NVTA (2019 - Q3)

Ladies and gentlemen, thank you for standing by. And welcome to Invitae’s Third Quarter 2019 Financial Results Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Laura D'Angelo with Invitae. Thank you. Please go ahead, ma'am. Laura D'

Thank you, operator, and good afternoon, everyone. Thank you for joining us for our third quarter 2019 financial results earnings call. Joining us today are Sean George, our CEO; Shelly Guyer, our CFO; Bob Nussbaum, our CMO, Lee Bendekgey, our COO; and Katherine Stueland, our Chief Commercial Officer. 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. Before we begin, I'd like to remind you that various remarks that we make on this call that are on not historical including those about our future financial and operating results, our plans and prospects, the focus of our business strategy, our plans to integrate and manage businesses we acquire, market opportunities, future products, services, our product pipeline, and the timing thereof, demand for and reimbursement of our services, and our investment in 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 accurately predict demand for our services and therefore our actual results could differ materially from our guidance. Our guidance on future company performance assumes among other things that we do not conclude any additional business acquisitions, investments, restructurings or legal settlements. We refer you to our 10-Q for the quarter ended June 30, 2019, in particular to the section titled Risk Factors for additional information on factors that could cause actual results to differ materially from our current expectations. These forward-looking statements speak only as the date hereof. To supplement our consolidated financial statements prepared in accordance with Generally Accepted Accounting Principles in the United States or GAAP, we provide non-GAAP research and development expense, non-GAAP general and administrative expense, non-GAAP operating expense, non-GAAP net loss and net loss per and cash burn. We encourage you to review these reconciliations, which are available in the press release. With that, I will turn the call over to Sean.

Thank you, Laura. 10 years ago, we started Invitae to get genetic information incorporated into mainstream medical use for everyone around the world in modernized economies. While we have many years to go, the transformation of the genetics industry is underway. And we believe our 26th quarter of on average double-digit quarter-over-quarter growth serves as an indication of a new trajectory, a new model for personalized medicine as we move this industry beyond the more than 1.7 million people in the U.S. diagnosed with cancer per year into all of the equally impactful genetic disorders affecting those we serve. As we drive adoption of state-of-the-art genetics to benefit fully healthy mom and baby for the 6 million pregnancies in the U.S. every year and as we lead the way into the new but potentially immense opportunity in proactive genetics, utilized at the system level. We are currently investing to position Invitae as the only company with a broad capabilities to partner with clinicians and patients to benefit from genetic information throughout all stages of life. Of note, in the third quarter, Invitae acquired and integrated Jungla whose capabilities in addition to lowering interpretation and reporting costs, put us on the cutting edge of interpretation and reporting for variants of unknown significance, allowing us to provide the most certainty at the time of testing compared to anybody else. We have completed the integration of Singular Bio, with our combined development teams creating a path to drive down costs to a level that will support the adoption of this technology to benefit healthy mom and baby for the 20 million to 30 million pregnancies in modern healthcare systems worldwide. We added nine partnerships to our growing network of nearly 60 partnership programs. The growing genome network allows us to diagnose more patients than ever, faster than ever, and introduce them to partners across the healthcare continuum to help with appropriate treatments, therapies and clinical trials. For our biopharma partners, quite simply, it allows them to enroll trials faster and pull forward future sales for the thousands of important rare, often genetic-based diseases. Also, it was announced this morning a program with the University of Vermont Health Network to offer genomic DNA testing to Vermonters as a part of their routine clinical care. While a small first step, we feel this is an important sign of things to come as health systems around the globe look for a partner to deliver genetic information and manage that information for the benefit of the individual at population scale. We also added to Cigna 16 million covered lives in network status. In rapid succession, Invitae has become the leading genetics provider for government and commercial health plans with approximately 295 million covered lives in network. Having contracted with all national commercial payers and 47 states for Medicaid, Invitae services are now in network for the vast majority of Americans. When we started this Company, many advised us that price doesn't matter in health care, and that the historical, institutionalized game of high pricing or opaque coding, aggressive selling and aggressive billing was the only way to win. We feel that this recent milestone achieved by the newest of the companies in the landscape is an important indicator of the future evolution of the space. In six short years, Invitae has grown from 229 samples and a few hundred thousand dollars in revenue in 2013 to tracking toward our 2019 annual guidance of more than 500,000 samples and $220 million in revenue. While the investment in our broad capabilities to deliver that outcome was determined years ago, consistent with our long-term strategy, it is now, of course, the focus for our commercial and operating functions to pace out the remainder of the year. As we continue to invest in technologies that enable Invitae scale, we deepen and widen our competitive moat as we now make it easier than ever to access genetic information needed across all stages in life. I’ll now turn the call over to Shelly to highlight our financial results for the quarter.

