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Edited Transcript of NVTA earnings conference call or presentation 6-Aug-19 8:30pm GMT

Q2 2019 Invitae Corp Earnings Call

SAN FRANCISCO Sep 26, 2019 (Thomson StreetEvents) -- Edited Transcript of InVitae Corp earnings conference call or presentation Tuesday, August 6, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Katherine A. Stueland

Invitae Corporation - Chief Commercial Officer

* Laura D'Angelo

Invitae Corporation - Head of IR

* Randal Scott

* Sean E. George

Invitae Corporation - Co-Founder, President, CEO & Chairman

* Shelly D. Guyer

Invitae Corporation - CFO

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Conference Call Participants

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* Bruce David Jackson

The Benchmark Company, LLC, Research Division - Senior Healthcare Technology Research Analyst

* Doug Schenkel

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Eleni Maria Apostolatos

JP Morgan Chase & Co, Research Division - Research Analyst

* Jeffrey Scott Cohen

Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research

* Kevin Michael DeGeeter

Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst

* Puneet Souda

SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst

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Presentation

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Operator [1]

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Good afternoon, my name is Chris and I'll be your conference operator today. At this time, I would like to welcome everyone to Invitae's Second Quarter 2019 Financial Results Conference Call. (Operator Instructions) Thank you. Laura D'Angelo, you may begin the conference.

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Laura D'Angelo, Invitae Corporation - Head of IR [2]

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Thank you, operator, and good afternoon, everyone. Thank you for joining us for our second quarter 2019 financial results earnings call.

Joining us today are Sean George, our CEO; Shelly Guyer, our CFO; Lee Bendekgey, our COO; Katherine Stueland, our Chief Commercial Officer; and Executive Chairman, Randy Scott.

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'd like to remind you that various remarks that we make on this call that are not historical, including those about our future financial and operating results, our plans and prospects, the focus of our business strategy, our plans to integrate and manage businesses we acquire, market opportunities, future products, services, our product pipeline and the timing thereof, demand for and reimbursement of our services and our investment in our infrastructure and operations 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 guidance. Our guidance on future company performance assumes, among other things, that we do not conclude any additional business acquisitions, investments, restructurings or legal settlements. We refer you to our 10-Q for the quarter ended March 31, 2019, 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. To supplement our consolidated financial statements prepared in accordance with the generally accepted accounting principles in the United States or GAAP, we monitor and consider non-GAAP research and development expense, non-GAAP general and administrative expense, non-GAAP net loss and cash burn. We encourage you to review reconciliations which are available in the press release.

With that, I will turn the call over to Sean.

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Sean E. George, Invitae Corporation - Co-Founder, President, CEO & Chairman [3]

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Thank you, Laura. Invitae is now a decade into the execution of a contrarian model in health care, demonstrating that aggressive investment in technology can successfully remove barriers, such as cost or access. The execution of this model has led to increased utility and subsequent demand of genetics for the billions of people on the planet we believe could benefit from this most fundamental of personal health information.

Every year, just in the United States, more than 1.7 million people are diagnosed with cancer, but only a fraction of them are getting the genetic information they need to guide their care. Invitae continues to lead with science in demonstrating the importance of offering comprehensive genetic testing for everyone with cancer and therefore, broadening testing guidelines.

Beyond cancer, we have found exactly the same to be true in other areas of medicine. More people would benefit from access to genetic testing to inform their health care choices. For example, of the 6 million pregnancies in the U.S. per year, only a small percentage of those currently benefit from the full suite of genetic information that can be of great value for the health and well-being of both the mother and baby.

Invitae also believes there is a clear benefit in making genetic health screening available to those without a strong personal or family history that would traditionally warrant testing. With the launch of our proactive offering a number of years ago, we opened up genetic testing to a completely new set of customers. Our approach is gaining ground with a broader commercial launch of our direct channel, which enables those customers for the first time to order the same clinical-grade testing that experts have come to rely on from Invitae.

With more and more data supporting a broad utility and value of genetic information across all stages of life and our success in lowering the barriers that people gaining access to comprehensive clinical-grade testing, we are moving towards the day when personal genetic information is considered a necessary part of everyone's routine health care.

Another opportunity to increase access to such testing is through our biopharma partnerships. With the addition of a dozen partnership programs in the second quarter alone, we now have a growing network of more than 50 biopharma partnership programs. The growth of these programs allows us to accurately diagnose more people than ever. And then upon including them in our network, introduce them to partners across the health care continuum that can help with appropriate treatments, therapies and qualify patients for clinical trials. We envision this trend accelerating into the foreseeable future as monitoring, screening and prevention strategies as well as therapies become more tailored, better targeted, more cost-effective and result in better outcomes.

In a very short period of time, we've ramped up commercial insurance coverage, now approximately 275 million lives in network. More importantly, the payers are now starting to engage more strategically, given the growing importance of genetics in the provision of health care. We are honored to be named one of only 7 companies to UnitedHealthcare's preferred lab network effective July 1. We continue to believe that broad capabilities, quality, transparency and price matter, especially in health care.

As more and more payers, self-insured employers, integrated provider networks and governments around the world evaluate the various tools available and partner with the best provider for their genetic information needs, we will continue to execute and invest to further position Invitae as the leader in advanced medical genetics.

We are proud to have grown from 229 samples and a few hundred thousand dollars revenue in 2013 to where we are now. Our progress in the first half of 2019 gives us confidence in our ability to deliver on our guidance of more than 500,000 samples accessioned and more than $220 million in revenue.

This is another year of investment for Invitae as we lower the cost of genetic testing across our platform. And at the same time, rapidly add to our content and capabilities. We continue to deepen and widen our competitive moat as we now make it even easier to access genetic information needed across all stages in life.

I will now turn the call over to Shelly to highlight our financial results for the quarter.

