Invitae Corporation (NYSE:NVTA) Morgan Stanley 20th Annual Global Healthcare Conference Call September 13, 2022 8:00 AM ET
Company Participants
Ken Knight – Chief Executive Officer
Conference Call Participants
Tejas Savant – Morgan Stanley
Tejas Savant
Hey, everyone. Good morning. My name is Tejas Savant. And I am the life science tools and diagnostics analyst here at Morgan Stanley. It’s my pleasure to host Ken Knight, CEO of Invitae here. And again, thanks for joining us. Before we get started, I just have to read the research disclosures. For important disclosures, please see the Morgan Stanley website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your sales rep. So with that, Ken thanks again for joining us.
Ken Knight
Thank you.
Question-and-Answer Session
Q – Tejas Savant
Maybe just to set the stage, I mean, obviously, it’s been – it’s been a very eventful year for Invitae. Can you talk about sort of your key priorities heading into year end and into ‘23 after the restructuring? And what are you most looking forward to over the next 12 months?
Ken Knight
That’s quite a bit. And thank you Tejas for having us here. First of all, it’s great to be back in New York. I lived across the Holland Tunnel in New Jersey for about a decade, always exciting to come back into the city. And it’s glad that we can actually do some things back in person again. So first of all, glad to be here. As I think about our – my immediate priorities and the priorities of our company, we laid those out in our realignment announcement back in July, first of all increasing our cash runway that was important for us. As we looked at the availability of capital, we kind of recognized that in ensuring that we had sufficiency in our liquidity through the end of 2024 that was super important for us.
Now, you don’t do that by just making cost-cutting initiatives, it really required us to realign the way we think about our business. And as we did that we are navigating towards really becoming a cash flow positive company and doing that in a manner that allows us to still continue to grow the business. And then the third priority for us is really taking care of the hearts and minds of the people of Invitae. These actions are not small by any means. We have talked about upwards of 1000 people being impacted by our actions in July. And so taking care of the hearts and minds of our folks, showing some wins that we actually are on a path toward becoming a healthier company is important for us and taking care of the hearts and minds of our patients and clients. And so those are my priorities really for the short-term and you talked about over the next 12 months, I’d say the next thing for us is really, as we look at our capital structure and some refinancing issues that we have on the horizon, we really have to take care of that.
Tejas Savant
Got it. That’s actually a really good overview. Maybe we will dig in a little bit into the restructuring, as you and Roxi sort of looked at the portfolio, how did you decide which businesses stay and which businesses need to go? And what gives you the confidence that what you have done so far is enough?
Ken Knight
Yes. Interestingly enough, Roxi and I started looking at the kind of the overall health of our company really about a year ago. And so as we were looking in Q3 of 2021, we started recognizing that we had to take some actions and kind of fix ourselves from the inside out in terms of improving our cash consumption and the efficiency of our utilization of capital. And we started at that point really focusing on improving and expanding our gross margins. And if you look back over the last four quarters, you see a continual steady improvement in gross margin expansion. Those efforts started to inform as we started to look at the clarity about where the business was and the time horizon it would take to kind of move a more productive flow of capital. They started to inform things for us at that point honestly. And then as we got into Q1 of this year, we recognized that our efforts needed to be accelerated and we probably needed to go farther. And so we looked at it really kind of holistically first of all, what are the businesses that really support our long-term strategy? We – our mission is not changed. We are here to bring genetic information and mainstream medicine really for billions of people around the world. That’s when we will feel like we have accomplished our mission. And so certain clinical areas support that mission more than others. And so we looked at what are the strategic fits to our long-term vision? We looked at also the likelihood of us being able to improve the business from a standpoint of certain clinical areas, others – certain areas were farther along on the journey and others where we are not as close and really becomes a bandwidth in all of us, all of our teammates. We are limited by how much we can do. I mean, I think sometimes we all believe we are supermen and superwomen. But the reality is that we can, we are limited on what we can do. So we had to choose what are going to be the things that we can do the best.
