Invitae Corporation (NYSE:NVTA) Q3 2022 Earnings Conference Call November 8, 2022 4:30 PM ET
Company Participants
Hoki Luk – Investor Relations
Ken Knight – President and Chief Executive Officer
Roxi Wen – Chief Financial Officer
Conference Call Participants
Marta Nazarovets – JPMorgan Chase
Operator
Hello, everyone and thank you for joining the Invitae’s Third Quarter 2022 Financial Results Conference Call. My name is Darius and I will be the operator for today. [Operator Instructions] I now have the pleasure of handing you over to your host, Hoki Luk. Please go ahead. Your line is now open.
Hoki Luk
Thank you, operator and good afternoon everyone. Thank you for joining us for our 2022 third quarter results call. Joining us today are President and CEO, Ken Knight and our CFO, Roxi Wen.
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 vision and business model, the company’s strategic business realignment, future financial and operating results, expectations of future growth and reduction in burn rate, and future products, services, our product pipeline and the timing 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 our services and therefore our actual results could differ materially from our stated outlook.
Statements of future company performance assume, among other things, that we don’t conclude any additional business acquisitions, investment, restructuring 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 our current expectations. These forward-looking statements speak only as of the date hereof.
As you listen to today’s conference call, we encourage you to have our press release available, which includes financial results as well as key growth metrics and commentary on the quarter. 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. We encourage you to review our GAAP to non-GAAP reconciliations which are available in the press release and in the appendix of the earnings slide deck. Both of which you can access by visiting the Investors section of the company’s website at ir.invitae.com. Today, Ken and Roxi will discuss Q3 highlights, the continued execution of our realignment plans, updates within our portfolio, financials and key metrics of the third quarter, including our guidance and concluding the call with Q&A.
With that, I’ll turn the call over to Ken.
Ken Knight
Thank you, Hoki and thank you all for joining us today. Let me start with an overview of our third quarter performance, which shows solid operational execution against our realignment plan. We are proud of our team’s ability to continue to deliver and appreciate their passion for our patients, our mission and our future. We are working hard and are encouraged by the financial and operational results of this quarter.
Revenue for the quarter was $133.5 million, growing almost 17% year-over-year. This was paired with further improvement in our gross margin, with non-GAAP gross margin of 45.9% in the quarter compared to 35.6% in Q3 2021 and 40.1% in Q2 2022. We are well on track to achieve our full year non-GAAP gross margin forecast of 42% to 43%. Additionally, our effort to reshape our cost profile has good momentum and is reflected in the reduction of our non-GAAP operating expenses to roughly 112% of revenues compared to 176% of revenues in Q3 2021 and 146% of revenues in Q2 2022. This will help us to reduce our cash burn to $108 million in the quarter if we exclude one-time non-recurring items compared to $169 million cash burn in Q1 2022.
Lastly, we will provide an update later on how we see cash burn for the full year 2022. The reduction in cash burn to $108 million represents an annualized run-rate reduction of approximately $245 million from Q1 and reinforces that we are on track to deliver the $326 million in cash burn reduction fully realized in 2023. We have made the tough but necessary workforce decision with modifications and reductions pretty much completed as planned. We have also made headway in consolidating our office and lab footprint, including steps to reduce underutilized office space. Regarding the consolidation of our geographic footprint, we have exited all impacted international territories prior to the end of September. In Q3, our ex-U.S. business positively contributed to our improvement in non-GAAP gross margin.
Finally, our portfolio optimization work has begun. And we have taken steps to consolidate our offerings, including exiting our pre-implantation products for IVF and exiting other underperforming products and account. We continue to pursue divestiture or wind down of our distributed kits business, but not much more to report on that at this point. So in summary, we are on track to deliver that $326 million of cash burn reduction.
