Invitae's (NVTA) CEO Sean George on Q4 2016 Results - Earnings Call Transcript

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InVitae (NYSE:NVTA) Q4 2016 Results Earnings Conference Call February 13, 2017 4:45 PM ET

Executives

Sean George - Chief Executive Officer

Lee Bendekgey - Chief Financial Officer

Katherine Stueland - Chief Commercialization Officer

Robert Nussbaum - Chief Medical Officer

Randy Scott - Executive Chairman

Analysts

Steve Wheen - JPMorgan

Doug Schenkel - Cowen

Puneet Souda - Leerink Partners

Aurko Joshi - William Blair

Raymond Myers - Benchmark

Operator

Good afternoon. My name is Mariana and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter and Year End 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.

I would now like to turn the call over Katie Reglan [ph] You may begin your conference.

Unidentified Company Representative

Thank you operator and good afternoon everyone. Thank you for joining us for our fourth quarter 2016 earnings call. Joining us today are Sean George, our CEO, Lee Bendekgey, our CFO, Katherine Stueland, our Chief Commercialization Officer, Dr. Robert Nussbaum, our Chief Medical Officer and Randy Scott, Executive Chairman.

As you listen to today's conference call, we encourage you to have our press release available, which includes our financial results, as well as metrics and commentary on the quarter. We encourage you to set in questions to ir@nbc.com to be answered by Invitae management at the end of our call.

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, feature product services, our product pipeline and the timing thereof demand for and reimbursement of our services, and our investment and our infrastructure and operations constitute forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act. It is difficult to actually predict demand for services and therefore our actual results could differ materially from our guidance.

Our guidance on future company performance assumes among other things that we don’t conclude any additional business acquisitions investment, restructurings or legal settlements.

We refer you to our 10-Q for the quarter ended September 30, 2016, in 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.

With that, I will turn the call over to Sean George

Sean George

Thanks, Katie. Invitae exited 2016 in a strong position to lead the way in bringing genetics in the mainstream medical care for everyone and modernize healthcare systems. We believe the leadership in a large rapidly growing and complex medical genetic sector will translate to leadership in genetic information management, as we accelerate the coming inflection point in which broad adoption of low-cost, high-quality genetic enters in the mainstream medicine.

With progress we made with payers in 2016 and our expected execution of those contracts, we believe the last question marks on our business model have been lifted. No longer a concept story, we now focus on swift execution and operational excellence. We pursue both our long-term growth strategy and positive cash flow in the fourth quarter of 2018.

With that in mind, we are going to try a different approach to our quarterly earnings call. Given our progress and the consistency of our execution today, we believe is the metrics by which we drive our business should speak for themselves and going forward will serve to validate Invitae business model without the need for a great deal of elaboration.

We know that all of you are very busy and so we will focus on providing a summary of our business metrics and try to provide some insight into the trends that are driving our progress against them.

We are hoping to engage more meaningfully with investor community during Q&A by encouraging and directly answering questions, so that ideally the interaction becomes more of a dialogue. Transparency is a core value at Invitae and we would like to make sure that we are answering all questions and concerns that our shareholders and those representing they might have.

Before I review the fourth quarter of 2016, I want to remind all of you the key metrics we recently announced to measure our growth and progress toward positive cash flow. They are volume of samples accessioned and reports delivered, value of billable reports delivered, revenue, average revenue per report delivered assuming 90 days - 90 DSO's or days sales outstanding, average cost of goods per sample accessioned, gross margin per report delivered, non-COGS related operating expenses and cash.

In Q4 of 2016 we roughly tripled our volume compared to same period in 2015. We achieved this growth with around 35 sales representatives active in the field in the fourth quarter and fewer for much of that year. We believe this growth confirms our goal of operating with uniquely efficient commercial model, by delivering a better product at a lower price and with better service levels.

We had roughly doubled the size of the sales force by mid-January and at this point in time they are full complemented, active in the field. In 2017, we expect to roughly double our volume to accession between 110 and 120,000 samples.

The value of billable reports delivered in Q4 of 2016 was $22.6 million. This figure reflects our expected billings for the quarter without regard to collectibility. We view this figure as a way to keep an eye on overall value of our business and as annualized growth. In addition, while we never collect 100% of our billings, as we improve our collections and move more of our revenue to accrual accounting it will be a useful point of comparison to assess the progress of our revenue pull-through efforts.

Our revenue in the quarter increased nearly 200% over the same quarter last year. Our Q4 revenue benefited from our success and consistently getting paid for our Medicare cancer patients and included catch up payments to reflect the upward adjustment of Medicare prices for cancer panels and to bring Medicare payments current.

As with our Medicare experience, we expect that our efforts to pull-through revenue from contracted payers went on average, take a couple of quarters to fully manifest. As a result, while we expect revenue growth to be greater than volume for 2017, it will likely be back half waited as a result of the catch up effect of operationalizing payer contracts. In 2017, we expect to generate revenue between $55 million and $65 million.

