Q3 2020 Invitae Corp Earnings Call

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Ladies and gentlemen, thank you for standing by and welcome to <unk> third quarter 2020 financial results Conference call.

At this time all participants are in a listen only mode. After.

After the speaker presentation, there will be a question and answer session.

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I would now like to hand, the conference over to Laura de Angelo. Thank you. Please go ahead.

Thank you operator, and good afternoon, everyone. Thank you for joining us for third quarter 2020 earnings call. Joining us today are Sean George our CEO Shelly Guyer, our CFO, leaving Dechy Archie policy out there Bob Nussbaum, our Chief Medical Officer, Katherine Stueland, our Chief commercial officer.

And Jason Meyers President of our oncology business area as you listen to today's conference call. We encourage you to have our press release available, which includes our financial results as well as metrics and commentary on the quarter.

Before we begin I would 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 and plans to integrate and manage businesses, we acquire market opportunities feature product services our product.

Hi, Blaine and the timing thereof demand for and reimbursement of our services and our investment in our infrastructure and operation. These.

These statements constitute forward looking statements within the meaning of the safe Harbor provisions of the private Securities Litigation Reform Act.

It is difficult to accurately predict demand for services and therefore actual results could differ materially from stated outlook.

Statements on future company performance assume among other things that we don't conclude any additional business acquisitions investments restructurings or legal settlements. We refer you to our most recent 10-Q in particular to the section titled risk factors for additional information on factors that could cause actual results to differ materially from.

My current expectation. These forward looking statements speak only as the date thereof.

To supplement our consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States or GAAP, we monitor and consider several non-GAAP measures.

In this period. These non-GAAP measures include cost of revenue gross profit operating expense, including research and development, selling and marketing and general and administrative other income expense net as well as net loss and net loss per share and cash burn. We encourage you to review our GAAP to now.

Non-GAAP reconciliations which are available in the press release and in the earnings slide deck with that I will turn the call over to Sean.

It's been a busy and exciting few months, both NBC and around the industry at large while there is a lot to discuss if we leave you with one key take away from the call today, it would be to Orient or reorient, everyone to our mission the long game at any day.

At about 11% of Bill volume overall.

Overall, our volume product offering and mix continue the trend back toward or exceed pretty covid levels.

Or wherever we continue to urge some caution on expectations for growth over the next few quarters as we entered the flu season, and COVID-19 hotspots emerge that could lead to regional shut down or.

Accession to billable volume spread was 8% for the quarter higher than our historical 4% in the third quarter the impacts from COVID-19 for the primary driver of this change.

We generated 68 $7 million of revenue this quarter compared to $56 5 million in the third quarter of 2019, representing I nearly 22% increase.

The third quarter over 68% of our revenue came from third party payers and nearly 32% from farmer partners in patient the.

The continued high percentage from third party payers is largely due to higher Medicare payments and steady improvement in commercials third party payer performance, particularly with our hereditary cancer and N I P F.

After seeing consecutive quarters of declining a S. P. We realized nasty of $429 this quarter up from $399 and the second quarter of 2020.

Increases primarily driven by product next changes, which bounce back to pre covid levels with cancer and C. N P. Cardio narrow P. Returning a higher proportions of our overall business.

We saw increases in third party payer asp's driven by R. N I T S offering after bringing the test and how in July.

<unk> setting these increases was a shift in our peer mix from third party to institutional and patient pairs with lower S. P. B.

The addition of Archer should increase the Isps as we move into 2021.

One final note the rising is peace over time due to pay your progress represent a notable source of leverage are many investments in our platform and willingness to provide early access to patients ahead of the pair adoption curve is bearing fruit.

As we've noted in prior quarters, the pace of M&A activity and other factors make it easier to understand our business and financials by providing non-GAAP metrics.

Most line items on the P&L are affected by acquisition related charges, primarily acquisition related stock-based comp amortization of acquired intangible assets and fair value adjustments to acquisition related liabilities too.

To allow for the comparison of the two sets of numbers, we urge investors to review the detailed reconciliation to non-GAAP end tables included in today's press release and at the back of the flight deck for the remainder of the call. We will refer non-GAAP numbers, including cash burn, which we believe provide a more relevant depiction of the opera.

