annual guidance.

Of over $220 million in revenue.

In the third quarter of 2019, we reduced Cogs to an average cost per sample of $249 down from $252 and the second quarter of 2019.

Recall that in the second quarter Cogs included an approximate $13 per sample stock based compensation expense for annual retention and merit based RSU grants, which we did not have this quarter, but products mix changes, including processing more and I, yes, and zone, which have relatively more.

More expensive given their lower volumes and are not yet wringing out cost savings put upward pressure on Cogs. These specific tasks cost per sample are expected to decrease with time. We also had an uptick of about $7 per sample due to intangible asset amortization costs related to jump was developed.

Technology acquired.

We will continue to amortize over the 10 year life of this intangible asset, but the dollar impact per sample will decrease as volumes increase.

Just a reminder, my past comments on Cogs, we expect Cogs will continue to fluctuate as we introduce new products and bring new technologies online importantly, new products. We introduced will have lower margins early on and depending upon the uptake of those products could put pressure on our Cogs, we made a commitment to make 2019 here.

If investment and we intend to envy tell your eyes newly acquired technologies and products and continue to target 50% gross margins.

We improved gross profit by 44% from the previous year generating $24.4 million and the third quarter of 2019 versus $16.9 million and the third quarter of 2018, this quarter or gross margin was 43% down from 45% into third quarter of 2018 and 48.

8% last quarter as a decrease in the asps quarter over quarter outweighed the decrease in the average cost per sample. We expect that gross margin will fluctuate with the coming quarters and will trend towards our 50% goal.

As discussed last quarter, we're investing in several areas of the business to foster our growth this year and beyond enabling us to scale and offer additional products across all stages of life and we have completed two acquisitions, both of which impact operating expenses and need to be teased out for the quarter, we incurred a GAAP operating expense which include.

<unk> cost of revenue of approximately $101.4 million compared to 47 million for the third quarter of 2018.

This quarter's operating expense includes $47 million in research and development $32.7 million and sales and marketing costs and $21.7 million in general and administrative costs.

It is important to understand what a non-GAAP operating expense of 79.8 million is more indicative of the spend for base business, eliminating the stock based compensation and post combination expense related to our two recent acquisitions.

So what are the key drivers of Opex this quarter.

First research and development costs were $47 million, including 18.6 million and stock based compensation for the inducement ours. He was granted the singular bio employees as part of the acquisition our spend on the base business increased by $5.7 million compared to the second quarter of 2019, primarily due to continued investment in R&D.

Including headcount expansion focused on scaling our business content expansion, improving the customer experience and reducing Cogs.

Second.

Sales and marketing costs were $32.7 million, which includes $4.2 million and branding and advertising costs related to our direct channel campaign launched in June of this year.

Third general administrative costs were $21.7 million in fairly flat from the prior quarter, we incurred over $3.5 million and cost for the acquisition of John glass in the third quarter.

Finally stock based compensation during the quarter includes $33.1 million related to the management incentive plan, which will continue to see in future quarters.

Now, let's move to our cash position at quarter end, our cash cash equivalents restricted cash and marketable securities totaled $473.5 million during the quarter, we raise $19.5 million of net proceeds from our ATM and $339.9 million in net proceeds from the convertible debt offering.

Cash burn a non-GAAP measure totaled $140 million <unk> third quarter of 2019. This includes a 15.4 million dollar cash payment in connection with the acquisition of junk GLA and an $85.6 million payment to extinguish the overland debt, which includes 1.3 million of accrued interest on our.

Third quarter 2019 quarterly interest payment.

On an apples to apples basis.

And how we have talked about the burn over the past here in the absence of these cash outflows the cash burn would have totaled $40.3 million in the third quarter of 2019.

On the second quarter call, we indicated that we would continue to invest in our business throughout the year and into 2020 and that our quarterly burn with increase throughout the year for the year. We stated that we anticipated burning up to 50% more in 2019, when compared to 2018, our burn could be as high as 150.

The million dollars in 2019.

Excluding the impact of overland and the acquisition related cash payments, we have burned hundred $3 million year to date.

I will now turn the call over to Bob.

Thank you showing and repay we're committed to advancing science and improving the practice of evidence based genetics as Sean mentioned the acquisition of jungles advanced modeling is an important addition toward a very interpretation capabilities.

Many people undergo genetic testing and get neither positive nor a negative result, instead they receive a variety of uncertain significant sort of us meaning there is a change in a gene, but we do not yet know what it means this is frustrating both patient and provider because it leaves them in limbo.