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Shelly D. Guyer, Invitae Corporation - CFO [4]

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Thank you, Sean.

Volume matters. We are pleased to have posted a 52% growth in accession volume over the second quarter of last year and an 18% sequential growth from the first quarter of 2019. We accessioned more than 111,000 samples this quarter with billable volume of nearly 111,000. Notably, we experienced growth across all segments, especially strong volume from international markets, which again accounted for over 10% of the total accession volume.

Several comments on how to think about modeling our business moving forward. This quarter, the accessioned and billable volumes were nearly the same, in line with our historical experience with the difference between accessioned and billable volume is small in the second quarter. But we expect that due to seasonality, there will be a larger gap between accessioned and billable volumes in the third quarter as shown on the slide in the appendix. And as you think about the remainder of the year, remember that we normally experience seasonality in our growth and accessions between the second and third quarters.

Last year, we only grew 7% between these quarters. And how are we tracking to our guidance? We guided to 40% of the volume in the first half of the year with over 205,000 accessions, we stand at over 41% of our annual guidance in the first 6 months of the year. We reiterate our guidance for the year of over 500,000 accession samples for 2019.

In the second quarter, we generated $53.5 million in revenue, which represents a 43% growth in quarterly revenue year-over-year. This quarter, over 70% of our revenue came from third-party payers and just under 30% from both institutions, including partners and patient pay.

The increasing percentage from third-party payers is largely due to the full effect of Medicare paying for the del/dups for HBOC and Lynch syndrome as well as from continued increases in insurance payments.

In terms of ASPs, our average was $471 this quarter, down from $500 in last year's second quarter, which included a onetime $2.3 million benefit for Medicare Payments for HBOC del/dups. Excluding the onetime del/dup payment, the comparable number from last year would have been $466. And while this quarter's $471 is up from the first quarter's ASP of $455, remember that we had some write-downs in the first quarter that we don't expect to repeat. Taking these into account, we believe that we will have our ASPs bounce around a bit, but that we will see the ASPs trend lower in the near-term as our payer and products mix changes.

As we continue to get more tests into contract and collect more from the third-party payers, we expect small quarterly increases in ASPs, but these will be offset by lower pricing in areas that are growing, like our patient pay and international businesses as well as the product mix changes.

While we are pleased with our strong revenue growth this quarter, our historical experience is that our third quarter revenue is traditionally only up slightly from the second quarter due to seasonality in the underlying billable volumes. We believe that this year will follow this trend.

So in sum, revenue in the second quarter is on track with our annual guidance. Recall that we had suggested that around 40% of our revenue historically came in the first half of the year. We achieved 43% in the first half of this year. We reiterate our annual guidance of over $220 million in revenue for 2019.

In the second quarter of 2019, we reduced COGS to an average cost per sample of $252, down from $279 in the second quarter of 2018, representing a 10% reduction year-over-year. But COGS per sample increased from the first quarter primarily due to a large stock-based compensation expense in the quarter for our annual retention in merit-based RSU grants, totaling $1.5 million, which added approximately $13 per sample as well as other factors, including higher costs related to NIPS and our direct channel launch.

Just a reminder of my past comments on COGS. We expect COGS will continue to fluctuate as we introduce new products and bring new technologies online. Importantly, new products we introduce will have worse margins early on, and depending upon the uptake of those products, could put pressure on our COGS. We made a commitment to make 2019 a year of investment, and we intend to Invitae-ize newly acquired technologies and products and continue to target 50% gross margins.

We improved gross profit by more than 50% from the previous year, generating $25.5 million in the second quarter of 2019 versus $16.9 million in the second quarter of 2018. This quarter, our gross margin was 48%, up from 45% in the second quarter of 2018, which was aided by the onetime Medicare Payments for del/dups and without this benefit, would have been 42%.

As discussed last quarter, we are investing in several areas of the business to foster our growth this year and beyond, enabling us to scale and offer additional products across all stages of life. For the quarter, we incurred operating expense, which excludes cost of revenue of $77.4 million, an increase of about 65% from the $46.9 million in the second quarter of 2018.

But what are the current changes? The increase in OpEx of $21.8 million from the first quarter was due to several factors that need to be further explained so that you can understand the cost structure of our base business, excluding the impact of our acquisitions. First, we had an increase of $4.9 million of stock-based compensation and OpEx in the second quarter primarily due to the annual retention and merit-based RSUs granted.

Second, we expensed approximately $2.6 million in stock-based compensation for the inducement RSUs granted to Singular Bio employees, which is expensed to R&D. Third, we incurred over $3.2 million in onetime costs for the acceleration of options upon the close of the Singular Bio transaction, which is expensed to G&A. And fourth, we expensed $1.2 million in legal and accounting acquisition-related costs for Singular Bio and Jungla.

The remainder of this increase from the first to second quarter in OpEx was due to growth in our base business. We continued our investment in selling and marketing and R&D with a total increased cost of over $6 million.

In selling and marketing, we increased our sales head count to approximately 190 at quarter's end and incurred additional marketing cost to support our NIPS offering, launched in mid-February, and our direct channel launched in early June.

In R&D, we continued our head count expansion focused on scaling our business, preparing for future content expansion, improving the customer experience and driving costs down.

Now let's move to our cash position. At quarter end, our cash, cash equivalents, restricted cash and marketable securities totaled $254 million. Cash burn, a non-GAAP measure, totaled $33.2 million in the second quarter of 2019. On the first quarter call, we indicated that we would continue to invest in our business throughout the year and into 2020, and that our quarterly burn would increase throughout the year. For the year, we continue to anticipate burning up to 50% more in 2019 when compared to 2018. Our burn could be as high as $150 million in 2019.

