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spk07: Hello, everybody, and welcome to the InVTage Fourth Quarter 2022 Financial Results Conference call. My name is Sam, and I'll be coordinating your call today. If you'd like to ask a question during the presentation, you may do so by pressing star followed by 1 on your telephone keypad. I'd now like to turn you over to your host, Hokie Luke, Head of Investor Relations and Capital Markets, to begin. Hokie, please go ahead.
spk03: 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 CFO, Roxy Nguyen. Before we begin, I'd like to remind you the various remarks that we make on this call that are not historical, including those about our vision and business model, the company's strategic business realignment, future financial and operating results, expectations of future growth and reduction in burn rates, expectations regarding the exchange and equitization of existing notes and extension of debt maturity, and future products, services, and our product pipeline and the timing. 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 state outlook. 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 10Q and 10K, 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 four-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 rr.ndj.com. Today, Ken and Moxie will discuss our financing announcements, our fourth quarter and full year highlights, our roadmap and portfolio strategy, financials and key metrics of the fourth quarter and full year, as well as our 2023 guidance. We will then proceed to conclude the call with Q&A. With that, I'll turn the call over to Ken.
spk02: Thank you, Hokie, and thank you all for joining us today. Let me start with the financing activities. We have just announced steps taken to reduce our debt and successfully extend the vast majority of the near-term debt obligations. Roxy will discuss the terms in detail in her remarks. Overall, we are very pleased with these transactions, and they highlight our ongoing commitment to taking the action needed to improve the health of our balance sheet. I'd also like to thank our investors and other stakeholders for their continued support and confidence in the long-term opportunities of Invitae. Now, moving on to an overview of our quarterly performance, which demonstrated continued operational execution against our realignment plan. Revenue for the fourth quarter was $122.5 million versus $126.1 million a year ago, reflecting the impact of businesses and geographies that we have exited. This was paired with solid improvement in our gross margin, with non-GAAP gross margin of 47.8% in the quarter compared to 36.5% in Q4 2021 and 45.9% in Q3 2022. Additionally, our effort to reshape our cost profile continues to gain momentum. and is reflected in the reduction of our non-GAAP operating expenses to roughly 111% of revenues compared to 171% of revenues in Q4 2021 and 112% of revenues in Q3 2022. Over the last six months, the major initiatives under our strategic realignment have been largely completed. with our most recent step being the sale of certain assets related to the distributed RUOKitted solution that was executed at the end of 2022. Collectively, this work helped us reduce our ongoing cash burn to $77 million for the quarter if we exclude certain items. This is a significant reduction compared to $196 million in Q4 2021. And our cash burn has continued its declining trend over the past five quarters. Overall, looking at four-year results, we delivered 12% year-over-year growth in our top line. Non-GAAP growth margin was 42.5%, which was in line with our 2022 guidance. Our four-year cash burn of $510 million also performed significantly better than our guidance. Note that this reported cash number includes all restructuring and past acquisition-related expenses, as well as the cash inflow from our RUO Kitted solution sale. Later, Roxy will provide some perspectives on our ongoing cash burn trend, excluding these special items. We have also started 2023 in a strong fashion, and two months into the year, we remain on track. to continue to perform well against our objectives of extending our cash runway through 2024 and driving toward profitable growth. Overall, we are pleased with our team's performance and ability to deliver on our goals, and we appreciate their unwavering commitment to our patients, over 3 million of them whom we have served, to our mission and to our future. So, as I just pointed out, we have largely completed the major initiatives surrounding our realignment efforts. We have stabilized our portfolio, reduced our ongoing cash burn, and profitable growth is the foundation on which we built our business plan for 2023 and beyond. 