Invitae Corporation

Hello and welcome to the Invitae second quarter 2023 financial results conference call. My name is Alex. I'll be coordinating the call today. If you'd like to ask a question at the end of the presentation, you can press start followed by one on your telephone keypad. If you'd like to remove your question, you may press start followed by two. I'll now hand it over to your host, Hoki Luck, VP Investor Relations and Corporate Development. Please go ahead.

Thank you, operator, and good afternoon, everyone. Thank you for participating in today's call. Hosting the call today is our president and CEO, Ken Knight. Before we begin, I'd like to remind you that various remarks that we make on this call that are not historical include those about our vision and business model, the company's strategic business realignment, future financial and operating results, expectations for future growth and reduction in burn rates, and future products, services, our product pipeline, and their timing. Certain points we make will constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Security Litigation Reform Act. It is difficult to accurately predict demand for our services, and therefore, our actual results could differ materially from our stated outlook. Statements on future company performance assume, among other things, that we don't include any additional business acquisitions, investments, restructuring, or legal settlements. We refer you to our most recent 10-Q and 10-K, 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 four looking statements speak only after the dates clear up. The supplement of consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States, or GAAP, the monitoring considers several non-GAAP measures. We encourage you to review our gaps and non-gaps reconciliations, which are available in the press release and in the appendix of the early slide deck, both of which you can access by visiting the investor section of the company's website at ir.abc.com. Today, Kim will discuss our future results and recent developments. I will cover the financials and key metrics from the second quarter, as well as update you on our 2023 guidance. We will then conclude the call with Q&A. With that, I'll turn the call over to Ken.

