Invitae Corporation (NYSE:NVTA) Q3 2023 Earnings Call Transcript

Invitae Corporation (NYSE:NVTA) Q3 2023 Earnings Call Transcript November 8, 2023

Invitae Corporation beats earnings expectations. Reported EPS is $-0.1, expectations were $-0.3.

Operator: Good afternoon, and welcome to the Invitae Third Quarter 2023 Financial Results Conference Call. My name is Carla and I will be your operator for today’s call. We will have a Q&A session following your host’s remarks. [Operator Instructions]

Hoki Luk: Thank you, operator, and good afternoon, everyone. Thank you for participating in today’s call. Joining us today are President and CEO, Ken Knight; and our new CFO, Ana Schrank. Before we begin, I’d like to remind you the various remarks that we make on this call are not historical, including those about our vision and business model, future financial and operating results, future products, services, our product pipeline and the timing, expectations of future growth, reduction in burn rate and discussions with our stakeholders, and operational improvement in cost reduction efforts. Certain points we make will 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 on future company performance assume, among other things, that we don’t conclude any new business acquisitions, investments, restructurings, or legal settlements. We refer you to our most recent 10-Q and 10-K, in particular to the sections 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 dates hereof. 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 will provide an update on recent events and operational news during the quarter. Ana will cover the financial details and key metrics as well as our 2023 guidance. We will then conclude the call with Q&A. With that, I’ll turn the call over to Ken.

Ken Knight: Thank you, Hoki, and welcome everyone who joined us today. Q3 was another productive quarter for us, where we met or exceeded consensus, estimates and key performance metrics. Our pursuit of higher quality revenues and lower unit costs resulted in continued gross margin expansion. We have improved our non-GAAP gross margins for nine consecutive quarters and hit 52.4% this quarter, which represented a 250 basis point sequential expansion from Q2 2023. Operational improvement efforts and expense control have resulted in a reduction in ongoing cash burn of approximately 60% in the first nine months of 2023 versus the same period last year. We are on track for our full year 2023 cost reduction commitments. Revenues for the quarter were $121.2 million, an increase of approximately 4% year-over-year on a pro-forma basis, and an improvement from the second quarter, which saw roughly 1% pro-forma growth.

Rare disease led the way with 44% year-over-year revenue growth, followed by women’s health with 21% growth. Oncology saw a 7.5% year-over-year pro-forma decline, influenced by lower fee-for-service revenue, as we work to rebuild that pipeline, and impacted by commercial insurance payment headwinds for hereditary cancer. Oncology did see a 3.3% sequential revenue growth from Q2 2023, and was bolstered by an 11% volume growth for hereditary cancer in our U.S. market on a pro forma basis. Regarding the commercial payment headwinds, we have devoted significant resources to tackle this issue to improve payment collections and we are seeing progress. In the second quarter, we reported a negative impact of approximately $5 million to the revenue line and that number decreased to about $2.2 million in Q3.

We believe that we are going to continue to see positive results in the fourth quarter and into next year. We are encouraged by these improvements and also recognize there is still much work to do on our journey. Today you will see going concern language (ph) in our 10-Q. Since our realignment in July 2022, our entire team has been executing on the initiatives and actions needed to improve the health of the business. Those efforts have been productive and will continue. We are creating plans that will, over the next 12 months, further reduce operating cash burn and improve the company’s liquidity. This is a top priority and we are actively engaging with our stakeholders in seeking constructive feedback and solutions. Our board of directors has formed a special committee to focus on addressing our capital structure needs.

With our board, we are exploring a number of options, which could include raising capital, addressing our debt, selling certain assets, and continuing operational improvement and cost reduction efforts. Moving to Slide 6, I want to highlight a few of our recent wins. In the third quarter, we secured the first of its kind SBA authorization for our common hereditary cancer panel. We are proud of this accomplishment. As Invitae was able to establish a new category of device based on our technology and methodology. We submitted a de novo application in 2021 using this panel as an example of a method-based approach to validation. It was a voluntary submission and our goal was to guide the agency’s understanding through the submission and review process.

