Invitae Stock – A Pure-Play on Genetics Testing
We research and write about tech companies and stocks religiously, but we’ve learned the hard way that trying to cherry-pick winning stocks is a high-risk game. No matter how promising the thesis, every company can potentially implode. In an attempt to weed out the land mines, we look for companies with strong industry partnerships (as opposed to a bunch of MOUs that never go anywhere), consistent revenue growth that demonstrates traction, and large total addressable markets. That’s exactly what we saw in ArcherDX, a precision oncology company that planned to have an IPO (initial public offering) before being acquired just days ago. Naturally, we wanted to take a closer look at the life sciences company they merged with – Invitae (NVTA).
Founded in 2010, San Francisco based Invitae is a leading medical genetics company that took in nearly $200 million in funding before going public in 2015. We first came across the company six years ago, and we’re only realizing right now that our over-worked MBAs never checked back in. Today, Invitae is a $3.4 billion genetics testing provider that just made a big move by acquiring ArcherDX for $1.4 billion.
Invitae will acquire ArcherDX for upfront consideration consisting of 30 million shares of Invitae common stock and $325 million in cash, plus up to an additional 27 million shares of Invitae common stock payable in connection with the achievement of certain milestones, for an overall transaction valued at approximately $1.4 billion.Invitae’s Press Release Announcing the ArcherDX corporate event
When assessing any publicly traded company for the very first time, we like to skip over the glossy investment decks and start by scanning the latest annual report for insights. The first thing we came across was Invitae’s founding principles which seem to telegraph their strategy (our comments in italics).
- Patients should own and control their own genetic information – This is what Helix was trying to do with their DNA app marketplace which fizzled out.
- Healthcare professionals are fundamental in ordering and interpreting genetic information – Selling direct-to-consumer genetic healthcare tests means lots of regulations and rules. It hasn’t worked out well for others.
- Driving down the price of genetic information will increase its clinical and personal utility – Reducing the cost of tests means more people will be likely to take them which means loads more valuable data.
- Genetic information is more valuable when shared – This has always been a pain point for ancestry genetic testing companies that needed to explain to consumers what they were doing with their data.
Invitae sees themselves as the sole provider of genetic tests for a patient over their lifetime. Having insurance companies pay for the tests validates their usefulness, and so does always having healthcare professionals order them for patients. As for driving down the costs of tests, that’s where other technologies come into play.
The Technology Behind Genetics Testing
The Invitae genetic testing platform uses automation, robotics, and bioinformatics software to reduce cost and complexity while being able to offer a 20,000-gene menu (they started at 200 genes in 2013). Being able to test for any combination of genes based on what a healthcare provider requests sounds better than trying to create your own bundled tests like others have tried to do.
Part of Invitae’s strategy is to “make acquisitions that expand test menu content and services to open new markets.” Putting ArcherDX aside, let’s look at the other five companies Invitae spent $245 million (that’s total consideration including cash and shares) acquiring in 2019 and 2020 to-date.
This startup was building AI-powered software capable of diagnosing genetic disorders in minutes based on next-generation sequencing data and patient information. The company says their platform “is the first software worldwide to use artificial intelligence for rare disease diagnostics.” This provides Invitae with an immediate increase in testing throughput.
Pharmacogenetics is the study of how a patient’s genetic composition affects the treatment they’re being given. Many treatments take a “spray-and-pray” approach when perhaps some personalized medicine would be more effective. YouScript’s software pairs a patient’s pharmacogenetic profile with published drug and gene interaction information to assess the risk for adverse drug events and possible side effects. This equips Invitae with more comprehensive genetic information for patients.
Along those same lines, Genelex is working on pharmacogenetic testing that analyzes the genes that are important for understanding variation in how people metabolize and respond differently to prescription medications.
This company was developing chatbots that provide patients with actionable information throughout the genetic testing process along with guidance for understanding test results. Their flagship bot, Gia, can guide patients regarding consent, personalized risk assessment, insurance benefits, pre/post-test education, and understanding their test results, all through an intuitive online conversation made possible by some natural language processing (NLP) technology.
A privately held company funded by Andreessen Horowitz that developed a cloud-based platform that combines clinical knowledge with advances in functional genomics, biophysics, cellular engineering, machine learning, and distributed systems to help clinicians and patients understand the results of genetic and genomic tests. This acquisition will help Invitae deliver more informative results to patients.
After learning more about Invitae’s platform, we can then start to think about how their acquisition of ArcherDX might provide synergies going forward. While short-term price movements mean very little if you’re looking for exponential returns, investors rewarded the news by pushing up NVTA stock to almost double, even though the transaction is not expected to close for several months. Let’s take a quick look at some basic financial numbers for Invitae.
Invitae’s Basic Financial Numbers
Remember what we said earlier about revenue growth? Invitae certainly has it, but they’re burning through a lot of cash to get it. In 2019, they saw revenues of nearly $217 million with losses of around $240 million.
As of their last quarterly report, Invitae had $290 million in cash and marketable securities on the balance sheet after burning through $98 million during last quarter alone.
Invitae doesn’t say much about the types of tests they’re selling, but they do give some aggregate numbers for billable tests as follows:
- 2017 – 145,000
- 2018 – 292,000
- 2019 – 469,000
For 2019, approximately 34% of the billable tests they performed were billable to institutions and patients, while the remainder were billable to insurance companies. In 2019, Medicare was their only customer accounting for more than 10% of total revenues at 25%.
Invitae’s “yearly billable tests” metric needs to grow as fast as possible while making sure that they can secure enough funding to cover their losses until economies of scale start to kick in. Genetic testing will be the foundation of personalized medicine, and Invitae has a $45 billion total addressable market they can now expand into following their tie-up with ArcherDX.
Companies like Invitae often end up burning through massive amounts of cash on a mission to go big or go broke. Burn rates don’t just turn on a dime, and they’ll need time to slowly transition the business to profitability. If funding dries up, they’ll be pushed into increasingly unfavorable funding terms as time goes on.
There’s also the regulatory risk associated with selling genetic tests that until now are not considered medical devices, something the FDA is currently mulling over. At the same time, the companies aggressive pursuit of growth – both organic and acquired – makes it a must-hold stock for any investor looking for some pure-play exposure to genetics testing.
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