2023 will also be a year of investment and innovation into our future to fuel our next wave of new growth opportunities. While we will drive growth and better execution of our core businesses, We must also deliver new capabilities, products, and services for the long term. One of the big growth bets for us is in somatic oncology, specifically our minimum residual disease product PCM, which has shown great utility for monitoring and surveillance of cancer. We are investing in clinical confirmation, adoption, ease of use, and reimbursement in advance of full commercialization. In addition to our capability in bringing high-performing assays to the market, another growth driver will be our efforts at integrating and connecting our portfolio, especially for non-genetics expert adoption. This will offer us a distinct advantage as we can leverage call points and utilize customer-facing digital tools to make it easier for practices and healthcare systems to use our entire suite of offerings. Another area of investment will be in our data and patient network platform and its utility to provide solutions to multiple partner types. We remain committed to growing a patient network which will offer a unique data set with more enriched longitudinal engagement combined with our industry-leading variant interpretation. Lastly, when we enter our acceleration phase, we will have implemented the differentiated technology and services needed to fully enable our major growth opportunities. We will be valued for our ability to help put the puzzle pieces together for the patient journey. And we're building this with a focus on generating positive cash flow. Now, a few words on our portfolio rationalization and strategy. The chart on the left represents an overview of our product offerings as we closed out 2022. and where they stand relative to each other based on their revenue size, non-GAAP gross margin, and growth rate profile. At the end of 2022, the entire business was much improved from where we were a year ago, including the sharp rise in overall non-GAAP gross margins exiting the fourth quarter. The progress we've made in women's health has been significant, and teams are actively replicating those successes and our rare disease product line as well. In 2023, we're driving the core businesses toward continually growing revenues and expanding growth margins, and hereditary cancer continues to be the largest and most profitable business. On the right side, we're showing how we see the portfolio evolving over the next two to three years. As new products become material drivers of revenue, they are depicted by new bubbles of their own. Somatic shows up here as PTM flows in the clinical commercial usage and moves toward positive gross margin with the full benefit of reimbursement practices that are coming into play more and more. The somatic market is still nascent as the level and timing of reimbursement for clinical use is still to be solidified. Yet we are encouraged to see the recent progress in the landscape. As it relates to our own path, we have taken the necessary steps to secure favorable reimbursement while preparing for widespread launch activities. I'd encourage you to watch for additional data and publications on that front. We have also separated pharmacogenomics, PGX, from rare disease to highlight our expectation that it will become a more significant part of our business based on improving reimbursement and broader adoption. A third new bubble is our patient network. which is combining our genotypic insights with phenotypic clinical insights to solve puzzles for patients, advocacy groups, and biopharma in a unique and time-saving platform. All of our portfolio offerings, along with our strong foundational variant interpretation capability, have a role to play in building sustainable growth for Invitae, delivering an increased number of solutions for physicians and patients, and speeding the development of new therapies. Before I hand the call over to Roxy, I'd like to remind everyone of our strategic vision for the business. Currently, we're taking the steps to evolve from one patient, one test, which is today's norm in our industry. Once that expansion is established, we can take the next step and leverage the data from our integrated network, allowing for collective insights for many patients to provide multiple solutions for multiple use cases and customer types. This is the multiplying value proposition. And Vitae is uniquely positioned to do this, not simply because we think it makes sense, but because patients will demand it. And we're getting after it. Let me now pass it to Roxy to go over the financials.