As such, the FDA worked closely with us to review the test and our supporting data, which led to this market authorization. Meeting the agency’s stringent requirements is a testament to our product and to our labs, processes, and quality. Importantly, this decision sets the bar for expected performance and the associated data required for future regulatory approval of similar products. As for the next step, our teams are working through the implications of offering an FDA-authorized assay as it relates to our operations, development, and potential commercial benefits. We also believe that this decision serves as a proof point that we will remain very well positioned to the regulatory landscape surrounding laboratory developed tests change in the future.

In the third quarter, we also reached 4.4 million patients served across a diverse spectrum of clinical areas. Of these patients served, 64% are available for data sharing. We continue to believe that this breadth of patient data will further strengthen our variant interpretation capability and we are well positioned to provide the highest quality of clinical interpretation at an industry-leading scale. And as I already mentioned, our efforts to improve revenue cycle management and cash collections also continue to gain traction during the quarter. Finally, we recently had an exciting update in which we received clear approval on our submission for our enhanced personalized cancer monitoring assay. Onto Slide 7, the enhanced PCM assay is expected to benefit our customers and patients as well as our business.

And all migration steps required for the chemistry and internal processes have been completed seamlessly. We are running the enhanced assay going forward, and here are a few of the benefits. We have reduced the number of steps in the PCM workflow, increasing capacity and lowering the burden of materials and labor costs. The process now lends itself to automation, enabling scale and supporting our future growth. From a performance perspective, we were able to lower our limit of detection, potentially improving lead times. This enhanced assay is able to achieve the same sensitivity as the prior version with less cell-free DNA, enabling us to test samples that may have previously been rejected. As part of the submission, we have also validated whole exome sequencing as a standalone comprehensive genomic profile to permit reporting of tumor profile, enabling us to add new products to our oncology menu.

And finally, we are confident that the enhanced chemistry addresses the primary matters arising from the ongoing Natera litigation, providing us an even more differentiated solution. Overall, we continue to have strong confidence in our ability to operate, and most importantly, our ability to continue offering PCM to pharma partners and patients as we rebuild our fee-for-service pipeline. Longer term, we continue to see synergies between hereditary germline and somatic products. Study after study concludes that the combination of the two datasets results in superior decision making in cancer care. Our ability to do both types of testing on one platform anchors one of the most comprehensive offerings for a physician and patient, considering treatment options for cancer.

Before I hand the call over for the financial discussion, I’ll note that we have added some fantastic talent to our executive leadership team since our last call. Over the past few months, we announced the appointment of Robert Guigley, as our Chief Commercial Officer; Ana Schrank, as our Chief Financial Officer; and David Sholehvar as our incoming Chief Operating Officer. They each bring extensive and relevant experience, and I’m confident that they will deliver long-term value to our team. And with that, I will turn to Ana to discuss the financials. Ana?

Ana Schrank: Thank you, Ken. I’m pleased to be here to discuss our fiscal third quarter results, which, as you mentioned, reflect solid progress toward our goal of reducing cash burn. Revenue decreased 9% to $121 million, primarily due to the exit of certain product offerings, including the RUO kit and IVF products and certain international geographies as part of the realignment we announced in 2022. When excluding the impact of those exited businesses, revenue increased approximately 4% year-over-year and was roughly flat from last quarter. Looking at the revenue breakdown, oncology including hereditary cancer and fee-for-service TCM testing offered to pharmaceutical partners generated $62 million. Women’s health including carrier testing services and non-invasive prenatal screening, generated $27 million.

$23 million was generated from our rare disease business, including neuro, cardio, pediatrics, and other testing products. Data and patient network revenue is approximately $9 million. This includes our sponsored testing programs, data management, and a number of data partnership projects. As I mentioned earlier, pro-former revenue increased approximately 4% year-over-year and was roughly flat sequentially. We also exited our PGX testing during the third quarter, which did not have a material impact on revenue. For your reference, if we exclude PGX revenue, our third quarter year-over-year and quarter-over-quarter pro-forma revenue growth would have been 40 basis points and 30 basis points higher respectively. Looking at the details of our revenue composition, oncology revenue of $62 million improved sequentially, primarily due to higher fee-for-service PCM revenue this quarter compared to last quarter.

