NVTA - Invitae Corporation (NVTA) Management Presents at TD Cowen 43rd Annual Health Care Conference (Transcript)
2023-03-06 16:05:02 ET
Invitae Corporation (NVTA)
TD Cowen 43rd Annual Health Care Conference Transcript
March 6, 2023, 1:30 PM ET
Executives
Ken Knight - President and CEO
Roxi Wen - Chief Financial Officer
Analysts
Dan Brennan - Cowen and Company
Presentation
Dan Brennan
Yes. Thank you. Great. We are just about at the time here 1:30. So sorry about that. Welcome. Obviously, day one of the TD Cowen Health Care Conference. I am Dan Brennan. One of the tools analyst here. Really pleased to be joined here on stage with the senior management of Invitae. We have Ken Knight, CEO; and we have Roxi Wen, the Chief Financial Officer, to Ken’s left. Feel free -- I will look up during the presentation, feel free to raise your hand if you have any questions, I am happy to try to weave you into the flow here. So, first off, Ken, Roxi, thanks a lot for being here.
Ken Knight
Thank you, Dan. Thanks for having us.
Question-and-Answer Session
Q - Dan Brennan
Awesome. So, maybe, Ken, you have been at the helm here for less than a year, but I have overseen some major changes at Invitae, including business restructuring, divestiture of the business and a big refinancing, right? So you are balancing a lot trying to kind of push that growth profile while managing the burn. Just how would you articulate what are the kind of key priorities for the company as you look out here over the next couple of years?
Ken Knight
That’s a great question. And actually I have been here at Invitae. I got a little bit of feedback. I am not sure.
Dan Brennan
Let me see. I think he is probably working on.
Ken Knight
Working on...
Dan Brennan
You have been there a lot…
Ken Knight
Yeah.
Dan Brennan
You have been…
Ken Knight
Yeah. I have been here since July 2020.
Dan Brennan
Yeah.
Ken Knight
I joined the company as the Chief Operating Officer and so the work in terms of starting to get us on a different trajectory and I think started really in 2021. But as you mentioned, in July of 2022, the Board asked that I stepped in as the CEO and we have done a lot.
The work on realigning the company, I think, was through, thoughtful. It really started to look at what aligned to our long-term strategy and what did not and we were very intentional about businesses, territories, product lines that did not fit our long-term strategy and we made some hard decisions. There were a lot of dedicated ambitions that were impacted by those decisions so they weren’t taken lightly. But we felt like we made the right move for the company.
And you start thinking about what we were trying to accomplish. One was to extend our cash runway through the end of 2024. That was important for us. We recognize that in order to give us some stability and some ability to execute on our plan, we had to do that and that’s well on track.
And then when you think about some of the product decisions that we had to make, divesting of our RUO kitted solutions, that was like the last major step of our realignment that we completed in 2022. So on the realignment aspects we really feel strongly that we have pretty much completed those actions.
And now as you were alluding to, it’s really about you can’t cost cut yourself into prosperity. We have to continue to grow the company and do it in a way that is accretive and adds the ability for us to reinvest in ourselves and that’s how we are kind of viewing this inflection point for Invitae, is this pursuit of sustainable growth is really a pursuit of being able to invest in ourselves.
We got a lot of things we want to do. The mission of the company continues to be to bring genetic information into mainstream medicine for healthcare for billions of people for the world. And in order to do that, we have to be -- we have to build a sustainable business in order to do that.
Dan Brennan
Great. Okay. So the debt financing was a really big deal. It’s been a huge overhang for investors or coders for getting that done. Maybe give us some color on just how did you arrive at the structure you executed. Were there any ways like the dilution that is incurred obviously on the convert where the stock is what it is, but just maybe walk through a little bit about like how you view the structure that got done and kind of how did it compare to some other maybe alternatives you might have been considering?
Ken Knight
Yeah. I will let Roxi go into some of the maybe the alternatives. I would say that the objectives were clear is that, we had $450 million or so of short-term maturity and so the opportunities, the options that we had, they were -- we spent months working on this. This was not a short decision. We had our shareholders in mind. We were not -- we were trying to find paths that solve the solution, solve the issue without excessively diluting our shareholders. But in the grand scheme of things, in order to get these converts to be done, it was going to be some shareholder dilution as a result of it.
And we think we set the company into a healthier space. And if that’s -- from our standpoint, that’s what provides long-term value for our shareholders is to get the company in a healthier space, give us the time and the runway to work on our business and to build a more profitable space for the company, get back to growing, get back to innovating and disrupting, which is what we do best and I think we have landed on a solution that optimizes all the things that we were trying to plan for. I don’t know if you want to add anything more to it.