spk04: Thank you, Cam. I'll spend the next few minutes summarizing recent announcements related to our debt and financing management. First, we have signed a $336 million transaction led by Deerfield Management. This transaction effectively addresses 96% of the outstanding convertible debt due in 2024 and sets us on a more stable financing footing for years to come. Investors will exchange 90% of their current 2024 notes with new senior secured notes due in 2028, and also will accrutize 10% of their holdings. In addition, certain investors will provide an additional $30 million of capital to help address most of the remaining 2024 notes, leaving a balance of approximately $14 million due in 2024. We truly appreciate their support and confidence in the company's future. Additionally, we have now fully repaid the $135 million three-year secure term loan. In early February, we had elected to pay down $50 million of that outstanding balance, reflecting the $45 million inflow from the REO sale. In light of the larger debt transaction and our continued cash firm reduction, we're able to pay down the total amount without significantly impacting our overall cash runway. By deploying the added capital to extinguishing this debt, we eliminated a total of $135 million debt and associated interest obligations in a rising rate environment. We estimate that repayment will save us over $15 million of interest expense. Once completed, These transactions will push out our debt obligations significantly and reduce the payment due in 2024 from $485 million to $14 million, an easily manageable figure. More importantly, we'll also decrease our total debt by over $165 million, making notable progress in improving our balance sheet. We estimate that the company will have a performer cash balance of $450 million at the close of the transaction. Based on the current plan, we continue to expect we have a cash runway until the end of 2024. In addition, we also have about $245 million secure debt capacity available after this transaction. And utilization of such could further extend our runway. Needless to say, these transactions represent a fundamental change and benefit to our capital structure and the financial health of the company. Now moving on to our financial results. In the fourth quarter of 2022, we generated approximately $122 million of revenue, and the breakdown was as follows. $76 million from oncology, including hereditary cancer, therapy selection, and PCM services offered to pharmaceutical partners. $20 million from our women's health business, including NIPS and carrier testing services. $16 million from RareDx, pharmacogenomics, and other testing products. Data and patient network revenue was about $11 million. This includes our sponsored testing programs, data management, and a number of data partnership programs. Non-GAAP growth margin was 47.8%, which is an improvement of over 1,000 basis points from the prior year and 190 basis points from the prior quarter. Non-GAAP operating expenses was $136 million. compared to $216 million in the fourth quarter of 2021 and $150 million in the third quarter of 2022. As a result of our realignment plan, we also incurred about $9 million of expenses, including employee separation, asset impairment, and professional services fees. These items, and again from the REO sales, were excluded from our Q4 non-GAAP operating expenses in today's presentation. Moving on to cash performance, cash, cash equivalent, restricted cash, and marketable securities totaled $557 million on December 31st, 2022, compared to $596 million on September 30th, 2022. Total revenue for the year was $516 million, were 12% growth from prior year. Non-GAAP growth margin in the full year 2022 was 42.5%, which improved by almost 600 basis points over the 36.6% in 2021. Non-GAAP operating expenses in 2022 was $695 million, or 135% of revenue compared to $771 million or 167% of revenue in 2021. In the full year, expenses related to the realignment activities, the REO sale, and impairment charges for Goodwill and certain IPR&D assets were excluded from the full year non-GAAP operating expenses in today's presentation. We think that it's important to look at our ongoing cash burn trend, excluding the proceeds from the REO sales and the realignment plan, as well as prior acquisition-related cash expenses. In the fourth quarter, the cash burn for our ongoing business was about $77 million. This was, again, a meaningful reduction as compared to the run rate at the beginning of 2022 and last quarter. Stepping to the business metrics, For the sake of continuity through 2022, we'll provide the same metrics established prior to last year. However, following our realignment activities and considering the company's current maturity and scale, we'll be considering, we'll be consolidating our metrics to fewer measurements that are more relevant to our progress into the coming year. For 2023, we'll eliminate metrics associated with active accounts, active partners, and new product vitality. Financial metrics related to growth margins, cash burn, and operating expenses will be covered in financial performance discussions. Our business metrics in 2023 will include revenue per patient, total number of patients served, number of patients available for data sharing, as well as variable cost productivity. Now to the 2022 metrics. Under portfolio growth, our active accounts and active partners were both relatively stable in Q4, primarily as a result of our realignment plan. However, the number of patients and the ones who are available for data sharing continue to expand. We now have served over 3.6 million patients, with over 62% of them available for data sharing. Our new product vitality has improved slightly from Q3 and returned to a similar level to previous quarters. Revenue per patient measured by total company revenue divided by the number of ordering patients for the quarter has continued to increase in the recent quarters as we have focused our efforts on achieving higher quality of revenue. Moving to operational excellence, We're seeing continued quarter-over-quarter improvement in all categories, non-GAAP growth margin, variable cost productivity, non-GAAP OPEX as a percentage of revenue, as well as cash burn. Moving to our financial guidance. On a pro forma basis, we exited fourth quarter of 2022 with an annualized revenue of roughly $450 million. for our remaining business. For 2023, we're expecting revenue to be over $500 million, representing low double-digit year-over-year growth. And so far, the performance in the first couple of months in 2023 supports that expectation. We also anticipate the revenue breakdown to be roughly 45 to 48% in the first half of the year, and 52 to 55% for the second half. We've also given additional color as to the product mix expressed as a percent of total revenue. In 2023, we expect top-line growth to be driven by call point expansion for hereditary cancer, women's health industry consolidation, the higher average press per test due to better reimbursement and revenue management, in particular rare DX. We also expect our non-GAAP growth margin to continue to expand from the 47.8% in Q4 to be between 48 to 50%. thanks to our more focused portfolio, higher quality of revenue, as well as sustained improvements in lab operations, supply chain, and logistics. Looking at our cash burn, we now expect full year 2023 to be between $250 and $275 million, a more than 45% improvement from the $510 million in 2022, driven by our top-line growth, improved growth margins, reduced OPEX, as well as working capital improvements. In 2022, we incurred approximately $38 million of cash expenses related to our realignment effort, which compares favorably to the $75 million original estimate. In 2023, we anticipate a small amount of realignment-related cash expenses and thus The current guidance reflects largely our ongoing cash burn target. We're encouraged by our progress today and are confident in our team's ability to deliver. Back to you, Ken.