Our financial strategy is to focus on the increase of operating cash flows. While we've elected to push our path to GAAP profitability out and instead make 2019 a year of investment, we will operate the company to maintain the ability to swing to profitability with the resources on hand.

In our press release, we have provided non-GAAP net loss per share reconciliation. We will provide these reconciliations every quarter until our obligations to Singular Bio for equity milestone payments have been completed. How should you think about our future payments. If you look at the performance, you will see several categories. We do not expect future payments for acquisition-related post combination expense, which totaled $3.2 million this quarter. However, you will see large acquisition-related stock-based compensation charges. These charges were $2.6 million for the 10 days from deal closing to the end of the quarter.

As we move forward, the compensation expense for each quarter may include both time-based and performance-based grants. Each quarter, we will break out these acquisition-related charges, separate from our base business OpEx. We expect that this would last no longer than 2 years.

I will now turn the call back over to Sean.

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Sean E. George, Invitae Corporation - Co-Founder, President, CEO & Chairman [5]

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Thank you, Shelly. We've had a strong and busy quarter with the launch of our direct channel to enable consumers to initiate a clinical-grade genetic test for the first time, the presentation of data at various conferences, demonstrating that more people could benefit from genetic testing; the acquisitions of both Singular Bio and Jungla, whose technologies enhance the quality and scale of our business and continued work in expanding our genome network with more biopharma partnerships. The pace of our industry's consolidation is picking up, volume and scale matter. Technology infrastructure will win the game in the long run, and we've demonstrated the ability to acquire and successfully integrate technologies and platforms over the last several years.

We've grown the company explosively over the past 25 quarters continuing to average double-digit quarter over quarter growth. Our model is working, and the timing is right. Around the globe in all corners of healthcare-related industries, the fundamental importance of genetic information is coming into focus and Invitae is in the right position to lead in this new era of medicine.

Before we move to Q&A, I wanted to take the opportunity publicly to express my deepest gratitude and utmost thanks to Randy, who is here with us today. His vision for the future has been a guiding light, not just for all of us here at Invitae, but for many across the entire industry. While we miss his direct official involvement in the future operations of the company, I very much look forward to our continued strategic brainstorming and working with him as an internal friend of the company. Thank you, Randy, for everything you've done and the many more things you're going to do for Invitae, the industry and the world at large.

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Randal Scott, [6]

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Thanks, Sean. Boy, it's been a fantastic experience being a part of the founding team here at Invitae. And I really couldn't be more excited about the future. Because in my opinion, Invitae, really is not just building a company, but an entire ecosystem. So as I retire and take some time to spend with my amazing wife, who's put up with me starting and running companies for 35 years and kids and 3 of the cutest grandkids you've ever seen, it really is knowing that Invitae is in great hands going forward.

So next year, after taking some time off, I plan to open a family investment office and to continue investing in the ecosystem Invitae is creating and being a great partner going forward. So with that, let me just say that I plan to be a very significant shareholder for Invitae for a very long time. And as I turn not only the call, but the chairs roll back over to Sean, it's just really been one of the great joys of my life to work with you guys as a team.

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Sean E. George, Invitae Corporation - Co-Founder, President, CEO & Chairman [7]

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Thanks, Randy. Thank you for all of us. And with that, we'll turn the call over to operator for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question is from Tycho Peterson with JPMorgan.

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Eleni Maria Apostolatos, JP Morgan Chase & Co, Research Division - Research Analyst [2]

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This is Eleni on for Tycho. First, can you comment on what are the key hurdles that need to be addressed to hit the 50% long-term gross margin goal? And what does that -- the acquisition of Singular Bio and Jungla do to expedite that time line?

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Sean E. George, Invitae Corporation - Co-Founder, President, CEO & Chairman [3]

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Yes. I think I'll let Shelly comment on exactly where we are. I can say that the Singular Bio, of course, there are price points for noninvasive prenatal screening in the 200-plus million pregnancies around the globe that are -- that the Singular biotechnology will allow us to hit and maintain our 50% gross margin target. Jungla, we spent a good 4-plus months in a pilot or collaboration with them before we really started moving to discussing teaming up together. And that -- in that, we got enough data to know that we could significantly reduce our variant unknown significance rate as well as reduce the labor involved in resolving those. That will actually have an impact. We'll start enjoying that impact within a couple of months, again, against the backdrop of all of the larger puts and takes that affect our COGS line, which I think I'll let Shelly speak to now exactly where we're at and where we see it going forward.

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Shelly D. Guyer, Invitae Corporation - CFO [4]

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Thanks for the question. So 48% was our gross margin this quarter. We have had quarters that have been above that, and we told people that we anticipated that it would jump around a bit. So as we look at it, given that it is a target, and it's not going to be specific, we anticipate that by collecting more, let's say, from the third-party insurance, as we begin to get some more of those payers to pay us higher rates, not only for oncology tests but also for other tests, reproductive and other diagnostic sorts of tests that we can drive up the collection rate. Similarly, we have control over the cost in many of respects. For instance, we've been putting a lot of money in the medical interpretation. And as Sean mentioned, Jungla should help us be able to bring some of those costs down, but also to enable us to scale over time.

So it's really the volume throughput, which allows us to have much more control on driving those long-term costs down. So it's always in a quarter whether we're investing or whether we are trying to drive the COGS specifically down. And that will mean that we will have bumps around. With time, the decision is to either try to collect more or we can have decisions to bring the pricing down and to be aggressive with that, or we can add more content on the COGS or drive that down. So all of those levers are available to us, which is why we've indicated that it will jump around, around that 50% in any of those -- any of those levers will assist us in helping to further our business and stay around that 50% level.