In Q4, the revenue collected per report delivered at 90 days payable was $600. While we expect aggregate quarter-over-quarter revenue increases in 2017, and a general trend of improvement in per report payments, this number may vary from quarter-to-quarter until we have succeeded in fully operationalizing our major payer contracts.

We nevertheless believe that until we are accruing the majority of our revenue, this metric provides some insight into your collection efforts by dividing our quarterly revenue by the number of reports delivered in the prior quarter, which roughly reflects the timing of our collection.

We will continue to focus on reducing COGS throughout 2017, as a key lever in generating positive gross margins and moving us to positive cash flow. Scaling our genetic information infrastructure also enhances our efforts to grow the market for hereditary genetic information by making it more affordable and accessible.

In the fourth quarter of 2016, we achieved our goal of operating and positive gross margins. This is a key milestone in our business trajectory, as we grow our volume it allows us to reduce our use of cash for non-COGS related operating expenditures and gives us more confidence in continuing to grow our business and generate positive cash flows in Q4 of 2018.

In the fourth quarter of 2016, we incurred operating expenses, excluding the cost of reports delivered of $26 million, of which about 24% were general and administrative expenses, 45% were research and development expenses and 31% were commercial expenses.

Fourth quarter operating expenses included approximately $6.7 million in non-cash expenses, including approximately $4.3 million in equity compensation expense. Excluding the cost of a one-time employee performance stock plan [ph] our non-COGS related operating expenses declined as compared to Q3.

We will continue to focus on increasing our operating leverage relative to the scale of our business as we move forward. We have a healthy balance sheet exiting the year. Our cash used in operating activities for the year was $4.4 million lower than in 2015. The reduction in cash burn during a period of rapid growth reflects the operating leverage we are beginning to demonstrate as we scale our business.

We expect the cash used in Q1 and Q2 of this year will be roughly consistent, followed by an accelerating reduction in the back half of the year as payer contracts operationalized with the expectation that we will reach positive cash flow by the end of 2018.

In summary, with momentum from 2016, and an exciting lineup of new content and partnerships for 2017, we believe Invitae is well-positioned to emerge as a leader in bringing genetics from downstream to mainstream medical care.

With that, I'll now turn the call over to the operator for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Tycho Peterson with JPMorgan. Your line is open.

Steve Wheen

Hey, guys. This is Steve Wheen, on for Tycho. Thanks for taking my question. Maybe just to start off, can you give us an estimate of how fast you think the overall markets growing and then give us a sense of how much you hear is been driven by market share capture versus just overall market growth?

Sean George

Sure. I mean, as we've kind of postulated and suggested for a couple years, we think that the market has been growing quite rapidly. Most people are following hereditary cancer testing, which I think you know, again, I think it’s becoming a apparent by a variety of data sources now that it has been growing pretty rapidly and we believe continues to do so.

We also experienced or we believe that some of these other disease areas are growing, just as fast if not faster. Our market - our volume to date kind of nothing dramatically has changed since last quarter, it continues to be a mix of growth in accounts that we're already in, as well as new accounts that were picking up. So we're kind of seeing a healthy mix of both, pretty difficult to kind of nail down exactly what percentage, but we do see both.

Steve Wheen

Got it. And then you mentioned you know, the 35 sales reps active now, how you're you thinking about kind of the commercial investment priorities for 2017 and kind of what areas are you particularly looking at building out?

Sean George

Right, you know, we had 35 reps at the end of last year, we've now as of mid-January had roughly doubled that, we're about 60 active sales representatives are equivalent in the field. They are all in the market fully trained up and an active as we speak. So that's where we are today. Katherine, do you want to point out just a few details on where they are focused?

Katherine Stueland

Yes. So the majority of our reps right now are faced – are focused on the oncology side of the business, continuing to serve the genetics community, while also starting to help support some of the areas where we're seeing some potential marketing expansions, including colorectal cancer, prostate cancer, and otherwise.

So as we think about the rest of the sales force, we have a small, and again very targeted sales force that’s focused on children's hospital and really helping us expand our presence there to secure intuitional contract. We do think that the introduction of our exome this year will help us mound out our offerings, to be able deem work and stay [ph] with all of those children's hospital. So that’s really where the sales forces are focused right now.

Steve Wheen

Got it. And then just lastly on margins, how should we think about kind of the cadence of gross margin expansion throughout the year. As you launched some of these newer test and I am thinking specifically about the exome test?

Sean George

Right, so we're looking at gross margin we believe you know, accordingly - our plans are to continue to expand into positive gross margin territory and continue that going. We do note that as we are able to lower our COGS, we do intend to bring on more and more content.