And so as we started looking at the strategic alignment, long-term, the ability for us to improve those parts of our business, things started rising to the top, which was great. The more difficult decision became the things that were falling to the bottom and deciding which of those items we were going to continue with and which are those we would not and we have spent a thorough amount of time on this realignment plan. And we feel really good about it. We have accomplished the ability to extend our cash runway. We are on a path to getting cash flow positive and we still have the provisions in our plan to continue to grow the company all the while by taking care of our patients and our customers.
Tejas Savant
And in terms of the specifics of the turnaround itself, Ken, can you just give us an update on where you are on the OpEx front, on the geographic sort of exit front as well as the divestiture discussions for offshore and the IVF business?
Ken Knight
Yes. So summarily, we are on track with our cost out plan. In mid-July, we notified all of our employees, those who were impacted both positively and negatively by the realignment and that will continue to keep going back to people in this. This is hard work. And I am so appreciative of the commitment and dedication of the Invishians [ph] around the world who continue to support our mission. But we are on track. We have got our plans in place and we are executing to our plans in terms of costs – getting cost out of the business. We are having discussions with interested parties and we have made it clear that we are going to divest or wind down our consolidated distributed kit business. And so we are having discussions, not much to talk about at this point until we get something ready to talk about. And as we look at the overall plan, we feel good about our plan we feel we have the right plan. I think one of your questions was how do we know we went far enough? Well, you never really do know. But one thing I do know is that we aren’t going to cost cut ourselves to success. And I also know that we were not going to just kind of grow to success without having some disciplined approach to our spending. And so we feel good about our plan. It satisfies the elements of what we were trying to get to. Now it’s about executing it, so more to come.
Tejas Savant
Got it. And any updated color on customer conversations since you have announced the turnaround. Are there any markets where you are seeing sort of elevated levels of disruption or the possibility of share loss to competition?
Ken Knight
I wouldn’t say elevated, no. What’s been interesting is that in some of the markets where we have decided to exit, we have actually had clients relate to us that number one, they are disappointed in the decision, but they understand. They wish that there was a path forward for us to continue to support them even though we are kind of commercially exiting certain markets. And so we are becoming very nimble in terms of making sure if there is a path to continue to support those clients, we will be interested in reasonable in trying to find a path to do so, because we had spend some time ahead of time really on this plan. And I think we did a really thorough job. We had a really strong communication to our clients and customers upfront as to what we were doing and how it was going to impact them, now there is certain clinical areas like our oncology business that we really have not backed off – backed away from whatsoever. And so we understand that there is probably noise from our competition about what’s happening with Invitae. But we have had already solid communications with our clients and customers. And we are pretty pleased right now with the reaction. I mean, this is like I said, it’s a tough situation, but we are pretty pleased with the reaction from our clients and in terms of understanding, wanting to continue to work with us and trying to navigate a path to do so if there were any impact to them at all.
Tejas Savant
Got it. Again, in terms of essentially, what remains in Invitae, which is you have got germline testing and reproductive health and sort of a fledgling somatic testing business that you hope to grow on the clinical side? What do you view as your sort of key competitive mode on a go forward basis versus some of your peers, like a Sema4 or Myriad or some of these other companies, because these are increasingly competitive settings?
Ken Knight
Yes, no doubt. I am reminded that competition is actually a good thing. It’s a great thing for patients and clients and customers to have competition. So, firstly I am not intimidated nor overly consumed with the fact that there is competition. However, your point about the competitive mode, when I think about the true strength of our company is that, our broad portfolio is a unique proposition for us. We are in fact strong and a leader in germline testing in our oncology space. We obviously have a growing – a rapidly growing women’s health business in our NIPS and carrier products or have been just outstanding for us this year and last year and they continue to grow. And then we have a rare disease part of our company that we are really starting to get off the ground. And as we tie it all together, so first of all, our broad portfolio we think is gives us a competitive advantage. And then as we start to think about our digital tools that we are putting in place to help with decision support and aggregation of testing and how we can present ourselves from an ordering and processing standpoint, the ability for us to navigate through multiple clinical areas and tie it all together for clinicians around the world is strong for us and then as we tie – we bring in our patient data network that we are really starting to get excited about the combination of our genetic testing, our digital tools that we are putting in place that are kind of bridging between the healthcare provider network and potentially other growth opportunities that we are pursuing and then finally pulling together the patient data network. That’s a competitive mode that’s going to be very difficult to deal with. We have to execute it all.
