After completing a deep dive into Invitae (ticker: NVTA, Market cap: $1B), I recently built a position in my portfolio for the company. The headline about Invitae to whet your whistle: in March of 2015, during its first earning call as a public company, Invitae reported full year revenues of $1.6 million; just 2 days ago on the company’s end of year earning call they announced revenue of $147.7 million in 2018. I’ll let you do the math on that rate of growth, while I spend a little time providing some background on the company…
Here is what I learned in my research:
Company origins and leadership:
Invitae was spun out of Genomic Health in 2012 and IPO’d in February of 2015. The Company’s founder is Randy Scott who was co-founder of Genomic Health (Mkt cap $3B) and before that the founder of Incyte (mkt cap $18B), a drug developer. Scott is currently Executive Chairman of Invitae and owns roughly 6.5% of the company’s shares. Here is Scott’s bio from the Invitae website:
Randy is executive chairman of Invitae. Prior to this position, Randy served as chief executive officer. Prior to co-founding Invitae, Randy served as Genomic Health’s Chief Executive Officer from 2000 until 2009 and Executive Chairman until 2012. Under Randy’s leadership, Genomic Health developed and launched two revolutionary cancer diagnostics tests. At Incyte, Randy served in various roles from 1991 through 2000, including Chairman of the Board, President and Chief Scientific Officer. Randy holds a B.S. in Chemistry from Emporia State University and a Ph.D. in Biochemistry from the University of Kansas. Randy is a prominent thought leader in the genomics and sequencing space and is the author of more than 40 publications, 20 patents, and is the recipient of numerous awards, which highlight his leadership in the personalized medicine space.
The CEO of Invitae is Sean George. His background is equally impressive:
Sean is chief executive officer of Invitae, whose mission is to bring genetic information into mainstream medicine. Prior to his CEO position, he served as Invitae’s president and chief operating officer. Sean was a co-founder and CEO of Locus Development, an early stage genetic analysis startup that later merged with Invitae. Prior to co-founding Locus, he served as COO at Navigenics, an early leader in personalized medicine. Previously, he has also served as SVP of Marketing and SVP, Life Science Business at Affymetrix as well as VP, Labeling and Detection Business at Invitrogen. In the past, he has also worked at McKinsey & Co. and Molecular Probes. Dr. George holds a B.S. in Molecular Genetics from UCLA, an M.S. in Molecular Biology from UC Santa Barbara, and a Ph.D. in Molecular Genetics from UC Santa Cruz.
George gets the outstanding distinction of being the first CEO of a company I own in my portfolio to receive a 100% Rating on Glassdoor: https://www.glassdoor.com/Reviews/Invitae-Reviews-E784446.ht…
While you are on glassdoor.com checking out George’s rating, I encourage you to also read the employee comments. 90% 0f employees would recommend the company to a friend and much of what is written conveys the excitement of working in a company growing fast and innovating even more rapidly.
Invitae believes that genetic screening will play an increasingly important role in the prevention and treatment of diseases. They aim to provide genetic screening at a low cost as part of everyone’s comprehensive preventative care and healthcare treatments. Here is the Company’s mission statement from there website:
Invitae is one of the fastest growing genetic information companies, whose mission is to bring comprehensive genetic information into mainstream medical practice to improve the quality of healthcare for billions of people.
And the company’s strategy to meet this mission:
Specializing in genetic diagnostics in clinical areas across all stages of life, Invitae is aggregating the world’s genetic tests into a single service with better quality, faster turnaround time, and lower prices.
Invitae utilizes an integrated portfolio of laboratory processes, software tools, and informatics capabilities to process DNA-containing samples, analyze information about patient-specific genetic variation, and generate test reports for clinicians and their patients. Invitae provides a variety of diagnostic tests with clinical utility in:
*preimplantation and carrier screening for inherited disorders
*pediatric and developmental disorders
Invitae offers test in three key areas:
Diagnostics: Confirm a diagnosis, provide a better understanding of prognosis, and direct medical management;
Reproductive health: Help make healthy pregnancies possible with carrier screening and pre-implantation testing;
Proactive health: Determine a healthy adult’s predisposition to cancer, cardiovascular conditions, and more.
In this last category, “proactive health,” you can work with your doctor to order a test from Invitae, for the cost of $350, that will screen for 147 different genes “that are well-established indicators of a significantly increased risk of developing hereditary cancers, cardiovascular conditions, and other medically important disorders.” This information presumably can be useful in designing preventative actions on the part of the individual.
You can learn more about the genetics test catalogue that Invitae has developed here: https://www.invitae.com/en/
I find this company and the field of genetics to be fascinating. There is a lot more information about the company that I encourage you to explore. Go on their website, which is packed with company information; read each quarterly ER conference call transcript; dig into their quarterly and annual reports, and the company’s pre-IPO S-1, which clearly sets out Invitae’s business strategy, effectively how they plan to meet the company mission through execution on their business objectives. For me doing this has been a fascinating way to understand the laser focus this company has had and how that focus translates to striking results thus far.
My Investment Thesis: I am going to now dive into the qualitative and quantitative metrics that will allow us to see the performance of Invitae. But before I do that, I thought it would be helpful to define my investment thesis for this company, so here it is:
Given the advances in science and the rapidly declining cost in effort and expense in mapping the human genome, personalized medicine is the next big trend in healthcare in the developed world. Invitae, led by proven industry leaders and attracting significant capital for research and development, has developed products that are superior qualitatively and price point-wise in a disruptive market that is expanding rapidly. Finally, Invitae is proving that scaling is critical to it business model: by consistently increasing the number of sample tests they perform, they are able to bring down the cost of test to the consumer, thereby significantly increasing profitability over time.