Roxi Wen
Yeah. Sure. So just to add to what Ken said, right, our objectives, we started planning on this refinancing quarters ahead of time. We obviously need to solve the $485 million near-term maturity. So the company is a viable company. And then with the least amount of dilution, longest runway and lowest cost of capital, I think where we arrived to achieve all of those objectives and also partner up with people who share the long-term vision of the company.
So we were pleased where we landed. The options considered from, as Ken said, self-help. We got to address our cash burn situation to straight that convertible debt, equity and full equitization, all of those, we considered all of them and eventually get to a place, it’s a combination of all of these things in many ways. So we are happy at where we are, but we granted more work to do.
Dan Brennan
Great. So maybe just staying on the finances for a bit and then we are going to jump into the business and some of the exciting growth opportunities, but just on the burn, the reduction has been significant from over -- almost $850 million in 2021, a little over $500 million last year and then your guidance this year that basically cut that in half again down to $250 million to $275 million and you talked about Ken here extending the runway through 2024. So, again, without guiding, is the idea that we should expect in 2024 for you to achieve like the same level of burn reduction that you saw year-over-year this year? Any color just on the pace of that moderation in burn and kind of what it looks like?
Ken Knight
Yeah. I mean, Roxi has said it best, as we think about how we see cash burn continuing to evolve is that, 2023 our cash burn had to start with the two and we have now guided $250 million to $275 million and cash burn for us in 2024 has to start with a one. Now, again, we are off to a great start and so we continue to believe that, that’s all within the capabilities of our business lines and our portfolio to do that.
And so if you kind of continue that trajectory, you see that this is not kind of a -- this is also not a short-term solve the cash flow problem and then to change the way we are going to run the business. We are doing this with the intent of delivering an operating cash flow company. And so can we do 50% reduction every year? Probably not, but 2024 is going to start with one and we are on our way toward being a cash flow positive company.
Dan Brennan
That’s great. So just on gross margin, you had previously guided for long-term gross margins of 50% and then you reach out a lot faster than expected in 2023, given your guidance this year is 48% to 50%. So maybe what are the key components that enable you to see such a big year-over-year improvement in 2023 and is there room for more expansion beyond 50%?
Ken Knight
Well, we have guided to 50% plus…
Dan Brennan
Okay.
Ken Knight
…we -- as a long-term view of the company. But the things that we -- the actions we took, so when we decided businesses to keep territories to exit product lines to call, we did that with a viewpoint on what was the gross margin implications of those actions.
And I’d say the evidence is that we guess right more than we guess wrong. And so the fact is, is that as we got to the end of Q4, those decisions we have made have been solidly in support of expanding both margins.
I would also go back to -- I started this earlier saying that, we started working on this a little bit earlier than just the realignment of 2022. When we exited 2021, we were at 35% gross margins, and quarter-after-quarter we have been expanding gross margins and so I think that effort has gone in terms of improving our kind of cost position, improving the revenue quality.
Those efforts have begun before the realignment and then the decisions we made about where to exit -- what products to keep were intentional in terms of supporting a healthier gross margin portfolio and so what you have seen is we exited Q4 with 47.6%, 47.8%, something like that percent gross margin non-GAAP.
Dan Brennan
Got it. Okay. And then, obviously, just finishing out kind of the cost structure to OpEx, down 14% this year, despite the low double-digit topline guide and OpEx was down 6% last year. It was up a lot the year prior. So just how sensitive is OpEx on a durable basis beyond this year to your topline? You are guiding for 15% to 25% over time. I am just wondering about like assuming you can -- I don’t -- assuming you go 15%, what kind of level of OpEx could you run the business at over a period of years?
Ken Knight
Yeah. It’s like growing OpEx and we have kind of built some internal methodologies around how much -- how OpEx has to respond as revenue grows or reduces and so that’s the recipe that we put together when we build our 2023 business plan. We look at OpEx as -- it has an affordability index, if you will. And so revenue minus gross profit, nice gross margin gives you gross profit and then there is an affordability envelope that we are building for OpEx.
Now here’s the deal, though. When we look at OpEx, it’s not just the OpEx to run the current volume and revenue, there’s OpEx to invest into the future. So when we look at the OpEx spend that we have laid out for 2023, it includes the investments we are making into somatic in our MRD product, which, by the way, today was a really big announcement that Blue Shield of California has included our PCM product, our tumor-informed minimal residual disease product in coverage and those expectations are really exciting for us the product, the technology, the approach we are going to circle in tumor DNA is being well received.