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Eleni Maria Apostolatos, JP Morgan Chase & Co, Research Division - Research Analyst [5]

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Great. That's helpful. And then you mentioned that volumes from both institutions and patient pay were just under 30%. So I was wondering, what is sort of the positive early traction you're seeing following the patient-initiated testing platform launch at ASCO? And how you're expecting that to evolve?

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Sean E. George, Invitae Corporation - Co-Founder, President, CEO & Chairman [6]

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Yes. I think I'll let Katherine speak to the evolution of it. I think early returns are in and basically, as expected, we expect kind of that direct channel to build modestly. Again, we're spending orders of magnitude less on the -- that type of channel than kind of, I think, people are accustomed to for consumer-type products. And an important measure, I think, on the mix here is that, that direct channel yields all 3 payment types, both -- all 3 patient pay, institutional and insurance bill. The channel is the volume driver that we're using to generate the interest and as -- and, I think, as expected, and I think also interestingly, the mix of what people are looking for is quite different. Some are coming in through that direct channel for diagnostic tests and are indeed qualified for insurance payment, some are coming in as a part of one of our almost 50 biopharma partner programs that enjoy -- for which that ease of access and easy use is a key feature. And then of course, some are finding this information interesting enough that they're just willing to go ahead and start the process and pay for themselves. So all 3 payment types will come in through this channel. So as it's broken out in the Ks and Qs, it's not a one-to-one correlation. But with that as a clarification, and Katherine can speak to what's -- what to expect in the future.

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Katherine A. Stueland, Invitae Corporation - Chief Commercial Officer [7]

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Sure. Thanks, Sean. So we've spent 5.5 years, building a really strong medical brand that genetic counselors, genetic experts and other clinicians have grown to trust and rely on and ensuring that with the introduction of this new channel, we are able to continue to uphold that, those relationships and that brand, that was really of paramount importance to us as we introduced our direct-to-patient channel initiation. And so the initial response from clinicians after we did some education with them on it was very positive. And so we are in our of nascency of experimenting with various marketing strategies, mainly digital right now, and we'll plan to spend the next several months continuing to experiment there with pretty minimal spend. We'll keep you posted as we learn more if our spend looks to be more than what we currently have budgeted for. But as Sean mentioned, our intention is that it will be orders of magnitude less than what you see pharma or direct-to-consumer ancestry companies do spend. So this year, as we've mentioned in the past, minimal contribution to volume from the direct channel, but more as we look to 2020 and beyond.

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Eleni Maria Apostolatos, JP Morgan Chase & Co, Research Division - Research Analyst [8]

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Great. And last one from us. Can you briefly comment on interest from pharma and how you're seeing pharma partnerships evolve?

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Katherine A. Stueland, Invitae Corporation - Chief Commercial Officer [9]

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Certainly. So we added -- we added 12 additional programs this quarter. And what we've seen is a handful of things. One, we're adding additional partners to existing programs, and we're adding additional programs to existing partners, too. So we're starting to see some same-store sales, if you will, within the pharma channel. We also introduced several new programs for detect programs where we're screening for muscular dystrophy, prostate cancer, LSDs and heart conditions as well, cardiomyopathies and arrhythmias. And we have signed on at least 1 partner to those programs and look to bring on additional partners. And we're really looking forward to seeing what the returns are on those programs because they are really addressing unmet needs for patients who are not getting tested. These are also in conditions where they are gaining data to show the utility of genetic testing in these areas. And similarly, these are areas where pharma companies are currently investing in clinical research. So that was how we chose those 4 areas, it really came up in terms of pharma conversations where they were looking to be able to generate data in those areas. So continuing to really build a strong and growing network of patients as well as pharma partners.

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Operator [10]

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Your next question is from Doug Schenkel with Cowen.

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Doug Schenkel, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [11]

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Before getting into my questions, I just want to say, Randy, you've had a very profound impact on Invitae and the broader world of genetics. I know this is just a break in the action for you rather than something that warrants the "so long" or a "goodbye." So I'd just say congrats and enjoy it, and we'll talk soon. So I guess my first question is really on new growth drivers. What is the expected impact of being part of the United PLN effective July 1? Is that something that you expect to have to drive volumes at some point this year or beyond?

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Sean E. George, Invitae Corporation - Co-Founder, President, CEO & Chairman [12]

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Yes, Doug. So I think our expectations, I'd say, in the early months and perhaps in months, meaning 3 to 6 months is, I think, likely to be modest, these kind of programs tend to take a while to get ironed out, kind of the systems -- the same systems that we've been working with, struggling over the many years to kind of get all the payment up to full freight are the same systems that are also rolling out these programs. So they tend to take a while to iron out the kinks. With that said, I think, in the relatively near term, they do have an effect. These kind of steerage programs are effective in a lot of other aspects of the United States commercial insurance business. And we think that it is a longer term. It is certainly a very important piece of our commercial strategy.

We have always suggested, even for many years, it looked like we didn't really understand what we were talking about, what we had suggested at some point in time, people who pay for genetic testing, genetic information, they're going to start looking at the line item and asking questions, and it would appear that, that has begun. And with United as a leader in it, I think we expect over the next year for many more to follow suit. And again, it has always been a part of our commercial strategy. The suggestion that the purchasers of our -- the information that we are the providers that will help us in driving the volume. And it looks like that day has come. And we do expect to see that influence increase over time.

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Doug Schenkel, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [13]

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Okay. I guess another growth driver question, which I'll segue us into a quick discussion on guidance assumptions. So on noninvasive prenatal testing, what's been the impact on new account growth in the early going? And what expectation for NIPT cross-selling in these accounts is embedded into guidance, given the second half ramp that your guidance implies, especially Q3 to Q4?

