Invitae's (NVTA) CEO Randy Scott on Q2 2016 Results - Earnings Call Transcript

| About: Invitae (NVTA)

Invitae (NYSE:NVTA)

Q2 2016 Earnings Conference Call

August 08, 2016, 04:45 PM ET

Executives

Katherine Stueland - IR

Randy Scott - Chairman and CEO

Sean George - President and COO

Lee Bendekgey - CFO

Robert Nussbaum - Chief Medical Officer

Analysts

Tejas - JPMorgan

Doug Schenkel - Cowen

Raymond Myers - Benchmark

Operator

Good afternoon. My name is Kristine and I will be your conference operator today.

At this time, I would like to welcome everyone to InVitae’s Second Quarter 2016 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

Katherine Stueland, you may begin your conference.

Katherine Stueland

Thanks, Kristine and good afternoon, everyone. Thank you for joining us for our second quarter earnings call. Joining us today are Randy Scott, our Chairman and CEO; Sean George, our President and COO; Lee Bendekgey, our CFO and Dr. Robert Nussbaum, our Chief Medical Officer.

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, market opportunities, future product services, our product pipeline and the timing thereof, demand for and reimbursement of our services, and our investment in our infrastructure and operations may constitute forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act.

We refer you to our 10-Q for the quarter ended March 31, 2016 and particular to the section entitled 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 and we disclaim any obligation to update them.

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

Randy Scott

Thanks, Katherine. At Invitae, we like to think big. Our mission is nothing less than aggregating all of the world's genetics tests into a single low cost platform in order to make genetic testing more affordable and accessible to the over seven billion people on the planet.

In doing so, we believe there are substantial opportunity to build a vast network of users including patients, physicians and medical researchers who can use genomic information to better everyone's health and to manage that genomic data over the lifetime or course of disease of a patient.

As we come to the halfway point of our 2016 fiscal year, which is useful to step back and review our progress toward that mission. The first phase of our mission is to establish Invitae as the world's leading genetic testing company.

We've made substantial progress this year and now have proof that the business model is working as planned. Our four dominoes have created significant operating leverage. Driving down cost of goods has allowed us to rapidly expand content, which has dramatically increased our volume, which in turn has resulted in significant reimbursement progress.

Invitae now has one of the lowest cost, highest content, genetic platforms in the industry, which we believe will give us substantial marketing leverage moving forward.

In Q2, we saw million dollar improvement quarter-over-quarter in our gross margins. Even as we increased content over 1,000 genes in production and launched multiple new disease area programs.

With world-class content across oncology, cardiology, neurology, pediatrics and rare disease, we continue to demonstrate industry-leading market share growth with 25% quarter-over-quarter.

With two national payers now on board, Medicare and Aetna, and more to come in the near future, we believe the reimbursement tide is turning rapidly as payers adopt their low cost platform and begin to eliminate the high gross margins that have restrained the growth in genetic testing and frustrated clinicians and payers alike for decades.

Most of our advance in operating leverage this year will be due to substantial improvements in cost of goods with reimbursement yet to have a significant impact. Now with payers moving on board, we expect reimbursement improvements to be a key driver of operating leverage in 2017 and beyond.

Based on our rapid volume growth and conversations with payers, we also believe the market for hereditary breast and ovarian cancer is over 400,000 patients per year and growing.

New data such as the recent New England Journal of Medicine article calling for a change in guidelines to provide hereditary genetic testing for all men with metastatic prostate cancer suggest that the market for cancer genetic testing is in a rapid growth phase and may soon encompass many metastatic cancer patients with no prior family history and eventually could be applicable to all cancer patients, drawing the future potential market to almost two million patients per year.

This market growth can only be achieved at lower prices that effectively expand the reach of our current healthcare dollars to help far more patients and cancer is just a fraction of the genetic testing market.