You pointed out exome as a new offering, to run an exome and in particular to deliver the report – interpret and report an exome is more costly than a smaller panel test. We will price accordingly. So that we continue to expand our gross margin contribution even if you absolute COGS do increase. For example if exome begins of to become a significant piece of our business.

As absolute expansion gross margin dollars, again we just point out that we are metering that versus our operating expenditures to make sure that we get to a cash flow positivity by the end of 2018.

Steve Wheen

Got it. That’s all from me. Thanks, guys.

Operator

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

Doug Schenkel

Good afternoon. So my first question I guess is a bit of a follow-up – I guess, to an extent the sales force observation. So you're now solidly in phase 2 of your strategic plan with all major payers you have targeted signs, you've doubled your sales force over the past year.

Katherine, you just spoke about some of what the expansion position either do in terms of different hospitals that you can now target and moving beyond what was your historical core? I'm just wondering if either Sean or Katherine, if either you could speak to your thoughts on what would prompt you to further expand the sales force and if you now feel you're also in a position to potentially get more aggressively and going after all volumes, including asymptomatic, but at risk patients?

Sean George

Right. I think I'll let Katherine answer on the details of what we would see in the field and what would trigger a further investment there. I think just at the highest level, while we think we demonstrated that in the battle of the business models as it were that the one that we're pursuing is going to prevail.

We're also conscious of the fact that we are running a leaner margin than the kind of a traditional and or the as the incumbents run. So it’s really a – it’s a bit of a trade-off. We think there is plenty of volume out there and with further investment in sales and marketing we feel confident we can go and capture that.

With that said, we also are targeting that gross margin – I am sorry the cash flow positive point at the end of next year and those are the discussion we have internally over the trade-off of return on investment in rough timeframe of delivery of that. Bu Katherine, maybe something that we're working on that perhaps would swing another direction if we saw it materialize in the field?

Katherine Stueland

Sure. Doug, I think right now having just double the size of the sales force, we really feel good about our ability to execute on the volume projections that we put out this year. We have some additional commercial ads that we think will help us be even more efficient in a way that we are deploying our sales reps, feelings sure that we're able to really capture as much volume as possible.

I think you know, Sean that we're really right now kind of walking that tight rope, as we're seeing revenue start to ramp and volume continuing to ramp. And so right now I think steady state for the sales force is probably, but best for rules [ph] that we articulated for 2017.

If we were to start seeing volume and revenue jumping earlier in the year, then we cold take another look at it, but for now we think that this is the most prudent approach to be able to meet both our volume projections, as well as our financial needs as well.

Doug Schenkel

And maybe just a related follow-up, are you seeing anything in the way of payers trying to push volume to Invitae, you clearly have a compelling economic argument relative to certainly some of the incumbents to actually get the payers on board. You also have to make a compelling clinical argument, you've already accomplished that given where coverage is, are there some effort by the payers that actually can you know, essentially augment the commercial effort that you have already built out over the last year?

Sean George

The short answer is yes. So again, we positioned ourselves to deliver a value proposition, not just to the patient, not just to the provider, but also to the payer. We view the payers as a customer, as a part of our – the trio customers that we serve. And as such in the last we feel that’s actually contribute a lot to our success, relatively rapid success in getting in network with these payers.

As you know, our manage care team and as is Dr. Nussbaum and Randy have been on the road talking at the highest level with these payers has become very clear to them and to us that there's a great partnership in the making here in the years to come for broad, accessible, high-quality genetic testing.

With that said, the payers are still payers and the insurance industry is so the insurance industry, so this won't happen overnight, but you can see the beginnings of payers starting to pay attention specifically to genetic testing as a class, its lately become one of their faster -growing line items and they are paying attention pretty closely to who is in network and who is not, and what billing practices are taking place - are being pursued.

They are helping out augmenting our sales efforts. You know, as payers often do this is - this kind of no secret payers often will help their partner providers, in network providers by providing pretty good detail on who's ordering what and from whom and where volume would like to be directed and that's a great way to really target the sales force and get a much more effective cost of client acquisition per for sales reps deployed.

And in the future we think there is some other – I think we may have mentioned in the past, they haven't developed yet, but we continue to work on them and I think signs are positive that working on pathways that are you know, similar to have generics work on the therapeutic side, by the way providing incentives for both provider and patient for going with one laboratory provider versus another..

We think those are things like that, our discussions we're having with the payers and we'll be working with them again with no clear timeline on that, but the short answer is yes, they are working with us to direct volume.

Doug Schenkel

And then in terms of broad competitive dynamics, you guys clearly had a strong year and a strong Q4. The largest incumbent, the volume leader in hereditary cancer testing has been a share and a price loser for several quarters.

