Biotech

Bhavneesh Sharma

Top 20 Ranking (28.2% Avg Return) --TipRanks

Invitae: The 'Amazon of Genetics' and a $22 billion market opportunity

Invitae (NYSE: NVTA) is a leading genetics company which is aiming to bring foster, affordable and high-quality genetic testing to millions of people for various health conditions. The company aims to be the Amazon of Genetics by allowing affordable genetic testing for people.

The company started its operations in 2010 and the first commercial assay was done in 2013. It is based on San Francisco, California.

Strengths:

The company has entered a period of hyper growth. The company announced fourth-quarter earnings earlier this week. The annual revenue increased by 117%. The test volume increased by 107% annually. The management guidance for 2019 is more than 500,000 test samples and $220 million in revenue. The cost of goods also decreased by 24% annually. The gross profit increased by 274% annually and the gross margin was 46% in 2018.

 

(Annual growth in revenue and test volume)

The company is well - funded for the next 12 months and has approximately $132 million in cash reserves at the end of 2018. Operating cash burn was $92.2 million for 2018. The long-term debt is $74.47 million.

The company has deferred tax assets of approximately $132 million on the balance sheet which could be used to defray future taxes and increase the net earnings.

The company’s management is very strong and experienced, for example the CEO Randall Scott co-founded Genomic Health and served as a CEO of a subsidiary and its director. He also co-founded the well known oncology company Incyte (INCY).

The company achieved several milestones in 2018. These are listed below:

·         Initiated a new patient-initiated testing channel in Q2, 2019, allowing consumers to initiate a comprehensive genetic test themselves.

·         Added noninvasive prenatal screening allowing women to order affordable genetic testing in early pregnancy.

·         Signed 11 new partnerships with biopharmaceutical companies, health systems and cancer centers since the beginning of Q4 2018.

The company is addressing genetic testing in multiple areas like cancer, cardiology, neurology, pediatrics, metabolic conditions, rare diseases, prenatal and perinatal genetic testing.

 

The company is expanding through acquisitions for example Altavoice, Good Start Genetics, Combimatrix etc.

The company is increasing the trend of reimbursement for genetic billable tests. The company now has contracts with payers covering 264 million lives including Medicare.

Invitae’s unique selling proposition:

Invitee is a video on its website which describes how it is different from competitors. The company differentiates itself by offering high quality and accuracy of genetic tests. Another unique feature is that the whole process of genetic testing is almost fully automated. The company has invested in artificial intelligence and robotics which use a total hands-free technique for processing and testing of blood samples and the clinical report generation and optimization. Few years back, genetic testing used to be very expensive and many patients could not afford it. In addition, many healthcare insurance companies did not reimburse it. Now, Invitae has made genetic testing affordable for patients by lowering the costs and increasing reimbursement by healthcare insurers. The company also has a user-friendly website where prescribing clinicians can easily order a panel of tests by just clicking on a suspected disease’s name.

Weaknesses:

The company still has negative EPS due to increase investment in R&D and capital investments. Although the annual revenue is almost doubled annually, the market cap looks a bit expensive at $1.5 billion compared to $148 million in revenue for 2018.

The company’s shares had a big run up since December and have increased by 2.5 times. Shares could be setting up for a pullback.

Shares seem appropriately valued at present after the above big run up in just two months.

Opportunities

Global genetic testing market is expected to be approximately $22 billion by 2024 according to the research firm Global Market Insights. Among this, digital genomic sequencing market was approximately $20 billion in size in 2015 and is expected to grow at 9.5% annual growth rate till 2024. Although the largest market for genetic testing is the US, there is increased opportunity for growth in India and China due to increase in disposable income, rising affordability and increase investment in the health care infrastructure.

 

Many prominent researchers are recommending that all the patients with newly diagnosed breast cancer should be offered genetic testing for mutations like BRCA. This might expand the revenue opportunity for the company.

Many researchers are also recommending that the guidelines for prostate cancer should be expanded to include genetic testing for more mutations. This is another opportunity for the company to expand its market since one in six prostate cancers are hereditary.

The company has partnered with Biomarin (BMRN) to identify children with hereditary epilepsy due to certain genetic mutations. This will also expand the target in a similar market for the company.

The company has partnerships with biotechnology companies like Alnylam (ALNY), Ariad, Astra Zeneca (AZN), Biomarin (BMRN), Blueprint Corp. (BPMC), Jazz Pharma (JAZZ), and Merck (MRK) to support clinical trial recruitment and other research related initiatives. It also has existing partnerships with healthcare systems like Geisinger health system, the Mayo Clinic, Memorial Sloan-Kettering Medical Center, Stanford Healthcare and North Shore University Health System.

Blue sky scenario

Invitee is building a huge database of genetic information from patients. This genetic database could be used to develop newer treatments targeting different genetic diseases in partnership with biotechnology companies and could be shared with governmental agencies, researchers and payers to improve healthcare outcomes.

Threats:

Genetic testing is becoming an overcrowded space. The competitors for invitee are Ambry genetics, Athena diagnostics which is a subsidiary of Quest diagnostics, Baylor Genetics, Blueprint Genetics, Centogene, Color Genomics, Laboratory Corporation of America, Myriad Genetics as well as academic labs.

Many competitors have longer operating histories, larger customer bases, greater broader recognition and market penetration, substantially greater financial, technological and research in developmental resources, selling and market capabilities and more experience dealing with third-party payers.

FDA does not regulate the laboratory-developed tests, LDTs at present but certain legislative proposals addressing FDA’s oversight of LDTs have been introduced and it is possible that in future, LDTss may require to be approved by FDA like new drugs or medical devices.

Genetic testing is an area with low barriers of entry since genetic tests are not patent-able. Companies can only differentiate by factors like low cost, high accuracy, lower turnaround time and increase to reimbursement.

Illumina (ILMN) is the only company which supplies genomic sequencers and associated reagents to Invitae. Illumina itself is a big genetic testing company and in the future, if it breaks ties with Invitae, this could be hurt Invitae’s revenue.

My strategy for trading Invitae shares

I consider the shares appropriately valued after the recent run-up. I have added the company’s stock to my watch list for long-term biotech investments. I am waiting for a pullback for the shares to approximately $17-$18 level which is a long-term support. In my opinion, shares can pull back to this level if there is also a pullback in the overall market, which is also overbought after the big run up since the December close.

 

 

 

Risks in this investment:

I have explained many risks under the weaknesses and threats sections above. Invitae stock appears expensive and could see a pullback. The company has negative EPS despite rapidly growing revenue. Genetic testing is a crowded space though Invitae has several differentiating factors. Investing in emerging healthcare companies is risky and it is possible to lose the entire capital invested. Investments in this space may not be suitable for all investors.

Disclaimer:

This article represents my own opinion and is not a substitute for professional investment advice. It does not represent a solicitation to buy or sell any security. Investors should do their own research and consult their financial adviser before making any investment. Investing in equities, especially biotech stocks has the risk of significant losses and may not be suitable for all investors. While the sources of information and data in this article have been checked, their accuracy cannot be completely guaranteed.

I am/we are long BMRN, ALNY.

 

Bhavneesh Sharma covers biotech as one of the original contributing analysts at FATRADER. A market expert with a medical degree and MBA, he is ranked among the top 15 financial bloggers and top 100 overall financial experts (including Wall Street analysts) on TipRanks.
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