There’s some exciting news coming from Invitee (NYSE: NVTA) Call of results Q421. The management team has announced its intention to shift the emphasis from growth fueled by external capital to self-financing. To achieve this, the company will need to transform its operations positive cash. However, it will not be a year’s work. It will probably take more than twelve months to get there, and there will be hiccups along the way. Nevertheless, seeing the management team commit to this objective is very encouraging.
This change in direction will also materialize through a change in financial parameters. Prior to this, the company shared ASP (average selling price) and cost per unit figures, which meant investors had little to see. Most analysts have valued the company on sales multiples, which is not a good metric when used alone. Going forward, the company will share growth figures for commercial access points (hospitals, clinics, pharmaceutical companies) and patient population. Additionally, the company will now also focus on operating cash flow metrics. Namely, the company is aiming for positive operating cash flow. At the same time, the company will also focus on non-GAAP gross margins, targeting 50% in the long term.
To achieve the necessary improvements in gross and operating margins, the company will have to shift some levers. Among them is the integration of the two-year, $3 billion acquisition spree. This is fundamental given that they have acquired so many companies.
Therefore, product enhancements associated with the modernization and automation of acquired assets should help improve productivity while maintaining revenue growth. The company is also shifting from an intense dive into mergers and acquisitions to a more opportunistic stance.
Let’s dive deep and see what the company bought.
The acquisitions of Invitee
Singular Bio is a company developing single molecule detection technology. Its technology enables high quality nucleic acid analysis for application in non-invasive prenatal screening (NIPS). The idea is to detect problems in the fetus in early pregnancy using a blood sample. Singular Bio says its platform enables high-volume screening by combining advanced optics, custom chemistry and molecular biology.
In theory, this technology should reduce testing costs. Invitae already has NIPS services, but these are still expensive. The idea is to reduce costs and pass them on to patients, thereby increasing the total addressable market. Sean George, CEO of Invitee, pointed out that this could turn the NIPS market into a 50% gross margin business.
One of the most demanding problems in genomics is understanding what a particular mutation will do. This is especially troublesome if the mutation is unknown. If we have several observations of the same phenomenon, we can generate correlations. However, this is not possible for new mutations. These are called a Variant of Unknown Meaning or SUV. Now, to offer some perspective on this problem, the occurrence of mutations is not that uncommon. New DNA, like the one parents pass on to their children, will generate hundreds of mutations.
Jungla specializes in an approach that predicts the impact of SUVs. Using machine learning, they look at the particular variant and predict its effect on the protein. Obviously, Inviate, being one of the largest genetic testing service companies, needed an SUV solution. Jungla’s cloud-based platform is a clear addition to Invitee’s current suite of genetic variant interpretation tools.
An important note about this acquisition is that it reveals how close genomics is to proteomics. Probably, in the future, these fields will overlap a lot. Therefore, companies like Quantum-Si (QSI) and its protein sequencing technology will play an important role in expanding genomic testing.
Another company tackling the problem of variant interpretation is Diploid. The company has developed Moon, an artificial intelligence software capable of sifting through huge amounts of data (whole genome sequencing data) and providing diagnosis within minutes. Diploid’s technology, at least in theory, appears to enable scale while lowering the cost of diagnosis.
The technology is particularly well suited for rare genetic diseases, which is essential for children with rare genetic diseases in neonatal and pediatric intensive care units. Going from whole genome sequencing data to diagnosis in minutes is essential to providing fast and accurate treatments.
Genelex Pharmacogenetics and YouScript
The patient population has genetic variations that affect their response to drugs. These differences mean that two people taking the same drug may have different responses to treatment. Genelex offers low-cost tests to provide information on the impact of drugs on patients.
YouScript is a clinical decision support and analytics platform. The company’s software predicts likely drug interactions, genotype-based medication and dosage recommendations, and analysis of common medications, foods, and recreational drugs.
The combination of the two companies will allow clinicians at the point of care to easily make prescribing choices. Medical personnel will have access to the drug-gene interaction and can assess the risk of unwanted side effects.
ArcherDX is a precision oncology company. It will allow Invitae to integrate germline testing, tumor profiling and liquid biopsy technologies under one roof. The result will be an offer ranging from diagnostic tests to follow-up and optimization of therapy. The company is currently developing STRATAFIDE for therapy optimization, while its personalized cancer monitoring product will enable therapy assessment and early identification of recurrences.
One Codex is a microbiome analysis platform used in academic, commercial and clinical settings. The Company’s platform has two main purposes: to analyze microbial data against a large collection of reference microbial genomes while presenting the results in a digestible format for users.
Genosity is a genomic testing company. Invitae is currently developing a personalized cancer monitoring platform. Genosity has developed technology and skills that have the potential to augment Invitee’s offering, including reducing the turnaround time for complex sequencing-based assays. Since the company is already working with Genosity on several projects, management already knows the gains it can achieve with this company.
The company is a serial acquirer, which raises red flags. However, by going through the different acquisitions, we see that they seem to form a mosaic where one is based on the other. Basically, we see multiple testing and software technologies enabling a wide range of offerings. By developing a platform that attracts network participants, the company can increase the usefulness of genetic information to them.
Integrating all these different businesses will be one of the most critical factors. The integration of different technologies will drive sales through new or improved offers. It will also help gross margins through improved efficiency. Finally, the restructuring of the current levels of Opex will be necessary.
All in all, this is a tipping point for Invitee. The company must execute on this plan or risk months of turmoil due to management reshuffling and strategic pivots. So are the company’s expectations realistic? In my opinion, this process will take more than two years. If we take a simple approach and try to model management advice, we will get the following:
The underlying assumptions are revenue growth of 40% per year, gross margins of 45% and operating expenses growing 20% in 2022 (and remaining constant thereafter). The main result of this model’s estimates is that the company will not reach zero cash burn until 2025. These assumptions are not conservative and we cannot say that there is a large margin of error. Also, there is significant additional dilution involved in these numbers. On the bright side, the genomics field is poised to grow dramatically over the next decade, and Invitae looks well positioned to catch that wave.
In my opinion, the price volatility of this security will remain very high. In subsequent years, periods when the company appears to be moving closer to the model will likely result in double-digit P/S ratios. Those periods when things seem to be going off the rails will see dramatic reversals. Volatility aside, I think the company, mid-decade, can trade at a double-digit market cap.
The company is trading more than 85% below its all-time high and close to its 2018 low. the progress of Invitee. After reviewing the acquisitions and revamped strategy, I believe that if the management team shows evidence of its ability to eliminate cash burn in a reasonable timeframe, the market will reward the stock handsomely.