In the December quarter, they grew volume sequentially, this could just be normal seasonality, or could be a sign of stability. Another observation is there are some changes with Ambry, as well with their sale, you know, recognizing one quarter never makes a trend, I was just wondering if you could comment on whether or not you saw any notable change in competitive dynamics during the quarter, given the update for Myriad and some of the developments with Ambry?

Sean George

Yes, let me answer it quickly, and then Randy will certainly have some more thoughts on the landscape as its evolving. I would say just very quickly, I think it's safe to say that there is a lot of dynamism and change out in the industry right now. Players have pulled out of the community setting, some players are starting to show signs of retreating or retrenching to higher-price, higher-margin niches you know, where they may have a singular offering for the time being.

And so, I guess what I would say is, is we saw you know - we saw the beginning of a lot of change in the dynamic of who's out there offering what tests this last quarter and I think we would expect that to continues as far as we can tell. But maybe Randy, can comment high-level, overall.

Randy Scott

Yes. Its really just a very dynamic time in the market, its quite amazing to what we always believe that if our business model driving the cost and making genetics more affordable and accessible would drive sort of volume and market opportunity. And I think we've really seen and especially in the last year what's been historically cited as kind of a flat to very modestly growing market.

We saw one recent survey that suggested the overall market is now growing as much as 50% per year. And we think that continue for many, many years. So I think there maybe a case for a rising tide that’s carried [ph] in all ships that the growth in the overall market for genetic testing is really growing very, very strongly.

Now having said that, you know, we're growing roughly 25% to 30% quarter-over-quarter and have been for the last couple of years. So that means that you know, we're growing well beyond even the highest estimates. So we're clearly gaining in market share across the board, but I think it is a fairly broad industry and probably a bigger market then has been taught over the last or year two.

So we continue to watch those competitive dynamics very closely. We didn't see any trends that would make us think that anything changed in Q4, if anything with acceleration of our sales force, we're feeling quite strong that the value proposition that we deliver of making genetics more affordable and more accessible is playing extremely well across all markets.

Doug Schenkel

Thanks for that Randy. And maybe just one more and we'll get back in the queue. I guess another competitive question, so CMS held a CPT code meeting last week, they were discussing several CPT codes important to hereditary cancer testing, including CPT code 81432, as well as a few new codes for hereditary cancer.

Do you have an opinion you'll be willing to share on the proposed codes and the changes that were discussed and how these could impact you and other market participants? Thank you.

Randy Scott

Sure. This is Randy, again. Yes, so we support all three coding changes very strongly. I think we've seen over the last several decades the impact of next-generation DNA sequencing technology, its really time for next generation economics as well and the CPT coding system was really designed for kind of what is now in our CAG [ph] system of charging on gene-by-gene basis and stacking codes and its resulted in incredibly high prices that are out of touch with what next-gen sequencing technology can really deliver.

So three things specifically that I think would impact the cancer space are the expansion of 81432 code to be more inclusive, narrowing of the old bracket codes, reflecting the fact that almost nobody now is using those older codes which have much, much higher prices and a new pan cancer code that would be a single code for all of cancer, regardless of the number of genes, which we really think reflects where the world is moving to today and what's going to be the standard of care well into the future.

So this world in which you know, you can run two genes and get paid $2 to $3000, but if you take those same two genes and add additional work and include them in a 14 gene panel you get paid a half price makes no economic sense in anybody's playbook. And so we think this is really a move to start modernizing the AMA CPT coding system, it will be very interesting to see how the committee comes out on that.

Robert Nussbaum

This is Dr. Nussbaum. I just wanted to add, we've reviewed for example, the types of panel that have been ordered and retailed over the last year and there have been 2240 different combinations of genes ordered by heart clinicians. So the idea that you could have a few individual CPT codes is so totally archaic and completely out of date.

I think the AMA will eventually catch on to the fact that they need to change their thinking.

Doug Schenkel

Okay. Thanks, guys, really appreciate all the commentary and information.

Operator

Your next question comes from Puneet Souda with Leerink Partners. Your line is open.

Puneet Souda

Yes. Hi, guys. Thanks for taking my question. Just on a high level, on the biopharma, if you could talk a little bit about the collaborations you had and then - or more importantly in terms of the acquisitions that you have done.

Could you describe as to you know, where could that go and potentially build into longer term?

Sean George

Sure, thanks. I'll let Katherine go through the details. Again, kind of the backdrop of this is as we were laying the foundation in 2016 for our genome network efforts, largely by taking inbound inquiry kind of you know, biopharma across the transom requesting for either assistance in understanding the genetics, some of the conditions that we're chasing after or certainly starting addressing cohorts of the population for which they were interested in clinical trials or outreach.