Waiting business dynamics.

Are non-GAAP cost per sample was $247 in the third quarter of 2020 down significantly from the second quarter.

Per sample cost was impacted by next changes as well as some remaining excess capacity early in the quarter and higher stock based compensation charges.

We're not acquisition related.

Now we have a reproductive health test in house that had previously been performed via send out we expect their cogs to benefit moving forward.

Non-GAAP gross profit was $26.8 million, which translates to a gross margin of 39% in the third quarter of 20th 20, excluding amortization of intangibles. The gross profit improved dramatically compared to last quarter due to increased volume battery S P and reduced Cogs.

We expect to trend back to our target, 50% gross margin as we exit the year.

Moving the operating expense, we continue to invest in our business while simultaneously moderating are operating spend.

Non-GAAP operating expense, which it excludes cost of revenue for the third quarter with $102 $6 million as compared to $105.7 million in the second quarter.

As we highlighted on our last earnings call to navigate the new Covid reality, we took action to significantly scaled back our expenditures, which included both a reduction in force and a salary decrease for remaining employees.

Thought opex decrease due to this and the quarter a significant decrease in opex quarter to quarter was obscured by a $6.8 million stock based compensation charge due to a special equity grant to show remaining employees, our appreciation of their hardworking commitment as of Covid impact came into focus.

Eliminating this we actually saw an appreciable decrease in our opex in the third quarter of nearly $10 million.

We intend to continue to make prudent investments and projects programs in companies that further our business strategy admission such as the closing of the Archer transaction just after the quarter clothes.

Cash burn was $64.9 million in the third quarter, which included approximately $7.1 million acquisition cost paid in the quarter Moon.

Moving to our cash position cash cash equivalents restricted cash and marketable securities total $368 million is September 30th compared to $428 $5 million at June 30th.

When considering our cash position I note that the Archer D X transaction close early in the fourth quarter <unk>.

Concurrent with the clothing, we consummated of 275 million dollar pipe and 135 million dollar credit facility. After subtracting the $325 million in cash to close the Archer deal, we added $85 million without deducting the cost of the deal in cash, thereby entering the fourth quarter.

With an enhanced cash position.

Cost reduction initiatives, we implemented earlier in the year resulted in a reduction in the third quarter burn and those changes will yield continued savings as we exit Dear however in the fourth quarter, we expect more significant fees and costs related to closing the archer transaction and integrating the two companies.

On a housekeeping note will be providing our traditional metrics for the remainder of ear, but with the complexity and interrelated elements of our platform, we will be working to streamline and refine some of those reporting metrics.

For example, we will be moving to a single volume detrick versus providing accession and available as we move into 2021. These changes will be intended to provide a simpler line of sight to the key factors driving the overall health of the business in a long term success of our model.

Now turn the call back over to Sean to discuss additional strategic activities and progress.

Thank you Shelley I'd like to take some time to highlight our vision and goals and then D day and why they are more important and attainable than ever. The reason notable acquisitions undertaken by industry, leading companies like Illumina, an exact sciences underscore the notion that the future of molecular medicine will not be dictated by any single technology test or segment of the Mark.

On the standard it will need to be delivered in a broad systemic and acceptable fashion.

With both centralized and distributed capabilities onboard Enrique is now uniquely positioned to provide flexibility and medium customers.

Whatever their specialty and wherever they choose to practice and serve their community.

The addition of archers differentiated solution provides optionality to the comprehensive menu.

From liquid and tissue biopsies.

Early or late stage cancers, and somatic and Germline testing.

We estimate the comprehensive menu and address a $45 billion global market opportunity.

More importantly that market will expand our capabilities expand to inform the treatment of all cancers at all stages in any location around the globe.

It is truly an exciting time to be involved in molecular medicine.

And I'm thrilled to be leading the oncology team and effort to make genetic testing and monitoring the everyday standard for every cancer patient.

Which is a perfect bleed into discuss the recent research and publication that are making ways throughout the oncology community.

So with that I'll hand, the call over to Bob.

Bob is the person directly responsible for some of that research and he can best fill you in on study finding and as significant as we look forward to the continued importance of genomics and main Street Asia.

Thank you Jason we're delighted to have you on the detailed team.