Trimble is a powerful technology that will help to reduce buses and substantially enhance nvtc scalable genetic variant interpretation. So we can deliver more informative result to patients.

In addition to the Jungle acquisition, we were also busy launching in retail detect programs in five conditions for which testing is underutilized, but can improve diagnosis and treatment importantly, we are seeing bio pharma partners showing interest in coming on board with our detect programs demonstrate.

During the important rule that genetic information can play in bringing patients and bio pharma resources together to improve clinical care.

We also presented a wide range of clinical studies and research highlighted at the American Society for human genetics, and the National Society of genetic counselors of note. We continue to published research demonstrating the expanding number of people to can benefit from access to medically actionable genetic testing.

And as such we're seeing testing guidelines continuing to expand.

It is critical to Nvcs mission to continue to open up excess for all those that can benefit from understanding the genetic information and how it impacts or health.

We're pleased with University Bromont Health network announced their partnership with US on a testing program to offer the in vitro being proactive genetic screening as part of routine clinical care for people in Vermont we.

We have ample evidence that one six people have a medically actionable genetic conditions are not aware of.

University of remote program will grow into a population wide project to evaluate the impact of such do testing for actionable conditions on a large scale.

Such testing will also be embedded within healthcare system, so that patients and providers have the medically actionable genetic information needed to manage their health. This testing program demonstrates the future of genetic testing as we continue to further the integration of genetics into medical care.

Sure and public health.

Ill now turn the call over to shortly.

Thank you Bob we have a strong balance sheet, our investment to growth profile is on track and we see essentially unbound potential ahead of us leading the generics industry transformation in the years to come.

We also feel that we are approaching a bit of a transition point in industry.

When we have been counting on driving two for many years in which the adoption of advanced technology surrounding genetics starts delivering ever increasing value to individuals around the globe at an accelerated pace relative to that of the historical diagnostic industries.

We remain focused on our model of rationalizing the testing business, expanding our genome network and moving to genomic information management in the future.

The best indicator of our success remains the topline volume growth and our focus in the future will increasingly be on the absolute gross profit growth that translates in operating cash flow.

All of which are financial metrics that drive the business forward and ultimately benefit the clinicians and patients we serve.

With that I'll turn the call over to operator for acuity.

Thank you as a reminder, you'll need to press Star then one on your telephone to withdraw your question press the pound or hash key please standby well, we compile acuity roster.

Your first question comes from mine, if Doug Schenkel from Cowen Your line is open.

Hey, good afternoon, guys. Thank you for taking my questions I want to I want to start with a long term financial target question and then.

Then then come back to the more near term just trying to break down 29 chain guidance a little bit.

Starting on the long term financial targets.

All of years back you said 2020 financial target.

At processing 1 million task and M&A S&P $500.

So we can I'll do the math on what that would take you to and revenue next year.

Current 2020 revenue consensus fits well below those targets and I would argue that the current stock valuation doesn't imply that you're getting a lot of credit from the streak for that target.

With that in mind, what's the right way to think about 20 to 20 target as we sit here with two months to go and 29 team.

So would love to get your thoughts on that and keeping in mind consensus is well below your prior 2020 target.

Would you be willing to comment on whether or not you are comfortable with the consensus sell side revenue forecast for next year.

As we sit here with with too much to go in the year. Thank you.

Yes, yes.

Happy to thanks. Thanks I appreciate the question.

The truth of it is next years numbers will play out.

You know in large part as the result of investments made you know two years ago or longer.

And you know, it's not always easy to predict the three to six five windows as to when those play out with which I mean of course I know that you know.

But I do think worth.

Stating.

Not as a dodge, but as a.

In front of that question now that said we are in truth still finalizing our commercial operating investment plan for 2020.

So what will stick will stick to the practice of giving guidance in January .

As far as the Street 2020 numbers, let me first question and what I would say is it it would be premature for anybody to change or 2020 models now until we provided guidance for the year, which again, we will we'll get to in January .

And I think I do think taking a step back.

In context, the numbers that we are talking about this million samples $500 million those relate out as aspiration all over a couple of years ago.

When when the questioning the dialogue was whether or not there was a real to him to justify the investment under technology second we suggested that it is indeed huge and that many years of high growth lie ahead at the time very few people believe this where we're currently on a trajectory that no one else is on.

And on this salt as ever and the conviction of the value. We are building. This company. So I think.

I understand not a direct to answer but I am hoping I'm, hoping that sheds light on our on our position on ended at this time.

Okay. That's helpful Sean enough not to belabor less but.

Maybe to just say what you said in a different way with you object.