Our efforts in cardiology, neurology, pediatric disorders and rare diseases are in the early days, but we're experiencing rapid growth in all of these new areas, which should continue for many years.

Today we're announcing that we will be leapfrogging our yearend goal of 3,000 genes in production by jumping to approximately 20,000 genes with a boosted exome that will have deep coverage for the over 3,000 clinically relevant genes we originally targeted and provide basic coverage across the remaining 17,000 or so genes in the genome.

Combined with our large and growing panel offerings, we believe we'll be able to provide the full spectrum of content for virtually every clinical need from targeted panels to full exome sequencing, which is especially important to resolve diagnostic odysseys and for many complex pediatric disorders, such as developmental delay and intellectual disability. We expect this new exome offerings will be available in Q1 2017.

The second phase of our business is to begin creating a network of users who can help the patients and physicians coming to us for genetic testing. As our genetic testing menu and volume has increased, the biotech industry has taken notice.

In the first half of the year, we established multiple clinical partnerships with companies that approached us, desiring access to rare disease patients and/or testing for their targeted clinical trials. This is the beginning of the network effects that we believe will allow us to play a key role in directing newly diagnosed patients towards researchers and clinical programs that can help.

And lastly, the third phase of our business models genome management. We officially began this phase of our business when we launched the targeted effort with our adult prevention panel earlier this year, which has grown to over 10 institutions now trained and beginning to utilize our genetic platform to explore the application of genetics in healthy patients.

We believe the market for preventive genomics is enormous and in its infancy. In summary, Invitae is delivering on its business model and providing investors with a unique opportunity to invest in the future of genomic medicine.

With that, I'll hand it over to Lee to cover the vital stats and discuss the emerging operating leverage of our business.

Lee Bendekgey

Thanks Randy. In the second quarter, we made significant progress on our strategy to drive towards positive cash flow by substantially improving our gross margins and by holding our non-COGS related operating expenses flat as compared to Q1,

By improving revenues while reducing the average cost per test to approximate our yearend target, we made significant progress toward our goal of generating positive gross profit. At the same time, our expenses across our R&D, commercial and general and administrative organizations were essentially flat as compared to the first quarter, which coupled with our improved margins enabled us to reduce our cash burn.

Our average cost per test report this quarter was about $500 per test, compared to a cost of about $600 per test last quarter. We're pleased that in Q2 we came very close to achieving our yearend goal of an average cost per test of under $500.

As you'll recall, the calculation of our average cost per test is based on the number of samples accessioned in the quarter. In Q2, we accessioned over 12,500 commercial samples. Because of this reduction, our average cost per test report, our total COGS expense for all cash accessioned in the quarter increased by only 8% despite the volume increase of 30%.

The total billable value of test delivered in Q2 was $11.7 million. Our revenue in the quarter was $5.6 million, an increase of about 41% over Q1. We're especially proud of this quarter-over-quarter increase because we achieved it even though we experienced some delays in billing and collections as a consequence of our progress with payer.

As we enter in to new contracts or expand our coverage with payers, as occurred in Q2, they typically will ask us to hold our invoices for between 45 and 60 days while they load our contract terms into their payment systems, which can cause temporary delays in billing and payment.

As we continue to make progress with payers, we expect this pattern to recur. As a result, while we continue to expect substantial growth in revenues in the second half of the year, the growth will not necessarily be linear when comparing consecutive quarters.

Our revenue in Q2 includes an accrual of about $800,000 representing the continuation of our transition to recognizing revenue on an accrual rather than a cash basis. As a reminder, under General Accepted Accounting Principles, we've historically recognized revenue as cash has been received from our customers.

When recognized on a cash basis, our revenue in any quarter is derived largely from test delivered in the prior quarter. In addition to Medicare and the Private Insurance payers with whom we have begun to contract, as of June 30, we had active contracts with more than 100 institutional customers as compared to 70 as of the end of Q1.

