Invitae Corporation

Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Invitae fourth quarter 2021 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, again, press the star one. Thank you. Jack Sinks, Investor Relations. You may begin your conference.

Thank you, operator, and good afternoon, everyone. Thank you for joining us for our 2021 fourth quarter and full year results call. Joining us today are Sean George, CEO, Roxy Wenz, CFO, and Ken Knight, COO. 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 future financial and operating results, plans and prospects, focus of our business strategy, plans to integrate and manage businesses we acquire, market opportunities, future product services, our product pipeline and their timing, demand for and reimbursement of our services, and investments in our infrastructure and operations. These statements constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act. It is difficult to accurately predict demand for our services, and therefore our actual results could differ materially from our stated outlooks. statements on future company performance assume, among other things, that we don't conclude any additional business acquisitions, investments, restructurings, or legal settlements. We refer you to our most recent thank you, in particular, 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 exclude from our non-GAAP operating results as applicable, among other items, amortization of acquired and tangible assets, acquisition-related stock-based compensation, post-combination expense related to the acceleration of equity grants or bonus payments in connection with a company's business combination, adjustments to the fair value of certain acquisition-related assets and liabilities, including contingent consideration and acquisition-related income tax benefits. We exclude from our non-GAAP cash burn as applicable changes in marketable securities, cash received from equity financings and debt, and cash received from exercises of warrants. Non-GAAP measures may include cost of revenue, gross profit, operating expense, including research and development, selling and marketing, and general and administrative, other income and expense, net, as well as net loss and net loss per share and cash burn. We encourage you to review our GAAPs, 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 investor section of the company's website at ir.nvsa.com. With that, I turn the call over to Sean. Thank you, Jack, and good afternoon, everyone. As you will see outlined in our call today, we're tapping into something unique at Invitae. Aside from quarterly and sometimes even annual short-term revenue fluctuation, solid fundamentals back our top-line execution, and we are well-positioned to continue that growth in the years ahead as we hurdle forward to meet the immense unmet demand for the use of genetic information in everyday personal health. Today's call will be numbers and metrics heavy, so I won't go deep into our full year of financial performance, but in summary, revenue and volume growth were as expected, growing at approximately 65% and 77% respectively. We finished the year with very strong provider account growth and the addition of almost a million patients to our platform throughout all stages of life as we continue to develop an integrated solution of health information, digital solutions, and data services that will shape the genomic medicine era. The technology cycle kicked off at the dawn of the genomic medicine, now 20-plus years following the Human Genome Project, is presently set to dominate our industry. The fundamental knowledge of the human genome and its impact in healthcare is driving the single greatest shift in medicine in recent history, a shift to where in time most diseases will have a well-understood risk that can be minimized or staved off, and if or when they arrive can be rendered a chronic condition to be managed for years or even decades of a customer's life. In 2010, this sounded like science fiction, but if you take a step back and look out at the genomics landscape, it's coming to focus quickly. And a company that can provide the science, infrastructure, support, and guidance for customers throughout their own personal health journey can lead this shift with immense impact for customers, providers, and the industry at large. To make this future a reality will require investment and time, but we're committed to maintaining sustained high rates of growth and unlocking the value presented by this immense opportunity. The company that can deliver the capabilities I just mentioned will be transforming very large, durable, and converging markets in healthcare. What I mean by converging markets is that soon, the provision of any single test or result at a given call point will become far less relevant than the ability to provide information in the context of the individual's broader personal health journey. The general tailwinds for our growth are picking up, coming from rapidly expanding biopharma pipelines full of genetically targeted therapies, a better understanding of the improvement of health and a cost outcome driving private payers and national healthcare systems to adopt, and changing perceptions and attitudes about the role of the patient in their own healthcare and engagement from those paying for it. At virtually every major medical meeting, the number of studies linking genetic information to better clinical decisions and outcomes continues to expand. The concept of genomics as a subset within certain medical specialties is being replaced by the understanding that genetics and multi-omic information will be the underpinning for care across all areas of medicine. As for specific drivers of growth over the next two to three years, we see the following. In pediatric disease, our neurodevelopmental delay offering