spk02: Thanks, Vasi. There are three areas that summarize our focus. First, Invitae is moving from a broad, somewhat disconnected portfolio of individual tests to an integrated and connected portfolio of solutions. In that regard, patient service, valuable and rich data, and sales and marketing synergies are how we are building our competitive advantage. Secondly, our business model is evolving to unlock profitable growth with customer experience, adoption, partnership value, and clinical insights and solutions as growth levers. balanced against reimbursement, cash flow, and affordability. Early results are demonstrating that we are all in and making great progress. Finally, we have an incredibly talented group of engineers and scientists at Invitae who have shown they can do big things. Moving forward, our innovation efforts will focus on offering integrated solutions for our customers in addition to going after big bet opportunities. with the potential for long-term growth and a healthy margin profile for the company. I firmly believe this is the right strategy, and I'm excited about the opportunities ahead of us. Operator, I'll hand it over to you for questions.
spk07: Thank you. If you would like to ask your question, please press star followed by one on your telephone keypad now, and if you change your mind, please press star followed by two. When preparing to ask your question, please ensure your line is unmuted locally. Our first question comes from Tejas Savant from Morgan Stanley. Tejas, your line is now open. Please go ahead.
spk05: Hi, this is Gabby on for Tejas. Thanks for taking my question. So in your 48 to 50% gross margin guidance for 2023, how should we think about this trending throughout the year?
spk08: Yeah, we have, you know, the 48 to
spk04: 50% is an average throughout the year, and we exited the quarter Q4 with 47.8, so it should be a pretty smooth improvement throughout the year.
spk05: Okay, great. Thanks. And then just in terms of NIPS coverage, where do you think stand in terms of winning back share, particularly in California following the legal decision? Thanks.
spk02: Ken, I'll take a stab at that. I mean, our NIPS business has grown consistently throughout 2022, and we've been really pleased with the progress that we've made there in terms of market penetration. You know, we continue to be optimistic about the developments that have happened in California relative to the injunction that was placed, and so we still are optimistic We're still bullish on our ability to grow our presence in California as well as the rest of the country.
spk05: Great, thank you. And then just one more for me on the Morehouse partnership. So just curious, what other efforts are you making to address healthcare disparities among underrepresented groups beyond Morehouse? And then looking longer term, how do you plan to integrate this into your offerings?
spk02: Yeah, so let me start with the Morehouse partnership. We are extremely excited about that opportunity. First of all, obviously, as you mentioned, to be able to bring genetics into what are historically underrepresented populations in terms of use of genetic information. Morehouse also helps us with understanding the community health setting a little bit better than we do today. So we see it as actually serving both patients and clients better than we have today. We've had studies and partnerships with other diverse populations across the world. And so we're not just newly starting this effort, but Morehouse gives us a really focused effort intended upon the underrepresented populations here in the United States. So it's really a part of the way we see this unfolding and how we think we can serve the world better than we have before. As we think about our support of diversity, equity, inclusion, and how we think about our ESG efforts and sustainability, this is really a part of the core of Invitae, and we're excited about the work that's going on specifically with Morehouse.