Now, turning to core product area, in hereditary cancer, the Invitae brand is trusted and valued. We have generated an enormous amount of compelling data. And we have used that data to drive changes in guidelines and coverage policies, resulting in broader clinical adoption and more consistent reimbursement. Our most recent contribution includes an Invitae publication in JAMA, underscoring the American Society of Breast Surgeons Guidelines, recommending that all breast cancer patients receive genetic testing.
We also recently highlighted NCCN’s decision to expand guidelines in CRC advocating for universal germline testing for all colorectal cancer patients past and present. Hereditary cancer testing is still under penetrated, with some estimates as low as 10% to 20% of potential patients being tested. In addition to expanding adoption, we have additional initiatives underway to bring product enhancements and improve workflows for more access and ease of use. We intend to keep the momentum going with the genetic counsel of community and are expanding our call points to non-genetic experts, with a focus on workflows, education and decision support, in pursuit of the very best outcomes for patients.
Our hereditary cancer offering is our highest revenue business with a margin profile well above our corporate average. And our goal is to leverage this to extend offerings into the somatic space. The most recent addition to our somatic offering is our minimal residual disease product we call it, Personalized Cancer Monitoring or PCM, which is powered by our proprietary and technology. As many of you are aware, getting somatic testing incorporated into patient care is a massive opportunity. There are over 18 million cancer survivors in the U.S. and it’s estimated that there are nearly 2 million new cases diagnosed each year. The total addressable market for MRD is $20 billion to $30 billion and it’s still in the early stages.
Widespread clinical use is still on the horizon. And we are actively working through the steps necessary to further facilitate the adoption of our PCM engaging with clinicians, key opinion leaders and payers. Our goal is to continue to demonstrate the utility of PCM to combine it with our other oncology insights and to be positioned to enable cancer treating physicians to advanced precision oncology. In an effort to move cancer into a chronic disease, PCM will provide the speed and accuracy to detect cancer sooner, thus reducing the downstream cost of care and improving patient outcomes. While we are working through reimbursement options and clinical trial results, we are supporting a growing number of top biopharma companies and academic medical centers who are partnering with us via fee-for-service arrangement to conduct research and generate revenue.
Moving on to women’s health, we see guideline expansion recommending screening for all pregnancies, including average risk, has created a meaningful tailwind to us and to this segment with a TAM of over $2 billion. As part of our operational shift, we have exited channels with lower quality revenue as well as implemented better reimbursement practices internationally. In the U.S. changes in our billing policy, improved COGS performance, and better discipline in our contracting have eliminated several underperforming aspects of this business. These factors together have taken our women’s health non-GAAP gross margins from deeply negative to positive and we expect continued improvement into next year. We are sharpening our product positioning, which includes new core and expanded panel and we are also tapping into additional women’s health channels, including OB/GYNs and breast surgeons to expand hereditary cancer testing.
On the rare disease and data side of our business, we are seeing growth opportunities bridging our testing and data collection. Our testing business gives us access to multiple disease populations and hundreds of clinician relationships. We now have an emerging capability to combine genomic and phenotypic data, including real world evidence and are seeing an enthusiastic response to this capability among patients, advocacy groups, researchers and biopharma partners in the rare disease area. We are excited about the growth of our recent partnerships with Praxis. We used our platform as natural history data to support their IND application for the treatment of pediatric epilepsy and with AstraZeneca, who is using our platform for real world data and the research of a rare bile duct cancer.
While currently a small part of our total revenue, our data segment is a high growth, high margin and scalable business and there are more opportunities in our pipeline. By the way, recent findings in JAMA demonstrate that a positive epilepsy genetic diagnosis leads to clinical management changes in approximately half of patients and that change is implemented by clinicians based on genetic testing, improved health outcomes and as many as three quarters of patients. This will help adoption and reimbursement of our epilepsy genetic testing product.
With that, I will turn it over to Roxi for financial highlights of our most recent quarter.
