Invitae (NVTA) - Introduction

Invitae’s products help determine hereditary cancer risks via gene sequence analysis. People can take preventive measures if they know they are susceptible to certain cancer types. The most famous example of a use case is Angelina Jolie getting double mastectomy in 2013 (She probably did not use Invitae); doctors estimated she had an 87% risk of breast cancer and a 50% risk of ovarian cancer.

Investment thesis: As the cost curve of gene sequencing comes down, the market grows “exponentially” bigger; the leaders in the field will have a snowballing cost and technology advantage over competitors in their area of core competency.

Historical cost of gene sequencing:

2003: $1 billion, took 13 years (entire human genome sequenced for the first time)
2013: $3000 ~ $5000, takes 1 ~ 2 days to complete
2018: $1000, takes 1 hour

Invitae’s cost per sample trend:


 **Q1   Q2   Q3   Q4       Decrease  Q1    Q2    Q3    Q4**
**2016** 600  520  465  400
**2017** 359  345  330  321           **2017** -40%  -34%  -29%  -20%
**2018** 280  280  260  249           **2018** -22%  -19%  -21%  -22%

Key metrics:

  1. 2018 revenue growth: 117%. Guided 2019 revenue growth 50% (to $220mil). We can probably expect higher growth.

  2. Current P/S: 12, S = 2018 Q4 sales * 4. P is market cap from Google, may not be accurate. For high growth companies, I prefer to use last quarter sales * 4 rather than trailing 12 months, especially for Saas companies.

  3. Gross margin: 53%. It used to be negative just 3 years ago. Management had said they will probably maintain the gross margin to be around 50%, and increase their product capabilities (detect more diseases, which increases costs)

  4. Cash burn in 2018 Q4 is $17mil, a decrease of 50%+ from 2018 Q1. In 2016, management said they expect to be cash flow neutral by end of 2018. They got close, but not quite there. Currently, they should have $200mil+ in cash (had secondary offering in 2019.03).

Business / industry particulars:

There is a bunch of gene sequence analysis companies, each company focuses in different areas:

  • Invitae: Hereditary cancer risks (Current target market: expecting parents, prenatal, newborn)
  • Guardant Health: Lung cancer liquid biopsy
  • Exact Sciences: Colorectal cancer via stool test
  • 23andMe: Ancestry determination via saliva

The above are famous ones people may have heard of. There are many more other companies I am sure. Technically, those companies can encroach into each other’s territory if they want to, but there must be nuances why they focus on their own areas. As time goes, each company will expand their offering, so there will be consolidation in the future. However, currently the market is growing so fast, those companies are focusing on their area of core competency and adjacent low hanging fruits.

Why I bought Invitae:

In late 2018 I started to see the stock symbol being mentioned in different places (Facebook discussions, Motley Fool message boards,… etc), but stock symbols are everywhere all the time, so I didn’t care at all. In 2019/01, I saw my college friend posted this link on Facebook: https://www.businessinsider.com/invitae-genetics-will-offer-…

It turns out he works at Invitae and has been there for 5 years. He is a very bright guy and has extensive experience working in the “biology mixed with computer science” field, so that caught my attention. I did some preliminary research on the company, and thought it was intriguing enough where I took a 2% position. The company was growing rapidly, reducing costs, increasing margin, reducing cash burn. However, in 2018 it burnt through close to $100mil of cash, so the uncertainty is high. After 2018 Q4, it’s a better bet than before.

Things I learned since my first purchase:

  • Invitae’s products do not need FDA approval, since it’s telling customers their “risks” for different diseases, not a definitive one like “no”, you don’t have lung cancer. They are regulated by CLIA and CAP where approval process is much faster than the FDA’s.

  • Invitae has multiple products, so customers may do multiple purchases in their lifetime. However, it doesn’t have repeat customers like Guardant Health where patients need to get retested every so often.