Somebody saying, okay based on what Sean just said.

2020 financial target still possible, but a few things Gotta go your way for that to happen in the meantime, theres nothing going on in the business that would suggest what the streets modeling for next year is off the Mark is that there's not a fair synopsis.

That's right I'd say like I said I'd I'd advise.

There's no there's no impetus to update models at this time, if there were we would say it.

As is our practice. We we are we are growing now a very large business very rapidly and our continued to drive the business as such but.

But always want to have our guidance to be something that that we know is achievable and so within that context I absolutely agree I think youre. Your summer is is as good as as good as any okay. That's helpful. Thank you. So a couple questions.

We think about trends heading into year round.

So I believe you've increased your sales force headcount by about 60 since the beginning of the year.

I'm curious what you're seeing when it comes to productivity with new hires.

And I guess to some extent how to view this in the context of full year guidance. So I was just doing some quick math, hopefully I'm not necessarily but your revenue per rep was I think around 340 to $350000.

Per rep per quarter.

In Q2 through Q4 of last year.

To get to full year guidance, you need to be a little bit better than that in the fourth quarter, but not much better. So so on on one hand that makes me feel pretty good about your ability to get to Q4 numbers.

On the other hand, I think productivity would actually need to improve by about 20% to 25% relative to what you did in Q3 using the same metric just based on the fact that.

I think because you're ramping new people the productivity is a little lower than it was last year.

So I'm just hoping you can help us out what are you seeing when it comes to productivity that that can make us feel better about you getting to 2019 guidance.

Yes, So I think Thats fair Fair question Q4 has traditionally been thus strongest quarter oftentimes by lot and we expect the same exact same for this year.

Look I mean, obviously, we would like to have been closer to that annual guide Mark at this day or at the end of Q3 than we are.

No no doubt about that as per my previous comments of how we how we'd like to approach guidance.

With that said as you point out that it's the same whether you consider how much volume and revenue remains in the year, what the Q3 to Q4 growth profile profile needs to look at like what the Rep productivity increased news looked like the statement you made is the right. One it's in line, if not a little bit higher than a tiny bit higher than past years profiles.

To get there and so with that said you know this year, we had some additional contributors in the sales team ads.

They really kind of finish on the second quarter and really got to full productivity in August of this year and we in there that whole that entire team continues to be highly motivated.

To run run to the tape to the end of the year.

No the NPS launch that we did in the spring.

We knew would be in ended the year contributor and indeed, we are seeing that will be accounts pick up and that effect is something that different from last year's is a backend weighted effect.

As an aside and you know when we expect to continue into next year.

And then of course, the additional farm for until we've picked up the pace of pharma programs addition, we've launched a handful of our own and those also.

Consider the timing of all those those are also things that we feel and see our contributing toward the back end of year.

So you would you I think that general statement of the the remaining the of the remainder to go is similar profile that we've had in the past. We've got these three things that we think.

Contributed give us confidence that we're tracking.

And again.

Can't.

I can't not also show in our ability our ability to hit this year. You know again that was that was investments made over two years ago and yes. It's now in the hands of our commercial and operating teams as they run run it out.

But you know when you take a step back.

The momentum and business and when we think about the momentum of where we've been where we are and what next year looks like.

Especially when you consider kind of the past the recent new and coming technologies, we've developed and are required.

For example, the engine listening in bio et cetera. These this this is where you know taking a step back we really like what we're seeing now even as it like I said, it's a commercial and operating team game now.

As we run out run out the remaining two months of the core.

Okay.

That's great and if I could just talk a one more topic just some recent developments on the coding front.

So first.

As I'm sure you're aware.

One of your peers in the space from Ariad materially Miss their quarterly results are materially cut full year guidance.

Due largely to what they attributed to this being coding changes.

Yeah, with a multiyear move to the to the newer Ngs CPT code.

Doesnt seem like that had any impact on your business I just want to make sure that was something that was completely myriad specific for whatever reason and not something that would impact your business.

And then then the second coding related question is I'm just curious what your thoughts are on the new Ngs NCD that was proposed by CMS, Tom It seems to require FTC approval for use of a an ngs based germ line cast in breast and ovarian cancer I don't actually think that exist. So practically speaking what did what do you think happens here.

And I guess to the extent that this does hold off where are you in your efforts pursuant to an FDA approval.

Yes, so look I'll answer really quickly because there's a ton of noise confusion and as offerings coating. It this way that the short answer is.

None of that we feel has any impact on the future. Our business now that said Lee Lee can walk through both those questions in more detail and give you some more more flavor for a higher Doug.