has recently launched, and we have improvements coming throughout this year in our exome testing, moving to an offering based on the customer's genome. This, combined with improving commercial reimbursement and rapidly growing interest in genetic disease from biopharma partners, has had a great backdrop for growth at this stage of life. In reproductive health, we still see a large unmet need for core genomic offerings for young women having children. Our broad offering and coming improvements in ease of ordering, logistics, clinical decision support, and patient services will continue to drive growth and improve health for both mom and baby. For oncology, adding to our leading position in inherited risk for cancer, this year we will commercialize a cancer monitoring and therapy selection offering that is as good or better than any of the leading companies in the market. This, combined with solid demand for our distributed oncology offering, growing demand for comprehensive precision oncology solutions, and attractive reimbursement, set us up well for helping more customers understand their cancer risk and be armed with the information to fight and beat the disease. All of our growth across all of these stages in life fuels our data and platform services business. We've recently broken this revenue line out, and we expect this part of our business to be an outsized contributor to growth as interest grows in our large network of patients who are interested in utilizing their data with ecosystem partners. I look forward to sharing much more about our investments in the content, production, digital health tools, and patient-owned data network capabilities we're building during our technology day in a few months. But for today, we'll focus on the financials. For the first time, we'll be guiding not just to the top line of our business, but also to gross margin and cash burn. We'll also be introducing some nontraditional metrics and key performance indicators for investors to follow on a quarterly and annual basis. These are the next level of key performance indicators that we run our company again, and we're going to invite everybody to watch these quarter by quarter. This is a reasonably big shift for the company, undertaken primarily for two reasons. First, we're building a new category, pursuing a novel business strategy, and it's an ambitious undertaking. As such, the standard measurement tools used in the specialty diagnostic industry are not helpful in measuring or modeling the business going forward. We are attempting to be as transparent as is useful to help all investors understand how we are thinking about running the business and follow our thinking and execution at a detailed level. Second, we've clocked industry-leading growth for many years now, pursuing this unique model. Pushing past half a billion in revenue, we'll be at a billion and then two before we know it. The size of the numbers at this point is such that instead of pursuing our unique strategy and growth at all costs, We'll be operating the company aggressively and adding targets for gross margin and cash burn reduction, providing a clear picture of our march toward generating large, sustainable cash flows in the future. I'll hand the call to Roxy to walk us through this year's results and forward-looking metrics.

Thanks, Sean, and thank you all for joining us today. For the remainder of the call, we'll discuss non-GAAP numbers, including cash firms. As noted in prior quarters, it is easier to understand our business and financials by providing non-GAAP metrics to allow for comparison of the two sets of numbers. We urge investors to review the detailed reconciliation to non-GAAP financials included in today's price release and at the back of the slide deck. In the appendix section, we also included Q4 billable volumes, ASP, and cost per unit data. Before we move to the detailed financial update, I want to note that this will be the last time we provide the blended ASP and cost per unit metrics in our quarterly update. As our business evolves with dozens of products across all categories, each in various stages of maturity, aggregate price and cost data will become less helpful to properly model and assess performance. Consequently, we'll be focusing our comments on revenue growth, our new metrics dashboard, and other selected financial data on a quarterly basis, while continuing to disclose our billable volume data as part of our 10Q and 10K filing. In 2021, we generated $460 million of revenue, and the revenue breakdown was as follows. Approximately $281 million from oncology, including germline testing, therapy selection, and companion diagnostics. Approximately $83 million from our women's health offerings, including NITS, CARIA, and other reproductive tests. Approximately $57 million from the rare diseases and other testing covering cardio, neuro, metabolic, and newborn screening. Data and platform revenue was approximately $39 million. This includes data management, analytics, data as a service, and certain biopharma and patient identification programs. We include Q4 revenue performance and breakdown in the appendix of the slide deck. Revenue from all four areas increased nicely in the fourth quarter and across the past three years. Moving down to P&L. For 2021, non-GAAP growth profit was $168 million, which translates to a non-GAAP growth margin of 36.6% in 1% decline from the prior year. In the fourth quarter, non-GAAP growth margin improved slightly to 36.5% over the Q3 growth margin of 35.6%. Non-GAAP operating expenses were $771 million, or 167.5% of revenue, compared to $457 million, or 163.3% of revenue in the prior year. The operating expenses include costs from newly acquired businesses. As we stated on earlier calls, the rate of growth in spending will come down in 2022. We're committed to this