My take on Invitae, (NVTA)

[SaulR80683]

I thought Invitae (NVTA) looked interesting, with the incredible rate of growth. So I looked into it. I actually went through the last four earnings releases and read the articles about it. Here are my thoughts what I found:

For the first nine months:

Test Revenue was roughly $40 million
Total expenses were $129 million (more than three times revenue).
Losses were $89 million, or more than twice revenue.
The Cost of Revenue was 81.5% of test revenue, so Gross Margin was just 18.5%.

Let’s say they increase that 9-month revenue by an enormous 150% to roughly $100 million. At the current gross margin that additional $60 million would contribute $60 million x 0.185 = $11 million, so a 150% revenue increase would reduce that $89 million loss by $11 million.

But, you say, gross margin should rise with increased volume… Okay, say it rises from 18.5% to 25%. At that rate the $60 million increase would reduce the $89 million loss by $15 million. (At an unlikely 30% gross margin it would reduce the $89 million loss by $18 million).

But there’s another catch:

Operating Expenses (R&D, S&M, and G&A) were $96 million.

If revenue rises by 150%, Operating Expenses will rise too in dollar terms. A lot!

Say the company accomplished a miracle and grew revenue 150% and only grew operating expenses by half as much, by 75%, thus greatly improving operating margins.

In that case the operating expenses would be $96 million x 1.75 = $168 million (up $72 million, and swamping any benefit from the increased revenue, even at 30% gross margins). The company will have much greater losses.

……

Here’s another way of looking at it:

Looking at even total revenue, they had only $9.7 million left after the Cost of Revenue. In other words, $9.7 million was their Gross Margin Dollars.

But, Operating Expenses came to $96 million. So that $9.7 million gross margin dollars would have to rise 10 times to just break even. It would take ten times as much revenue at the current gross margin percentage. And that’s with growing revenue ten times with NO INCREASE in operating expense.

xxxx

In other words, there’s no chance that this company can ever break even. Their only hope is to be acquired by a big company that can fold them in with only a tiny increase in their own operating expense. Of course, if that happened, you’d make money, if they didn’t go bust, or totally diluted first. (At the end of the 3rd quarter they had $30 million in cash and equivalents, and were losing $27 million a quarter!!!)

If you think I made some major error which will change the results, please tell me. (Don’t bother with “18.5% margin isn’t right, it should be 19.5%”, etc as that wouldn’t change any conclusion the slightest.

Sorry,

Saul

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[remmdawg]

In other words, there’s no chance that this company can ever break even. Their only hope is to be acquired by a big company that can fold them in with only a tiny increase in their own operating expense. Of course, if that happened, you’d make money, if they didn’t go bust, or totally diluted first. (At the end of the 3rd quarter they had $30 million in cash and equivalents, and were losing $27 million a quarter!!!)

If you think I made some major error which will change the results, please tell me. (Don’t bother with “18.5% margin isn’t right, it should be 19.5%”, etc as that wouldn’t change any conclusion the slightest.

Sorry,

Saul

Thanks for the analysis! No chance that they will every break even, though? That seems premature. I’m not convinced - never say never.

But the market seems to agree. I might exit the position and keep it on my watchlist. If their cash position, expenses and losses move in the right direction, I might buy back in.

dave

[SaulR80683]

Here’s another way to think about it. If they tripled quarterly revenue, adding $80 million more to the quarter, and THE WHOLE $80 MILLION went to reducing losses with NO COST OF GOODS SOLD at all (100% gross margin instead of the current 20% or so), and NO increase in operating revenue, NOT EVEN sales and marketing, they still wouldn’t be at breakeven.

[remmdawg]

Here’s another way to think about it. If they tripled quarterly revenue, adding $80 million more to the quarter, and THE WHOLE $80 MILLION went to reducing losses with NO COST OF GOODS SOLD at all (100% gross margin instead of the current 20% or so), and NO increase in operating revenue, NOT EVEN sales and marketing, they still wouldn’t be at breakeven.

I just looked at the numbers on FMI and they seem as troubling (or even more so given the much slower growth). FMI has had significantly widening losses every year (NVTA apparently narrowed its losses slightly from 2015 to 2016). In 2016, FMI lost $101 million on $117 million in revenue. And as of the last quarter, it looks like FMI had only $77 million in cash.