Thank you, Sean. For some time, we have noted that volume is a key metric by which we judge the velocity of the growth of our business. Again, we have seen strong growth this quarter, accessioning more than 129,000 samples, a 65% increase this quarter over the third quarter of last year. While the third quarter is normally one of our slower growth quarters, we achieved 16% sequential growth from the second quarter, higher than last year's 7% sequential growth. Notably, we experienced growth across all segments, especially strong volume from international markets, which again accounted for over 10% of the total accession volume and we saw a pickup in our reproductive test volume in general, led by increases in our NIPS testing, and our pharma testing including our Detect programs. We reported billable volume of approximately 124,000. In prior calls, we have made comments about the relationship between accessioned and billable volumes. This quarter, there was a 4% difference between accessioned and billable volumes, which is in line with our historical experience in the third quarter and what we suggested in our last earnings call. We expect that due to seasonality, there will be a smaller gap between accessioned and billable volumes in the fourth quarter. And how are we tracking to our guidance? With approximately 334,000 accessions year-to-date we stand at about 67% of our annual guidance in the first nine months of the year. Typically, fourth quarter volumes are highest due to seasonality, despite the timing of some key medical meetings for our customers. This year, we expect further strengthening due to several additional factors, the newly introduced NIPS product, our increase in recently launched partnering programs, and the timing of sales force add throughout the year. We reiterate our guidance for the year of over 500,000 accessioned samples. Now turning to revenue. We generated $56.5 million in revenue in the third quarter, which represents a 51% growth in quarterly revenue year-over-year. As with last quarter, over 70% of our revenue came from third-party payers and just under 30% from both institutions including partners and patient pay. The continued high percentage from third-party payers is largely due to higher Medicare payments on our cancer tests and better payments from commercial third-party payers as we continue to get more tests into contracts and collect more on each test from these payers as a group. Consistent with our discussion of ASP trends last quarter and our expressed goal of bringing testing to more patients, we realized an ASP of $448 this quarter, down from $471 in the second quarter and $490 in last year's third quarter. The decrease was primarily attributable to payer and product mix changes. While third-party payers again contributed more than 70% of revenue this quarter, there was a 4% decrease in third-party billable test volume. Strong increases in billable volumes from both institutions and patient pays made up the difference. This trend was expected due to our introduction of the Detect testing program, part of our pharma efforts and the uptake of our NIPS product line, both of which enabled more patients to have access to testing and both of which carry lower ASPs. Movement in our ASP is also due to how much we picked up in the quarter due to revenue recognition guidelines. We had an increase of $1.2 million additional benefit from our change in estimate on excess cash collections during the third quarter, compared to $2.4 million in the second quarter. As we gain more history under the 606 standards, we expect that the magnitude of future benefits in any quarter will decrease with time. Taking these changes into account, we believe that our ASPs will bounce around a bit, but that we will see the ASPs trend lower in the near-term as our payer and product mix changes. As we continue to get more tests into contract and collect more from third-party payers, we expect small quarterly increases in ASPs, but these will be offset by lower pricing in areas that are growing, like our patient pay and international businesses. We also expect that our changing product mix will put downward pressure on our ASPs in the near term. So, in summary, we are on track with our annual revenue guidance. Our year-to-date revenue is over 68% of our full year revenue guidance. Consistent with our historical experience, we expect a strong fourth quarter due to seasonality in both the underlying billable volumes and collections from payers. We reiterate our annual guidance of over $220 million in revenue. In the third quarter of 2019, we reduced COGS to an average cost per sample of $249, down from $252 in the second quarter of 2019. Recall that in the second quarter, COGS included an approximately $13 per sample stock-based compensation expense for our annual retention and merit-based RSU grants, which we did not have this quarter. The product mix changes, including processing more and NIPS and exomes, which are relatively more expensive, given their lower volumes and are not yet bringing out comp savings, put upward pressure on COGS. The specific test costs per sample are expected to decrease with time. We also had an uptick of about $7 per sample due to intangible amortization costs related to Jungla's developed technology acquired. We will continue to amortize over the 10-year life of this intangible asset, but the dollar impact per sample will decrease as volumes increase. Just a reminder, my past comments on COGS. We expect COGS will continue to fluctuate as we introduce new products and bring new technologies on line. Importantly, new products we introduced will have lower margins early on, and depending upon the uptake of those products, could put pressure on our COGS. We made a commitment to make 2019 a year of investment and we intend to Invitaeize newly acquired technologies and products and continue to target 50% gross margins. We improved gross profit by 44% from the previous year, generating $24.4 million in the third quarter of 2019 versus $16.9 million in the third quarter of 2018. This quarter, our gross margin was 43%, down from 45% of the third quarter of 2018 and 48% last quarter, as the decrease in the ASPs quarter-over-quarter outweighs the decrease in the average cost per sample. We expect that gross margin will fluctuate with the coming quarters and will trend towards our 50% goal. As discussed last quarter, we are investing in several areas of the business to foster our growth this year and beyond, enabling us to scale and offer additional products across all stages of life. And we have completed two acquisitions, both of which impact operating expenses and need to be teased out. For the quarter, we incurred GAAP operating expense, which includes cost of revenue of approximately $101.4 million, compared to $47 million for the third quarter of 2018. This quarter’s operating expense includes $47 million in research and development, $32.7 million in sales and marketing costs and $21.7 million in general and administrative costs. But, it is important to understand whether non-GAAP operating expense of $79.8 million is more indicative of the spend for base business, eliminating the stock-based compensation and post compensation expense related to our two recent acquisitions. So, what are the key drivers of OpEx this quarter? First, research and development costs were $47 million, including $18.6 million in stock-based compensation for the inducement RSUs granted to Singular Bio employees as part of the acquisition. Our spend on the base business increased by $5.7 million compared to the second quarter of 2019, primarily due to continued investment in R&D, including headcount expansion focused on scaling our business, content expansion, improving the customer experience and reducing COGS. Second, sales and marketing costs were $32.7 million, which includes $4.2 million in branding and advertising costs related to our direct channel campaign, launched in June of this year. Third, General and administrative costs were $21.7 million and fairly flat from the prior quarter. We incurred over $3.5 million in costs for the acquisition of Jungla in the third quarter. Finally, stock-based compensation during the quarter includes $3.1 million related to the management incentive plan, which we’ll continue to see in future quarters. Now, let's move to our cash position. At quarter-end our cash, cash equivalents, restricted cash and marketable securities totaled $473.5 million. During the quarter, we raised $19.5 million in net proceeds from our ATM and $339.9 million in net proceeds from the convertible debt offering. Cash burn, a non GAAP measure, totaled a $140 million in third quarter of 2019. This includes a $15.4 million cash payment in connection with the acquisition of Jungla and an $85.6 million payment to extinguish the overland debt, which includes $1.3 million of accrued interest on our third quarter 2019 quarterly interest payment. On an apples to apples basis on how we have talked about the burn over the past year, and the absence of these cash outflows, the cash burn would have totaled $40.3 million in the third quarter of 2019. On the second quarter call, we indicated that we would continue to invest in our business throughout the year and into 2020, and that our quarterly burn would increase throughout the year. For the year, we stated that we anticipated burning up to 50% more in 2019 when compared to 2018. Our burn could be as high as $150 million in 2019. Excluding the impact of overland [ph] and the acquisition-related cash payments, we have burned $103 million year-to-date. I will now turn the call over to Bob.