So far in the life of Invitae as a public company, this thesis has prove out. What follows are some metrics that help us understand this better.
Key Business Metrics: (*All numbers rounded.)
First lets look at some long term numbers that are key to understanding Invitae’s growth:
Volume: In 2014, the company accessioned 4,300 samples, by the end of 2018, 303K samples.
Revenue: In 2014, the company earned $1.6M, by the end of 2018, $147.7M.
COGS (Cost of Goods) Per Sample Test: in 2014, COGS=$1,320, by the end of 2018, COGS=$264.
Note that as volume increased, COGS decreased significantly. This, to me, proves out a key investment thesis that as the company scales it becomes more efficient. Next, we’ll take a look at 2018 and see that volume has grown consistently much faster than operating expenses, another key indicator of a path to profitability, IMHO. Also noteworthy is how consistently the company executed against these key business metrics. If you go through quarter by quarter you will see that the increases in each of these areas trended upward throughout this 5 year period.
Recent results (Q417-Q418):
_**Volume (samples Accessioned):**_ **Q4(17) Q1(18) Q2(18) Q3(18) Q4(18)** 53K 64K 73K 78K 87K *102% growth in annual volume Y/Y _**Revenue:**_ $25M $28M $35M $37M $45M *117% Growth in annual revenue Y/Y (includes a 1-time $1.9M payment from medicare--see earnings report for details) _**COGS(per sample)**_ $322 $279 $279 $262 $243 *Invitae is committed to creating a differential cost advantage over competitors. Scale gives them the ability to achieve this. _**Gross Profits**_ $8M $10M $15M $17M $24M *Improved gross profit by 274% annually Y/Y. Gross margin of 46% in 2018, including gross margin of 53% in Q418. Company's long term gross margin goal: 50%. Note: Given history to date, I believe they can exceed this as volume continues to scale up (but this is an informed guess). _**Operating Expenses** *$43M $46M $47M $47M $50*_
*Operating expenses increased 36% annually Y/Y.
An important point: While grew volume 102% Y/Y, OPEX grew just 36%. This is a critical data point when assessing Invitae’s path to profitability, IMHO.
Guidance for 2019
Invitae expects to accession more than 500K samples in 2019 and expects to generate more than $220M in revenue.
Here is an excerpt from the Earning Report Press Release on 2/19/19:
Full Year and Fourth Quarter 2018 Financial Results
Increased test volume by 102% year-over-year:
Accessioned approximately 303,000 samples in 2018, including approximately 87,000 samples in the fourth quarter, which exceeded the increased 2018 guidance of more than 285,000 samples expected in 2018
Increased revenue by 117% year-over-year:
Generated revenue of $147.7 million in 2018, including $45.4 million in the fourth quarter, which exceeded the increased 2018 guidance range of $140-145 million expected in 2018
Includes $1.9 million in payments from Medicare for Lynch syndrome analysis
Decreased cost of goods sold (COGS) per sample by 24% year-over-year:
Drove down COGS per sample to $243 in the fourth quarter
Improved gross profit by 274% year-over-year:
Achieved gross profit of $67.6 million in 2018, including $24.2 million in the fourth quarter
Reported 46% gross margins in 2018, including 53% gross margins in the fourth quarter
Total operating expenses, which excludes cost of revenue, for the full year 2018 were $190.2 million compared to $139.4 million in 2017. Operating expenses for the fourth quarter of 2018 were $50.1 million compared to $43.2 million in the fourth quarter of 2017. For the full year 2018, net loss was $129.4 million, or a $1.94 net loss per share compared to a net loss of $123.4 million, or a $2.65 net loss per share, for the full year 2017. For the fourth quarter of 2018, Invitae reported a net loss of $29.8 million, or a $0.40 net loss per share, compared to a net loss of $40.5 million in the fourth quarter of 2017, or a $0.78 net loss per share.
At December 31, 2018, cash, cash equivalents, restricted cash, and marketable securities totaled $131.9 million. Net increase in cash, cash equivalents and restricted cash was $100.7 million in 2018 and $11.7 million for the fourth quarter, and cash burn was $97.6 million in 2018 and $17.0 million for the fourth quarter.
I hope this gives you, my fellow Fool investors, a worthy introduction to Invitae as a potential investment. I think this company could be interesting for investors interested in rapidly growing companies in the health care sector and for those investors who are looking to diversify their hyper growth holdings beyond SaaS related companies (although there is a data analytics component to this company that I did not detail here–and that I am still trying to understand). I wrote this deep dive to encourage all of you to take a deeper look at NVTA, not as a recommendation for you to invest. Every investor should complete their own due diligence before putting their hard earned cash into buying shares in a company. I also wrote this so that the smartest investors on these boards will find the weak points in the investment thesis and the company performance and note those. We all have our blinds spots, it is the TMF mind hive that helps smoke 'em out…
I have thoroughly enjoyed diving deep into understanding this company. And thus far, my investment has been a good one. I built my position in this company starting on February 11th and added later in the week as I grew more comfortable with my investment thesis. My timing proved to be fortunate as my current position is up about 25% mostly as a result of Invitae’s blowout earning report 2 days ago (blind squirrel luck…). I don’t expect the ride to be this easy going forward, as this is a growing company that at some point, no doubt, will experience growing pains.
Finally, I must say I have enjoyed doing this wrote up as well. Largely because while writing this post i have finished off 2/3rd of a fantastic French 2015 Madiran (Chateau Laffitte-Testone), a rather bretty red that provides an extra kick to this Ticker Guide… All of that is to say, please excuse all typo and content errors, blame the magnifique French vintners and my propensity to post UI of red wine.