Genetic-testing leader Invitae (NVTA +0.00%) has promised to usher in a new age of healthcare, one influenced by every individual's unique genetic profile. To do so, it's ditching the industry's old business model that relied on selling low volumes of really expensive tests in favor of one that relies on selling high volumes of affordable tests. Accessibility over propriety.
The strategy appears to be working. Year-over-year revenue growth of 189% in the third quarter of 2017 certainly shows the business is on the right trajectory.
That means investors can turn their attention to the next unanswered question: When will the high-growth strategy result in positive numbers on the bottom line? Will Invitae ever turn a profit?
Image source: Getty Images.
By the numbers
Invitae turned in another solid performance during the third quarter of 2017. The business doesn't appear to be slowing down anytime soon, especially not when considering potential market sizes and recent acquisitions. The performance through the first nine months of the year shows just how quickly the business model is gaining traction:
|
Metric |
First Nine Months of 2017 |
First Nine Months of 2016 |
Difference |
|---|---|---|---|
|
Total revenue |
$42.8 million |
$15.8 million |
171% |
|
Gross profit |
$9.7 million |
($3.9 million) |
$13.6 million |
|
Net income |
($82.9 million) |
($75.4 million) |
($7.5 million) |
|
EPS |
($1.86) |
($2.35) |
N/A |
|
Testing volume |
96,500 |
37,500 |
157% |
Data source: Invitae.
It's important to note that although EPS improved between the comparison periods, it was only made possible by stock dilution. At the end of September 2017, Invitae had 44.6 million shares outstanding, compared with 32.1 million one year earlier. That dilution was necessary to fund growth, but it did take a bite out of shareholder returns.
The best way to end dilution: reach profitable operations. Or breakeven operations, at the very least. Management says it could achieve that milestone by the end of 2018.
Underpinning that goal is the recent acquisition of Good Start Genetics, which offers genetic testing services for prenatal applications and IVF clinics. It began operating within Invitae's network in the last few days of the third quarter of 2017. The pending acquisition of CombiMatrix, which offers genetic testing for prenatal, neonatal, miscarriage analysis, and pediatric applications, will also prove important in 2018. The acquisition is expected to close this month.
Management recently illustrated the potential for these acquisitions to contribute in a meaningful way. The following numbers exclude any potential cost savings from operational synergies once Good Start Genetics and CombiMatrix are fully integrated into Invitae's universe.
|
Metric |
2016 Results of Invitae, Actual |
2016 Results of Combined Companies, Hypothetical |
2017 Results of Combined Companies, Projected |
|---|---|---|---|
|
Total revenue |
$25 million |
$60.4 million |
$90 million to $105 million |
|
Gross profit |
($2.8 million) |
$14 million |
$25 million to $35 million |
|
Operating income |
($100.2 million) |
($119.3 million) |
($100 million) to ($120 million) |
|
Net income |
($100.3 million) |
($122.5 million) |
($115 million) to ($125 million) |
Data source: Invitae.
As investors can see, the acquisitions will significantly improve gross profit at the expense of expanding net loss compared to 2016. That's mostly due to adding the sales and marketing expenses of three separate companies. While this area will see the largest cost savings as an integrated company, that's not to say it won't increase from historical figures. Invitae is investing heavily in its sales efforts. Selling and marketing expenses increased 80% in the first nine months of 2017 compared to the year-ago period -- and that doesn't include either acquisition.
By how much the line item increases is impossible to answer, although investors should expect this to be the fastest-growing expense down the road and the category central to Invitae's prospects of reaching profitability.
Will the company ever turn a profit? Well, total operating expenses are on pace to reach $175 million this year. If the business achieves gross margin of 35% to 45% -- the range management thinks is possible -- then it would need $390 million to $500 million in total revenue to report neutral EPS.
Given that operating expenses will continue to grow with the business, this paints a relatively gloomy picture of Invitae's future. However, it's important to remember that the company is growing revenue at triple-digit clips every year. Doubling revenue to over $200 million in 2018 is entirely possible. Then again, it's also far from what's required to report a profit.
What does it mean for investors?
The problem with projecting operational performance for hyper-growth companies such as Invitae is that small business changes result in massive deviations in financial performance. The added business from the Good Start Genetics and CombiMatrix acquisitions serves as a great example.
Similarly, the genetic-testing leader has a wild card that isn't on most investors' radars yet: genomic subscription revenue from biopharma companies. Invitae generated $2.2 million in revenue from these channels in the first nine months of the year, up from just $65,000 in 2016. It could be on the cusp of becoming a major business segment in addition to genetic tests destined for the clinic, but investors have no way of knowing how this will play out yet.
For now, investors will have to treat Invitae as a growth story with incredible potential that, one day, they hope will be profitable. It just doesn't look poised to reach that milestone anytime soon.