Tejas Savant
Got it. Well, that’s actually a perfect segue into my next question. I mean, over the years Invitae has generated a very significant amount of data driven by the scale of your business. And so, talk to us about how do you envision sort of monetizing that data? Is that something which we will see you do more aggressively over the next couple of years here? And I think you recently announced a partnership with Simons Searchlight as well for neuro disorders. So, any color on that would be helpful as well?
Ken Knight
Yes, I think the Simons Searchlight as well as the practice announcement that they recently released that demonstrated how our combination of the genotypical data that we have. We have more than just about anybody else. So, the kind of way we view it is that genetic data is more valuable when shared. We also view that genetic data combined with phenotypic data is more valuable when combined. And so as we look at our approach to kind of the data play, it’s really about being able to provide especially early on our pharma partners with a more efficient use of patients for trials, a more efficient use of information for validation and in bringing their medicines to the marketplace. We want to become the most effective partner for them. And we expect that we will be able to extract value for us as a result of that. And so it’s starting to show, I mean, the practice and is starting to show that combining those two unique pieces of information is taking time out of the development process and it’s also resulting in better outcomes. And so that’s how we see it unfolding.
Tejas Savant
Got it. And what does the restructuring mean for your cancer screening efforts that you were hoping to invest in? I mean, that’s obviously a very large TAM, it was something that Shawn had spoken about in this as an internal R&D project and then with the possibility of looking at external partnerships etcetera as well. Where does that stand in the pecking order today of things you want to focus on over the next 12 months?
Ken Knight
I’d say I wasn’t on the pecking list prior. And so it’s not on the pecking list now. It doesn’t mean that we won’t eventually get to that. One of the great things about going through the process we did is it really forced us to be intentional about prioritization and focus. And one of the things that we have heard on an often basis from our folks is that, hey, we may have been trying to do too many things. And so find a narrow end somewhat and focus is what we have done. So that was not on our list before. And it’s still something we might do in the future, but it’s not currently in the cards for us.
Tejas Savant
Got it. And any updates on the PCM side of things, I mean, you are in early stages of the launcher, but it’s clearly an interesting market reimbursement is opening up that pretty rapidly as well. How do you see that playing out over the next 12 to 18 months?
Ken Knight
Yes, reimbursements not open up as rapidly as I would like. But I kind of maybe have a different sense of time. And I think time is the most underappreciated asset that we have. And I try not to waste time, but PCM is doing well for us. We have got some studies that are going to be hopefully published in Q4 this year that continue to confirm the utility of our MRD product called PCM, personalized cancer monitoring. We love our technology. Our AMP technology is different than some of the approaches that others are taking. We are tumor specific. And we believe we have sensitivity and specificity capabilities that are going to be market leaders. And we are working hard right now on our workflows on behalf of our clinicians to really make the utility and the adoption of this technology or this approach to clinical care to continue to grow and grow and grow. We see it as a growing piece of the oncology puzzle. And this is one where when you talked about the competitive mode, I mean, we have the – we will have the combination of genetic germline testing, somatic therapy selection and therapy guidance as well as our MRD product for monitoring of the progression and successful elimination of cancer in the patients. So we will have that unique capability throughout the entire spectrum of oncology.