The increase in our collections, coupled with continued reductions in our average cost per test report, enabled us to make significant progress toward our goal of positive gross margins by the end of this year, despite continued growth in volume on a quarter-over-quarter basis.

As you can see from this slide, we improved our gross margin for test by about 63% in the second quarter and while we do not expect progress on cash collections of COGS reduction to be limited, the continuation of the trend shown here would allow us to generate gross profits and accelerate the reduction in our cash burn.

In the second quarter, we incurred operating expenses excluding the costs of tests delivered of $23.2 million of which 24% were general and administrative expenses, 46% were research and development expenses and 30% were commercial expenses.

In the aggregate, our non-COGS related operating expenses were flat when compared to Q1 despite continued strong growth across all of our key metrics. This continues the trend that we've seen over the last several quarters as you can see.

We believe that our ability to control these expenses tightly while continuing our dramatic growth, illustrates the operating leverage we are beginning to enjoy from the investments in infrastructure that we've made since we raised over $200 million in 2014 and early 2015.

As we continue to reduce our average COGS per test and improve payments, this leverage should allow us to reduce our cash burn as we scale our business. As of June 30, 2016, our cash, cash equivalents and restricted cash and marketable securities had a total value of $90.2 million. This represents a reduction of $18.5 million as compared to the end of Q1.

Going forward we plan to continue to focus on limiting growth in operating expenses, driving down our COGS, growing volume and driving revenue. As we've begun to show in Q2, these will be keys to beginning to generate positive gross margins and reducing cash burn, enabling us to reach the inflection points in which the scale of our business drives more rapid reductions in cash burn as we work to reach positive cash flow.

We emphasized the goal of achieving positive cash flow because we believe with this accomplishment rather than GAAP profits, will enable us to fuel continued growth and investment in our business as we drive to make the use of comprehensive genetic information part of mainstream medical practice for billions of people on the planet.

I will now turn the call over to Sean for some additional color on our progress in Q2.

Sean George

Thanks Lee. We’ve executed consistently on all business measures over the last seven quarters. With our investment and driving scale we feel confident in our ability to continue adding to our menu of services, improving the customer experience, driving volume and lowering cost ever faster in the quarters to come.

The investment in our sampled answer process infrastructure continues to payoff. We're ahead of schedule this year in COGS reduction and we plan to continue releasing infrastructure improvements in turn allowing us to continuing lowering COGS at the same time increasing the content available to our clients.

In the coming months we will be bringing up our new higher throughputs sample construction platform installing the next generation of our sample processing automation system, moving volume from the HiSeq 2,500 to the HiSeq 4,000, improving our sample targeting methodology and releasing a continue series of workflow improvements in automation into our clinical interpretation reporting software. All of these in turn are intended to allow us to continue to March our COGS reduction for many quarters to come.

At the end of Q1, we had released a new set of cardiology, neurology, pediatric and metabolic disorders with a goal of getting our production capabilities to over 3,000 genes by the end of the year.

This week we are adding another batch of our content to our menu. Including additional cardiomyopathy genes, neuropathy panels and additional neurological disorders and we now turn to completing our pediatric and metabolic offerings.

Our investment in development and production infrastructure has paid off in the last few quarters as we've increased the velocity of our menu development. At this point, we are confident enough in our ability to continue doing so, that in addition to the expansion of our diagnostic disease area panels, we're going to accelerate our offering of the exome testing service.

This will be a diagnostic grade exome allowing us to evaluate variance in the 3,000-plus known clinical relevant genes with extremely high sensitivity and specificity as well as best-in-class coverage for the remaining 17,000, many of which are candidate disease causing genes.

We aim to begin to offering this service around the end of this year, so that by early next year, in conjunction with our continued development of high sensitivity diagnostic panels, we will be able to serve the full spectrum of genetic testing needs from the single gene level up to all of the known genes in genome today.

