Summary

Founder and Executive Chairman ran Genomic Health from a start-up into a public company worth $1 billion.

Rapidly expanding its services and collected 158% more samples than last year by shifting its model to selling high volumes of affordable tests.

Currently can detect over 1,000 genes linked to multiple diseases including cancer.

Operational metrics are trending in the right direction as the company continues on track towards its vision.

Introduction

We all know about the current role of genetics in medicine as well as the vast potential that exists in the future of medicine utilizing genetics to increase efficacy and efficiency. With many irons in the proverbial fire to choose from I am going with Invitae (NVTA) as I believe it realistically has the potential to generate some enormous returns for investors willing to stomach the accompanying risk. Per the company’s website: “Invitae is one of the fastest growing genetic information companies in the United States whose mission is to bring comprehensive genetic information into mainstream medical practice to improve the quality of healthcare for billions of people.” The company’s changing business model of shifting from expensive to affordable tests should pay off in the long term – even though in the short term it has not helped the company’s bottom line and there has been significant dilution to shareholders due to capital needs.

The Short Term Pains

Net revenue dilution to shareholders– The company has a sinking bottom line and recorded a net loss of $82.9 million for the three quarters ending 2017 which had widened compared to the same time period of $75.4 million in 2016. While EPS has improved recently, it is important to note that is due to the issuance of more shares. Since the company has yet to turn a profit the dilution has been necessary for funding growth with the company having almost 48 million diluted shares outstanding at the end of September, compared to the 36 million diluted shares it had at the start of 2017.

The Solution to End Dilution

The quickest way for dilution to end is for NVTA to become profitable, and it hopes to be on the path to achieving that as soon as the end of this year by having acquired Good Start Genetics and most recently, CombiMatrix. Both acquisitions were purposeful as the CombiMatrix completed the Invitae’s entrance into the prenatal and perinatal markets and is a well-fitted complement to its acquisition of Good Start Genetics. These two acquisitions allow the company to ability to offer tests applicable to every stage of life

Signs of Progress

After the most recent earnings call in early November, shares shot up nearly 14% on several bits of good news the company shared with investors showing signs of progress. Revenues rose 189%, gross profits increased $5.84 million, volume was up 158%, and COGS per sample was down 26.7% for the quarter compared to the same quarter of the prior year. All of these metrics follow longer term trends that have existed at the company prior and continue to strengthen.

The Year Ahead

For 2018 I anticipate the momentum to continue with having completed key acquisitions and beginning to see operating efficiencies as it gains economies of scale and is the company is estimating total operating expenses to land around $175 million this year. While management says it’s possible to break even this year, I wouldn’t hold my breath. Doing some simple math and assuming that a gross margin of 50%, $350 million in revenue would be required for a breakeven EPS. And while sales and volumes are growing rapidly, I do not see sales growing enough in 2018 to reach a breakeven point – which is fine with me as Invitae is in its early stages of growth still. Also the company should continue to grow revenues from its genome network subscriptions and it provided Invitae $2.2 million for the first three months of 2017 – which constitutes a massive increase from the paltry $65K for all of 2016. Recurring revenues such as this are one of my favorites as they tend to have high margins and these require little effort on the company’s part.

Conclusion

For investors with a long term investing mindset as myself, APMs are interested in genomics and I believe they are likely to be incorporated into Medicare at some point in the future. Founder and Chairman Randall Scott took Genomic Health from a startup to a $1 billion public company. He has the knowledge and desire to drive Invitae to push the company’s diagnostic tests to the masses for routine medical care and has started to do so through key acquisitions and shifting the business model to high-volume, low-cost tests.