Compared to approximately $67 million of oncology revenue a year ago, the year-over-year decline was largely attributable to reimbursement pressure on hereditary cancer testing, as well as weaker PCM revenue. As Ken mentioned earlier, we are working diligently to build back our pipeline. Women’s health grew 21% to $27 million, led by our carrier screening product, as well as continued improvements in APT. In our rare disease business, pro-femur revenue grew approximately 44% year-over-year, driven by continued penetration of neurodevelopmental and pediatric panels and testing for rare cardiac conditions. Our data and patient network business declined by about $2 million year-over-year, primarily due to our focus to drive more profitable sponsored testing programs.

Moving to Slide 11. Third quarter non-GAAP gross margin was 52.4%, which improved year-over-year compared to 45.9% in Q3 2022 and sequentially compared to 49.8% in the second quarter. Third quarter non-GAAP operating expenses were $122 million or 101% of revenue. While OpEx is still higher than we want, our continued cost control measures resulted in improvements compared to OpEx of $150 million in the third quarter last year, which was 112% of revenue, and $158 million or 131% of revenue compared to Q2 of ‘23. On a GAAP basis, we incurred restructuring impairment and other costs of $877.3 million related to impairments and losses on disposals of long-lived assets net. We ended the third quarter with $265 million in cash, cash equivalents, restricted cash, and marketable securities compared to $596 million at September 30, 2022.

We can proudly point to nine quarters of non-GAAP gross margin expansion. In the third quarter, the margin expansion was due to improvements in revenue management, successful efforts to drive costs out of the system via supply chain, and other operational and process efficiencies. Third quarter ongoing cash burn as defined on Slide 13 was approximately $64 million. This represents an improvement of 41% compared to the same period last year. The increase in sequential cash burn this quarter includes the impact of approximately $5 million in a semiannual interest expense payment, approximately $4 million related to a contract renegotiation, and another $4 million in acquisition-related payments, partially offset by around $3 million resulting from improved DSO.

As Ken mentioned, we are actively assessing the operational liquidity measures necessary to address the going concern language in our 10-Q. We are working closely with our stakeholders to understand the options that can help extend our cash runway and optimize our current balance sheet. Currently, we have sufficient liquidity to operate as usual and continue to service our customers, partners, and financial obligations as we chart the path forward. Our third quarter key metrics are on Slide 14. Revenue per patient is measured by total company revenue divided by the number of ordering patients for the quarter. In the third quarter, revenue per patient was $474 versus $459 in the prior period. This improvement was based on stabilized hereditary cancer payments as well as the company’s billing and collection initiatives.

Variable cost productivity continued favorable performance in the quarter as we found efficiencies in our cost of goods sold that helped to drive higher margins. Cash burn as a percent of revenue picked up in the quarter for the reasons we mentioned on the prior slide. We are reaffirming guidance and anticipate 2023 revenue to be in the range of $480 million to $500 million and non-GAAP gross margin in the range of 48% to 50%. In 2023, as a result of the voluntary repayment of our term loan and the related prepayment penalty in the first quarter. Reported cash burn will exceed ongoing cash burn. We are reaffirming our ongoing cash burn guidance range of $220 million to $245 million, which as a reminder was adjusted downward after the second quarter.

Our cash burn target represents more than 50% improvement from 2022. Before I hand it back to you, Ken, I just want to say it has been great getting to know my colleagues here at Invitae the last few weeks, and I look forward to meeting and interacting with many of you going forward. Ken?