Thank you, Shelly. At Invitae, we're committed to advancing science and improving the practice of evidence-based genetics. As Sean mentioned, the acquisition of Jungla’s advanced modeling is an important addition to our variant interpretation capabilities. Many people undergo genetic testing and get neither a positive nor a negative result, instead they receive a variant of uncertain significance or a VUS, meaning there is a change in the gene, but we do not yet know what it means. This is frustrating to both patient and provider because it leaves them in limbo. Jungla is a powerful technology that will help to VUSs and substantially enhance Invitae’s scalable genetic variant interpretation, so we can deliver more informative results to patients. In addition to the Jungla acquisition, we were also busy launching Invitae’s Detect programs in five conditions for which testing is underutilized but can improve diagnosis and treatment. Importantly, we are seeing biopharma partners showing interest and coming on board with our Detect programs, demonstrating the important role that genetic information can play in bringing patients and biopharma resources together to improve clinical care. We also presented a wide range of clinical studies, and research highlighted at the American Society for Human Genetics, and the National Society of Genetic Counselors. Of note, we continue to publish research, demonstrating the expanding number of people that can benefit from access to medically actionable genetic testing. And as such, we're seeing testing guidelines continuing to expand. It is critical to Invitae’s mission to continue to open up access for all those that can benefit from understanding their genetic information and how it impacts their health. We're pleased that the University of Vermont Health Network announced their partnership with us on our testing program to offer the Invitae proactive genetic screening as part of routine clinical care for people in Vermont. We have ample evidence that one in six people have a medically actionable genetic condition they are not aware of. The University of Vermont program will grow into a population-wide project to evaluate the impact of such genetic testing for actionable conditions on a large scale. Such testing will also be embedded within healthcare system, so that patients and providers have the medically actionable genetic information needed to manage their health. This testing program demonstrates the future of genetic testing as we continue to further the integration of genetics into medical care and public health. I'll now turn the call over to Sean.

Thank you, Bob. We have a strong balance sheet, our investment to growth profile is on track and we see essentially unbound potential ahead of us, leading the generics industry transformation in the years to come. We also feel that we are approaching a bit of a transition point in the industry, one we've been counting and driving to for many years in which the adoption of advanced technology surrounding genetics starts delivering ever-increasing value to individuals around the globe at an accelerated pace relative to that of the historical diagnostic industries. We remain focused on our model of rationalizing the testing business, expanding our genome network and moving to genomic information management in the future. The best indicator of our success remains the top-line volume growth and our focus in the future will increasingly be on the absolute gross profit growth that translates into operating cash flow, all of which are financial metrics that drive the business forward and ultimately benefit the clinicians and patients we serve. With that, I’ll turn the call over to operator for Q&A.

[Operator Instructions] Your first question comes from the line of Doug Schenkel from Cowen.

Hey. Good afternoon, guys. Thank you for taking my questions. I want to start with a long-term financial target question, and then come back to the more near-term, just trying to breakdown 2019 guidance a little bit. So starting on the long-term financial targets. A couple of years back, you set 2020 financial targets at processing 1 million tests and at an ASP of $500. So, we can all do the math on what that would take you to in revenue next year. Current 2020 revenue consensus sits well below those targets. And I would argue that the current stock valuation doesn't imply that you're getting a lot of credit from the street for that target. With that in mind, what's the right way to think about the 2020 target as we sit here with two months to go in 2019? So, I would love to get your thoughts on that. And keeping in mind consensus is well below your prior 2020 target, would you be willing to comment on whether or not you are comfortable with the consensus sell side revenue forecast for next year, as we sit here with two months to go in the year? Thank you.