spk05: Okay, great. That's great to hear. Thank you.
spk02: Thank you.
spk07: Our next question comes from Andrew Brackman of William Blair. Andrew, your line is now open. Please go ahead.
spk06: Hi, this is Dustin on the line for Andrew. Maybe just on the revenue guidance here, I think in the past you talked about sort of a 15% to 25% baseline growth rate, recognizing there are some moving pieces there with the baseline, but just wondering if you could talk about those and maybe help us pursue this guidance that you gave today versus those prior comments made.
spk08: Yeah, this is Ken.
spk02: I'll start. The way we view the 15 to 25% is we still are confident that that's really how we will see our revenue growth play out, at least for the the next several years. Now, as we look at 2023, obviously we're coming out of the realignment activities. We have a strong base of clients and customers. There's obviously still some macroeconomic uncertainty still to play itself out as well. Is it going to be recession? Is it not? I mean, so I think as we looked at our best view of 2023, we feel pretty confident that what we're signaling in terms of low double-digit growth is how we see it best today. With all those inputs being considered, that's how we see it best today. But it doesn't change our long-term view on how the business is going to unfold.
spk06: Got it. Okay, thank you. Another question we have is we're wondering if you can talk about some of the investments that are needed on the data and patient network front. How should we think about those being done organically versus you guys potentially forming some partnerships?
spk02: I'll let Voxie start with that. She's actually leading our patient network efforts more personally, so I'll let her start, and then I'll maybe add some comments.
spk04: Yeah, thanks for the question, Dustin. You know, patient network and data business is one of the two big bets we have, as Cam mentioned in his note today and previously as well. We're very excited about the potential of the space, and we have some unique capabilities. Through the 3.6 million patients we have so far tested, and over 60% of them gave us, you know, the ability to work with them to share their data. So that's a very deep, you know, database and, you know, data source. And also we have a very significant variant interpretation capability throughout the decade of In addition to that, our acquisition of the citizen platform has added a very unique capability to our entire data and patient network capability. Ken talked about adding clinical record into our genetic data source. But in addition to that, as you probably have seen, we have announced and executed a number of partnerships. So that's, you know, from our combined in-house capability, our combined strength with the citizen network as well as the partnerships. We're very excited about the future of this.
spk06: Okay, great. Thank you. That's it for our questions.
spk07: And the next question comes from Matthew Sykes of Goldman Sachs. Matthew, your line is now open. Please go ahead.
spk00: Hi. This is Evie Kozlowski on for Matt. Congrats on the debt transactions. Just a couple for me. So historically in oncology, you've been the provider that's driving more affordable access to genetic testing. As you look to commercialize your PCM franchise, and given you have a more differentiated product that the tumor informed, Do you believe you'll be able to charge a premium, or will you continue to compete on price in that? And then if it's more the former, what kind of impact will that have on long-term gross margin?
spk02: Ken, I'll take a stab at that. First of all, our commitment to lower prices and make genetic information more affordable and accessible is not wavering. We still believe that the path to genetic information being mainstream for the world is enabled through affordable and accessible genetic information. As it relates to the market presence in oncology, I would describe it as we're going to have, we believe we're going to have a great product that's going technically superior to most and that we will get a representative value in return in terms of revenue for that product. And as we built our business case together, it's built in consistent with our plan to drive down prices in the marketplace, but it's also built on the foundation of profitable growth. And so without going into specific details, That's how I would summarize our plan to commercialize PCM. Okay, great. That's super helpful.
spk00: And then also as you look to commercialize that, I know you're doing like biopharma activities right now, but as you look to commercialize that, what does that timeline look like and will there be an uplift in gross margin as you're making those investments?
spk02: Yeah, so if you refer to the slide that we included, you'll see that as we see the next couple of years playing out, somatic is shown probably at lower gross margins than it will be long-term. And so that's really kind of the transition of getting the product into the marketplace, getting solidified reimbursement in play. growing commercial adoption. But what we believe and what we've seen from the products that are in the marketplace is that this is going to be an uplift accretive to gross margin for us in the long term. And so we've got some transition period to get there, but it's going to be accretive in gross margin. That's how we see it.
