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Invitae: Buy at the High?

By Maxx Chatsko - Updated Apr 20, 2019 at 5:25PM

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The genetic-testing leader is trading at multiyear highs on the heels of impressive growth in 2018, but it still isn't profitable.

What a difference a year can make. Shares of Invitae (NVTA -3.98%) plummeted to an all-time low of $4.35 in March 2018, but the business valuation is at an all-time high of $1.4 billion today. The stock price is over $19 per share now, although recent serious dilution means that level is just shy of its post-IPO price.

Shareholders have little to complain about especially following 2018, which saw triple-digit year-over-year growth in revenue and testing volumes. Guidance for 2019 indicates another year of impressive growth is ahead. Meanwhile, the business remains unprofitable, but it has begun improving operating losses in recent quarters.

Should investors look beyond an expensive valuation and consider Invitae a buy at the high?

An educational model of DNA

Image source: Getty Images.

By the numbers

Invitae outlined a path to profitable operations years ago: Grow testing volumes, reduce per unit costs (thanks in part to scaling), and expand the testing services offered. It would be simple, but not easy. The business sure has made it look like a breeze, though.

In 2018, the genetic testing platform grew testing volumes 102% and revenue 117% compared to the year before. The fact that revenue growth outpaced testing volumes means Invitae sold a larger volume of higher-priced tests last year than it did in 2017. That's a promising sign, as is the fact that full-year 2018 revenue of $147.7 million exceeded the high end of guidance.

Cost of goods sold per sample dropped precipitously, too, averaging just $243 in the final quarter of 2018, compared to $321 per sample in the year-ago period. That helped drive full-year 2018 gross profit to an all-time high of $67.6 million, up 247% year over year.

Metric

2018

2017

Change (YoY)

Test volume

303,000

150,000

102%

Revenue

$147.7 million

$68.2 million

116%

Gross profit

$67.6 million

$18.1 million

247%

Operating expenses*

$270.2 million

$189.5 million

43%

Operating income

($122.6 million)

($121.3 million)

N/A

Operating cash flow

($92.2 million)

($97.9 million)

N/A

Data source: Invitae press release. Note: includes cost of revenue. YoY = year over year.

As the table above makes clear, scaling the genetic testing platform in a highly competitive industry hasn't come cheap. But investors can be encouraged by two trends in particular.

First, Invitae delivered year-over-year improvement in operating income in both of the last two quarters, demonstrating the business is on the path to profitable operations, albeit there's a long road ahead. Second, operating cash outflow improved in each quarterly period in 2018, suggesting it could achieve positive operating cash flow as soon as late 2019.

Peer comparison

Despite all the progress, Invitae is still the least mature business among its publicly traded peers, including Genomic Health (GHDX) and Myriad Genetics (MYGN -0.90%). Here's how it compares to its closest competitors:

Metric

Invitae

Genomic Health

Myriad Genetics

Market cap

$1.43 billion

$2.94 billion

$2.37 billion

Forward P/E

N/A

48.8

16.8

Price to sales

9.7

7.8

2.9

Operating income, three months ending 12/31/2018

($25.9 million)

$9.4 million

$6.1 million

Operating margin, three months ending 12/31/2018

(57.1%)

9%

2.4%

Data sources: Yahoo! Finance, company press releases. P/E = price to earnings.

It will take time for Invitae to scale its business to profitability, but management offered an encouraging glimpse ahead: Full-year 2019 guidance calls for testing volumes of at least 500,000 and revenue of at least $220 million, representing year-over-year growth of 65% and 49%, respectively. That reflects a change in product mix from new product launches, as well as recent coverage decisions by Medicaid, which will only reimburse costs for germline cancer testing for late-stage patients. The industry is hopeful that regulators will change their stance this year.

Meanwhile, on the fourth-quarter 2018 earnings conference call, CEO Sean George said the company intends to reach more than 1 million people in the year 2020. That suggests Invitae is confident that it can continue to scale at an impressive clip, perhaps owing to its new patient-initiated testing channel, set to launch in the second quarter of 2019. That's when individuals will be able to order specific clinical-quality tests directly from the company -- without dealing with barriers such as hesitant clinicians using outdated testing guidelines, or insurance hassles.

Direct-to-consumer product offerings could also expose the company to increased regulatory scrutiny down the road, though, something that might be able to be mitigated by implementing the model of pairing testing (raw data) with genetic counselors (interpretation of the data).

A ladder heading toward the sky

Image source: Getty Images.

Invitae's growth is unprecedented, but it's expensive

On the one hand, Invitae's growth shows no signs of stopping anytime soon. Despite some hiccups here and there, the fledgling genetic-testing industry continues to gain traction in doctors' offices across the country, and gain new reimbursement codes from the nation's largest insurance companies. If a rising tide lifts all stocks in the industry -- as has been the case recently -- then Invitae's $1.4 billion market cap could be attractive on an ultra-long-term basis.

On the other hand there's no denying that shares of Invitae are a little expensive right now. The recent run-up in shares could be short-lived, and the stock could lose some steam in the coming quarters, providing a better entry point for investors looking to start or add to a position.

That said, considering that the business recently reached an important inflection point and is slowly progressing toward profitable operations, investors with a long-term mindset might not hesitate to buy shares now. But given the historical volatility of genetic-testing stocks, it's probably best to spread out purchases over the course of the year if you do plan to buy into the potential.

Check out the latest earnings call transcripts for companies we cover.    

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Stocks Mentioned

Invitae Stock Quote
Invitae
NVTA
$2.77 (-3.98%) $0.12
Myriad Genetics, Inc. Stock Quote
Myriad Genetics, Inc.
MYGN
$18.72 (-0.90%) $0.17
Genomic Health, Inc. Stock Quote
Genomic Health, Inc.
GHDX

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