And so -- but we are investing into that product this year with clinical studies, with adoption, with our commercial team growing to be able to support it and we made investments in our patient network as well and so our OpEx portfolio is not just what’s required to run today’s business, but we are still doing so with a view on investing into the future.
And so we have some internal methodologies about how we are going to allow OpEx to grow as revenue grows and we think that’s going to be the discipline required to ensure that we are making the right bets because we are not going to stop making bets. But we are going to have space to be intentional about bets we make and then those investments will allow us to keep growing the topline. There will be some additional needs for commercial resources as PCM starts to take off and get more and more into the commercial marketplace and we are prepared to do that.
Dan Brennan
Great. So maybe just zooming out, I don’t know if there’s any questions in the audience right now. Maybe just zooming out for a moment, just on kind of the near-term for 2023, so your guide is 15% to 25% over -- I don’t know if it’s a longer term or three years to five years, I think, get the exact period you put on that and this year it’s a little bit more modest in that low double-digit. Is that just conservatism this year given the inflation of macro or just kind of characterize the guide this year versus your longer term plan?
Ken Knight
Yeah. I think as we got closer to the end of the year and we looked at the pro forma and understanding how the products were performing, we felt like we were confident in the minimum $500 million for 2023.
We didn’t bake in -- for instance we didn’t bake into 2023 any commercial clinical revenue for PCM. Well, we just got some good news today that says that, that may change the way we look at 2023.
We didn’t really -- I mean one of the things we showed on our bubble chart, we showed the community, how we look at our current products, where they sit in growth and gross margin and then we had some bubbles that are not kind of set aside yet on their own, because they are not significant enough revenue to get their own bubble, but PCM is one of them. Our PGx pharmacogenomics product is another. Our patient network is the third.
And so as we did not embed those into our 2023 growth, because we are still working through reimbursement and adoption of those products, we just looked at our core business and our core business is growing in every clinical area that we have, we believe it’s growing.
And so mapping it from the pro forma, exiting countries and exiting product lines, a little bit of a work process, if you will get that right. But it should not -- was not signaling any less – lack of confidence that we have and the ability to grow the clinical areas that we are competing in today.
Dan Brennan
Great. Okay. Maybe, so right, so maybe going in to over of the drivers and I definitely want to hit PCM, but just kind of high level on oncology.
Ken Knight
Yeah.
Dan Brennan
Can you unpack it a little bit, because I find like one of the things with Invitae is that, there’s no doubt, you made dramatic changes to the burn in a short order of the balance sheet, giving you a lot of runway. At the same time, I think, when the prior CEO was here the growth thoughts 40% block. I know you guys have dialed it down on this like so healthy level. But the question, as well as PCM differentiate but underneath it and like what’s the hook like Invitae, how much confidence do you have that they can actually go 15% to 25% and there’s not really nothing like. So in terms of give us a flavor within oncology, maybe if you want to unpack it a little bit, like, what are your -- what are the biggest businesses in oncology? How are you viewing it? How have you been doing? Just give us a flavor for that business and how we think about the growth profile there?
Ken Knight
Yeah. So when you think about oncology, our primary revenue driver there is our hereditary cancer germline test. We are a leader in the marketplace. We have great relationships with genetic counselors and the key opinion leaders who upgrade out academic medical centers, we have got a great product and our varying interpretation by the way is second to none and that’s one of the reasons why our hereditary cancer product does so well.
And when we think of oncology, we are looking at the addition of our minimal residual disease product, PCM as part of our oncology franchise. And so one of the reasons we are excited and we are optimistic about the growth of the company is that, the utilization of hereditary cancer testing and PCM in early-stage cancer treatment, that combination is a powerful combination and we are uniquely positioned with our own internal products and the reputation we have in the HCTs marketplace could be -- we think we are going to be a meaningful and formidable competitor in that space.
Our technology is strong. We have seen evidence that our PCM product is going to have as good as if not superior specificity and sensitivity. So we have got some things to prove out, but the combination of the way we are able to bring this to the marketplace, we think is the reason why we are optimistic on oncology’s growth.
And the other thing we have talked about, but this year is, when we think about hereditary cancer, as I said, has been pretty much utilized and driven by the genetic counselors and so, mostly genetic experts, but we see there’s a great opportunity to expand in the adoption of hereditary cancer testing to non-expert communities like community health centers into underrepresented communities like the work we are trying to do with Morehouse and so we are trying to expand the pie.