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Sean E. George, Invitae Corporation - Co-Founder, President, CEO & Chairman [14]

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Yes. So there's definitely a -- I would -- given the seasonality, the summer break impact on Q3, at the beginning of the year, we suggested and still at this point, it looks indeed that the Q4 -- the impact of the NIPS offering this year and its creation of new accounts and allowing us to also pull carrier with it, along with other -- we have a variety of other tests in that setting, reproductive health setting. The significant impact in the year will happen toward the end of the year into Q3 -- at the end of Q3 into Q4. And that's still our outlook. Nothing's changed there. Or put a different way, it hasn't launched wildly in excess of our expectations and nor do we think it's going to be a major driver of Q3. So it's kind of -- launched a couple -- a few months ago, it's proceeding about as we expected, we are seeing new account pickup. We suggested that without NIPS, there were some reproductive health accounts that were just not interested in having a conversation, that is indeed playing out. And again, we do see it and expect it to start picking up the growth in our reproductive health accounts toward the end of the year.

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Doug Schenkel, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [15]

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Okay. So recognizing you clearly had a lot of momentum this quarter and have over several quarters, just to be clear about the math in terms of sequential growth, Q2 to Q3, you're assuming, I think you said about 10% sequential volume growth. That would seem to imply that you're looking for volume growth of about 40% sequential Q3 to Q4. So again, there's a lot of momentum here. And I appreciate what you just walked through Sean on NIPT and NIPS. But that does seem to be a big jump at least on the surface. So is it reproductive that should give us more confidence in the achievability of this target? Or is there something else that we should, in addition to NIPS, be looking to?

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Sean E. George, Invitae Corporation - Co-Founder, President, CEO & Chairman [16]

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Yes. I mean it's not only reproductive. So reproductive is definitely a big chunk of that. We are seeing uptick in the pharma partnership volume. So that is growing rapidly. We are also seeing, as we kind of highlighted last quarter, the international business is picking up pace. And so when you take all of those involved, that's what gives us confidence about a big Q4. And I think also and I think this is -- I'm glad you brought it up because it's a very familiar conversation. This is the exact same Q3 conversation we had last year at the end of Q3. Remember, it was only 7% growth. People were freaking out that, oh my gosh, there's no way you could have such a monster quarter. The seasonality is real, it's a very real factor. Q4 is definitely a big quarter. So when you take those 3 factors in order plus the seasonality, we're -- we think we're in great shape to meet and exceed the guidance.

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Shelly D. Guyer, Invitae Corporation - CFO [17]

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The only addition that I would make there is that we did mention that we upticked a bit in our sales force in the quarter, and that as those people start tracking, and they take some time to get onboarded, we would expect late in the third quarter and into the fourth quarter that they will all be fully productive by that point in time. So that's one other thing that I think gives us the confidence at year-end.

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Sean E. George, Invitae Corporation - Co-Founder, President, CEO & Chairman [18]

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Yes. That's a good point. I think it's worth 1 point of detail on that. In the past, we've -- it's been small enough where we've typically added the entire of the new adds almost entirely mid-month of January. The size and the territories this time around, we didn't really finish that process up until April. And then of course with a 3- to 6-month burn, that's the other factor that gives a late contribution from the new -- the last bit of the new reps.

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Doug Schenkel, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [19]

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Okay. That's helpful. And Shelly, just last one for you, really, a clean-up question. Last quarter, you had some revenue reversals working against you -- in any given quarter, there can be reversals, there can be on the flip side, I think, some accruals that can work in your favor. Anything to call out this quarter in terms of things that maybe worked against you or worked in your favor in terms of reversals or accruals or anything like that?

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Shelly D. Guyer, Invitae Corporation - CFO [20]

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So let me answer that by differentiating between the onetime pickups that we had historically for the del/dups, and that was in the second quarter last year of $2.3 million, and that was not expected, and that was for tests going back a full year. So $2.3 million in the second quarter. So some of the comparisons this year, you have to take that out to be able to have an apples-to-apples with this quarter.

The other time that we got that onetime pickup was in the fourth quarter, and that was $1.9 million also from Medicare, but that time for Lynch syndrome. This year, we have not had any of those one-time that we've broken out. If you look at the charts in our slides, you don't see any dotted lines. So yes, we had some diminution and some things that we took, but they weren't from exogenous factors. They were from our internally controlled things. And as we did indicate, it was probably on the order of about $1.6 million, and it was largely related to acquisitions and reviewing some of the institutional expect prices in the first quarter, and we took those down.

What you will always have in every quarter under the rules of 606 is that you set your expect prices and that as you find your collections changing over time, you can increase or decrease those. In this quarter, you'll see in our 10-Q, which is I hope now filed, $2.4 million of upticks. That means that we were conservative historically in some of those amounts and that just across the board, in general, we're collecting better than we had anticipated. So that's $2.4 million. But that and the first quarter, none of those were exogenous factors. Those are all just looking at our collections and saying what's up and what's down. And we'll continue to do that every quarter under 606 as we move forward, and we'll report on those. Nothing spectacular, all just normal course of business this quarter.

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Operator [21]

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Your next question is from Kevin DeGeeter with Oppenheimer.

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Kevin Michael DeGeeter, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [22]

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Congratulations on a really strong quarter, guys. With regards to the biopharma channel, can you just talk to us a little bit about some framework is the relative order of magnitude of contribution to pharma and kind of also to what extent now that you do have the patient-initiated channel, are you seeing a change in uptake of patient volumes that are -- may in part be driven through access through that channel.

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Sean E. George, Invitae Corporation - Co-Founder, President, CEO & Chairman [23]

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Yes. I mean at the very high level, and I think then we can go into level of details you want. The pharma business, the paid revenue there shows up in the filings in the institutional. And it -- I would just -- we don't break out that versus kind of academic institutes, but you can kind of say it's a good portion of that institutional revenue that's represented there. On the business basis, again, since we don't break out by the disease areas and frankly, the new pharma partnerships are now kind of beginning to encompass our entire menu, I would just say that it is a significant contributor to our overall growth, and certainly, our revenue growth. Albeit that being said, the clinical business is still the driving factor of both the volume and the revenue. So very important contributor, a rapidly growing contributor. But we're not at the point where it is the swinging factor on the business.

