Invitae Corp. (NVTA, Financial) is a genetic testing company based in San Francisco, whose stated aim is to aggregate the large number of different genetic tests currently available to patients into one single service. It is currently trading around $12.50 per share and has a market capitalization of $970 million.
The company’s value proposition is to decrease the costs of obtaining and using genetic information for both doctors and patients. Currently, the company offers gene panels and single-gene testing for adult inherited disorders in a range of clinical areas, including oncology, neurology, pediatric genetics, metabolic disorders, immunology and hematology. Invitae also offers reproductive and family testing, as well as proactive testing for individuals seeking to pre-emptively identify genetic mutations that may make them susceptible to certain disorders later on in life.
On Nov. 7, the company posted earnings for the third quarter of 2018 (ended Sept. 30). Let's see what the latest earnings tell us.
Numbers don’t lie
Financial results for the third quarter were promising. Invitae announced a gross profit $16.9 million for the quarter, up from $5 million from the prior-year period. The company recorded 78,000 samples, up from 40,000 year over year, representing a 95% annual volume increase. Revenue grew to $37.4 million on the quarter, representing an 106% annual increase and beating expectations by 5%. This beat has caused management to revise revenue guidance for 2018 to $140 million to $145 million, up from $135 million to $140 million.
Furthermore, the small-cap biotech was able to drive down cost of goods sold to approximately $260 per sample, increase cash and cash equivalents by $52.6 million (for a total of just under $135 million), reduce cash burn to $18.4 million and currently has access to more than $250 million in capital. The combination of these cost-saving exercises and access to a healthy credit line forms the basis of our bull thesis.
Cash burn under control
The $18.4 million cash burn for the third quarter represents a decrease of almost 50% from the first quarter. Management had previously set a target of 40-50% cash burn reduction, which the company has now met ahead of schedule. Not only is this a vote of confidence for the C-suite, it is an important milestone on the road towards becoming cash flow positive.
Invitae’s large store of financial dry powder and ability to access further capital gives management ample time to continue growing.
Business model scalability
As sales and revenues have grown at triple-digit speeds, operating expenses have remained relatively flat over the last few quarters. Viewed on a year-on-year basis, operating expenses have risen by just 31%, compared with 95% growth in sales and 106% growth in revenue.
As Invitae continues to add more tests to its arsenal, it will benefit more and more from the economies of scale that come with having established sales structures and relationships with insurance companies and clinicians.
Additionally, the cost of goods sold of $260 per sample mentioned above actually represents a 21% reduction year over year from $330 per sample. Furthermore, the difference between revenue and sales growth (106% versus 95%) is indicative of the fact that the company is managing to secure higher price points for some of its tests. Taken together, this paints a picture of a secure future.
Huge market opportunity
Although genetic testing has come a very long way since the early days of Crispr, it has an even longer way to go. The market for genetic testing is enormous, both in and outside the United States. With companies like Invitae driving down costs worldwide, it is not inconceivable that in the next decade we will see genetic testing kits offered to populations as a standard part of public health policy.
It must be noted that this is a double-edged sword, as the pace of innovation within this space may prove too disruptive for any given company to remain on top for too long. However, we consider Invitae’s diverse offering of genetic panels to provide some insurance against the possibility of any one of them becoming obsolete.
Verdict
Overall, we see a company that is moving swiftly from the developmental research stage to the growth story. With sales and revenues increasing at red-hot rates, and with costs falling, we believe Invitae is well positioned to take the next step in conquering the market for genetic testing.
(This article was co-authored by Stepan Lavrouk, director of research at Atreides Capital LLC and a former research analyst for Almington Capital Merchant Bankers.)
Disclosure: No positions.
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