Yes, happy to. Thanks, Doug. I appreciate the question. I think, the truth of it is, next year's numbers will play out, in large part as a result of investments made two years ago or longer. And it's not always easy to predict, the 3 to 6-month windows as the windows play out, which -- I mean, of course, I know that you know, but I do think worth stating not as a dodge, but as -- in front of that question. Now with that said, we are still finalizing our commercial and operating investment plan for 2020. So, we'll stick to the practice of giving guidance in January. As far as the street 2020 numbers, I mean, fair question. And what I would say is, it would be premature for anybody to change their 2020 models now, until we provided guidance for the year, which again, we will get to in January. And I think, I do think taking a step back, in context, the numbers that we are talking about this 1 million samples $500 million, those were laid as aspirational over a couple of years ago. When the question -- the dialogue was whether or not there was a real TAM to justify the investment in the technology. We suggested that it is indeed huge, and that many years of high growth lie ahead. At the time, very few people believe this, we're currently on a trajectory that no one else is on, and as solid as ever in the conviction of the value we're building in this company. So, I think, I understand not a direct answer, but I'm hoping that sheds the light on our position on it at this time.

That's helpful, Sean. And not to belabor this, but maybe to just say what you said in a different way. Would you object to somebody saying, okay, based on what Sean just said, 2020 financial target’s still possible, but a few things going to go your way for that to happen. In the meantime, there's nothing going on in the business that would suggest what the street’s modeling for next year is off the mark. Is that a fair synopsis?

That's right. I'd say -- like I said, I'd advise, there's no impetus to update models at this time, if there were, we would say it. As is our practice, we are growing now a very large business, very rapidly and are -- continue to drive the business as such, but always want to have our guidance to be something that we know is achievable. And so, within that context, I absolutely -- I think, your summary is as good as any.

Okay. That's helpful. Thank you. So, a couple of questions as we think about trends heading into your end. So, I believe you've increased your sales force headcount by about 60 since the beginning of the year. I'm curious what you're seeing when it comes to productivity with new hires. And I guess, to some extent, how to view this in the context of full-year guidance? So, I was just doing some quick math. Hopefully, I'm not messing this up. But your revenue per rep was, I think, around $340,000 to $350,000, per rep per quarter, in Q2 through Q4 of last year. To get to full year of guidance, you need to be a little bit better than that in the fourth quarter, but not much better. So, on one hand, that makes me feel pretty good about your ability to get to Q4 numbers. On the other hand, I think, productivity would actually need to improve by about 20% to 25%, relative to what you did in Q3, using the same metric, just based on the fact that I think, because you're ramping new people, the productivity is a little lower than it was last year. So I'm just hoping you can help us out what are you seeing when it comes to productivity that can make us feel better about you getting to 2019 guidance?

Yes. So, I think that's fair question. Q4 has traditionally been the strongest quarter, oftentimes by a lot, and we expect the same for this year. Look, I mean, obviously, we would like to have been closer to that annual guide mark, at this day, -- or at the end of Q3 than we are, no doubt about that, as per my previous comments of how we like to approach guidance. With that said, as you point out that it's the same way that you consider how much volume and revenue remains in the year, what the Q3 to Q4 growth profile needs to look at like, what the rep productivity increase needs to look like. The same statement you made is the right one. It's in line, if not a little bit higher than -- a tiny bit higher than past year’s profile to get there. And so, with that said, this year, we had some additional contributors. The sales team adds, they really kind of finished down the second quarter and really got the full productivity in August of this year. That whole, that entire team continues to be highly motivated. To run to the end of the year. The NIPS launch that we did in the spring, we knew would be an end of the year contributor, and indeed we are seeing that will be account pick up. And that effect is something that different from last year's is a back end weighted effect, as an aside, when we expect to continue the next year. And then of course, the additional pharma program, we've picked up the pace of pharma programs addition, we've launched a handful of our own. And there was also, if you consider the timing of all those, those are also things that we feel and see are contributing toward the back end of the year. So, I think that general statement of the remaining -- the remainder to go is a similar profile that we've had in the past. We've got these three things that we think contribute and give us confidence that we're tracking. And again, I cannot also show -- our ability, our ability to hit this year, again, that was investments made over two years ago. And, yes, it's now in the hands of our commercial and operating teams as they run it out. But, if you take a step back, the momentum in the business, and when we think about the moment of where we've been and where we are and what next year looks like, especially when you consider kind of the past, the recent new incoming technologies we've developed and/or acquired, for example, the Jungla, Singular Bio et cetera. These, -- this is where taking a step back, we really like what we're seeing now, even as it -- like I said, it's a commercial and operating team game now as we run out the remaining two months of the quarter.

Okay. That's great. And if I could just tackle one more topic, just some recent developments on the coding front. So, first, as I'm sure you're aware, one of your peers in the space Myriad, materially missed their quarterly results and materially cut full year guidance due largely to what they attributed to as being coding changes with the multi-year move to the newer NGS CPT code. Doesn't seem like that had any impact on your business. I just want to make sure that was something that was completely Myriad specific for whatever reason and not something that would impact your business. And then, the second coding related question is, I'm just curious what your thoughts are on the new NGS NCD that was proposed by CMS. It seems to require FDA approval for use of an NGS based germline test in breast and ovarian cancer. I don't actually think that exists. So practically speaking, what do you think happens here? and I guess, to the extent that this does hold up, where are you and your efforts pursuant to FDA approval?

Yes. I will answer really quickly because there is tone of noise confusion and as all things coding. The short answer is, none of that we feel has any impact on the future of our business. Now with that said, Lee can walk through both those questions in more detail and give you some more flavor for it.