The first question had to do with up coding changes and private payors and as I understand the issue that has been raised it has to do with the retirement of.

A couple of old Bracco water and Braca to codes and it is true that a revision to the coding manual earlier this year.

Tired those codes at its heart, though this is not a coding problem. This is a contracting and pricing problem. We have said for many years now that as we made our presence felt in contract negotiations with private payers.

That prices would come down it has taken longer than any of us likely would have imagined a few years ago, but it is happening.

And it is not done yet.

And you are correct to say that it doesn't affect us because we are probably the major contributor to it.

So thats I think that answers your question about the impact of.

Third party contracting on our prices Tom.

With regard to the recent draft national coverage decision.

So not to serve go into the sort of the labyrinthine history of all of this but as you'll recall some months ago.

There was widespread concern that that in earlier version of the snap national coverage decision was being interpreted to apply for germ line cancer testing.

Only two late stage patients and.

At the time, we expressed the view that that was.

Resulted from misunderstandings on the part of the the folks at.

CMS.

And as we expected there was a uniform reaction among the professional science societies, the industry and advocacy groups.

Suggesting that that was a wrong turn and indeed, the revised national coverage decision reflects that.

And and there is no longer limited to late stage cancer patients.

We have a new anomalous.

Piece of language in there that as you said.

Seems to suggest that reimbursement would be available.

Only four.

For for Ngls test for Germline, count hereditary breast and ovarian cancer with only be available if the test where after FDA cleared or approved.

We like you are not aware of any such test and and we do not for a minute believe that.

But thats really what CMS intended to essentially render all germline testing for HBIO see syndromes.

Non covered and so we expect that there will be a similar universal reaction on that point based on preliminary conversations we've had with a bunch of people.

This is either just add or have a somewhat loose.

Use of language or it's possible that what they match was that.

Companion diagnostics would need FDA approval now to our knowledge are also know next generation sequencing companion.

Devices that are approved by the FDA those that have been approved our all.

I think Pcr.

But in any case that may be what they had in mind since the original NCD was based on the foundation one test, which is also essentially a companion test. So it may be that thats, what they had in mind, but I don't for a minute think that.

That the outcome that people are worried about is what CMS intended or what will.

Resolved one when the answer is finalized.

Understood. Okay Super helpful. Thanks for all the color.

Yep.

Your next question comes from line of Tyco Peterson from JP Morgan Your line is open.

Hi. Thanks. This is giuliani title. So maybe you could you give us what color on the Vermont partnership and then moving that went with Cigna, how should we think about the volume ramp from those two progresses and the impact on SP or any of those contributions sort of embedded in your Fourq you outlook.

Yeah, So well go there.

Let's let's start with Cigna.

That one.

You know I would I would say roughly yes, it's something that we've kind of work on for I don't know how many awhile.

And as finally happened and that one isn't that isn't so much a that's no impact volume that this is an impact how much we get paid our third party insurance reimbursement has been improving steadily over the past many quarters and this this will be yet one more thing that contributes to that steady improvement of that third party reimbursement line so not necessarily.

Volume impact per se.

There's always a little bit of an increase when it when it gets a little easier to answer questions for clinicians about out of pockets and whatnot once you're finally in in networking in contract, but for most part that's that's a revenue game, which is consistent with past few quarters.

On Vermont and apologies.

After nussbaum had to run off he is flying out to initially c.. So I would have loved for him that answer more about that but the bottom line on Vermont is this is in this category assessing our proactive or preventive genetics.

We are not really forecasting this line much in our business at all so this is one where are we feel the proactive use of genetics in mainstream medicine.

It is something that we it's a newly developing market. We think of the of the three that we serve diagnostics reproductive health and proactive. This is the largest one it is everybody in Myers healthcare systems.

So super excited about this super excited about working.

With this system to do it to do it right.

There are all kinds of implications for the future in the in the and the future model with that said.

These these kinds of things will take time and so we're not we're not going to be.

As a result of a single one of these are frankly, the dozens to come.

I think it will be like the rest of our business has been for the past six years.

It's an operating business, we add on clients, we add on volume volume per client goes up overtime I don't anticipate a huge jump in any given quarter. As a result of any of these things maybe I'm just thinking of making the point is to to distinguish it from for example, a lot of population sequencing type programs, where volumes are revenues are recognized.

Is that single Pops. This this will look like the rest of our business and will phase in overtime.

Generally the one other thing I would add on Cigna as you know under the revenue recognition criteria. We have to see those expect rates that were much lower when they were out of contract we have to actually see those collections pop up and since December 1st is the effective date I don't know, whether we will see that in the fourth quarter and be able to account for that.