And so those things, again, there’s work in process, they not necessarily deliver in 2023, but we are building -- we are putting the building blocks together to build a 15% to 25% long-term growth company and so that’s how I would look at Oncology is currently HCT and then we are adding in our MRD product.
Dan Brennan
And kind of as you pull back from some of your sales force, obviously, and you have had some dislocation in the market amongst competitors as well, but there’s also some of the players that maybe think they are gaining share. Like could you speak a little bit to like within that business, pricing, share volume? Are you gaining share, growing with the market, where is pricing sitting out? Just when you roll up that business, is that a 5% growth all in or is that like a 15% grow? How do we think about that base hereditary cancer germline business for you?
Ken Knight
Yeah. It is growing less than our overall topline average for the company and growth rate. So it’s growing less. I mean when we look at our penetration, all indications is that we still have the lead market share and we don’t have any major concerns about losing share. We are focused on how we can expand the pie and that’s what -- when we think about our 2023 plan is really about expanding the pie for the hereditary cancer business.
Dan Brennan
So then maybe just on PCM, because you have had a lot of news here recently. Just what -- discussed the profile of PCM and what’s the go-to-market strategy there, like, you go in clinician and try to have them adopt PCM, like, why they are going to use PCM over some of the alternative test?
Ken Knight
Well, I think, first of all, we are tumor informed and we believe that is going to provide and we provide a patient-specific panel that we think that combination is going to be able to provide better guidance and insights for the specific patient to be a tumor informed is a unique attribute of our product.
And it also is similar to the attributes of Signatera, which is tumor informed as well and I think this the Blue Shield policy change, specifically called out our two products because it’s -- we have the ability to identify the biomarker as necessary for -- in use of ctDNA.
So, again, we start off with an oncology relationship that our hereditary cancer testing is industry-leading. And you couple that with now monitoring and surveillance, we think there’s a natural migration that will take place, because we have got such a strong reputation in that space already.
We have awesome variant interpretation and because we are able to give more clarity and report outs and things like that, that we already have a foot in the door and we are going to combine that now with the product that is needed that is absolutely needed for patient care and so that’s going to be our narrative. And we are pretty confident that that’s going to put us in a space with an oncology patient journey is going to be very well secured through a relationship with Invitae and then I will also be remiss if I don’t talk about our pharmacogenomics product that is going to also help in that patient journey as well.
So we think by making our portfolio more connected, more integrated, easier to use and continue to work on that experience from the client perspective is what’s going to continue to give us the leverage to bring in something like PCM into the spaces where we are very strong and get consideration.
Dan Brennan
How do we think about it even though it’s not in guidance this year, but from a coverage basis and from a timing basis, like, what’s the, obviously, there’s a tremendous amount of excitement on this emerging space, but is this a $10 million business for you in a year or is this $100 million business? How do we think about what the guidepost are?
Ken Knight
Yeah. So what we show on our chart is, we gave it a separate bubble, and we say, in the next 24 months to 36 months, it will have its own bubble in the way we look at our portfolio and so it will be material enough in revenue that it deserves its own bubble. I mean, all indications is that this MRD space is, I don’t know, I think, I have heard $20 billion, $30 billion TAM and we think we are going to be a leading provider of monitoring and surveillance of oncology and we are going to get our fair share of that marketplace.
Dan Brennan
Okay. So maybe final one answer, what do we watch for next on PCM?
Ken Knight
Yeah. We have got some additional studies that are -- some data report out that will be coming out, hopefully, in the next months. And we will also, with this latest change by Blue Shield, we have thought to be able to get some commercial clinical experience and business and we will learn from that and we will be better positioned to understand what our commercial go-to-market is going to be. That’s the great thing about this decision as it allows us to actually have real experiences with clients and customers and know what we need to improve upon as we get ready to do widespread launching of PCM.
We are still working on reimbursement with other payers do. I mean, so that’s something we have said all along is this has been like a parallel process for us, clinical studies to validate our analytical information, working with our KOLs and working on adoption and then working on reimbursement. Those are going on in parallel and that’s one of the things we made investment into 2023.
Dan Brennan
Then we think about like 15% to 25% from all your other businesses, which -- we do look at it in our model and see how to size it and you have given some normalized growth rates, but would -- which of the – of all your businesses, which are the most important couple that investors want to try to do their diligence on Invitae and say, wow, could they get into that 15% to 25% sustainably, which area should we be building thing you think?