Every time we've added new content, we have seen volume increase as a result. Our cardiology business has doubled over the past six months and we expect similar update as we complete our neurology, pediatric, metabolic and other rare disease panel offerings.

As we bring exomes to market, we believe that our value preposition to patients, providers and payers alike, will translate into rapid growth for that offering as well.

We drove another great quarter of volume growth. We recently brought our sales rep headcount to 35 and in the coming months we expect the new additions to begin contributing fully to our topline growth.

For every disease area in which we're active, we see significant topline improvement for every rep we add and expect that to persist as we continue to add more.

Another volume driver came in the form of our June licensure from the New York State Department Health allowing us to now offer services to clients in the State of New York. It's only been a few weeks but we already have some key account wins and are optimistic about our ability to rapidly gain share as we have in all other regions.

We also recently launched a turnaround surgical panel, targeted to meet the needs of women headed directly into surgery following a diagnosis, in conjunction with tools like the Cancer check patient screening tool, we believe we are positioned to better serve surgical oncologists and the genetics systems general counsel who support them.

Expanding our influence beyond core genetic sector in oncology and allowing us to continue taking share in a rapidly growing market currently sized at more than 400,000 samples per year.

Worth noting that we continue to maintain operating effectiveness through an almost tripling of year-over-year sample volume. In fact, our turnaround times continue to improve even as we push pass the 5,000 sample per month point on our way to the 50,000 to 70,000 samples projected for the year.

With our rapid progress with payers in the past few months and momentum picking up, we’re now in a position to align our commercial efforts to work with payers as partners in achieving our mutually beneficial goal and providing high quality, low cost genetic testing to patients.

With 95 million covered lives we are now in a position to actively support their moving other providers out of network and transferring the volumes smoothly as well as working with them as they put incentives in the place for providers to shift genetic testing volume are away.

Another key set of commercial partners will beginning to work with are the pharmaceutical and biotech companies. As we establish and rapidly grow a network of providers and payers with deep genetic information linked to patients and their disease states, we can work with these companies to identify patients that could be candidates for rare disease clinical trials or who would differentially benefit from therapies in development based on their specific inherited genetic background.

We’ve established partnerships with companies, leveraging our menu in oncology, cardiology and rare disease including Miocardi, Parion Sciences and a couple of pharmaceutical companies and we look forward to broadening, deepening and expanding the number of these relationships as a key aspect of our business built on top of our generic testing businesses.

Our goal is to build this network to not only include clinical trials, but also to include advocacy organizations and support groups, genetic experts and other resources that patients and the clinicians will find helpful in navigating their healthcare plan.

The basis of some of these partnerships also has the potential to provide data to further influence payers to cover not only our tests but also potentially for the treatments that are being developed.

In the near term this provides us with additional revenue streams further improving our cash flow, but in the long term we see this as an important part of our business strategy that will help improve time to diagnosis and access to treatments, ultimately improving our healthcare system.

In summary we continued to execute as we have indicated we would, our business model is indeed working and we are seeing the operating leverage that we believe will move us to positive cash flow generation.

Now with the payers and other key partners in the industry working with us, we are increasing our commercial leverage and can accelerate driving the change in the genetic testing landscape to an industry in which we are best positioned to lead.

We’d like to now open the lines for Q&A.

Question-and-Answer Session

Operator

[Operator instructions] Your first question comes from the line of Tycho Peterson from JPMorgan. Your line is open.

Tejas

Hey, guys it’s actually Tejas on for Tycho. Just a quick question here on the progress with payers, obviously Medicare was on board last quarter, now you have Aetna as well and you said, you expect others to follow soon.

And then on the other hand, I think Lee spoke about a slight delay while these payers onboard you off perhaps a month or two. So how should we think about those two factors particularly in terms of the fact that volumes have been really good for the first half of the year, but your volume guidance range is still in that 50K to 70K?

Should we expect you to be tracking towards the high end of the range. If you could just explain some of the puts and takes, that will be great.