At effect in the fourth quarter, but we would expect that to sink cigna pricing and what they will pay us we'll be going up. It's just a question, whether we'll be able to recognize that in the fourth quarter for weather will come in the first quarter.

Got it that's very helpful. And then maybe just some margins.

We certainly appreciate that there are a lot of moving pieces in the near term that could lead to fluctuations from quarter to quarter, given the pace up your and I keep us Ram and the pharma partners there certainly a dilutive effect.

In the meantime, going network with Cigna should help on positive side. So how should we think about your near term sort of gross margin trajectory.

We get that you mentioned you know it's that the the general trend to these sort of moving towards a 50% goal, but you know as we look towards you know next year, a without necessarily asking for guidance, but do you think there any chance that we could go maybe lower from current levels in the near term.

It's Shelly and I'll answer that I would note that the 43% this quarter had a 2% dimunition based on the junk less amortization of the intangible and so we will continue to feel that that was $7 per cogs per sample and that was about two per.

So would have been 45% gross margin, which is slightly down but not badly down from the prior quarter and that is as you know because of product mix change I would expect that we would get higher asps in some areas, but from the third party payers, but that will be offset by some of the lower.

Prices in areas, such as the institutions international and the patient pay so I would expect that this year, we'll continue to see some perhaps downward floating of that rate, but that with time as we begin to collect more and as some of the detect programs and other things yield higher.

Piece that that May switch in the next year. So it will move around a bit and it will trend back up to 50%.

And as we've always said it will be fluctuating depending on also the Cogs side of it not just the collection side. So we will continue to work actively on trying to bring down that Cogs things such as automation in our medical interpretation things such as the gentler acquisition and some of the variance.

Reading capabilities will all drive that Cogs down so I would expect that.

The piece may stay somewhere where they are but the cogs will be driven down over the next several quarters. So some improvement in the near term, but over time still fluctuating. This is Lee the only thing I want to add to what Shelly said was that and I think this was a two or three quarters ago. We when we were right around 50.

Percent.

We made the point that that we were probably going to focus more on adding content and delivering new content than we were.

Reducing cogs in the near term.

Having having approached our margin model and that's.

That's what we have been doing for the last couple of quarters.

Really for much of this year, but I would expect if we are continuing to work on Cogs reductions and so.

It is that is also one other reasons why you might see a very little bit from quarter to quarter based on how much new content as being launched.

Got it that's very helpful. And then lastly from me a I was just wondering if you could give us an update on the patient initiated testing since it was launched in.

How significant was the volume contribution to date and how about the mix. So have a mine proactive versus carrier screening process diagnostic versus expectations and how does that sort of testing that's compared to those test that generated from our sales channel. Thanks.

Sorry, so with that business Catherine we kicked off the offering of our direct channel at ASCO. This year in June and that's probably going on about involved as we wouldn't expect then we had.

Second minimal contribution to the overall volume on numbers for this here and we expect over time not gonna grow.

As we think about it.

We're learning a lot through through the work that we've been dealing with the initial digital marketing and.

I think one of that they see growth area for us is going to be and terms have really capturing in mind share as women as I'm really kind of think they keep our as hell. So that's going to be a big focus for us moving forward in terms of our carrier and cancer offerings and beyond that I think what's been really interesting to see.

The though is that we've seen ordering from across our testing menu and so I think that's one of our big differentiator is in addition to the strong medical brand that we've built over the past six years that is going to how best to succeed and driving volume through that channel.

We've also seen a lot of interest from clinicians in terms of being able to utilize this panel with their patient. So all in all I'd say, it's been a successful introduction of that channel. We don't anticipate that we're going to be spending on to that the level.

Hey were based companies in terms of marketing.

We do think that this is going to be a really important growth driver for us over the next.

For years.

Great. Thank you so much right.

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

Yes. Thanks.

Sean Chilean Lee.

First question is on the guide.

Appreciate you're keeping the guide and talk for the year and and but that does imply.

What seems like a a significant ramp here.

Correct me, if I'm wrong, but I'm looking at about 30% you know sort of sequential increase here in terms of accession volume you'd just delivered 16% and the number is mid teens to maybe a high teens that you have sort of delivered in past and I. Appreciate the fourth quarters strong and you have salesforce productive.

He here and.

In addition to bad you're you're hoping to get other.

Test at an IP as potentially growing but maybe just help me understand what is where do you get the confidence in terms of the volume and what segment is it mostly NPS is it mostly marketshare one of your competitors.