And frankly, if we continue to do things right, it'll -- the whole thing will grow, and it will continue to be a very important, but not major contributor. The -- I think the key thing on the patient pay volume or -- again, I think this is also where -- and look, we internally get tripped up on this too so it's worth just clarifying, there's the sales channel and then there's the direct channel, which is the direct marketing and digital advertising. And both of those channels can produce either patient pay, institutional or insurance billed business. In the direct channel efforts today that we just recently launched, we've seen a mix of all 3 payment types. And so you get -- the shortest answer to your question is, given the small numbers and the fact that there's a mix of all payment types, the overall impact of that direct channel market activity on the business has basically been minor at best and, I guess, the broader scope of everything that's going on.

Now, as Katherine pointed out, that direct channel over in the years to come will become a bigger -- we think will become a larger portion of the volume driving. And in that, I think you would expect to start to see the payment mix tilt toward patient pay and institutional. And that's because, again, without going too much into the details, obviously the patient pay aspect, that's pretty clear. That's people and families with credit cards, but also a large number of institutions we think are going to take us up on kind of ease of use and ordering through that channel. And by those, you could imagine, large physician practices, employers, self-insured employers, employer groups, et cetera, et cetera, in addition to academic and testing centers around the globe, for which it's just much easier to reach people with the easy, direct logistics. So I think -- I hope that answers your question. Was there more detail on the pharma side you wanted to go into?

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Kevin Michael DeGeeter, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [24]

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That's great. That's very helpful. And then maybe just one more sort of strategic question. I mean there has been a fair amount of M&A activity in the group. I think you cut a pretty clear path over the last couple of years in terms of Invitae style, kind of bolt-on, more technology-oriented transactions. But any thoughts as to where there might be opportunities, strategically to get to some of the longer-term goals more rapidly, bring in -- usually they're larger and more kind of commercial stage assets into Invitae, particularly given the currency you have here in the pharma stock, guys.

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Sean E. George, Invitae Corporation - Co-Founder, President, CEO & Chairman [25]

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Yes. Well, again, I think we're still wildly undervalued. So we still have to evaluate it on a one-off basis -- sorry, Kevin, had to throw that in there.

Look, I think the way -- this is a -- it's actually -- it's a telling question of the way we view both the industry and the way we built the business. Our view of M&A is that the targets we acquire really have to have a pretty clear path to being able to fully integrate into our technology platform, kind of bolting on businesses and adding them and kind of filling in the gaps with logistics and running multiple -- running multiple platforms in parallel just doesn't get us to the COGS that we need. And so therein is kind of the answer to your question is a bit of -- you'll notice kind of a marquee, all the way from the very smallest to the largest of our acquisitions are things that we have a relatively clear path to completely integrate it into the data flow of the platform.

Look, more or less integrated in the data flow of the platform. I think when you start thinking about much, much larger commercial assets and yield, that becomes harder and harder to imagine. And I think I'll just leave it at that. It's not a no. But the amount of work and the amount of that kind of integration work really goes up dramatically, the more established, the more different, the more, I would say, traditional the approaches. And in those -- and it's not for lack of looking -- in those examples, we often come to the conclusion that the investment -- the better use of capital is to build it on the modern infrastructure as opposed to trying to integrate a traditional technology stack into a new one. But again, only by way to try to give you a sense of the consideration, not necessarily yes or no. I think we have a pretty active M&A sourcing and diligence pipeline, and we consider a lot of things.

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Shelly D. Guyer, Invitae Corporation - CFO [26]

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Kevin, the only thing I would -- it's Shelly. The only thing I would add there is, yes, we look at the make versus partner versus buy. And so as you may recall, for somatic, we originally partnered and then decided that we could actually do that on our own, probably building on a better stack as we developed it internally. Remember that we did 2 out of 6 acquisitions, were to get in a new area of reproductive health. And so we will look at complementing to build the full suite of types of products that are being asked for by our partners, whether that be reproductive, whether that be somatic, et cetera. We'll look at all the opportunities. And then at the technologies, not only these 2 recent ones, which helped dramatically with COGS. But remember, AltaVoice got us into the partnership-type business. And so we'll look at across the board at what's being requested by our partners and our users, et cetera. And so that we can offer the vision that we've been talking about to build all the suite of products at the best cost accessible to all and make it easy and sticky for our customers to use us and so that's where we look across all of those various contributors to our business development.

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Operator [27]

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(Operator Instructions). Your next question is from Puneet Souda with SVB Leerink.

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Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [28]

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If I could first touch on noninvasive prenatal screening and your acquisition of Singular Bio. Just help us understand are you thinking broadly about the NIPT opportunity here, maybe the market strategy and potential COGS reduction you can derive from the technology and sort of -- could you elaborate a little bit more on the timing given you've had this a couple of weeks or maybe a little bit more since you acquired the company?

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Sean E. George, Invitae Corporation - Co-Founder, President, CEO & Chairman [29]

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Yes. Absolutely. I think kind of on the high level, let's just take a step back, our stated goals in reproductive health are from a woman considering having a child, all the way through the 1-year pediatric check-in. There are currently anywhere from about half a dozen or more genetic tests that may or may not be run to aid in both in outcome, healthy mom and healthy baby. Just in the U.S., there are 6 million pregnancies a year, a very, very small percentage of them take up that information as a part of general care. And that's what we're really focusing on is everything from fertility testing, pregnancy complications, care screening, noninvasive prenatal screening, amnio, CVS, all the [accessory] reproductive suite, up to and including a neonatal test that may in the very near future include everything from a kind of the metabolic, newborn screening-type panel we run today to exomes and genomes in the relatively near future. So that's how we view the reproductive health "market." It's -- kind of think of it as 6 million women just in the U.S. per year that are going to go through that journey and could use that information.