Randy Scott

Sure, so we're not changing our guidance at all. Obviously when you're growing at the types of rates that we are, it’s a little bit difficult to forecast in great detail, and we've just made a number of significant improvements like STAT turnaround time, which moves us into the surgical oncology market.

So we're not changing anything with regard to our guidance for the end of the year. Obviously as we bring payers on board, those conversations have gone well. We continue to expect at least one more of the major top payers, national payers to join before the end of the year.

It's very hard to predict the timing of what that impact would have either on volume or reimbursement, because as Lee mentioned, we typically do see there's a gap period between when you move in network and when the contracts actually get operationalized on the payer side. Many of the larger payers especially are conglomerates of multiple individual plans.

So it takes time for that to work through the system. So we think the biggest impacts you're going to see in terms of reimbursement really will be happening probably in later Q4, but mostly in 2017. Lee, do you want to add any color to the reimbursement?

Lee Bendekgey

Yes, I think, I think that's right. In general, we get paid in any given quarter, primarily the cash -- primarily results from cash delivered in the prior quarter and that will continue to be the case. What I would say is overall there will be some lumpiness, but in general the percentage payment rate will start to improve slightly perhaps by Q4 and then that will likely start to improve more dramatically beginning next year.

And that would be in general how I would think about it. It's a little bit tough to model at the detailed level the cash, because of these kind of starts and stops which to some degree will counteract each other.

So we still haven't for example caught up entirely on Medicare earlier from the beginning of the year. So some of that catch up may offset some of the delays and some of the other payers. So in general I probably if I were you wouldn't alter my model too much.

Tejas

Got it. And then in terms of the pricing on the Aetna contract, can you at least qualitatively talk about where that ended up? Was it closer to that 1K range or was it closer to the Medicare number. And how we should think about reimbursement in terms of the other private payer contracts to be signed in the near term?

Randy Scott

Sure, so we don't give out details on individual payer contracts, but the pricing is consistent with our overall pricing structure. So you're right, in that $1000 range as we've indicated in the past.

Tejas

Got it. And then in terms of working with biopharma companies, it's probably still a little bit early. But how should we be thinking of those contracts? Will they encompass, milestones, upfront payments or will it be on a per sample basis. And at what point do you see the revenue from those arrangements to become material to the business model.

Randy Scott

Yes. So each one is different and it can vary from R&D work and collaboration to them bringing us clinical trial samples, that they want us to do genetic testing for their clinical trials to us actually providing them access to patients that are coming to Invitae for genetic testing.

So you'll see a variety of models there. Obviously we're just getting started in that area. So it's already starting to generate some revenue, but it will pick up as we do more deals and collaborations in the future.

Tejas

Got it. Thanks so much guys.

Operator

Your next question comes from the line of Doug Schenkel from Cowen. Your line is open.

Doug Schenkel

Good afternoon.

Randy Scott

Hi, Doug.

Sean George

Hi, Doug.

Doug Schenkel

My first, I guess my first multipart is a follow-up there. So could you just talk about indications covered and if there's any notable limitations on coverage. I guess the second part is, is it worth talking about what percentage of volume sadness accounted for historically out of network, I guess I mean thus far?

The third part is, is there any ability to maybe get paid on some of the tests done previously. And the last part, part four is, did the CMS interim rate proposal impact your discussions with Aetna at all, doesn't sound like it, but would be curious if there was anything of note there?

Randy Scott

Sure. Well the answer to last questions is no, we didn't see any kind of impact on the Medicare surprising and I don't see that as impacting our payer discussions overall. So we're really pleased in general with the Aetna contract.

It is broad. The contracts generally cover on both sides all the products that we would have in our panel testing component and then we specifically focus on hereditary cancer and long QT or probably two of the biggest volume products that are in our portfolio and theirs.