Ken Knight
Well, we just spent a lot of time on oncology. Obviously, PCM is, I think, that’s clearly an area that’s going to be fueling our 15% to 25%. When we think about our patient network and some of the contracts and agreements we have made over the last several years, that’s going to become more and more of an evident revenue driver for us into the future.
And then I think the third piece is our pharmacogenomics business. We know there’s players out there that are driving significant revenue in that space. We are working on getting reimbursement and adoption of our product.
And so those were – those are three areas that we believe are going to be -- the good news is that we already have those products in our portfolio. We are working on adoption and reimbursement. And so getting those to a point where they are appreciable revenue is what we are saying is going to fuel our 15% to 25%.
And look, we have also got rare disease products that we are saying that they are still growing volume-wise and we are improving the quality of revenue. Our women’s health product is growing. It’s one of the fastest-growing segments in our business. We are improving the health of that as well. And so across the Board, I mean, the growth for the company, we have a tremendous amount of optimism that we have got the building blocks in place. It’s up to us now to execute on those.
Dan Brennan
So where does the PacBio relationship stand? I know they talked about a fair amount, I think, at the time that you guys made some significant cuts in order to kind of get to this point. But just kind of give us a sense of the update there, is that -- I know there’s been some changes in terms of investment, but is that still on track, is it delayed? Just how do we think about that product?
Ken Knight
Yeah. I mean we are still partners. We still -- we have, I’d say, mutual interest and shared interest. Bob was talking earlier, Dr. Bob Daber, our Chief Science Officer, is here. He was talking earlier about some of our R&D efforts are still looking to use PacBio sequences, long-lead sequencers and so we still are partners in this.
We are pulling for them. I mean anything that helps with the throughput and costs associated with what we are doing, that’s -- those are the kind of partners we want to have. We are just not making a financial commitment investment into their development anymore at this time. But the investments we have made we think gives us an opportunity to share in the benefits of their work.
Dan Brennan
Great. So I don’t know, like maybe just two minutes left. Maybe going back to the balance sheet, obviously, you just got the 2024 taken care of. When do we sort of thinking about the 2028? Is that like in 2026? I mean it’s probably all in your mind today?
Ken Knight
It’s already on our minds.
Dan Brennan
Okay.
Ken Knight
We don’t…
Dan Brennan
I think, I guess, any thought, I am sure it comes up, because there are some pretty maturities, but now they are five years out in the future, so you have time to run the business, but how do you answer the question in terms of dealing with those?
Roxi Wen
Yeah. So we think about our entire balance sheet all the time, because this is in addition to the realignment on the P&L side, we will fix our cost structure, fix our runway, fix our investment, capital allocation to drive for long-term growth. Balance sheet rationalization is a big step we need to take and will take. So we have time.
The good news is we have time, we have options, and so 2028 is -- addressing 2028 at the most appropriate time is when our balance sheet will be rationalized, and then, obviously, we need to think about what is the most optimal debt equity mix for our capital structure. And we also have a tremendous amount of upside from gross margin expansion also reflected in the intrinsic value of our stock. All of these will be opportunity for us to address our balance sheet.
Dan Brennan
Great. And then maybe last one, Ken. So what do you think is, if you said misunderstood about Invitae, there’s been a lot of changes that you have done in the short order here. So just as you go out and see where the stock is and/or meet with investors?
Ken Knight
Yeah. I guess, I mean, obviously, for myself, look, in 2021, we were about $160 million revenue company. We burned through $800 million plus in cash and we were market cap at the end of the year was about $3.5 billion. Today, we are -- we came out of 2022 with a $450 million revenue company with cash burn of less than $77 million a quarter. Gross margins significantly improved from 2021 and we are significantly on new value.
Now the debt situation, I get it, and so that’s what Roxi says, we are focused on improving our balance sheet. But I think we are underappreciated for the value that we deliver to the market, to the -- to our clients and patients and so we are heads down. We are just going to keep executing, doing what we know is best for the mission of our company, for those who we serve and there’s 3.6 million of them that we observe. And we are confident that when we do that and we continue to make this kind of progress we are making, that it will work itself out.
Dan Brennan
Great. Well, thank you, Ken, Roxi, for being with us. Thanks everyone in the audience. Hopefully, all enjoyed. Well, good luck for the rest of the conference.
Ken Knight
Thank you.
Roxi Wen
Thank you.
Dan Brennan
Bye.
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Invitae Corporation (NVTA) Management Presents at TD Cowen 43rd Annual Health Care Conference (Transcript)