Ken Knight: Thanks, Ana. To summarize the Q3 results in today’s call, we are reaffirming our full-year financial guidance. Non-GAAP gross margin expanded for the ninth straight quarter. increased resources and efforts to improve payment collection are showing progress already, and we achieved two regulatory wins with the FDA authorization of our hereditary cancer panel and the clear approval on our submission for the enhanced PCM assay. As we look to close out 2023, our operational performance continues to improve. Our team is focused on the things in the short term that we can control and we are committed to addressing the challenges that remain as we determine the best path forward in order to achieve our mission to serve many more patients ahead. Operator, I’ll now hand it over to you for questions.

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Q&A Session

Operator: Thank you, Ken. [Operator Instructions] Our first question today comes from Isabella Prugue from Leerink Partners. Isabel, your line is now open. Please go ahead.

Isabella Prugue: Hi, guys. Thank you for [Technical Difficulty] with the announcement for the chemistry enhancement, the MRD test. Could you perhaps maybe speak to how this helps address the Natera IP and litigation concerns? And if you don’t mind clarifying, if the other statements you’ve designed for the Natera as well?

Ken Knight: So, Isabel, this is Ken. I’m sorry, I was having difficulty hearing you. I think your first part of the question was relevant to the enhanced PCM assay and how it addresses the Natera litigation. Obviously, there’s still ongoing litigation with that in terms of specifics, I’m not going to be able to go into a lot of specifics about the differences between the chemistry and how it differs from the patents that are under dispute, but we are confident that the enhanced chemistry and the process changes we’ve made, knowing what those, that the items under dispute were, that this appropriately addresses it.

Isabella Prugue: Right. That was helpful. Sorry, I just didn’t notice myself, but the second part to my question was, what are these redesigns with the plan for the commercial assay as well and if we can expect to see that?

Ken Knight: Yeah. So the enhanced assay is our assay that we’re going to be operating and going forward. And so as we prepare for commercialization of our PCM product, our MRD product, that will be based off of the enhanced assay.

Isabella Prugue: Thank you so much.

Ken Knight: Thank you.

Operator: Thank you, Isabel. We will now take our next question from Dan Brennan from Cowen. Dan, your line is now open. Please go ahead.

Tom Stevens: Hi. This is Tom Stevens on for Dan. It was more a question on the guide, so clearly you reaffirmed it, but that seems to be in some sequential acceleration. So I guess you could talk through some of the puts and takes kind of behind that? And then I’ve got one more follow-up.

Ken Knight: Yeah. So we’re seeing, we talked about already that we’ve seen the sequential growth already taking place, especially in our hereditary cancer business. We talked about double-digit volume growth quarter-over-quarter, and so we expect that that’s going to continue. And then the combination of the work we’re doing on our collection and reimbursement, our average payment per test, gives us confidence that the fourth quarter will continue to have sequential growth and revenue. And we talked about our rare disease business and how it’s doing on a pro-forma basis year-over-year and 44% revenue growth in women’s health, a 21% revenue growth in hereditary cancer with double-digit volume growth and getting better quality revenue, we have a lot of confidence that the revenue guide that we have is what we’re going to be able to achieve.

Tom Stevens: Great. That’s helpful. I guess just kind of jumping off that, kind of stepping back. As you have these conversations with your stakeholders, have you settled down to a kind of revenue growth rate you feel is sufficient to kind of, potentially meet, cash burn requirements and credit requirements going forward?

Ken Knight: Without getting into a lot of details, I mean, I think I must respect the processes as we’re working with our stakeholders. Our stakeholders are asking the right kind of questions, and I think we are providing them sufficient information to the responses to those questions. And so, I am confident in the process and the relationship that we have. We’re working together. They’re asking good questions. And we’re determined to continue to map a path forward for our company to continue to build upon the work that we’ve already done. I just got to say that, how we — the work we’ve done to this point is a representation of the — just the dedication and the grip of the visions in our company. The team has worked extremely hard and we’ve made some tough decisions and we’ve been able to execute extremely well.

And so that goes without saying that, our team has really delivered on what we set out to do for 2023 and we like our momentum going into the last part of the year.

Tom Stevens: Great, thanks very much.

Ken Knight: Thank you.

Operator: Thank you, Tom. Our next question comes from Tejas Savin from Morgan Stanley. Your line is now open. Please go ahead.