So, these are broad contracts. We’re really pleased to have them in terms of volume overall. You can look at the volumes, they just mean reflective of the overall percentage lives covered by the various institutions that we're talking to.

So, we don’t see a big like there is a particular payer that has an out of proportion volume to their covered lives. It basically follows the covered lives pattern.

Doug Schenkel

And I guess the one part we mentioned there, which is probably a Lee question, is the ability to get paid on test on previously.

Lee Bendekgey

Yeah, the retro payment issue and again without commenting on any individual payer, I will say in each case we always try and propose how we are are willing to compromise on the pending claims at the time of contracting. Some payers have been willing to agree that arrangement and others not.

Where they don’t, we continue to appeal and expect to get paid on those where it’s appropriate for them to pay us at the higher, those are all build at 1500. So, that's kind of how it works and it varies from payer to payer.

Doug Schenkel

Okay. Second topic still reimbursement but pivoting to CMS, you started getting reimbursed under CTT code 81432 this quarter. The interim rate, as you outlined a few months ago was at least what was proposed was $622.53, could you just confirm this is what you've been getting paid thus for, talk about if there has been any progress made towards trying to get movement towards a higher rate.

And I guess the final thing I’d like to get at in this part of the discussion is recognizing some of your competitors including the volume leader in the market. so as they don’t need to use 81432, that type of differentiated approach, differential reimbursement for similar products, if that’s allowed to continued, that puts you at a disadvantage.

I’m just wondering if you have any thoughts on how and when and really if this inconsistency might get addressed.

Lee Bendekgey

So, let me try to answer most of your questions Doug and then often when these trenches are more geopolitical kinds of issues, I tend to differ to Randy, but in terms of the details yes, we have been getting paid. We got paid on some of -- on some of our Q1 billings and on some of our Q2 billings, so we haven’t fully caught up with Medicare; but we have been getting paid fairly regularly and the price been that 622 price.

That proposed price was actually formally published in Q2 and there is -- I think a 90 day commence period and we either Friday or today submitted our comments on that price.

It probably comes as no surprise that we suggested that the price be 950 that Medicare pay on this -- on the panel and we expect the price to get adjusted later this year. The precise timing is not clear.

I can’t comment on any individual other company but probably comes as no surprise as we talk to other companies in our sector and let me just say that the general understanding is that if you are delivering a hereditary cancer panel that particular CPT code is the one that you were suppose to use and I let Randy talk a little bit. He has anything more to add on that subject.

Randy Scott

Yeah, I think long term we just think it’s a simple fact the prices are coming down as the field has moved to generic and that of course started with the Supreme Court decision back in 2013 given the payer system and the structure of the payer system its takes a while for that to work its way through.

But we don’t see a future scenario, which there is a why disparity in pricing, that represents almost threefold differences between different providers that wouldn’t make any sense in our way of thinking curve especially the government given the overall cost of healthcare that would be very surprising to us.

If it turns out to be the case, we would certainly want to try to understand better from our congressional leaders as well. CMS on why you would pay one company three times what you might pay another.

But it does take time in the healthcare system to work through what contracts and process sees cetera. But we're reasonably confident that over the long haul all prices are going to come down into the range that we think is more appropriate of a generic – genetic testing market.

Unidentified Analyst

Okay, that's all, super helpful. Thanks guys.

Operator

Your next question comes from the line of Amanda Murphy from William Blair. Your line is open.

Unidentified Analyst

Hi. This is [Alco] in for Amanda. I just had a couple of questions, fewer parts. The first one is given that you're ahead of schedule on costs per test, is there any updates to guidance in that regard?

And the second one is, is there any updated guidance on the cash burn if you can outline even on inflection and it's perspective timing and productivity in the sales force that you've cited?

Randy Scott

Sure, I’ll take that on the COGS one, as we've noted, we expect the COGS line to bounce around as the two competing factors of increasing the size of our menu and driving down COGS play against each other.