If you think of the whole world, it's actually over 200 million pregnancies. And given all of that information I mentioned of half dozen or so more tests, some are covered by insurance, some are covered by insurance wholly, some are covered by insurance spottily, some are not covered by insurance. And so our view is that depending on what kind of -- how much information an individual would like to receive in that arc, there will be different price points. And we want to make sure that we have price points that can serve the entire globe, the 200-plus million women around the globe that become pregnant every year. And all the way up to those individuals interested in getting the absolute best-cutting edge, most information, leaving as a little chance as possible and the price points associated with that.

So with that as a fairly long backdrop to answer the question that -- Singular Bio allows us to dramatically reduce the cost of goods for noninvasive prenatal screening, and that we think that will be essential in hitting some of the price points that we think will really unlock the true global demand for it. And that's, of course, why we acquired them. There are -- the team has already -- it was -- in terms of logistics, it's pretty simple. They were a few blocks away. The team is now here. We've moved their development laboratory, we think we can get it into production within 18 months or 24 months, somewhere thereabout. And I would add the other -- by the way, the other benefit for really acquiring some small, really innovative shops as you pick up, you pick up great start-up talent that is used to working in an environment that is very unforgiving and time line focused and tend to be -- have pretty experienced folks that understand the technology well. And with all acquisitions -- with many of our acquisitions, we've been able to add that to the Invitae culture and this is no exception.

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Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [30]

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Great. So if I could pull back a little bit and just look at the menu expansion opportunities that you always -- menu expansion overall that you've talked about. And it seems like the number of opportunities that we're seeing where when Invitae is taking steps is in carrier screening and NIPS bundle, which we're hearing more about. There's a proactive testing or the patient-directed testing effort that you have ongoing and then you have the Detect programs on top of it for, I think, that started in July for prostate and muscular dystrophy and other health conditions. So I'm trying to understand, when we put that together in the framework of your full year guide, which is 500,000 tests and going to 1 million and doubling essentially. Help us understand how much sort of contribution should we expect from some of those efforts versus the core business, which was more hereditary and breast and ovarian cancer? And how should we think about these other -- these additional drivers driving over the next 2 years and sort of what sort of volume should we be expecting from these efforts?

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Sean E. George, Invitae Corporation - Co-Founder, President, CEO & Chairman [31]

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Yes. No, it's a great question. The -- and I think it's also -- it presents the opportunity to kind of frame how we're thinking about it. Yes. The guidance this year for the 500,000 samples, and all the revenue associated with that, that is -- we hope that by covering that arc of care, whether it's a reproductive arc or the cancer arc or the cardio arc, by providing that full arc of care from start to finish, we hope that we will start demonstrating that there are multiple data sets that we can deliver and add value for the patient and subsequently get paid for. However, I think for this year's guidance, we really aren't anticipating a whole lot of that nor meaningful impact from it. So this year is very much kind of a sample-by-sample ASP we're targeting. If you do the math, it's around 440 per example ASP this year.

And then that's kind of -- as we look aspirationally to next year and as a reminder, we provide guidance, routinely we provide guidance in January. But aspirationally, as we think about 1 million samples and $500 million of revenue next year, we absolutely are expecting a contribution of the idea that multiple tests would be ordered off the same sample; that results in one part of the family would lead to testing and results in the other part of the family; that, for example, integrated care networks would be interested in not only the data that is answering the question for the individual at the time of clinical care, but also data that could answer larger population-based questions for the larger management of their population. And thus, you could create the value multiple times off the same data set for the same patient. That will definitely be a feature or we are aiming to make that a feature of that aspiration for next year.

To the extent what percent is that versus the -- like I think you referred to it as a core business, again, that's going to be -- so that is actually the core business model. We've just been -- we've just been using the current diagnostic testing industry and the way that it works as building up into it as a prelude to it, and we will be transforming in wholesale. And so I think we'll do our best next year to map, kind of, here's how many samples in the old lingo this would be and translate it to how many "discrete" tests ordered. But we do anticipate next year, the revenue on a per patient basis to change to something that is more interesting, kind of year 1 revenue per patient, year 2 revenue per patient, year 3 revenue per patient, and the associated allocated COGS accordingly.

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Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [32]

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Okay. That's great. And if I could, just to squeeze one in on the commercial front, could you just -- I don't know if you gave the sales rep count that you have currently and sort of where does that go by the year-end in terms of the expansions that you're doing?

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Shelly D. Guyer, Invitae Corporation - CFO [33]

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Sure. So we have about 190 folks working on the sales team, and we expect that, that's going to be pretty steady, by and large, between now and the end of the year.

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Katherine A. Stueland, Invitae Corporation - Chief Commercial Officer [34]

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We do some times hire at the tail end of the fourth quarter to be sure that people are ready in January of the new year, but we wouldn't expect that they would be productive, if you're thinking about how many of them could generate volume this year. This is really that group that would be able to do that.

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Operator [35]

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Your next question is from Jeffrey Cohen with Ladenburg Thal.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [36]

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You spoke a little earlier about Global, and I know that your accession rate is 10% on the international basis. Could you talk a little bit about some of the areas of interest that you're seeing? And can you talk a little bit about some of the money flows as far as what you're seeing from reimbursement and payers out there and also talk about some of the geographies that are coming online, perhaps, quicker than you expected or not?