Hi, Doug. So, the first question has to do with coding changes and private payers. As I understand the issue that has been raised that has to do with the retirement of couple of old BRCA1 and BRCA2 codes. And it is true that a revisions to the coding manual earlier this year retired those codes. At its heart though, this is not a coding problem. This is a contracting and pricing problem. We have said for many years now that as we made our presence felt in contract negotiations with private payers that prices would come down. It has taken longer than any of us likely would've imagined a few years ago, but it is happening and it is not done yet. And you are correct to say that it doesn't affect us because we're probably the major contributor to it. So, that’s -- I think that answers your question about the impact of third party contracting on our prices. With regard to the recent draft national coverage decision. So, not go into the sort of the labyrinthine history of all of this, but as you’ll recall, some months ago, there was widespread concern that an earlier version of this national coverage decision was being interpreted to apply for germline cancer testing only to late stage patients. And at the time, we expressed the view that that was resulted from misunderstandings on the part of the folks at CMS. And, as we expected, there was a uniform reaction among the professional societies, the industry and advocacy groups suggesting that that was a wrong turn. And indeed, the revised national coverage decision reflects that and is no longer limited to late stage cancer patients. We have a new anomalous piece of language in there that as you said, seems to suggest that reimbursement would be available only for NGS tests for germline -- hereditary breast and ovarian cancer would only be available if the tests were FDA cleared or approved. We, like you, are not aware of any such tests. And we do not for a minute believe that that's really what CMS intended to essentially render all germline testing for HBOC syndrome non-covered. And so, we expect that there will be a similar universal reaction on that point, based on preliminary conversations we've had with a bunch of people. This is either just as a sort of a somewhat loose use of language, or it's possible that what they meant was that companion diagnostics would need FDA approval. Now, to our knowledge, there are also know next generation sequencing companion devices that are approved by the FDA. Those that have been approved, they are all I think PCR. But, in any case, that may be what they had in mind since the original NCD was based on the foundation one test, which is also essentially a companion test. So, it may be that that's what they had in mind. But, I don't for a minute think that the outcome that people are worried about is what CMS intended or what will resolve when the NCD is finalized.

Your next question comes from the line of Tycho Peterson from JP Morgan. Your line is open.

Hi. Thanks. This is Julia on for Tycho. So, maybe, could you give us more color on the Vermont partnership and the moving in network with Cigna. How should we think about the volume ramp from those two progresses and the impact on ASP? Are any of those contributions sort of embedded in your 4Q outwork?

Yes. I’ll go there. Let's start with Cigna. That one, I would say roughly, yes. It's something that we've been working on for I don't know how many -- a while. And it finally happened. And that one isn't -- that isn't so much a -- definitely impacted volume. That's just as an impact how much we get paid. Our third party insurance reimbursement has been improving steadily over the past many quarters. And this will be yet one more thing that contributes to that steady improvement of that third party reimbursement line. So, not necessarily volume impact, per se. There's always a little bit of increase when it gets a little easier to answer questions for clinicians about out of pockets and whatnot once you're finally in network and in contract. But, for the most part, that's a revenue game, which is consistent with past few quarters. On Vermont, and apologies. Dr. Nussbaum had to run off. He's flying out to NSGC. So, I would have loved for him to answer more about that. But, the bottom-line on Vermont is, this is in this category assessing our proactive or preventive genetics. We are not really forecasting this line much in our business at all. So, this is one where we feel the proactive use of genetics in mainstream medicine is something that we -- it’s a newly developing market, when think of the three that we serve diagnostics, reproductive health and proactive, this is the largest one, it is, everybody in large healthcare systems. So, super excited about this, super excited about working with this system to do it, to do it right. There are all kinds of implications for the future in the future model. With that said, these kind of things will take time. And so, we're not going to be -- as a result of a single one of these or frankly dozens to come, I think it'll be like the rest of our business has been for the past six years. It's an operating business, we add on clients, we add on volume, volume for clients goes up over time. I don't anticipate a huge jump in any given quarter as a result of any of these things. Maybe I'm just thinking of making the point to distinguish it from, for example, a lot of population sequencing type programs where volumes or revenues are recognized at single tops. This will look like the rest of our business and will phase in over time.

Julia, the one other thing I would add on Cigna, as you know, under the revenue recognition criteria, we have to see those rates that were much lower when they were out of contract, we have to actually see those collections pop up. And since December 1st is the effective date, I don't know whether we will see that in the fourth quarter and be able to account for that effect in the fourth quarter. But, we would expect that the Cigna pricing and what they will pay us will be going up. It’s just a question whether we'll be able to recognize that in the fourth quarter or whether it will come in the first quarter.

Got it. That’s very helpful. And then, maybe just on margins. I mean, we certainly appreciate that there are a lot of moving pieces in the near term that could lead to fluctuations from quarter-to-quarter, given the pace of your NIPS ran and the pharma partners, there is certainly a dilutive effect there. But, in the mean time, going in network with Cigna should help on positive side. So, how should we think about your near term sort of gross margin trajectory? I mean, we get that you mentioned -- you expect the general trend to be sort of moving towards a 50% goal. But, as we look towards next year, without necessarily asking for a guidance, but do you think there are any chances that we could go maybe lower from current levels in the near term?