Thank you, Hokie, and thank you all for joining us today. In the second quarter, we continued our steady march toward becoming a profitable business while continuing to serve our patients and clients. As evidence of our pursuit of higher quality revenues and disciplined cost control, we continue to make solid progress in both GAAP and non-GAAP gross margins and we're able to decrease our cash burn to well below our projected levels. We have improved non-GAAP gross margins for eight consecutive quarters, and ongoing cash burn in the first half of 2023 is 67% lower than the same period last year. We posted $120.5 million in revenue, which is a 1% increase in year-over-year pro forma top-line results. Looking at the different business lines, we saw solid double-digit pro forma year-over-year revenue growth in rare disease, data, and women's health, demonstrating continued momentum. Sequential volume growth for hereditary cancer and rare disease were both up 5% quarter over quarter. Despite 8% pro forma year-over-year volume growth for hereditary cancer in the U.S. market, we faced headwinds from several commercial insurance payers in terms of overdue payments, which impacted our hereditary cancer revenue by approximately $5 million this quarter. Our billing teams are working with these payers nonstop, ensuring that we are doing our part in every way possible to unblock payment processing. We are committing the necessary resources, and these efforts are comprehensive. We have been successful recently in driving better reimbursement in our rare disease and women's health businesses and have used our best practices from those efforts to assist in this regard. We are seeing reductions in the backlog of overdue payments as we enter the second half of 2023 and are engaging with a high sense of urgency with all stakeholders for faster resolution. Oncology revenue was also impacted by weaker fee-for-service. which we indicated last quarter would be lumpy and where we are rebuilding our pipeline of pharma orders. In fact, we are already seeing a stronger pipeline in the third quarter. Presentations at the 2023 American Society of Clinical Oncology Conference continue to highlight and confirm that hereditary germline cancer testing in combination with somatic testing provides the best picture for physicians. Together, these tools aid in understanding cancer risk, diagnosis, and treatment selection, leading to better outcomes for patients. NVTA has been a leader in generating this clinical evidence, as well as increasing adoption of germline testing and oncology, as seen by NCCN guideline expansions to that effect. However, even with guideline expansion and confirmation of the benefits of hereditary cancer testing, the usage rate remains elusive and low. A recent national public radio piece on All Things Considered showcased this front and center and is worth listening to, highlighting a recent study that was presented at ASCO led by Dr. Alison Kurian and co-authored with Invitae of one million patients diagnosed with cancer in California and Georgia. Investigators found that 93% of them did not get hereditary cancer testing, despite guidelines endorsing universal germline testing for several tumor types. This gross underutilization suggests many patients who are eligible for germline testing have not yet received it. This is the burning issue to solve and underscores our current efforts to drive education and additional call points at the community oncology level. In the second quarter, we reached the 4 million patient mark across a diverse spectrum of clinical areas, of which more than 63% are available for data sharing. We continue to be well positioned to provide the highest quality of clinical interpretation at an industry-leading scale. Looking ahead to the second half, we continue to allocate our resources in the key areas that will drive growth in 2023 and beyond. Let's start with oncology. On a pro forma basis, our oncology revenue in the second quarter was $60 million compared to approximately $69 million a year ago. As I said earlier, this was impacted primarily by headwinds and payer reimbursement for hereditary cancer testing and lower sales and fee for service. In hereditary cancer, guideline expansions and better outcomes are expected to further improve adoption among non-genetics expert providers. and community oncology settings. Efforts to expand our call points and facilitate the usage of hereditary cancer testing among these physicians and clinics are underway. This is where the majority of cancer patients are receiving their treatment support and represents the largest growth opportunity for hereditary cancer testing going forward. In Q2, we had a double digit volume in our non-genetic expert oncology US channel. Switching gears to our minimal residual disease efforts, we have made solid progress in updating our PCM platform chemistry with updates that provide the same quality and performance as our legacy technology while offering streamlined processes and improved cost efficiency. We believe this updated technology with a migration plan that begins in Q4 2023 also addresses the primary matters arising from the ongoing Natera litigation. and provides us an even more differentiated solution. Overall, we continue to have strong confidence in our ability to operate, and most importantly, our ability to continue offering PCM to pharma partners and patients in need of accurate monitoring. We also expect our updated chemistry to accelerate our fee-for-service revenue by delivering faster turnaround time, complementing the business development and marketing resources we've added. Looking at our ongoing efforts for the medium term, yes, we still see synergies between hereditary germline and somatic products. Together they will anchor one of the most comprehensive offerings for a physician who is considering options for an individual at risk of or diagnosed with cancer. In the meantime, we've been active at recent oncology meetings presenting new data that supports the use of germline testing. From this year's ASCO meeting in June, study of patients with lung cancer undergoing germline testing was the focus of two separate platform presentations. In this study, 14% of lung cancer patients with no family or personal history of cancer had positive pathogenic germline variants with potential clinical management implications. This prevalence is similar to what we have seen in patients with breast, ovarian, pancreatic, and colorectal cancer, all of which have guidelines endorsing universal germline testing. We continue to do the work, make the investments, and support clinicians as they pursue the benefits of universal germline testing. In the rare disease business line, we saw significant pro forma revenue growth in Q2 of approximately 32% year over year. driven by cardio and neuro panels, as well as strong performance in pediatric genetics. We continue to broaden our offerings and launch an expanded neurodevelopmental disorders, or NDD, testing panel in Q2. We've also implemented a number of programs to improve reimbursement rates and are seeing improved gross margins in this category. In women's health, revenue was up approximately 18% year over year on a pro forma basis. Our carrier screening panel continues to perform well and is well received by our growing customer base. We are seeing increasing productivity with our sales team along with market share gains. On the data side, we continue to introduce new products such as linking Invitae's genetic data with clinical claims and prescription data to enable more researchers and biopharma partners to deepen their understanding of the patient journey. and ultimately deliver a more effective therapy to the most precise patient population. We also continue to expand partnerships through other data products, which provide genetic insights to our partners and their specific areas of interest. We've achieved steady improvements in revenue cycle and working capital, which have helped to bolster cash flow and gross margin. Finally, We made the decision to exit our pharmacogenomics testing business and close the Seattle lab that is dedicated solely to PGX, while exploring the best strategic path for the related assets. While we fully believe in the utility of PGX and its future impact on patient care, we have decided that the resource investment and path to consistent reimbursement are limited within our desired time horizon. The impact on second half and full year 2023 revenue is expected to be approximately a $3 million reduction, although it will be accretive to our efforts to further expand gross margin. And with that, I will turn the call back to Hokie to discuss the financials.