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Here's Why Invitae Lost 15.2% in October

By Maxx Chatsko – Nov 7, 2018 at 8:26PM

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The fast-growing leader in genetic testing soared past a $1 billion market cap in September. Investors reconsidered prior to the release of third-quarter 2018 earnings.

What happened

Shares of Invitae (NVTA -3.85%) fell over 15% last month, according to data provided by S&P Global Market Intelligence. The reason for the fall appears to be, simply, that the stock had roared back to life with greater than 80% gains since the beginning of August, and the broad stock market sell-off in October was a good time to reconsider the company's $1 billion market cap.

Wavering confidence is not entirely surprising at this point in the company's life. While Invitae has grown revenue at a triple-digit clip in recent quarters, the company's operating losses have grown as well. Therefore, investors figured it would be better to wait and see if the business would continue to make progress on its stated goal to reduce operating cash burn by 50% by the end of 2018.

Turns out, the wait is now over, as the company reported third-quarter 2018 earnings in early November.

A genetic test and a buccal swab.

Image source: Getty Images.

So what

Invitae delivered a triple-digit increase in revenue during the third quarter of 2018 compared to the year-ago period. In fact, sales growth actually outpaced test volume growth 106% to 95%, respectively. That shows that the business is selling a greater volume of higher-priced tests within its product mix, which raised the average selling price reported. That went a long way to boosting profits -- and higher average selling prices went even further when combined with a year-over-year reduction of 21% in cost of goods sold on a per-test basis. The result: a cool $16.9 million in gross profit for the most recent quarter. 

So, what about operating income and cash burn? Well, Invitae reported another quarter with a significant operating loss, which was expected. But the business reached an important milestone: Operating loss in the most recent period was actually less than that reported in the year-ago period for the first time in the company's history. In the third quarter of 2018, the genetic testing leader posted an operating loss of $30.1 million, compared to $30.9 million in the third quarter of last year. It's not much of an improvement, but investors are hoping that it's the start of a positive trend.

On a related note, Invitae reported a sharp improvement in cash used in operating activities. The business burned $32.9 million in cash in the first quarter of 2018, then $25.7 million in the second quarter, and finally just $18.1 million in the third quarter. The most recent period's cash burn is less than half of the total from the year-ago period. That means the business should need much less outside financing in 2019 than it did this year. 

Now what

Invitae's growing operational strength is now translating to consistently strong gross profit each quarter. While operating expenses have barely budged in the last two quarters of 2018, allowing an important milestone to be reached for improving year-over-year operating income totals, investors shouldn't be shocked if the company decides to pour money into another growth opportunity -- thus increasing operating losses going forward once again. Either way, the company at least appears to have the option to begin clawing its way to break-even operations, although that journey may take four or more quarters to achieve.

Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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