Tejas Savant
Got it. And that sort of leads me to my next question, Ken, on just within the outer context, how do you envision sort of structuring this deal? I mean, you just mentioned the AMP chemistry presumably you want to keep leveraging it even after the divestiture. So is this a situation where we should think of licensing the IP as a path forward for you there?
Ken Knight
Yes. I mean, I am not going to get into a lot of details about how the potential wind down divestiture of the kitted business will unfold. Clearly, we are going to continue the PCM and the technology in the IP for that is core to our approach and finding an ability to divest our distributed kits business requires a partnership that acknowledges that fact.
Tejas Savant
Got it. Fair enough. You talked about not being able to sort of cut your way to growth. So as you as you think about your capital allocation priorities over the next 12 months, how are you thinking about internal R&D partnerships, M&A, I mean, some of these markets, reproductive health or even germline testing, it’s sales hustle that kind of like gets you over the finish line right versus sort of tremendous product differentiation across the different players in the market. I mean, everyone says that product is best, but at the end of the day, if you talk to docs, you talk to patients, the marketing aspect and the sales aspect are certainly more dominant. So, given the risks that you went through, how is employee morale and the commercial functions within the organization and how do you envision sort of – is there a sort of a SWOT team in-house for, to make sure that interesting, important initiatives, projects, investments don’t die on the vine as you look to dig down your cash burn and focus on profitability, etcetera?
Ken Knight
Yes, I mean, first of all, our commercial team has been really strong throughout this entire process. What’s interesting about 2022 is actually – we have actually expanded our commercial teams into some channels that we were not prior previously kind of operating in. So there has been expansion in our commercial team. Now, we expect that expansion yields return and we are not apologetic about that. But at the same time, we have invested in our commercial team. And so there are spaces where we are actually growing, and there are spaces where we decided to contract. And I will give you an example. I mean we talked about that we were prior to our realignment, probably selling in about 120 countries around the world. Well, that number is significantly lower now. And so, yes, there is an impact on our sales and marketing team in those regions and territories where we are no longer going to be selling. But there are places where we are in, we are in. And I didn’t talk much about our pharmacogenomics product, that’s another part of our portfolio that we believe gives us a unique competitive advantage. If you think about the life of a patient and the different things that a patient in rare disease or oncology is going through, one of the things is that they have oftentimes a lot of prescription medication and so we want to see how that can get unlocked, and we have invested commercial teams to go do that. And so, commercially, it’s never, both never have as many people as they want. But I can assure you that it’s been very well thought out in terms of continuing to go after the commercial marketplace. Now, the interesting thing about, what you talk about is that you are right, the traditional approach to getting volume and revenue in this space has been boots on the ground, and you got to go after the hearts and minds of the clinicians and the genetic counselors, etcetera. We still have that in our DNA. But we are also exploring other ways to grow the business in terms of other channels. And that’s where our digital play is looking to grow our business in an untraditional manner. And we are experimenting with that. And that’s where when I think about, where we are putting capital. We are putting capital into things that we know we can win. And we are putting capital in those things we want to experiment and try to find new paths. And so when we built that plan, we built the plan that allowed us to do those two things in tandem. We didn’t cut to the point where we are just going to be a stagnant entity. We are still experimenting and innovating. But we are doing it in a responsible way. It almost seems like actually more on experimenting in a responsible way. But we are trying to figure out how to do that.
Tejas Savant
Got it. I have to ask you a few sort of near-term questions, you are going to I mean, in terms of the macro environment on the margin, you are getting a little bit worse, growing sort of concerns around a recession, etcetera. Are you still comfortable with your back half guide? I think it was sort of flattish growth versus the first half, is that still the right framework to use?
Ken Knight
Yes. There is still no change there.
Tejas Savant
Got it. And as we think about that 15% to 25% long-term growth target? Can you just share some color on what’s the build up to that 15% to 25%? And what are the underlying sort of like market growth versus price versus share assumptions?
Ken Knight
Yes. I mean I think some of the assumptions that go into that is we think about our oncology business, somewhere between 10%, maybe up to 20% depending on the clinical area of the germline side.