spk00: Okay, great. And then any like investments in like operating expenses as you're ramping that up?
spk02: You know what? The investments that I talked about to get clinical utility, to get adoption, to work on reimbursement, all of those are operating expense investments. They're not kind of capacity related. They're really about how we are going to get the product into the marketplace. Those are built into our 2023 plan.
spk08: Okay, great. Thank you so much.
spk07: As a reminder, if you would like to ask a question, please press star followed by 1 on your telephone keypad now. Our next question comes from Jeffrey Cohen of Labenberg. Jeffrey, your line is now open. Please go ahead.
spk01: Hi, Kenny and Roxy. Thank you for taking our questions. Just a few from our end. So firstly, could you talk a little bit about rare disease and other as calling out that as your high score platforms? Could you talk about any specific drivers there of Drive 2023?
spk02: Yeah, our rare disease, we focus a lot of it in pediatric rare disease. And we've got some great products that are helping solve the puzzles for for these young folks as they're going through this diagnostic odyssey. And what we've also seen is Rare Disease has become a great partner for our patient network that we're building, that Roxy talked about. As a matter of fact, we launched a Rare Disease patient network last year. And many of the partnerships that we've been doing with the pharma teams have been in things like epilepsy, pediatric epilepsy, things like that. And so Rare Disease as a product for us is growing. And we're working on really improving our reimbursement and our average payment per test. And it's going to be a great product in our portfolio. And the teams are completely focused on really driving the improvements in the overall health of the business there. But we've got great customers. We've got great products. We've got good partnerships that are growing. We just got to put those things all together and make sure that we have a healthy business that can reinvest in itself, by the way.
spk01: Got it. And, Ken, could you talk a little bit about the general nature of coding and payers this year? I know that you and others in the space continue from data and efficacy, et cetera. So could you talk about how that may pull through in 23 or 24 where you'd anticipate on some of the testing fronts?
spk02: Yeah, I probably don't want to go into specific product lines, Jeff. What I would just say this is that, you know, it's an ongoing effort to stay in and great communication with the payer community. We've had the benefit of guideline expansion. If you remember back in 2022, we had NIPS expanded to be covered for average risk pregnancy. We just had some guideline expansion for breast cancer usage, genetic testing for breast cancer patients, colorectal cancer patients. I mean, so we're getting the support in the guideline space, and we also then take our access team to work with the payers to get, you know, support and reimbursement for those tests as we are doing great service on behalf of the patients. We're just trying to get, and by the way, we're unapologetic about this. We're just trying to get our fairly compensated for the tremendous value that we generate today. And we're working with our payer community. I have teams that are working with them every day. And we will continue to do that. Not in an adversarial type of an environment, but in a collaborative environment where we believe we have support for what we're doing. and we just want to garner their support and reimbursement.
spk01: Got it. And lastly for us, Ken, any commentary about, I know that we've seen some guidance from you as far as organic growth and some new product areas to think about, but all organic, is there any M&A stance there for 23, or you're fairly locked and loaded on the current platform and portfolios that you have intact with plans to grow those out and build them?
spk02: Yeah, I mean, what we've guided when we talk about 2023 is what we look to do within our own control. And that's what we really focused on. I mean, we really have done, the team's done a tremendous amount of work. I mean, if you think about what it's taken to redo our cost profile, to extend our cash runway to 2024, to... to reset the plot of portfolio and where we're doing business. It's really been quite a bit of outstanding work on behalf of the team. And 23 is really where we're going to put those things into motion and really deliver onto the next phase. We call that our execution phase. And so that's what we're focused on. I can't predict the future, but I can tell you that that's the arena that we're focused on for 23.
spk01: Great. That's super helpful.
spk02: Thanks for taking our questions.
spk08: You're welcome. And there are no more further questions, so I'll hand back to the management team for any closing remarks.
spk02: Well, as always, thank you, everyone, for joining us. Appreciate your continued support and look forward to sharing more updates in the near future. Have a great afternoon and evening. Thanks a lot.
spk04: Goodbye.
spk08: This concludes today's call. Thank you for joining. You may now disconnect.
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