  • Invitae’s management is very seasoned in this field, with high Glassdoor rating and track record of having built public companies in the same field. CMFSwift’s deep dive has very good information (https://discussion.fool.com/deep-dive-invitae-34140364.aspx). My friend said he doesn’t pay much attention to the stock price; he’s happy working in the company whose product helps people in a direct and important way. Those 2 pieces of info tells me something about their culture. That built confidence for me.

  • As of 2019.05.05 Cathie Woods’ [Ark Invest] Innovation ETF has NVTA as 2nd largest position at 6.84% (https://ark-funds.com/wp-content/fundsiteliterature/holdings…
    Genomic Revolution ETF has NVTA as 2nd largest position at 9.65% (https://ark-funds.com/wp-content/fundsiteliterature/holdings…)

It is interesting that her funds do not have GH, EXAS in them.

I find Cathie Woods’ views on investing to be very interesting and unique. Her funds performance are quite decent and she’s making a name for herself. She does have TSLA has her top position in Innovations ETF however, but the jury is still out on that one. Personally I am rooting for Tesla and see great potential, but also great uncertainty for them.

I had NVTA at a 4.8% position in my portfolio, after writing this recap, I bumped it up to 5.5% and will see how the 5/7 earning’s release goes.

Below are some of the numbers they track in their earnings release shareholder letter. The trend is favorable, just not sure how long can 50% growth sustain. 5/7’s earnings should give us more clue.

That’s all I have for now. Hope this is an easy read and give you some ideas on what Invitae does and the genomics industry. Thank you all for this board. The culture, professionalism, and investing wisdom is second to none here. I am very lucky to be a part of it. Happy investing!

Revenue


 **Q1    Q2    Q3    Q4   Total    Growth   Q1    Q2    Q3    Q4  Total**
**2016**  4.0   5.6   6.3   9.2    25.1
**2017** 10.3  14.3  18.1  25.4    68.1      2017 158%  155%  187%  176%   171%
**2018** 27.7  37.3  37.4  45.4   147.8      2018 169%  161%  107%   79%   117%

Operating Expense


 **Q1    Q2    Q3    Q4  Total**
**2016** 23.3  23.2  23.9  26     96.4
**2017** 28.3  31.9  35.9  43.2  139.3
**2018** 46.1  46.9  47    50.1  190.1

Cash Burn


 **Q1    Q2    Q3    Q4  Total**
**2016**                          76.3
**2017**                          97.7
**2018** 35.1  26.5  18.4    17   97

53 Likes

Great write up. I’ve been holding nvta since March and am up about 10%. I wanted to add that United Health Insurance - one of the big boys - recently named nvta as a preferred lab tester in its network (it was one out of a handful named - https://www.cmlviz.com/2019/04/22/NVTA/invitae-nvta-gets-a-h…).

My brother is also a heart doctor, and he told me these genetic tests are what the medical industry relies on when there is insufficient family medical history. Think of all the people that don’t know their family medical history or are too old to have had accurate diagnoses for their parents/grandparents.

I also think the world is switching to preventive measures instead of treatment of existing diseases. It reminds me of the tobacco industry. Everybody realized that the cost of treatment for tobacco related cancers was costing the states a fortune so they dumped a ton of money into stopping smoking before it begins (after tobacco got their asses sued off) … and the rest is history. I think insurance companies are starting to realize it’s CHEAPER for them to nip diseases in the bud instead of treat them. Genetic tests are the way to do this.

Finally, NVTA helps pregnant women and potential cancer patients (usually elder). There should always be a stream of new customers, or civilization has bigger problems.

As a new holder, I’m excited to hear about tomorrow’s earnings. The main point of focus for me will be how many more tests they’ve performed than this time last year.

Best,
BTL
Long NVTA

4 Likes

also a holder, I bought it to replace FMI when it got bought by Roche.