That you know, as we prepared for a direct effort in 2017, we kept running across the AltaVoice team and then and with a shared vision and with a, I'd say kind of a culture that was just you know, two cultures that we're going to obviously blend together well in pursuing a common vision we decided to go ahead and combined forces and greatly accelerate the efforts we otherwise we're going to be investing in. Katherine, do you want to talk specifically about where it’s heading and what we expect for this year

Katherine Stueland

Sure So a couple of things as Sean mentioned, thanks to our test menu expansions over the past several years. We've been approached by several companies to help them on a number of initiatives that are very important to them, in once case its clinical trial equipment and trying to increase and accelerate the users grading to be able to identify the right patient for clinical trial. So we have being doing that with companies, including Parion Sciences, as well as MyoKardia and others.

There are some companies who have been coming to us looking to see if we might be able to help, connect them with a patient or clinician who may have already been tested for Invitae, so there is an identification portion of this as well. And I guess important to note that information is not shared without permission from the patient. So that’s going to be an area of focus for us, so we can make sure that we can really open up potential clinical trial opportunities to patients who are being tested with Invitae.

And that leads us to BioMarin. BioMarin is a company that came to us with really a goal of partnerships that paradigm diagnosis for pediatric epilepsy. They were hoping to help introduce the idea of introducing genetic testing earlier in a course of clinicians though already there to rule in and over like rule out to these. And so we're now working with them on a screening program. They are sensitizing tests they have shared with their sales force to be able to educate pay pediatric knowledge and we have our sales force doing that.

And so it really gives us a great we opportunity not only talk about this BioMarin program in particular, but also to encourage clinicians to start testing earlier rather than later.

The AltaVoice acquisition really nicely gives us a lot of different opportunities. They've been doing this for about 10 years, with about a 100 patient advocacy organizations. So that enables us to be able to go to those organizations and see where testing might be a possibility. They've also been working with many biopharma companies as well, so we can be able to provide those companies now, I would say more valuable offer that would include those geno type specific information is information is always been information and in some cases medical history for patients.

So this is an area we're all really excited about, it ultimately means we're all working together across the industry and with patient advocate with the goal of helping to get patients diagnosed sooner and potentially connected to a treatment that could help them.

Puneet Souda

Got it. Thanks for that. And then, just two quick ones. On the COGS line, I am just trying to understand in terms of - as you tried to you know expand more offerings into exome's and beyond. I mean, with improvement in sequencing technologies coming maybe you know in 2018 or so, are there things that you are – are you building that into your sort of models already, help us understand that a little bit?

And then on the genome management offerings, I mean, is there - are the assets that you think you still need or you know, fairly have those both out having the experience so far with a number of players? And thanks for taking my questions.

Sean George

Sure. So I'll ask are social, Lee to kind of give the details it. I think it’s a very highest level, like we said, we are going continuing investing lower in COGS and I think Lee can kind of speak to the mix of COGS in content in the area and how it plays out.

Worth noting again, the sequencing cost, which now are kind of publicly forecast to come down over the next year are around 20% of our total operating - our total COGS So, so that's fantastic, that without any further investment, our partner Ilumina is going to be dropping the cost of sequencing, but again that’s about 20% of our total COGS and we'll continue investing in the restructurings. But Lee maybe the dynamic of COGS versus the volume versus the content and where we go moving from there on our operating model.

Lee Bendekgey

Sure. So as you'll recall Puneet, our long-term operating model is to generate a gross margin of around 50% with combined non-COGS operating expenses of around 40% and a 10% operating profit. And so Q4 was a big milestone for us in terms of generating positive gross margins for the first time.

And if you think about it, up until Q4 all the progress we made on gross margins was basically accomplished by reducing our average cost per test, and Q4 was the first quarter where we began to see some improvement on the revenue pull-through, really almost exclusively of the function of getting paid better by Medicare and getting some Medicare catch up payments.

And so right now we're feeling really good about our progress towards our margin model for a couple of reasons. One is that if you think about it as we are contracting we've said before we're contracting with payers, at least in cancer in the thousand to 1100 roughly price range on average. So with a current average cost per test report of $400 or a little under that, as long as we can get – collect better, we are already within spading this in some of our margin model, which now allows us to in addition now working the revenue lever, we can now think about COGS in a slightly different way and that is that in some circumstances COGS reduction will result directly and improve margin.

But in other cases, we will make the choice where Bob and the medical team become convinced that a more comprehensive solution will drive volume and deliver a better product. We can absorb some of that additional cost and maintain COGS to deliver a more comprehensive answer.

And so sometimes savings will allow it to generate more margin, sometimes savings will allow us to deliver a more comprehensive product, which will allow us to generate more volume and in that way we think we can deploy our the investment we've made in getting more efficient in a couple of different ways as we as we work our way to our 50% gross margin and positive cash flow by the end of 2018.

Operator

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

Aurko Joshi

Hi. This is Aurko in for Amanda. Couple of questions to follow up and I am sure if you disclosed this on. Did you quantify how large that Medicare catch up payment was in the quarter.

Sean George

No.