Roxi Wen
Thanks, Ken. In the third quarter of 2022, we generated approximately $134 million of revenue and the breakdown was as follows. Approximately $79 million from oncology, including germline testing, therapy selection and PCM services offered to the pharmaceutical partners representing a 12% growth over the prior year. Approximately, $25 million from our women’s health offerings, including NIPS, Carrier and other reproductive tests, a 19% growth over the prior year, approximately $17 million from a RareDx and other testing products 17% growth over prior year. Data and Patient Network revenue grew 48% over last year. This includes data management, data-as-a-service and the partnership project supported by the citizen patient network.
Non-GAAP gross margin was 45.9%, which is a improvement of over 1,000 basis points from the prior year and 580 basis points from prior quarter. Non-GAAP operating expenses was $150 million or 112% of revenue compared to $200 million or 146% of revenue in the second quarter of 2022 and 176% of revenue in the third quarter of the prior year. As a result of our realignment plan, we also incurred more than $125 million of restructuring and other one-time expenses, including employee separation and benefits, loss on asset disposal and other costs. These items were excluded from our Q3 non-GAAP operating expenses in today’s presentation.
We stated on our first quarter call that we plan to hold our operating expenses at a stable level. And on our July call, we further committed to reduce that figure by significant amount going forward. Our actions, including reduction in headcount, lab and office space, third-party services, as well as exiting certain businesses and geographies resulted in operating expenses reduction of nearly $50 million from the prior quarter. We expect additional reductions to our quarterly run-rate over the next two to three quarters as our cost reduction efforts take effect.
Moving on to cash performance, cash, cash equivalents, restricted cash and marketable securities totaled $596 million at September 30, 2022 compared with $737 million at June 30, 2022. Our cash position went down by about $141 million compared to the end of the second quarter. Excluding an inflow of approximately $10 million from our ATM facility, our total cash flow was $151 million. Adjusting for one-time items, including approximately $29 million related to the realignment program and $14 million related to compensation items for past M&A transactions, the cash burn for our ongoing business will be $108 million in Q3, a meaningful reduction from the run-rate at the beginning of 2022.
While we are nimble with our ATM financing options, we do not intend to use it to solve our bad maturities. Instead, we continue to have conversations with long-term partners who have a shared vision of our company and the desire to find a constructive solution for our balance sheet. As of now, we have close to $600 million cash and our cash burn trajectory is heading in the right direction aided by the effort we put into place over the past year and accelerated by our strategic realignment.
Stepping to the business metrics that are intended to offer more transparency and a more consistent, balanced perspective on our performance and the portfolio growth, our active accounts continue to fuel top line growth despite active partner being relatively stable in Q3 due to our geographic consolidation and focus on higher quality revenues. The impact of these efforts will continue to be a slight headwind to this metric. However, the number of patients we serve and ones who are available to share the data continue to expand each for roughly 48% over the prior year, and 10% sequentially. Our new product vitality was found slightly from previous quarters. As a reminder, this metric represents a revenue contribution by new products over the trailing 3 years. As previously communicated, we saw a pullback in that number resulting from the slowdown in new product launches in 2020, and parts of 2021.
Revenue per patient, measured by total company revenue divided by the number of ordering patients for the period has continued an increase as we have focused our broader efforts on achieving higher quality revenue. Moving to operational excellence, we are seeing continued quarter-over-quarter improvement in all categories. Cash burn had a number of one-time items in this quarter. Cash burn as a percent of revenue would have been 81% excluding those one-time items.
Moving to our financial guidance, we are reaffirming our 2022 revenue growth and non-GAAP gross margin targets. We expect full year 2022 revenue growth of low-double digits over the prior year and our non-GAAP gross margin to be between 42% and 43%. For the first quarter as previously communicated, we project we will have less revenue than the third quarter based on the fact that it’s the first full quarter of operations since our rate alignment started in mid-July. There will also be some revenue impact depending our final decision and the timing of our decision regarding our distributed chip business. Taking these factors and our current trajectory into consideration, we are maintaining our full year revenue guidance of low-double digit growth.