We're pleased to be ahead of schedule this year on COGS. We also just announced we'll release some more content this year, and are now exhilarating the number of genes we're bringing into production.

So given where we are, the dynamic nature of where we are and really trying to meet our clients' requests as quickly as possible, we hesitate to put in additional target out there lower on the year. That's just where we are today.

We continue to invest in all the avenues we can to continue lowering costs, but also keeping in mind that our goal is to keep -- is to aggregate the testing menus. So we’ll keep adding content on top of it, which is a counter closing force. So no updated guidance at this point. As for cash, I think we can kind of cover where we are and going.

Lee Bendekgey

Yes, so as you will have noticed, we ended the quarter with a little over $90 million, which resulted -- which reflected a slowing in our consumption of cash. And our goal as we've said all along is to continue to move the gross margin and the gross profit line in a positive direction while holding the rest of our expenses as tight as possible.

So our goal is for that burn number to continue to decline and you were quite happy with where we are with our current cash balance. Honestly I think implicit in your question has to do with the possibility of financing. I think you saw that we filed a shelf registration statement earlier this year.

And while as I said, we feel quite comfortable with our current cash balance, I will also say that as we get increasingly confident in the success of our testing business, if there is an opportunity at some point to add to the balance so that we can accelerate our progress with genome management, the genome network. We would consider that, though we certainly don't feel any particular compulsion to do so.

Unidentified Analyst

Got it. Thank you.

Operator

Your next question comes from the line of Raymond Myers from Benchmark. Your line is open.

Raymond Myers

Thank you. Let me first continue on that line of question before moving on. The R&D expense decline in the second quarter, can you discuss what your trend R&D expense is and why it might have declined?

Randy Scott

Yes, so one of the things that we have been describing really since last year when we staffed up our in R&D organization is that in many cases, we hired people to help us expand our content and to identify the genes that should be on our test menu and to curate the information that we would need to be able to annotate and call variance in those genes.

And those people start out in R&D and over time as we’ve have launched more content a portion of their time than sort of transfers over to the cost of goods, because what they are now doing is spending increasing amounts of their time actually interpreting the results of particular tasks and assisting in the classification of variance for individual patient reports.

So basically that portion of our R&D line over time migrates out of R&D and into COGS and that's some of what you saw it's to some degree a function of expansion of our test menu and the commercialization of a broader test menu, and to some degree it’s a function of volume growth that basically migrate some of the R&D expense over in the COGS.

Raymond Myers

Thanks, that's very helpful, that’s an interesting dynamic. So as you increased the number of genes and the number of indications covered by your tests this year, can you give us some discussion about whether the current contracts cover all of that or are they more BRCA focused.

Randy Scott

The current contracts generally do cover all of our content with the exception of the medical exome that we've talked about, obviously that's a new product, it historically has been used in diagnostic odyssey cases.

There aren't a lot of payer policies or prices yet set for exome sequencing. So everything in our current content menu is typically not always, but typically being covered in payer contracts that we're putting into place.

Sean George

I just want to add contract coverage and reimbursement in individual cases are somewhat different things. So although for the most part these contracts cover essentially all of the different disease areas that we cover in our test menu, each payer would tend to have different policies about the circumstances under which they would cover a particular patient.

So it doesn't always mean that 100% of the test will get reimbursed by the payer. It just means that inappropriate cases they will.

Randy Scott

Yes often times outside of the major cases side that I cited like breast and ovarian cancer is one, Long QT Syndrome is another. It quite often reverts to a pre-authorization policy, because almost no one is established really straightforward criteria for a lot of the rare disease areas once you get away from some of the most common disorders.

So the fact that it covers our broad portfolio means there's a path for the broad portfolio, but for any one or any given condition or any one particular patient episode it would go case by case with the payer with regard to pre-auth and approval, but we have a pricing mechanism in place for should they approve those tests.