I'd like to briefly touch on three recently published studies that underscore that genetic information is rapidly becoming standard of care in cancer patients.

First.

We published data that address the importance of both Germline and somatic testing in oncology.

Study performed in collaboration with researchers from Stanford and the University of California, San Francisco showed tumor only genetic sequencing of cancer patients. Mrs. Medically actionable genetic variants that germline genetic tests, we like that.

Suggesting both tumor and Germline testing are required to provide the most complete and actionable genetic profiling to inform cancer treatment.

The number of patients in whom a germline variables missed by somatic testing has second cancers that patients and their providers would have known about.

And might have prevented or anticipated if the germline testing has been done at the same time as their primary tumor somatic test.

It is clear that both types of testing are needed to conduct truly personalized medicine and the good news is that this information so important the patient care is becoming more accessible every day.

Secondly, the new study of 4000 men with prostate cancer found one in 10 harbors genetic germline changes linked to hereditary cancer syndrome.

According to the patients with positive finding the criteria for changes in their cancer management or treated based on their genetic client.

It's clear that we must continue to explore how we can make genetic information more available and accessible for men with prostate cancer.

Increased genetic testing of men, who are keenly benefits the newly defined themselves battling prostate cancer as well as informing your relative including both two sons and daughters of significant health risk.

I should note.

But we also began patient enrollment in a national study to explore the role of current guideline in either ensuring or interfering with prostate cancer patients receiving testing that can identify clinically relevant genetic variance that can inform prognosis and support access to targeted.

Yeah.

And just last week, a landmark study caused by our team and researchers in the Mayo Clinic was published that evaluated universal testing among all patients with solid cancer.

World showed one intake had inherited cancer related gene Barry.

Assessment <unk> script accelerated our entry into pharmacogenetics.

With general actually added pdx testing capabilities into the script, we added a clinical decision support tool focused on projects results in patient impact.

Together, they enable us to offer pharmacogenetics with a software infrastructure to further expand it to us.

Next we are well armed and integrating deployed and interpretation ended minimum into detail.

As I recall moon as AI software, which further advances are very interpretation of reporting platform and ability to quickly and efficiently turn large amounts of data and phenotypic information into actionable results.

One notable area of growth. This opens up is the ability to address the needs of patients with autism developmental delay and intellectual disability, who are underserved worldwide.

Clear genetics, which we acquired a year ago has has been fully integrated and contributes both service and platform enhancements.

Progress toward becoming a leader in DSG efforts shall.

Chili's leadership has been transformational for the company, helping us scale, our team raise capital and navigate the acquisitions of nine companies all of which has helped drive our growth and improve our ability to meet the needs of patients who depend on us.

She has been an amazing steward of her role for the company and I'm looking forward to continuing to benefit from her leadership and she does the same for our SG efforts, which is now rapidly growing in importance for us here at Nvidia, our investors and society at large.

The transition will be a thoughtful one commencing with a formal search during what Shelly will continue to serve as CFO and we'll work with the team through the filing of the 10-K and some period of time thereafter to ensure a seamless transition.

They should medicine game and <unk> as it were and so.

Really need the patient where theyre at weathered application in a trial or a patient being treated.

With either letting the testing happen locally or let the about the testing happen in a centralized facility.

Yes.

Thanks, Thanks for that guys and I said in my in my lead into the questions welcome Jason and congrats to join the team and bringing so much to the DJ family kind of kind of building off of what you guys. Both just described.

At the end you talked a bit about your really germ line inherited risk and you know it's notable that there does seem to be a pickup in focus amongst our pharma on the role of germ line in cancer in a way it kind of seems like a little bit of a back to future back to the future development in that sense I.

I guess I'm just wondering specific to the prostate program. What comes next how big a study or program are you are you contemplating and anything you could share on on timelines and for that matter, whether it makes sense to take on.

Kind of similar initiatives in other cancers would be of interest.

So I think the.

Short answer is we.

We continue working with.

Two fold increase.

Once we open this program up so I just want to emphasize instead of underlying withdrawn just set.

The other is that.

This research is important for patient care, but it has another use and that uses the change the minds of clinical.

Clinical guidelines right.