Reported and they are doing now a double digit growth and their volume. So I'm just trying to understand what gives you sort of the near term confidence here and getting to the full year.

Guidance or an exception volume.

Sure.

Yeah I appreciate the question sorry, So again I would I would state a lot you can look at it by volume and revenue.

Q4 versus the rest of the year you can look at a sequential growth rates.

And while the yeah, there's a there's a Q4 needs to be very strong quarter. It has historically always been a strong quarter those numbers whether its.

33% remaining in the year versus 28% or 27% in past years.

It's a little more but it's not that much more the sequential growth quarter over quarter has in not last year, but in prior years been in the high Twentys.

And so.

I think we're like I mentioned on previous question. You know were acknowledge that Theres a big Q4 ahead, and we expect to have been Q4 three the three major reasons are we added the Salesforce adds came in and are now only in August fully ramped up and productive and the whole team is now highly motivated focus on the into the year.

Our NPS launch is driving volume and increasing our account.

Take encounter account penetration in the Ob segment.

Mentioned another competitor Yeah counsel for many years had 20, 15% to 30% growth year over year, we would never expect that to immediately turn off into.

Zero.

With that said.

As I've also pointed out confidence on the reproductive spaces that have the 6 million pregnancy. The U.S. every year, there's only one to 2 million of them to get carrier or it could expand a carrier screening or noninvasive prenatal screening.

And or both.

So the council the former council business can continue to perform pretty well.

As as well as in the tariff virginity, and the smallish quest and Labcorp businesses, and we still feel that theres plenty of room to grow in reproductive.

And then the third the third that we mentioned again, you we accelerated the pace of and kicked off a handful of pharma programs middle of the or which we do expect to contribute strong.

Strong towards.

From volume, even as we even as we close out because of this year and move into next.

So those are the three the three contributors to the our view of the relatively backend weighted as I did mentioned before yes, we would love to be in a more comfortable perch to hit hit our annual guidance with that said.

We are correct, we're presently tracking and it's in the end of our commercial operating teams execute the next the next six seven weeks.

Okay things and if I could touch on on on and I P. S. Overall singular bio.

This is a significant cogs reduction here and I'm, just trying to understand what sort of when do you start benefiting from that and how are you tracking versus your expectations for single or bio to ramp up and take some of the and I P. S volume.

So I wouldn't be part of the company, we expected it kind of 18 24 months to really start to begin incorporating it into production.

That's that's still our view on track to that.

And again, it's not so much of volume play it's a it's a cost play and you know kind of again pointing to the 6 million pregnancies in the US every year of which only 2 million or served by an up yes.

We think thats an opportunity there to immediately begin generating it kind of volume.

Eventually bring the cost way down and more importantly, the 20 to 30 million pregnancies globally and modernize healthcare systems. We feel will only be served at prices that were seeing it about technology can afford.

Out at 50 plus percent gross margin.

Which is our which is our target for that so that's the.

Timelines still.

Timeline still is as we had anticipated and we're we're excited to.

But as you get that going like I mentioned the teams are integrated the development teams are working now.

I think we're getting even for a relatively young company. We've we've now done a handful of acquisitions, we're getting better and better in integrating them.

It's great to get injection of new talent small focus dedicated teams so far they love they love joining the larger effort.

Things are going well there.

On Cogs Puneet I would just add and that there isn't an interim step between here and getting to the Cogs with singular buyout is we will be bringing in house, the technology and that will be a step down as we indeed, yeah size that technology and bring it into our staff to be able to drive the costs of.

It's down so that currently send out then we'll bring it in house and then we'll move to singular. So that was the plan when we acquired singular and that's still currently our plan.

Okay and on the detect programs can you remind me if that's still a no charge genetic testing program and.

Are you bearing the full sort of cost of that and what's the expectation here longer term terms of volume. Thank you.

Yes, so it so the detect programs.

Our either similar to and or pulling in.

Are there pharma programs.

The payment.

Very pretty dramatically for whether people are paying on a per sample basis or for identifying patients are contacting them or for data data analysis.

And that's no different than detect program.

We.

In the five detect programs we line up however, we you know some of them. We did go out ahead of time, knowing full well who is interested in those patients.

Whereas in the past couple of years, we've we've only done that with with partner in hand, and kind of cash on the barrel that barrel HUD as it were.

Our feeling at this point it was it was enough enough experience there the economics are obvious they're better.

It's great it's great for us and it's like we said, it's a win win win for everybody. The physicians patients diagnosed more more of these individuals than ever.