It's Shelly. And I'll answer that. I would note that the 43% this quarter had a 2% diminishment based on the Jungla amortization of the intangibles. And so, we will continue to feel that. Those $7 per COGS per sample and that was about 2%. So, it would have been 45% gross margin, which is slightly down but not badly down from the prior quarter. And that is, as you know, because of the product mix change. I would expect that we would get higher ASPs in some areas, but -- from the third party payers, but that will be offset by some of the lower prices in areas such as the institutions, international and the patient pay. So, I would expect that this year we’ll continue to see some perhaps downward floating of that rate, but that with time, as we begin to collect more and as some of the Detect programs and other things yield higher ASPs that that may switch in the next year. So, it will move around a bit and it will trend back up to 50%. And as we've always said, it will be fluctuating, depending on also the COGS side of it, not just the collection side. So, we will continue to work actively on trying to bring down that COGS, things such as automation and our medical interpretation, things such as the Jungla acquisition and some of the variants, reading capabilities will all drive that COGS down. So, I would expect that the ASPs may stay similar where they are, but the COGS will be driven down over the next several quarters. So, some improvement in the near term, but over time, it's still fluctuating.

This is Lee. The only thing I want to add to what Shelly said was that -- and I think this is a two or three quarters ago we -- when we were right around 50%, we made the point that we were probably going to focus more on adding content and delivering new content than we were on reducing COGS in the near-term, having approached our margin model. And that's what we have been doing for the last couple of quarters, really for much of this year. But I would expect -- we are continuing to work on COGS reductions. And so it is, -- that is also one of the reasons why you might see it vary a little bit from quarter-to-quarter, based on how much new content is being launched.

Got it. That's very helpful. And then lastly for me. I was just wondering if you could give us an update on the patient initiated testing since it was launched. How significant was the volume contribution to date? And how about the mix sort of -- proactive versus, carrier screening versus diagnostics versus the expectations? And how does the sort of testing depth compared to those tested generated from sales channel? Thanks.

So, this is Katherine. We kicked off the offering of our direct channel at ASCO this year in June, and thus far, it's going about as well as we would have expected. We expected minimal contribution to the overall volume numbers for this year. And we expect over time that's going to grow. As we think about it, we're learning a lot through the work that we've been doing with initial digital marketing. And I think, one of the key growth areas for us is going to be in terms of really capturing the mindshare of women as really kind of a gatekeeper of health. So, that's going to be a big focus for us moving forward in terms of our carrier and cancer offerings and beyond that. I think, what's been really interesting to see though is that we've seen ordering from across our testing menu. And so, I think that's one of our big differentiators in addition to the strong medical brand that we've built over the past six years, that is going to help us to succeed and driving volume through that channel. We've also seen a lot of interest from clinicians in terms of being able to utilize the channel with their patients. So, all in all, I'd say it's been a successful introduction of that channel. We don't anticipate that we're going to be spending to the level of consumer-based companies in terms of marketing. But, we do think that this is going to be a really important growth driver for us over the next several years.

Your next question comes from the line of Puneet Souda from SVB Leerink. Your line is open.

Hi. Thanks, Sean, Shelly and Lee. My first question is on the guide. I appreciate you're keeping the guide intact for the year and -- but that does imply what seems like a significant ramp here. Correct me if I'm wrong. But, I'm looking at about 30% sort of sequential increase here, in terms of accession volume, you've just delivered 16%. And the number is mid-teens to maybe a high-teens that you have sort of delivered in past. And I appreciate that the fourth quarter is strong and you have sales force productivity here. And in addition to that, you're hoping to get other test added and IPS potentially growing. But, maybe just help me understand what is -- where do you get the confidence in terms of the volume and what segment is it? Is it mostly NIPS? Is it mostly market share? One of your competitors reported and they're doing now a double-digit growth in their volume. So, I'm just trying to understand what gives you sort of the near-term confidence here in getting to the full year guidance or an accession volume?

Sure. Yes. I appreciate the question. So, I would say a lot -- you can look at it by volume and revenue, Q4, versus the rest of the year, you can look at sequential growth rates. And while the -- yes, there's a -- Q4 needs to be a very strong quarter, it has historically always been a strong quarter. Those numbers, whether it's 33%, remaining in the year versus 28% or 27%, in past years, it's a little more but it's not that much more. The sequential growth quarter-over-quarter has -- not last year but in prior years been in the high-20s. And so, I think we're -- like I mentioned on a previous question, we acknowledge that there's a big Q4 ahead and we expect to have a big Q4. The three major reasons are, we added the sales force adds, came in and are now only in August, fully ramped up and productive. And the whole team is now highly motivated, focused on the end of the year. Our NIPS is driving volume and increasing our account take, account penetration in the OB segment. You mentioned another competitor. Yes, counsel [ph] for many years had 20 -- 15% to 30% growth year-over-year. We would never expect that to immediately turn off into zero. With that said, as I've also pointed out, confidence on the reproductive space is that of the 6 million pregnancies in the U.S. every year, there's only 1 million to 2 million of that get carrier or extended carrier screening or non-invasive prenatal screening and/or both. So, the counsel, the former counsel business continued to perform pretty well, as well as Natera, Progenity and the smallish lab core businesses. And we still feel that there's plenty of room to grow in reproductive. And then, the third that we mentioned again that we accelerated the pace of and kicked off a handful of pharma programs, middle of the year, which we do expect it contribute strong towards -- strong volume and even as we close out this year and move into next. So, those are the three contributors -- our view of the relatively backend weighted. As I did mention before, yes, we'd love to be in a more comfortable perch to hit our annual guidance. With that said, we are presently tracking and it's in the hand of our commercial operating teams execute the next the next six, seven weeks.

And if I could touch on NIPS overall, Singular Bio pharmacy’s significant cost reduction here. And I'm just trying to understand sort of when do you start benefiting from that and how are you tracking versus your expectations for Singular Bio to ramp up and take some of the NIPS volume?