There's as well as third party pairs, they need data and so one of the areas that we're gonna be getting into it's gonna be more emphasis working with outside collaborators.

Two two health outcomes and health Economics research.

Alright. Thank you. Thank you Bob.

Super interesting maybe the last one is just.

I I don't know.

Maybe early to ask this and I I know you just closed on Archer and it's it's.

Yeah. So.

Yeah.

There's not really a short answer that but.

But it is possible.

We then.

Cause it in for some period of time now.

Early early.

I think really early considering that any of the company we began putting in place the.

[noise] process and infrastructure to both run enacted M&A screening program and then work work with partners.

Pull the deals and the first one and then execute on them.

We've now I guess it was over over 10 companies that we've acquired.

I mean, obviously it.

Yeah, a high growth machine and there's always.

Something to fix or improve but I'd say, we're we're reasonably comfortable.

You can continue doing this and you know get than that.

Given the market opportunity here you are talking.

Just just in the stuff that we are commercializing today, it's it's more than 100 billion dollar market across any given patient stages in life.

With a lot more of a calm.

The data kind of like Bob which is represented the interest from farmer, which which kind of Jason covered and certainly we've seen increase.

We just kind of don't really see that that that opportunity contracting.

Contracting at all in fact, it just seems to be growing exponentially. So I think I think you can expect it to keep it keep keep the pacing and keep going really disciplined about what moves we make the use of capital in the investment when we do have a relatively short.

But barring that I think given the opportunity and.

And the numbers involved.

Send that we intend to stay at it.

And that's kind of generally what you can expect from us.

Got it okay. Thanks game.

At work between now and January to sort that out.

But I would say that very well could be the number and we're I think we're looking at.

Looking at what upside growth looks like.

Like in what the investment to get there needs to be and we'll get back to writing January on that.

The burnt so we are seeing some of the benefits for what we did when Covid hit I think the question is what are the good investments to.

He covid levels can you just maybe give some more color where those you know where you saw the biggest you know.

Volume transfer in the in the corner and then how does that training now without you have some visibility unfortunately.

Thanks.

I need it to drive Gee as a method for being able to improve our commercial leverage over time.

So across all area, both U S and international and aided by jazz, though.

Okay. Thank you.

Our next question is from who need soda with S. B C. We like to hear mine is open.

Hey, guys. Good afternoon. This is actually worse on for.

Interest volume trajectory the answer is no.

Kind of none.

Non invasive prenatal screening has been kind of been in play for now many years I think that the.

With regard to the potential impact on volume, but with regard to asps.

If I'm not mistaken I believe we have been running.

On our current and IP EPS volume about half average risk and half.

Heightened risk.

And and so the women with in the average risk category to the extent that they have been ordering from us have been paying patient pay so.

With improved coverage.

We would expect to see EPS.

Yeah. Its draft stratified blood has been communicated to be submitted this year and that is on track.

It is very attractive pricing for.

Up in Italy.

[laughter] chalets thing I want to.

The 930 numbers have not yet been issued we will be filing an 8-K with the pro forma that will include those 930 number. So I think it's premature for us to speak in a lot of detail, but Jason maybe you can give a general tenor of how the third quarter went.

For Archer.

I think you could do we can say we've had.

And you said that both in a new afton up or do you Oh across you know Bob customers or customers using that technology in their lab as well as continued progress with pharma did include you know clinical trial, I say, where companion diagnostic development.

As well as some technical feasibility and translational work.

In recruitment business.

That yeah that farmers stuff was a laggard in terms of the recovery the V shaped recovery that we've shown.

With that said with September like we mentioned September of as a.

Ah record all time record month so.

The program by program state by state country by country kind of Covid impact is getting it's getting hard to now see.

The noise I'll, just I'll just be honest with you even with some like recent new shutdowns, it's not as obvious anymore someplace with some of our clients have put in the measures and can react to it now.

Think our farmer programs included and so while while we know that there's gotta be some kind of impact coming here as we kind of go through flu season now with Covid.

It does look to us like it's gonna be muted compared to the last one and it's like I said against the bed against the backdrop of the higher growth I'll be honest, it's harder to tell for sure, but we didn't that trend you mentioned, we did we did experience as well.

And I think we'll we'll still see recovery.