More rapid pace for pharma partners were more essentially pulling forward clinical trial shortening clinical trials and pulling forward pick your sales and of course for us it's a expansion of the market.

Which as you know we're all we're all about here at every day. So yes. Those are all along and we think it when you when you asked by way of volume contribution as we've said, yes, we do think that the pharma programs will.

Contribute outsize growth compared to the other.

Some of the other testing lines, but we haven't broken most specifically, but yes optimistic about how that'll play out in the in the years to come.

Yes in an answer that one of the prior questions about where we see gross margin going it is important that there is a lag in this and we would expect that we would have higher payments for those programs in the future. So we are able to get those patients onto the our program at this point and then later to find those corporate partners and so.

You will see next year that you will reverse some of those where we're getting lower pace now as you get 123 or four partners in each of those programs to enable you then too.

Pay a sufficient amount to to cover those programs anymore. So that just takes a little time.

Your next question comes online as Kevin Degeeter from Oppenheimer. Your line is open.

Hey, Thanks for taking my question.

Can you just talk a little bit there's been some discussion recently about the roles are nay based testing in.

Calls for variance of unknown significance, just kind of your general thoughts on the topic and kind of more specifically going back to work Youre doing it do you feel you now have the right configuration.

So technology tools to trying to reduce the kind of manual calls component of kind of assessing those those very.

Significance.

Oh thanks.

The fun question. The short answer is yes, we absolutely believe that we are on the cutting edge.

Your interpretation, particularly when it comes of US resolution our portfolio now.

We would argue on on a percentage of patient impacted basis far more important than our in a analysis is the molecular effect.

Predictors and the classified as it we have acquired incorporated with with Juggler, that's already had an impact allowed us to read.

He recalls and buses and clarify some things for some individuals as we mentioned in our pilot program with them and reduced of us rate by 40% across a variety of disease areas. That's a that's a wild improvement and really valuable for our customers.

And on top of all that we also offer the R&D analysis, which yes for some splice sites variance can help.

Resolve the buses that's in a sub percentage.

Some percentage of the cases, but nonetheless customers like it and we are about customers and so.

We offer that as well.

But are you know kind of taking a step back our entire suite of both our core very interpretation pipeline and specifically now our ability to result buses, we think is world class.

And then just one more for me, yes, you did called out a couple of times the impact of an IP ask with regard to.

Contribution the quarters, we think about kind of take this fourth quarter for session volume question from a different perspective, you know would you care to comment on.

The kind of baseline contribution for an IP as currently so maybe we can size out you know the central magnitude of impact of that business has potential as it grows in this fourth quarter and going into 2014, thanks for taking my questions.

Yes, no thanks, Kevin and again and I know.

And satisfactorily for that for the crowd, we we don't break out the specifics of our of our different business line.

With that said our reproductive business.

It has been pretty steady since our acquisitions.

You know more or less 30% or so the business.

We'll bouncing around over time, but roughly and yes. Our NPS launch has enabled us to start growing that more rapidly and so is contributing we are able to pick up will be accounts.

With that said against the backdrop of everything else, whether it'd be the disease testing in cancer cardio neuro pediatric exosome, whether it be carrier screening.

Et cetera, it's it it I would say, it's not worth calling out as a huge swing in our numbers one way or the other at this point in time and that's I think thats. The best view of it we have pointed to and I think we continue to believe that next year reproductive health will be an outsized grower.

Because of.

The sheer numbers involved are offering a broad offering our pricing are you being the easiest on the on the market to work with.

But again breaking out specifics, we're not we're not here at a point, where we can do that.

One thing I would add to it we know that being able to provide one product for a clinician drive utilization of another product what skies utilization of another and not the benefit of having the comprehensive offering so having in NPS operating helps drive care carrier volume that hot.

Helped drive our our cancer volumes, so I think theres, a compounding effect as all of the various products that were offering within that that clinician office.

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

All right. Thanks.

A question. So as you said two if I may so.

Firstly could you talk a little more about the or the or U.S. business or more specifically or any geography, as you're willing to call out areas of strength or weakness Susan.

The current channels, which are kind of.

And traction.

Yeah no.

Happy to.

So I did mention a solid again solid and growing contribution from our O U S business.

We are I think our general sense is we are now at the price point.

Where that.

Broad landscape is now now is now now the time to time has now to address it.

We see in our last capital raising indeed, a use of proceeds specifically to go after that.

We've we've begun hiring you know I wouldn't say major commercial expansion, but modest commercial expansion to having country customer service business support that kind of thing.

And and then also some lift some really kind of basic logistics.