Tejas Savant
Yes. In the germline, okay.
Ken Knight
Of patients who are – there is guidelines in place for, there is support for germline testing, only 10% to 20% of the patients in those arenas are actually getting tested. The pie will continue to get bigger as adoption continues to grow. And that’s – so that’s one thing. Obviously, with our move into somatic and to MRD, we are opening up a new source of revenue there. Our women’s health business has been growing wonderfully over the last couple of years. We have no reason to expect that we cannot continue to grow that business. And then as I have talked about before, with our data play, we are opening up new growth channels. And so we have got enough places where we don’t have to hit homeruns in everything. We have enough places where we have a view of success that we feel pretty, pretty solid on our 15% to 25% growth even though we know we are putting some disruption in our own marketplace right now, because of our realignment. And so that’s why we have talked about the some of the exiting businesses are going to have an impact by the end of this year, and then the core of remaining businesses will be growing at a 15% to 25% pace, and till we know better.
Tejas Savant
Got it. On the COGS side of things, I mean obviously sequencing COGS are poised to come down very meaningfully. That’s I mean first of all, how much is sequencing as a percent of your COGS, probably 15% to 20% is the right zip code? Okay. Alright. And if so, then what are the other sort of levers you are focused on in terms of just reducing your COGS and improving gross margins?
Ken Knight
Yes. I mean it’s, when you think about kind of the life of the order, it starts from supply chain and relative to our kits and logistics. We are working hard on that part of the business, kind of putting some automation into our varied interpretation aspects. One of the advantages of doing all the sequencing that we have done is that we have probably more insight in the variance than just about anybody else. And so automating our varied interpretation is a big part of what we are trying to do. So, as I have said before, when you look at the fact that our gross margins have been steadily improving over the last four quarters or so, that doesn’t happen by accident by the way. And there has been a lot of kind of discovery of our own selves is where we have opportunities, and then teams getting charged up about going out and making an improvement. And so I don’t know maybe you were talking about the PacBio.
Tejas Savant
Sure. That as well as some of the newer players in the market?
Ken Knight
Yes. We are excited about this. We do some experimentation of our own about our own laboratory operation. We have – we are trying to kind of, we imagine how you can go from sample to data, which is where a lot of the COGS occurs. And so we have got some discovery efforts internally of our own. It does require the sequencing piece to get better and we are excited to see what Illumina and PacBio and others can do to try to drive that cost down.
Tejas Savant
Got it. Makes sense? Last question, you are in a minute or so. Can you just share some color on your conversations with Randy, now that he is back as Chairman of the Board. In a sense, I mean he is the guy who laid out that long-term vision for Invitae being, the Amazon of genetic testing when it grows up. Sean sort of ran the company under very different operating circumstances where capital is essentially free. You have been brought in to focus on profitable growth, just walk us through sort of to the extent that you can share, his philosophy, your philosophy, to take Invitae forward.
Ken Knight
First of all, it’s great to have Randy back as our as our Chairperson of our Board. Randy and I had a chance to meet and talk before any of the changes took place. And I found that he and I were more aligned, and not about how we looked at the future of the company. I would also say, look, I wasn’t brought into simply craft a path forward Invitae to become profitable. The thing is, is that generating cash is as important to the ability to have kind of an innovative high growth type of a company, as just about anything else, because you have to put fuel into the tank. And so I think Randy and I are really aligned. And it’s been wonderful to have him come in after being away for a while, and kind of pressure test some of our concepts and some of our strategies. I think he has been great to have that extra set of eyes and for the most part, he has really been aligned with what we are doing and has tweaked it when he needed to. So, it’s been great.
End of Q&A
Tejas Savant
Got it. Great. On that note, we will call it a wrap.
Ken Knight
Thank you very much.
Tejas Savant
Thank you so much. Appreciate the time.
Ken Knight
Thank you.
Tejas Savant
Good to meet you.
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