Looking at our cash burn, we now expect full year 2022, cash burn to be between $585 million and $625 million, improvement from our previous guidance of $600 million to $650 million. Know that this cash burn guidance includes up to $75 million may led it to realignment activities, and this amount has remained the same as our previous guidance. We are encouraged by our progress to-date and our confidence in our team’s ability to deliver. Back to you Ken.
Ken Knight
Thank you, Roxi. With that, we will now turn the call over to the operator for Q&A.
Question-and-Answer Session
Operator
[Operator Instructions] The first question comes from Tejas Savant from Morgan Stanley. Please go ahead.
Unidentified Analyst
Hi, this is Gabi Gabriela on for Tejas Savant. So, I was just wondering if the recent granting of preliminary injunction preventing California from enforcing a requirement of only labs contracting with them would be allowed to perform trisomy screening for California residents and if that would affect your NIPT volumes going forward? And how we should think about that impact of the NIPT providers?
Ken Knight
Yes. This is Ken, that’s a great question. We obviously were not supportive of the direction that CDPH was taking. And so it continues to allow us to operate in the State of California with our NIPS product, which we are excited about. And so as we see the broadening guidelines and expansion of guidelines and making the utility of NIPS more accessible to pregnant women, we see it as nothing, but upside for us.
Unidentified Analyst
Thank you. That was very helpful. And then just in terms of your hereditary cancer business, what are you seeing in terms of a shift towards expanding carrier screen panels? And what do you think are the challenges for broader adoption?
Ken Knight
Was the question of expanded carrier screen?
Unidentified Analyst
Expanded carrier screen panels?
Ken Knight
Yes. So, we have some work underway actually bringing out an expanded carrier screening product here pretty soon. There is a specific utility of expanded carrier screening. It’s obviously used for more complicated type of diagnoses. And so we see there is a place for expanded carrier. But we don’t expect that every one of our customers that are ordering carrier screening today is going to pivot to the expanded product. So, we will have the option for our customers in the future.
Unidentified Analyst
Okay. Thank you. I appreciate your time.
Ken Knight
Thank you.
Operator
The next question comes from Matthew Slater from Goldman Sachs. Please go ahead Matthew.
Unidentified Analyst
Hi, this is [indiscernible] on for Matt. Could you just talk through the new product vitality metric, which is a little lower on a sequential basis? I know last quarter, you talked about new products coming on in the second half of this year. So, any update on those would be helpful?
Ken Knight
Roxi, why don’t you take that one?
Roxi Wen
Sure. Just great question. Thank you. Remind the destination is revenue contribution from our new products or either acquired or internally developed over the last few years. So, as you indicated, the launches and the schedule and timing of launch does have an indication – it does have an implication on this metric. We did have some products – new product launches at the first half of this year, and expect some of those revenues will come in. If we are not providing guidance for these metrics that, we do recognize that the 2020 and 2021, part of 2021 slowdown is having an impact on this metric.
Unidentified Analyst
Great. Thank you. And then could you talk to pricing dynamics you are seeing in oncology and women’s health, and what impact that might have on margins as we move into ‘23. I know you mentioned more data in your hereditary cancer, which is driving reimbursements, but additional color would be helpful.