Raymond Myers

Can you help us to frame if you just looked at the coverage by -- what proportion of your current test volume would be covered by them under their current standards?

Randy Scott

Well I'd encourage I think Aetna is basically about $20 million covered lives, so they represent one of the top payers, I don't know the exact number, but it's in the probably 8% range or so of covered lives in the U.S. And that's similar to -- we don't do a specific breakout for investors on percentage of each payer, but you can generally look at the percent covered lives and that will be reflective of the volume.

Sean George

The other thing that's probably worth adding is that we have as we've said historically about 80% of our volume has been cancer, which is mostly hereditary breast and ovarian cancer and that is the indication for which most of the payers including Aetna has the clearest eligibility criteria and where coverage is kind of the easiest and most straightforward.

Raymond Myers

Great, thank you. That's what I looking for. Thank you very much.

Operator

Your next question comes from line of Doug Schenkel. Your line is open.

Doug Schenkel

Hi everybody thanks for taking a couple quick follow-ups. Just the first one for Sean, the 20,000 gene exome offering, is it right to think of this as a separate product at a different price point and if so, how should we think about the margin implications given that you are targeting gross margin breakeven by year end.

And then I guess my other follow-up is, I think you’ve talked a little bit about as part of the pharma partnerships, the fact that you are trying to identify patients for clinical studies. I believe that's the case could you just correct me if I'm wrong and if not could you just talk about the scope of that potential opportunity as a revenue generator over the coming quarters. Thank you.

Randy Scott

Right sure Doug.. So on the Exome, I think a few quick points, it is indeed a more costly service to deliver and so we can certainly expect a different price point, we are actually still in the process of figuring out exactly what that is going to be.

We are still committed to continuous gross margin improvement to the point. We're targeting the 50% gross margin line and I think overall as you look at the portfolio of our services, we will continue to march in that direction.

I would say this is where yes in general I think there will be Exome type services and single panel type services but I would – I think it is going to get a little more complicated that there is a lot of demand for kind of initial panel testing and then reflects to Exome business that may complicate the matter but in general I think you can think of it as a differently priced offering and we will get back to you with details on that.

Again the key point there being we're committed to getting the business to 50% gross margins. I think that was all the Exome questions.

Price margins and then so for pharma, this is where again our as we have been talking about for a couple of years now, as we aggregate and consolidate the generic testing landscape and indeed grow the market, both as it grows on its own and by what we think is a fair amount of pent-up demand for which price elasticity would solve. We believe that a broad network of patients, payers and even providers in the mix linked to very high quality, highly sensitive, highly specific genetic data is an incredible asset that people are going to want to have access to.

And as we have talked about so long as the patient is involved in that decision making. They are the ones that ultimately own their data, we believe that there will be – there will be business opportunities in offering access to that data or to those patients.

Right now I would say it is early enough for we probably don’t need to start talking about modeling or percentage of our business from those type of revenues right now. I think we will update you on as we get closer to that. We will say that we do expect that -- the margins on that type of business to be higher than our 50% testing business.

But other than that I would say it is pretty early to start putting guidance on what percentage of our business or what they are going to look like as we mentioned we are excited to get these going, we think maybe the most exciting piece of it is right now they are coming to us through our reputation as our brand has evolved, key opinion leaders are appointing Medical Directors and clinical trial and even people running clinical trials at pharma companies to us and so it is part of our strategy and it is now, it is time we are I think we are getting to the scale where it is time to start pursuing this. So again we will keep everybody posted.

Doug Schenkel

Okay. Thanks again.

Operator

There are no further questions at this time. Ms. Katherine Stueland, I will turn the call back over to you.

Katherine Stueland

Great, thank you and thank you all for joining us today. We will be attending a handful of conferences through August with the Canaccord this week in Boston and UBS and Gorbelli and then in September at Morgan Stanley in New York and hope to see you all there. Thanks so much. Have a great day.

Operator

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

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