So, when we acquired the company, we expected a kind of 18 to 24 months to really start to begin incorporating it into production. That's still our view, on track to that. And again, it's not so much a volume play, it's a cost play. And, kind of, again, pointing to the 6 million pregnancies in the U.S. every year, of which only 2 million are served by NIPS. We think that’s an opportunity there to immediately begin generating a ton of volume, eventually bringing the cost way down. And more importantly, the 20 to 30 million pregnancies globally, in modernized healthcare systems, we feel will only be served at prices that the Singular Bio technology can afford out at 50 plus percent gross margin, which is our target for that. So, that's -- the timeline still is as we had anticipated, and we're excited to get that go. And like I mentioned, the teams are integrated, the development teams are working now. I think, we're getting -- even for a relatively young company, we've done a handful of acquisitions, we're getting better and better at integrating them. It's great to get injection of new talent, small focus, dedicated teams so far, they love joining the larger effort. So, things are going well there.

On COGS, Puneet, I would just add and that there is an interim step between here and getting to the COGS with Singular Bio, is we will be bringing in house the technology. And that will be a step down as we Invitaeize that technology and bring it into our stat to be able to drive the cost of goods down. So that currently stand out, then we’ll bring it in house and then we'll move to Singular. So that was the plan when we acquired singular and that's still currently our plan.

Okay. And on the Detect programs, can you remind me if it is -- still in no charge genetic testing program and are you bearing the full sort of cost of that, and what's the expectation here longer term in terms of volume? Thank you.

Yes. So, the Detect programs are either similar to and/or are pulling in our other pharma programs. The payments vary pretty dramatically for whether people are paying on a per sample basis or for identifying patients or contacting them or for data analysis. And that's no different than detect program. We -- in the five Detect programs we lined up, however, we -- some of them, we did go out ahead of time knowing full well, who is interested in those patients. Whereas in the past couple o years, we've only done that with partner in hand and kind of cash on the barrelhead as it were. Our feeling at this point is with enough experience there, the economics are obvious, they're better. It's great for us. And it's -- like we said, it's a win, win, win for everybody. The physicians, patients diagnose more of these individuals and, more rapid pace. For our pharma partners, we’re essentially pulling forward -- shortening clinical trials and pulling forward peak your sales. And then for us, it’s expansion of the market, which as you know, were all about here at Invitae. So, yes, those are well along. And we think -- when you ask by way of volume contribution, as we said, yes, we do think that the pharma programs will contribute outsized growth compared to the other -- some of the other testing lines, but we haven't broken that specifically, but yes, optimistic about how that will play out in the years to come.

Yes. And then, the answer to one of the prior questions about where we see gross margin going. It is important that there is a lag in this, and we would expect that we would have higher payments for those programs in the future. So, we are able to get those patients onto our program at this point, and then later to find those corporate partners. And so, you will see next year that you will reverse some of those where we're getting lower pace now, as you get one, two, three or four partners in each of those programs to enable you, then to pay a sufficient amount to cover those programs and more. So, that just takes a little time.

Your next question comes from the line of Kevin DeGeeter from Oppenheimer. Your line is open.

Hey. Thanks for taking my question. Can you just talk a little bit -- there's been some discussion recently about the role of RNA-based testing and calls for variants of unknown significance, just kind of a, your general thoughts on the topic and kind of more specifically the work you're doing. Do you feel you now have the right configuration of technology and tools to kind of reduce the kind of manual call component of kind of assessing those variants of unknown significance? Thanks.

Thanks. That's the fun question. The short answer is, yes, we absolutely believe that we are on the cutting edge of variant interpretation, particularly when it comes to fast resolution. Our portfolio now -- we would argue on a percentage patient impacted basis far more important than RNA analysis is the molecular effect predictors in the AI classifiers that we have acquired, incorporated with Jungla. That's already had an impact, allowed us to recall some buses and clarify some things for some individuals, as we mentioned in our pilot program with them, we reduced our bus rate by 40% across a variety of disease areas. That's a wild improvement and really valuable for our customers. And on top of all that, we also offer the RNA analysis which yes, for some supply sites variants can help resolve the buses that's in sub percentage of the cases. But nonetheless, customers like it and we are about customers. And so, we offer that as well, but are kind of taking a step, our entire suite of both our core variant interpretation pipeline and specifically now our ability to resolve bus we think is world-class

And then, just one more for me. You did call out a couple of times the impact of NIPS with regard to contribution in the quarter. As we think about to kind of take this fourth quarter session, volume question from a different perspective. Would you care to comment on the kind of baseline contribution for an ITS currently? So maybe we can size out the potential magnitude of impact of that business, as it grows in the fourth quarter and into 2020. Thanks for taking my questions.

Yes. No, thanks, Kevin. And again, I know unsatisfactory for the crowd, we don't break out the specifics of our different business lines. With that said, our reproductive business has been pretty steady since our acquisitions, more or less 30% or so of the business. So bouncing around over time, but roughly. And yes, our NIPS launch has enabled us to start growing in that more rapidly. And so, it is contributing. We are able to pick up -- there will be accounts. With that said, against the backdrop of everything else, whether it be the disease testing in cancer, cardio, neuro, pediatric, exome, whether it'd be carrier screening et cetera. It's -- I would say, it's not worth calling out as a huge swing in our numbers, one way or the other at this point in time. And that's -- I think that's the best view of it. We have pointed to and I think we continue to believe that next year reproductive health will be an outsized grower because of the share numbers involved are offering, our broad offering, our pricing -- being the easiest on the market to work with. But again, breaking out specifics, we're not here to the point where we can do that.