Ken Knight
Yes. Sure. For our women’s health products, we have been seeing great improvement in our ability to get reimbursement that with expanded guidelines are helping immensely. Average risk is now covered pretty much with the most – almost all major players in the U.S. And so that’s having a tailwind in our average payment per test for NIPS products. We made some decisions about pricing ex-U.S. and in international marketplace. And as I have said in my preamble, the benefit of that is we are seeing our ex-U.S. business, providing positive contribution to our gross margin expansion initiatives. So, we are seeing that working as well. So, I would say from a pricing standpoint, where pricing changes needed to be done, we have done those and we have seen great benefits from it. For our hereditary cancer, it’s been pretty solid. I mean I think the – as I have said, our gross margin performance of our hereditary cancer product is well above our corporate average. And it’s staying pretty consistent. And so we don’t see, necessarily downward pressure on pricing any more than what we are doing in the marketplace. We continue to be the provider who was trying to drive more affordable, accessible access to genetic testing. So, we still believe in that part of our journey. But the pricing in the marketplace is pretty solid. There were some concerns about PAMA making some changes. But that’s obviously been held back for now. And so overall, we see the quality of revenue for hereditary cancer is growing based upon our reimbursement and internal policies and how we are going to market.
Unidentified Analyst
Great. Thanks for the questions.
Ken Knight
Thank you.
Operator
The next question is from Marta Nazarovets from JPMorgan Chase. Please go ahead Marta.
Marta Nazarovets
Hello. Thank you for taking the questions. This is Marta on for Julia. As it relates to you r current mix between an oncology, women’s health and others, how do you see those mixes evolving over the next year given the restructuring? And how do you see that mix settling beyond 2023? Essentially, what are some qualitative factors impacting that mix? Thank you.
Ken Knight
So, I would say, simply put, as I have – our hereditary cancer product line is our highest growth – highest revenue product. And it will continue to be our highest revenue product into 2023. And so I wouldn’t say there is a material shift in mix that’s going to be occurring. As we are adjusting our go-to-market for our women’s health, we are getting a higher quality of revenue for each of the tests that we are running. And so that’s going to provide some lift in our gross margin. But I am not expecting it to shift our mix significantly into 2023. So, I think our mix is going to continue to be more weighted towards hereditary cancer into 2023 and beyond.
Marta Nazarovets
Got it. Thank you. And then second question was related to the MRD product that you have mentioned. Can you just give us a little bit more detail about that? And how quickly do you think it could drive penetration of that product? And what are some of the competitive advantages over the existing products in the market? Thank you.
Ken Knight
Yes. Sure. I mean I will start with, how we see the product itself. Again, you might recall, we have a tumor specific product. And so there is products that are out there that are tumor agnostic. We have a tumor specific product, and we provide a panel specific to the patient and the tumor that the patient has, which we believe is a superior product. That’s number one. Our early data and analysis that we have seen is that our sensitivity and specificity are going to be top of the market in terms of how the product will perform. And so we have done, we are now in a period of time where we have got analytic validity, and now we are going in the process of getting clinical validity of our product. And so we have got several studies that are out there that are – we expect are going to continue to show the clinical validity of our product. And as we navigate through that, then we will be moving to kind of getting confidence in the utility of our product and ultimately the utilization and reimbursement. So, the journey is pretty well mapped out. We know how to do this. We are just in the process of getting that done. And in the meantime, we are utilizing our fee for service arrangements with biopharma or academic medical centers. And we are getting good interest in our product, in our PCM product. And we expect that’s going to be a kind of a raging revenue opportunity for us until we get all the way to clean up commercial utilization and commercial reimbursement.
Marta Nazarovets
Great. Thank you.
Ken Knight
Yes. We are pretty excited about it. So, I hope, I was answering the question there. I want to make sure you understand, we are very excited about our MRD product. And the space is, as I have said in the opening, $20 billion to $30 billion of tam and it’s still underutilized. And so it’s early, and we are excited to be competing in that space, in the very near future.
Operator
[Operator Instructions] It appears we have no questions registered at this moment. So, I am going to hand back to the management team.
Ken Knight
Well, thank you, operator and thanks everybody for joining us on the call today. We have remained very positive about the opportunities for Invitae and we are certainly confident in our team’s ability to execute on our plan. So, we appreciate your continued support and thank you all for joining us on the call.
Operator
This concludes today’s call. Thank you for joining. You may now disconnect your lines.
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