Aurko Joshi

Okay. And then a separate question, which is picking up from the previous one. On the pan cancer panel or the pan germline panel that you had been there discussing, do you have a sense of the timeline of when that might be, should we be looking for that in 2018, 2019, perhaps 2020 and how is those conversations progressing?

Sean George

Yes, you know, that’s completely in the hands of the AMA, CPT coding committee. So they just had a hearing on this on Thursday and Friday where the technology was discussed and presented. We certainly believe that is the long-term trend for the whole industry. It just doesn't make sense to have literally hundreds of different codes because there are now probably over hundred genes that are being used in hereditary cancer if you include you know, all the rare cancers as well.

So feel like that’s a very, very strong trend. It is the direction of the whole field is going to be going, it makes sense for the AMA, CPT coding committee to get there, whether that will happen in this session or sometime later this year or next, we don't know.

Aurko Joshi

Got it. And then in terms of guidance, do you have a sense of how much share non-oncology volume will be by the end of 2017 and then also the relative margin contribution in each one of those non-oncology and oncology on the gross margin line?

Lee Bendekgey

So right we're forecasting and Katherine and Sean, I'm sure will feel free to chime in. But we're - right now our assumption is that the non-cancer portion of our volume will be roughly consistent with what it's been which is around 20 to some quarters as much as 25%. So everything is growing so rapidly that it's difficult to be more precise than that. But our assumption is that it remains about the same.

In terms of price revenue per test and margin, it's actually not that different from disease area to disease area. I think there is this perception that somehow cancer gets paid better other tests are not getting paid. But in fact, the differences are not that material. And so in each case as we think about commercialization, it's really more a focus on how can we efficiently get to high-volume customers with a targeted commercial strategy, rather than sort of focusing on one disease area over another because we're getting paid better in one area rather than another.

Some of that having to do with the mix of customers that Katherine was alluding to earlier when she was talking about children's hospital and pharma and some of the rare disease and pediatric and neuro area, so…

Aurko Joshi

Got it. And then last one from me is that now that you are start [ph] pretty strongly in the pediatric setting, how much of your growth have you seen fueled in test volume by pediatric testing?

Sean George

Well, again, I think – we're starting from much smaller base. We're re seeing the same kind of growth that we saw early on you know, a couple of years on our oncology business. We do feel that we have a very compelling offering in the quality of the pediatric panels, the breadth of the offering and of course our pricing. In particularly you know, with pediatrics it’s often times you are dealing with you know, on institution basis at children's hospital and such.

And with our exome commercially coming available in Q1 of this year we think we'll be running out of really a very important offering there. Dr. Nussbaum can maybe comment on just why for example exome is a key part of pediatric testing?

Robert Nussbaum

So exome has really come to the fore in particular area of application and that is in the area where people have complex disorders that no one is been able to diagnose and in those situations whole exomes have found the diagnosis in somewhere between 25% and 40% in these patients. Therefore, bringing to a close, a very long expensive and to a great extent heartrending odyssey of attempting to find the cause for these disorders.

Sometimes the reason with disorder can be bounds because the patient actually has two disorders. And so they needed, taking together they don't fit any particular well-known description and that’s why they've escaped diagnosis. And I think the area of the whole exome has started to be looked at very carefully by third-party payers, there are some payers who are reimbursing now for exomes because they realized the – both clinical and economic value of bringing this odyssey to a close. And so we think exomes have very, very bright and important future.

Aurko Joshi

Thanks.

Operator

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

Raymond Myers

Thank you, good evening. My first question is about the operating expense step up that might be associated with the large sales expansion that you had going into Q1?

Lee Bendekgey

Well, so actually there was maybe a little bit of the sales expansion that was reflected in Q4, but actually most of the step up in the Q4 expenses as Sean mentioned was the results of a one-time performance stock incentive plan that paid out to our employees based on achieving positive gross margin. That was something that we focus the entire organization on this year. And so that was a non-cash charge that was - that hit in Q4. And if you took that, actually our Q4 OpEx was a little lower than Q3.

Raymond Myers

Okay. Great. You're at slightly lower number of sales people in Q4. I was talking about kind of give us a sense going into the current quarter, when the sales force is increased to approximately 60, should we expect higher OpEx in Q1 and going forward, then in the past?

Lee Bendekgey

Well, there will be growth in particularly the commercial portion of OpEx. We are working hard to keep the other portions of OpEx flat to down. But in general, what I would expect is in Q1 OpEx will be up a bit and the burn may be up a little bit. But then you will see a decline on accelerating basis through the year as our revenue pull-through manifests itself on and as we control the rest of our expenses. And so burn will decline on an accelerating basis throughout the year, on our way to positive cash flow in Q4 of next year.

Raymond Myers

Help us to understand if you’ve increased the number of sales people by almost doubling, how much increased sales expense should be expects starting here in Q1 because I'm sure it's not anywhere near a doubling of sales expense if double the reps, right?