One thing I would add is that we know that being able to provide one product for a clinician grows [ph] utilization of another product, which grows utilization of another, and then, the benefit of having the comprehensive offering. So, having an NIPS offering helps drive carrier volume that help drive our cancer volume. So, I think, there's a compounding effect of all of the various products that we're offering within the clinician office.

Your next question comes from the line of Jeffrey Cohen from Ladenburg Thalmann. Your line is open.

I just had two, if I may. So, firstly, could you talk a little more about the OUS business more specifically and any geographies you are going to call out, strength and weaknesses in specific channels which you are kind of gaining traction?

Yes. No. Happy to -- so I did mention solid again, solid and growing contribution from our OUS business. We are -- I think, our general sense is, we are now at the price point where that broad landscape is now -- now the time -- the time is now to address it. We in our last capital raise indeed a use of proceeds is specifically to go after that. We've begun hiring, I wouldn't say major commercial expansion, but a modest commercial expansion to having country customer service, bizdev support that kind of thing. And then, also, some really kind of basic logistics, showing you know kind of investments in regions where it will really help us kind of take care of the trade costs and tariffs and shipping and whatnot. There are some of these reasons where we're driving a fair amount of volume, and the patients are paying almost as much in shipping as they are for the testing. So, that's a kind of job number one is clean all that up. And we think just those two things alone will start to give us some more volume ex-U.S. And then, frankly, we'll go from there. The regions for a lot of -- regions of history, their interesting, without going into -- Latin America is particularly strong, Northern Europe, and of course Middle East and then Asia, Asia Pacific. Those are the reasons that were the strongest and we'll be focusing mostly on over this next year.

And then, on the spend side, could you provide any further commentary as far as the stock compensation? I know that you had 12 million piece from the Jungla from the quarter and some management [ph], what would you expect going forward?

Yes So, I think Shelley can kind of get in the details. I can offer the color commentary that this is -- given our trajectory and given how we think the next couple years are going to go, this is likely the beginning of the further divergence of gap and gap reporting and what is actually really important for modeling our business and tracking it. And so, with that said, so I can start digging into the details on that.

So, the key was provided today also and there is a chart in there that will give you a lot more information on this. But as I indicated, the acquisition, stock-based comp for singular was about 18.6 million. Recall that last quarter that was only about 2.6 million. And the reason that went up is we had only closed offering late in June million. And so, we only had a small proportion. So you can use this quarter’s 18.6 is being sort of a proxy for what it will be moving forward. Remember that we had about $90 million, that was compensation and that was the acquisition price, the earnout price. So, take that out for 18 to 24 months, and that gets you sort of that 80 million. We will be marking the market, it's $1 amount that we will be paying them for each of those. And it's a probability of success of meeting those milestones as well as some time-based. And so that's the largest chunk of it that you need to consider. And then, we did also call out some of the stock-based comp for the executive management, and that was higher in this quarter because it was new. And you will continue to see that over the next several quarters also. So, there is a breakdown in the queue. And those are the key components of it.

Your next question comes from the line of one of Ophir Gottlieb, from Capital Market Labs. Your line is open.

Hey, guys, thanks for taking my question. I want to talk about next year, possibly [indiscernible] but I’m going to try anyway. With the new convertible debt offering and after the elimination of prior debt, we’re looking at about $0.5 billion in cash, $473 million in cash as of September 30th. And given your reach for the continued growth next year, are you able to say that you're going have sufficient cash to not do a capital raise for the next [indiscernible]. So, without going too far out, can we say that there is no planned capital raises through the end of 2020 while hitting accelerated standpoint revenue growth rates and maintaining the system-wide gross margin at or near 50%? Thank you.

Yes. So, I think, the quick answer to that is as per the targets on the -- like what we're aiming for on the top line the same, the gross margin target is the same. We've got a lot of dynamism and momentum in the business that we are pushing on. Since our last -- since last fall, when you think about our first debt instrument, from that point time on, we have operated with the kind of the aegis that we are now operating under is that we will always maintain enough cash on the balance sheet to tip the company to cash flow -- operating cash flow positive, if needed. And that is a almost weekly, probably more quarterly realistically reflection of the investment thesis, the return -- our assumed return on that investment, and investors’ appetite to continue on one growth profile versus another. So, maybe a long way of saying, we've got all the capital we need, we're going to keep it that way. And to the extent the burn goes one way or the other, that will be entirely based on the landscape, the evolution of landscape in front of us, and where we think the right market is in to continue executing the long term strategy of the business which we are confident is building an immense -- creating immense value in long term. So, that's where I would leave that one next year cash question.

Do you still maintain the guidance that if you had to use the term cash flow positive, essentially, within a quarter, having already disclosed that your cancer business, such as your largest business is already a profitable business?

Yes. I would -- the short answer is yes. I would say, as we're getting bigger and bigger, I don't think the timeline for the turn is not quite as short as it used to be. Yes, we did do that -- we did make that move a while back and dropped burn in half and demonstrated we could clearly do it really quickly. At this point, it would take at least two or three quarters. With that said, we’ve got x quarters of cash on hand. So, we got a lot of time to sort that out. But that generally -- your sentiment is exactly how we do it at this point in time.

There are no further questions at this time. Ms. Laura D'Angelo, I turn the call back over to you.

Thank you for joining us today. We look forward to catching up with you soon at upcoming conferences.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.