Into it just hard to say what the Covid outlook.

Look is.

And on a different note.

Can we talk a little bit hot in the past about opportunities to go directly to large.

Okay, and how much of the business right now is exposed to reproductive testing and are there any mitigating factors that could offset the drop in the birth rate.

Yeah, So so I think that.

We've kind of seen that we've seen those those reports.

I would say are relatively new player in the reproductive health space.

And are kind of market share taking I think is going to is going to kind of.

It would be hard to see that birthrate drop affect our business.

Given kind of it but the sure take we've been experiencing and also.

Sure sure creation right again in the U S.

6 million pregnancy.

Maybe two little over 2 million get get served by any one of the current leaders and reproductive health progenitor Natera Council, which now part of myriad.

There's just so many more women out there that aren't getting this information that I E. R. General sense is even Ah.

One or two year drop in birth rate is going to get getting it washed out by the increase utilization of these technologies.

Okay. So thank you very much.

Can I just because it was doctor Spock coaches add one more thing Smith.

Most of our testing and read the Texas spaces occurring in the first trimester. So the first one is probably not as important as the pregnancy rate.

Yeah cause it's early in the pregnancy testing is being done. So if there was a drop off in the conception of pregnancy rate earlier in the Covid Pandemics Uhm I'm I, what I see is that starting to recover.

Okay. That's helpful. Thank you very much.

Sure thing.

Our next question is from over here Gottlieb with capital market Laboratory your line or something.

Hey, guys. Thanks for taking a question congrats Shelley that's very cool.

I have two questions first is given the distributed capabilities of Archer now.

[noise] openness.

Materially larger addressable market or let's call. It a larger addressable customer asking for internationally. So do you see that international Germline business growing as soon as Q4, so essentially right now and maybe if you could give a little color on the margin there too.

The Chinese there is no we're as.

As much as [laughter] as much as we'd love to dump Moore.

More on that.

We're gonna take it and turn focusing first on therapy selection keyed into cancer monitoring up and running and fully globally commercialized, both distributed and and centralized.

So it's not that the rest of our business.

And benefiting.

From that addition to our platform of the day.

Distributed kidding and pipeline and cloud.

<unk> interpretation of reporting is going to kind of start getting developed and rolled out.

Starting next year all throughout the year the year after.

And it's not it's not for lack of excitement it just kind of priorities.

Things first but that is definitely definitely something that we will.

We will be investing in and pushing on and I think it's something that we're.

We're really excited about there's much of the world for one reason or another will be running their own genetic globally.

I have encouraged people and I I don't mind, putting unplugging again, the UK had the NHS just put out a few weeks ago. A report about what that country's health system view of genetics and a central role in health care is going to look like I suspect, it's going to serve as a model globally.

I mean, I don't think it's unfair to say, it's essentially an RFP for the in VJ business model Soup-to-nuts and that's a great example, in NHS public health what the lever.

Public health laboratories.

There'll be running a duffen and that's where the archer capabilities on that there is to.

Get done the technology and IP is amazing and then there's an awful lot of really great no how how to package. These incredibly complex assays up and basically ship around the globe in one single room temperature box. So we're excited about that but it is going to it is kind of second part.

Primary therapy, such and then cancel modern game.

Okay. Thanks for that and then my second question is a little broader uhm I'm just trying to understand the cash burn direction in your view essentially covid and the impact on N D T.

The reacting to return of coated.

But I honestly I think honestly over its broader trends in the business you are seeing the world react to some of our moves in in the game and it's.

The Tam is obvious the players or after it all position and we intend to stay there and I think that the mindset people should be considering as we roll around here.

We're going to be sure about it right you've got few things to make sure. We're sure of what the cobot impact is.

The Archer transaction as good the Archer integration off running a good understanding of what our investment there is going to be.

And then the broader market, but like I said I think we're kind of hold all three of those things.

Time points in the year, our leading to us.

I think we're now more thinking about the Tam and our growth into it as the primary objective.

Okay. Thanks, that's great color I appreciate it.

Okay. Thanks.

Ladies and gentlemen, this concludes the Q next session hands today's conference call. Thank.

Thank you for your participation and at this time you may now disconnect.

Okay.

Yeah.

Oh.

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Right.

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