Lee Bendekgey

No, it's not, beyond that we haven’t really gotten into quantifying individual line items on the P&L and particular on a quarter-by-quarter basis. So, as I said over I think you can assume that G&A and research and development will be flat to down and there will be some increase in commercial, which - and then you will see growing gross margin over the course of the year and burn will decline, beyond that there is kind of a level of granularity that we just think it is - it would be misleading to make it - to get to detail because it's a very dynamic market and things change quickly.

Raymond Myers

Sure. I understand. You had good collections here in the fourth quarter, you mentioned that some of that was catch up payments from Medicare. Do you have continued potential for catch up payments either from Medicare or from managed care, now that you have contracted with most managed-care companies, do you still have more opportunity to reach back to prior periods now that you're contracted?

Lee Bendekgey

Well to some degree not with Medicare. So Medicare is fully current and so we're in great shape with Medicare and they are paying promptly. So the answer there would be no.

With regard to other managed care payers, the private payers, as we mentioned in the past, there is this process of getting into contract and operationalizing contract where for some period of time you're not getting paid at all and then it sort of turns on and you start to get paid.

And so it's for that reason that we're a little bit reticent about giving quarterly guidance in terms of burn or even revenue. Because as you saw, for example, in Q3 our growth was not as dramatic and that was in part because there was a slowdown in some of the private payers as we were just beginning operationalizing – operationalize those contracts.

And so there will be some lumpiness where you know, there might be one or two quarter catch ups, perhaps after a quarter where we were not getting paid very well by someone with whom we just contracted.

Raymond Myers

Okay, great. And next I wanted to move on the exome test, that you'll be launching here shortly. Can you talk some more about what the opportunity is that you see there?

Sean George

Sure. So exomes really have a very important role to play in genetic testing and its role is growing over time. And that is a large segment, particularly in pediatrics, but not just pediatrics, of a group of patients who have disorders that have just stumped their physicians. They have unusual disorders, often genetic that have escaped diagnosis.

These patients have gone through many months or even years of testing, visits to clinicians and a lot of frustration and lack of any management or treatment modalities, because nobody really knows quite what's going on them. And what whole exome provide is an opportunity to make a diagnosis in a significant fraction of those patients. The published data so far shows that somewhere between 25% to 40% of these patients depending on how - who is chosen to have an exome test, between 25% of 40% of those patients end up with a diagnosis and a large fraction of those diagnoses end up with at least some level of management guidelines that we didn't have before, as well as answering the question and turning off his treadmill of continued testing and hospitalizations and more diagnostic testing without getting an answer.

So I also think that the opportunities for exome's start to be introduced into other areas of genetic testing, particular testing of individuals who are unaffected and are looking for their basic risk levels is an area that is well worth our looking into and its something that we are interested in.

But at this point our exome offering that we are proposing is going to focused on the undiagnosed diseases network and there are no undiagnosed diseases market and there are number of insurance companies now that have started to reimburse for whole exome, so its not simply patient pay anymore, because the third-party payers have recognized that there is both economic and clinical value in supporting exome testing.

Randy Scott

I would just add that we really do also see exome's and genomes has the future of genome management. So we're in this window here that where because of cost panels are more efficient way to go across much of the genetic testing today, but as the sequencing technology cost continued to come down our overall COGS is going to come down, eventually a few years out, we think panels will start to roll up into exome's and exome's will roll up into genomes and a day of course will come in the future where everybody will get their genome sequence in a modern healthcare system and that information will be managed over life of the individual.

And that really is the long-term goal of Invitae is to be the market leader in managing that genetic information on behalf of the individuals as we look to the future.

Raymond Myers

That's great. Thank you, congratulations.

Operator

There are no further questions at this time. I will now turn the all over to Katie Reglan foradditional Q&A.

Unidentified Company Representative

Thank you, operator. And thanks for the questions so far everyone. We also had a number of questions coming from the investor community over the last few days, which we'd like to run through. [indiscernible] have more questions, give the team chance to answer them, if you have any other questions in the next few minutes, ir@nbc.com and we can try and squeeze them in. But for now I will get going with the first question.

Since almost all of your revenues recorded on a cash basis, there are no accounts receivable that you need to focus, right. When you look to accrual base revenue recognition over the next year, then we start looking at accounts receivable against your recorded revenue?

Lee Bendekgey

This is Lee and the questioner is correct. Since most of revenue is recorded on a cash basis, there is not material accounts receivable to accrue, but as we begin to – our expectation is throughout 2017 as we begin to accrue a greater percentage of our revenue then you will see on the balance sheet line for accounts receivable to reflect that portion of our revenue that has been recognized but not yet collected.

Unidentified Company Representative

Thanks, Lee. Is the current cash on hand and debt sufficient to get the company cash flow positive by the end of 2018? Are there any signs of additional capital raise if they are necessary?