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Sean E. George, Invitae Corporation - Co-Founder, President, CEO & Chairman [37]

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Yes, absolutely. I think our thesis globally has largely been one that at a certain price point the ex U.S. world of genomics -- genomic medicine opens up and we are there. So we've begun to see that with a very small commercial effort, historically, it's about 10% of our total business. Now that's the entire world, but still with the amount we've put after, the demand is palpable, the excitement is clear. We have fairly limited ex U.S. capabilities. We are essentially serving the ex U.S. market with the same infrastructure and logistics that we serve the domestic market. So it's always kind of hampered our ability to go after it nonetheless, we are starting to -- a picture is emerging that with the price points we have particularly in carrier screening, our price points in the broader -- there are -- I'll put our broad epilepsy panels, our large developmental panels. There is no one around the world that can get this high-quality information at the price points we can offer. So it's really kind of all over the map. It tends to be region-specific for a lot of reasons not worth going into now or perhaps ever. I think it's -- with more time, we can go into it. But the areas we see picking up are really kind of Northern Europe, Latin America, Israel, Middle East and kind of -- we spend a lot of time in the APAC as well. They all kind of have -- we see the equal amount of demand.

We do not do a lot in China or Japan, for structural reasons, it's just difficult to get in there. And worth pointing out to answer your question, we have not, to date, spent a lot of time with the traditional Central European reimbursement authorities. It's just -- historically, we just -- too long of a ramp, it's too much time. It's been not a priority for us. I think once we decide to put some real effort after international, I think we'll start by just continuing to broaden the menu, lower the -- essentially really fix up the logistics to make it much, much easier, get local language support. Over time, I think we might begin addressing at the government level. But I think we want the picture to emerge a little more clearly for governments around the world, just how valuable this is for the management of their population. And until then, I think we can do better. We can do better going after the demand that we know exists at the price points that we can currently offer and people are willing to pay. We're very, very bullish on it. The government reimbursement side of it, that's actually something that will probably be a question mark for a while.

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Shelly D. Guyer, Invitae Corporation - CFO [38]

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So I would just add to that, that institutions are how we really began and then we supplemented that with patient pay. And so we do get that paid for upfront. And then pharma partners are the other big piece of that. So when you think institutions, it's not just some of the large institutions that we direct bill, that means and not governmental agencies. And so as Sean said, we're not waiting for third-party insurance. We're not waiting for the governments. We're getting paid today from those institutions, pharma partners and patients directly.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [39]

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Okay. Got it. Would there be any other path as far as you're deciding as far as efforts made in certain territories, is there other avenues available that are more partnership focused or is that not a way that the company would plan to go over?

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Sean E. George, Invitae Corporation - Co-Founder, President, CEO & Chairman [40]

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A partnership possibly. In the past, we -- there was a period of time, we aggressively approved -- approached or pursued the distributor -- kind of the classic distributor model in our industry. And I mean frankly, with 60% in gross margin, there's just not enough margin to go around. We can't spend 40-plus percent of revenue on sales and marketing. We don't do domestically. And again, the global distribution network set up around these very -- these are very esoteric, these are very highly complex tests, the global distribution network set up around just, frankly, demands more margin than we have to give. So partnerships, yes, absolutely. But I do think, given our ability to drive volume with very, very little effort, we actually think there's -- it's worth exploring what we do direct with a little bit of cleaning up of the logistics and local language support. Export/import, et cetera.

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Operator [41]

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Your next question is from Bruce Jackson with Benchmark.

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Bruce David Jackson, The Benchmark Company, LLC, Research Division - Senior Healthcare Technology Research Analyst [42]

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So when you look at your product portfolio, are there any places where you'd like to fill in either in terms of technology, like you did with Singular and Jungla or any places in terms of capabilities with many (inaudible) or therapeutic area.

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Sean E. George, Invitae Corporation - Co-Founder, President, CEO & Chairman [43]

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Yes, the short answer is yes. I think the -- and it's actually -- it's a little bit of a running joke around here. All the things is the answer. But again, if you take a step back, we genuinely are pursuing, aggregating, all the world genetic information in a single platform and then turning that into the market at the right place at the right time on the patients' behalf. So if you think about kind of what additional -- we've done inherited genetics, we've mentioned that, and I think the way to think about is in each disease area, there is data that is very interesting for the management of patients, the preventive measures that can be deployed in the therapies they're in. And to the extent that we can envision taking those data streams in mass, generating that data on every sample that comes in the door, that's the kind of thing that we're looking to add to our technology stack.

In cancer, we've begun by working on somatic tissue profiling and then subsequently, the liquid biopsy for the monitoring, so that for a cancer individuals -- an individual with cancer risk or diagnosis, we can really understand the [micro] diagnosis of the cancer they have and then monitor it as treatment progresses. I would imagine that expression, expression profiling, other exogenous factors, any kind of genomic information that maybe isn't specifically inherited genetic or tumor or somatic genetic, but is also interested in the management for patient care. I would imagine that over time, we will be adding that as well. I think the way to think about the disease areas is we're pretty close to "all of it."

But now when you think of things like pharmacogenomics, when you think of autism, when you think of kind of more emerging areas for which the data is accumulating that genetics support that, previously, perhaps wasn't treated as a "Mendelian disease," but is now becoming important for health care, those are other areas as well. And I think that's probably good enough. It's -- there is a lot of really scaled information out there that we think en masse will lead to much better patient management and patient outcomes and is currently being deployed in the industry. And we'll continue investing in our cost of goods and our infrastructure capabilities to manage it.

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Operator [44]

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Ladies and gentlemen, this concludes the Q&A period for the call.

I'll now turn it back over to Laura D'Angelo for any closing remarks.

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Laura D'Angelo, Invitae Corporation - Head of IR [45]

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Thank you for joining us today. We look forward to catching up with you soon at upcoming conferences.

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Operator [46]

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This concludes today's conference call. You may now disconnect.