Good evening, everyone -
NVTA posted their earnings today after close, and it was a miss. Revenue was expected at $46.6 million but came in at 40.6 million. NVTA was trading down 15% in after hours. An interesting wrinkle in the miss was NVTA’s guidance for 2020, which was about 175 MILLION over expectations (approx 325 expected vs 500 guided). While that upward guidance is positive, it is my personal opinion that talk is cheap. I would much rather a situation of beating earnings and providing conservative guidance, which is what our SaaS companies usually do. I’m still not going to jump ship. I plan to hold NVTA through at least another earnings report to figure out if the story has changed, but I will definitely not be adding and might even trim some after a recovery from tomorrow’s dip.

Best,
BTL
Long-ish NVTA

8 Likes

Looking at the conference call transcript and the presentation deck showed that revenue was impacted by timing of test reports being released and that driving when revenue gets recognized. They did 9% more tests that they were able to recognize revenue on in the 1st quarter.

They say the best growth metric for them is tests performed as the payment delay can be a bit lumpy. Per the graph, this is the biggest offset they have had to date- perhaps there are some growing pains with regard to getting results out and doing the billing.

I took the opportunity to add a bit here. The made a big promise for next year and we will see how their reproductive and pediatric testing pans out to determine if they can get there.

https://www.google.com/amp/s/finance.yahoo.com/amphtml/news/…

2 Likes

Sorry but this is not my cup of tea. Their growth rate of over 100% in 2018 is now under 50%. And sequential growth negative! Or even if you give them slow billing, sequential just slightly above sequentially. Burning cash like no tomorrow. Follow-on stock offerings diluting massively every year. I had taken just a trial 0.8% position and I sold it. Not for me.
Saul

3 Likes

I have added to my NVTA position today.

Here is why:

The stock dropped on an earnings “miss” of analysts estimates.

*Analyst estimates are linear and the sales have some seasonality to it.
*1st quarter they didn’t get paid for all the samples run, about 10%.
*not lost revenue, just going to be realized later in the year.
*quarter didn’t miss the companies expectations

*maintaining their full year target of $220 M (up about 50%)
*restated their 2020 goal of $500 M (up over 100%)
*they have a history of hitting their goals

*they are burning cash because they are investing in the business 3 ways

  1. continuing to reduce the cost of running the tests
  2. developing more products to expand their market
  3. marketing to go DTC and expanding partnerships with insurance companies

They see all 3 of these as expanding their competitive advantage.

They have given clear targets in the past and have hit them, this gives me confidence they can achieve the guidance they have given for this year and next. If they hit that guidance, I really like the company at these levels.

Jim

5 Likes

MacInTheBox,

First of all, thanks for the write-up! You sparked my interest in the stock!

I really like the growth story of NVTA: The importance of genome testing for early discovery of hereditary diseases, a fast increasing TAM, possibly huge international expansion potential, the declinging cost of testing which should push demand higher going forward.

Yet, it doesn’t seem to play out in the numbers. As already mentioned, from Q1 2018 to Q1 2019 revenue growth has been 169%, 161%, 107%, 79%, and now 47%. Also, Saul mentioned their first qoq sequential decline in revenue this quarter, which is not a good sign.

The most important metric to follow according to the company is testing volume. I would have assumed that testing volume would show an exponential increase despite slowing revenue growth because of steadily decreasing prices. But it is slowing too:

Volume


       Q1      Q2      Q3      Q4
2017                   40.000  53.000
2018   64.000  73.000  78.000  87.000
2019   94.000

Look at the sequential increase: +13.000 (Q417’), +11.000 (Q118’), +9.000 (Q218’), +5.000 (Q318’), +9.000 (Q418’), +7.000 (Q419’). Clearly decelerating as well; not a good sign either.

Which makes me wonder why? Does someone have any more insights about the strong deceleration in growth? Is it competition? Is it lack of execution? Or is the demand picture not as strong as projected?

Thanks!
Niki

2 Likes

A little addition:

They are guiding for $220 mil in revenue (+49% yoy) on 500.000 samples (+65% yoy) for the full-year 2019.

In 2020 they want to achieve $500 mil in revenue (+127% yoy) on 1.000.000 samples (+100% yoy).

What will drive this huge reacceleration?