Sure I kind of investment.

In in regions, where it will really help.

Yes, it can take care of that trade cousin tariffs and shipping and whatnot. There are some of these regions, where we're driving a fair amount of volume in the end the patients are paying almost as much in shipping as they are for the testing. So that's that's a kind of job number one is the clean all that up.

And we think just those two things alone will start to give us.

Give us some more volume ex us and then and then frankly will go from there the regions.

For a lot of reasons of history, there and what you're seeing and I was going into Latin America is particularly strong.

Northern Europe .

And of course Middle East and then Asia Asia basically the Asia Pacific Asia Pacific. That's that's those are the regions that were were the strongest in and we'll be focusing mostly on over this next year.

Okay got it and then on the spend side.

Could you provide any further commentary as far as the Archstone restart compensation or you had a terribly piece from the June grow from the quarter answer management Teradata, what would you expect going forward.

Yes, so I think Shelley can kind of getting the details I can offer.

I can offer the color commentary that this is this is like given our trajectory and given how we think the next couple of years are going to go this is likely the beginning of the.

Further divergence of GAAP and GAAP reporting and what what is actually really important for modeling our business and tracking it and so with that said so he can.

Digging into the.

Into the details on that.

So the key was provided today also and there is chart in there that will give you a lot more information on this but as I indicated the acquisition stock based comp for singular was about 18.6 million recall that last quarter that was only about 2.6 million and the reason that went up as we had only closed that offering late.

In June and so we only had a small proportion. So you can use this quarter's 18.6 as being sort of a proxy for what it will be moving forward remember that we had about $90 million that was compensation in that was the acquisition price the earn out price so take that.

That out for 18 to 24.

Months and that gets you sort of that 80 million.

We will be marking to market you know, it's it's a dollar amount that we will be paying them for each of those and it's a probability of success up meeting those milestones as well as some time based and so that's the largest chunk of it that you need to consider and then we did also call out some of the stock based comp for the executive manner.

Smith.

And that was higher in this quarter because it was new and you will continue to see that over the next several quarters also so there is a breakdown in the queue and those are the key acts that key components of it.

Your next question comes from line of up higher got leap from capital market Lab. Your line is open.

Hey, guys. Thanks for taking my question.

Well talk about I want to talk about next year.

And possibly that Andrew I'm going to try anyway, with the new convertible debt offering and after the elimination hired that near we're looking about half a billion dollar on cash $473 million and cash as of September thirtyth.

And given your reach for the continued growth next year.

Well to say that you're going to have sufficient cash to not to do a capital raised for the full quarter.

Without going too far out can we say that there is no planned capital raises through the end of 2020, while hitting accelerated standpoint revenue growth rates and maintaining system by gross margin that or near 50%. Thank you.

Yes. So so I think I think that quick answer that is as per the targets on the like what we're aiming for on the topline the same that the gross margin target. The same we've got a lot of lot of dynamism in momentum in the business that we are we're pushing on.

We since since our last since last fall when you think about the our first debt instrument.

From that point in time on we have operated with the kind of aegis that we are now operating under is that we will always maintain enough cash on the balance sheet to tip. The company to Cashel operating cash flow positive.

If needed and that that as a almost weekly probably more quarterly realistically.

Reflection of the investment.

Thesis the return ours are assumed return on that investment and investors' appetite to continue on one growth profile versus versus another.

So so maybe a long way of saying you know we've we've got all the capital we need we're going to keep it that way.

And to the extent the burn goes one way or the other that will be entirely based on the landscape. The evolution of the evolution of landscape in front of us and where we think the right where we think the right Mark is adapting to continue executing the long term strategy of the business, which we which we are confident.

Is building an immense creating immense value in long term.

So that's that's where I would that's why I would leave leave that one next year cash question.

So do you still maintain the guidance that.

Yes, if you had to turn cash flow positive essentially within a quarter.

Having already disclosed that your cancer business, which is your luggage business is already a profitable.

Yep.

I would.

The short answer is yes, I would say that as we couldnt bigger and bigger I don't think that the timeline for the turn is not quite as short as it used to be.

Yes.

We did do that we did make that move a while back and drop the burn in half and demonstrated we could clearly do it really quickly at this point it would take at least two or three quarters.

With that said, we've got X corners of cash on hand, So we've got a lot of time to sort that out but that generally you are sentiment is exactly how we're how we view it at this point in time.

There are no further questions at this time Miss Laura the Angelo I turn the call back over to you.

Thank you for joining us today, we look forward to catching up in D.C.N. upcoming conferences.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.