Correct if my numbers are wrong. But it looks like the genomics testing industry in general is just not profitable at this time.

I am very confident in the future of the industry - and with time and scale, it will be profitable. Maybe it’s best to wait on the sidelines until that profitability is near.

dave

[MONYMAN3]

“I just looked at the numbers on FMI and they seem as troubling (or even more so given the much slower growth). FMI has had significantly widening losses every year (NVTA apparently narrowed its losses slightly from 2015 to 2016). In 2016, FMI lost $101 million on $117 million in revenue. And as of the last quarter, it looks like FMI had only $77 million in cash.”

I think that CMS coverage to detect an extensive number of biomarkers on December 1st should significantly increase revenues. As I recall the CEO mentioned that coverage gives them reimbursement to about 40% of their market. When private insurers get on board with reimbursements there should be a strong positive market reaction as each announces coverage. I only have a starter position in case an announcement comes soon. On December 22, 2017 FMI announced a mixed shelf offering and I await that secondary to fill my position. Roche’s 59% stake should serve as support for the shares in the short term IMO.

Rob

[Chamonyx]

Hi Saul

I know nothing about this particular company, but one thing to check is how much of their COGS is made up of depreciation? They may have had a heavy up front capital investment.

Cheers

Cham

[CMFMikenpdx]

A few notes on margin…

(Not trying to sway you here, your comments prompted me to double check my own memory of the situation.
So just sharing what I dug up for further context and consideration.)

I see margin reported in latest quarter as 23% on a consolidated basis (they’ve made relatively recent acquisitions) and their base Invitae business had margins of 29%.

In 4Q '15 their COGs were $700 per sample
In 4Q '16 their COGs were $400 per sample
In 3Q '17 their COGs were $330 per sample

From the latest call transcript…

https://seekingalpha.com/article/4121412-invitaes-nvta-ceo-s…

"Strong third-quarter volume coupled with some production improvements enabled a continued reduction in cost of goods sold per sample. COGS for consolidated operations including Good Start as well as for Invitae’s base business came in at approximately $330 per sample, representing an improvement of 27% year-over-year and about 4% from last quarter. Looking longer-term, we have opportunities to further reduce COGS and realized significant synergies in the consolidated business. In the near term, we expect to improve COGS through the full integration of Good Start including the transfer of production operations next year.

It’s worth noting now that management is guiding towards long term margins of 50% and reiterated confidence in this longer term goal on the latest call.

A couple other bits on the 50% longer term goal from the call…

Raymond Myers (analyst)

I understand that you’ve made a lot of improvements and continue to in your lab to keep driving your down your cost per test, we saw more progress in third quarter. How much more progress do you expect throughout say the course of 2018 in the driving down the cost per test?

Sean George (CEO)

Right, so, this is one that I think we guys we’ve begun indicating and I think would kind of reiterate today. We continue to invest in our technology leadership in particularly the ability to extend our cost advantage. With that said, as that proceeds we’re also bringing online other tests and other operational requirements that come into play and maybe Lee can kind of give a kind of a view of what 2018 and beyond would look like in regard to GOGS and the operations of the Company.

Lee Bendekgey (COO)

So, there’re a number of opportunities ahead of us to reduce the average cost per test. We’re for example just now implementing NovaSeq across our entire test menu. The real thing that we’re debating right now honestly is and I think you started to see a little bit in this quarter, we’ve now gotten to a place where as we approach our 50% gross margin target. The choice will be to whether to continue to drive down the average cost per test or to make our answers more comprehensive and add content in ways that will be useful to clinicians without increasing the average cost per test and while maintaining our target margin. And so in each case, it’ll be kind of tactical decision about what is best for the patient and what enhances our lead over the competition. So you can expect to see both which is volume as well as continued focus on things like NovaSeq and other technology enhancements to see COGS go down, but I think that it’ll frankly start to slow as we look at opportunities to add more content and provide more comprehensive and more useful information to clinicians and their patients.

This company is still in the “prove it” stage but things are trending in the right direction. We’ll have to see how much progress they can make towards that 50% margin goal in 2018.

They also expect to be cash flow break-even by the end of 2018. If you trust management, they are guiding towards being cash flow break even by end of 2018, made possible in large part to the integration of recent acquisitions.

best,
michael
long a starter position in NVTA