goal as we scale the business and manage returns on investment at the total portfolio level. Moving to our cash position, Cash, cash equivalents, restricted cash, and marketable security totaled $1.06 billion at December 31st, 2021, compared to $1.25 billion at September 30th, 2021. Full-year 2021 cash burn was $849 million, including cash for acquisitions, or $569 million, excluding acquisitions and related expenses. Indita's business model is highly depreciated and ambitious. As discussed on the last conference call, we spent the past eight months doing the work and taking the steps necessary to help offer visibility into the fundamentals of our business. Going forward, we'll provide clear visibility to a new set of key business metrics. We selected and developed these metrics based on their operational significance and ability to accurately describe returns on investment. These categories include expansion of our current commercial access points through clinics, hospital systems, or pharmaceutical partners, growth of our patient population and patients available for data sharing, revenue per patient for our testing and services business. New product vitality demonstrates how new products developed or acquired over the last three years connects strategic investment decisions to the freshness of the portfolio. And last but not least is the category of leverage. In addition to the standard OPEX metric, we will report operating cash flow as a percent of revenue to show scale and improvement. Today, our operating cash flow is consistent with our cash flow performance, but reaching that operating cash flow is now a due focus with continued rapid growth so that we can replace the current form of investment capital with a self-funding model at scale. For these metrics, success will not be measured by increasing every category in every quarter, and we do not plan to go into detail on every call about every metric. To be a useful dashboard, it will signal progress but also trade-offs and even areas that need attention from time to time. Our objective in sharing these metrics is to offer more transparency into a dynamic, fast-changing business and to provide a consistent, balanced perspective on performance. We intend to maintain and publish these as a quarterly update as we move forward, and I will walk through a few of the highlights here. Under portfolio growth, our active accounts and active partners both increased rapidly over the last three years. Similarly, the number of patients we serve and number of them who are available to share their data have also expanded nicely. New product vitality has been steady growth from 51% in 2019 to 64% in 2021. Revenue per patient measured by the total platform revenue divided by the number of ordering patients for the period grew from $456 in 2019 to $491 in 2021, primarily driven by expansion of the average number of tests per patient and growth in non-patient-specific revenue, including data, platform services, and oncology kits. As revenue per patient starts to diverge from ASP, we're encouraged by this early proof point of the future growth potential from the platform we have invested heavily in since inception. Moving to operational excellence, non-GAAP growth margins have experienced considerable downward pressure as compared to our long-term target of 50%. We have multiple levers in the business that can drive margin expansion, and we're already taking some of those actions and expect margin to improve in 2022 and 2023. Variable cost productivity measures the efficiency of variable costs relative to the volume growth in the period. Examples of variable costs include lab material, shipping, and labor. And it is important to note that negative numbers in this metric represents favorable productivity. The performance bounced around over the last three years. And in 2021, we've seen a recovery from 2020 when COVID significantly impact volume driving a decline in productivity. Growth margin improvement was held back in 2021 as growth in lower margin products more than offset productivity gains. On the strategic investment front, the trend of R&D as a percent of revenue and capital use for M&A, including both cash and stock, reflects our bold investment strategy and growth ambition. And the impact of this investment is partially demonstrated in our top-line growth and new product vitality metrics. As to our guidance for the year, we're providing revenue growth guidance of 40% or approximately $640 million for 2022. As Sean mentioned, the combination of the fast-growing accessible market and dynamic opportunity we see for market share capture and strategic activity will always keep our internal growth goals at high levels for years. I would believe the 40% target represents industry-leading growth and gives us some room for upside for both organic and inorganic activity. For growth margin, we expect a steady increase over the course of 2022 to a full-year growth margin to be in the range of 42% to 45% and exiting the year at a run rate higher than 45%. This year-end runway margin guidance should showcase our revenue growth and operational improvements throughout this year, and we may choose to discontinue this guidance metric in future years. And finally, our cash burn targets. We're targeting a cash burn of between $600 and $650 million during 2022. It is important to note that this cash burn target includes any cash we deploy for acquisition-related activities. and that it is a reduction of more than $200 million from the $849 million cash burn in 2021. We also plan to exit 2022 with a cash burn run rate that enables ongoing reduction as we continue driving the business to positive cash flow in the future. Now, I will turn the call over to Ken, who will tie together some of these metrics and goals with some core operating factors and programs. Ken?