Lee Bendekgey

As we've indicated before with the additional capital raise in Q4, we believe that we have sufficient cash to get us to positive cash flow in Q4 of next year. And that said, we - as we've indicated we anticipate that it's quite likely that will add some additional cash to our balance sheet via some non-dilutive debt offerings that will give us a little bit more cushion. But we do not anticipate use of equity to raise cash between now and in the end of 2018.

Unidentified Company Representative

Next question is, oncology has been big driver for you, tell us more about the test menu offering in other areas beyond oncology and what's the most exciting area there in terms of growth?

Sean George

Sure. We've kind of talked about exome and Katherine has talked about you know, kind of another area just basically all biopharma interests and where that takes us. Bob maybe just replay on neuro, cardio and others you are interested in?

Robert Nussbaum

Yes. So, the approach really for expanding our testing, both in the diagnostic realm, but also in partnership with biopharma and with biotech is really an important area that we are focusing on. Cardiology is one area where I think there's been some lagging in the use of genetic for diagnosis and cardiology and I think it’s because of a lack of a national consensus group. But that is now changing and there is going to be a consensus statement from some of the major operators in the cardiology space coming up next year or so.

In neurology, once again, I think it's important to emphasize that our model which is driving the price of testing down is removing one of the major obstacles to the use of genetic testing to make diagnoses and to help patients and their families deal with genetic diagnosis. And so since my driving the price down, we are expanding these markets significantly.

And then finally, an interest in the treatment and the development of therapies for rare disorders is expanding a lot, not just in small biotech, but also among the number of the large pharmaceutical companies. And it’s becoming quite clear to them and part of that is our advocacy to them, that they really can't develop therapies or carryout trials in genetic disorders when they don't know which genes are involved and what the particular mutations in those genes are.

And so by positioning ourselves as being brokers between affected patients and biopharma and being able to provide critical information on the underlying genetic changes that are responsible in these various disorders, think we're positioning ourselves very well for being able to move this forward in the future.

Unidentified Company Representative

Thank you. The next question is little bit longer. In 5 to 19 years, which part of your business will be the biggest one in terms of sales, will it be gene testing or gene management? I am trying to figure out as affordable gene testing will enable bigger picture of gene data management, I mean, data sharing between patients, drug companies and you as intermediary could lead to what percentage that reach prior.

Drug companies will be able to develop more accurate drugs [indiscernible] which patients will directly benefit from through better pricing if they share data. You as a company can benefit financially by sharing patient gene data, am I correct to think that, thing of gene data management in that sense or am I wrong?

Robert Nussbaum

It’s quite a question, and so answer first yes. We do and you know, again, for some – for a while have been kind of suggesting that as genetic enters managed free medicine there is a lot of value that can meet a lot of different parties in a genome network in the in the management of information on behalf of individuals with their healthcare providers.

So that's really the way we look at the business. I think its early days there. We laid the foundation for genome network and are pursuing it now this year. We'll be talking about that. This year we are laying the foundation for genome management and we expect if all goes well this year, then we'll be talking more about it next year as a routine part of business, with the idea that yes, that some point in time when we are bringing genetics into mainstream care for everybody in modernize healthcare systems across the globe that will be very key and important part of our business.

So that’s a good question, I think its something we would love to have been stating that clearly for a while now. So thanks for the question.

Robert Nussbaum

And this is Dr. Nussbaum. If I could just add one more thing, which is, I don't think you should think about the genome management and the diagnostic testing as two separate businesses, they are completely coordinated with each other. Each one is actually going to support the others. So we really see this is being one business.

Unidentified Company Representative

Next question is how many hereditary breast cancer is related to [indiscernible]?

Katherine Stueland

Thanks, Katy. So if we look at last year’s volume which is roughly 60,000 test, about 80% of those were cancer test and the vast majority of our hereditary breast and ovarian cancer. So I think over the next couple of years as we look at 2017 we think oncology again is really going to be 80% once again, but I think we'll start to see some utilization in other key clinical areas, as more and more data are published. We've talked about prostate cancer previously, but as we see more and more data on the clinical utility, I think we'll be able to see those shift on the HBOC [ph] market.

Unidentified Company Representative

Great. Thank you. And one last question, will gross margin is expected to come and remain positive for the year forward, is long-term guidance still 15%?

Lee Bendekgey

So this is Lee, and that is certainly our expectation that gross margins will remain positive and will grow over time. And just to be clear, our gross margin model long-term is the first 50%, five, zero and with combined non-COGS and operating expenses of around 40% yielding at scale a 10% operating profit.

Unidentified Company Representative

All right. Thanks, Lee. Looks like that was the last question. So thanks everyone for joining us today. We look forward to catching up with you too at upcoming conferences.

Operator

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

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