Here's Why Genetic Testing Stocks Rose as Much as 42.9% in February

What happened

February was a great month for genetic testing stocks. Shares of Invitae (NVTA 25.93%) paced the pack with a monthly gain of 42.9%, according to data provided by S&P Global Market Intelligence. That was followed by NeoGenomics (NEO 0.66%) and Myriad Genetics (MYGN -0.70%), which rose 17.9% and 10.1%, respectively.

Each stock soared on the heels of impressive quarterly operating results. The industry has long been a source of eye-popping growth, but is now harboring multiple profitable businesses, too. The greatly improved financial health, coupled with a quickly expanding market for genetic testing services, has investors excited about the road ahead.

Image source: Getty Images.

So what

There are differences among the three companies. Invitae provides tests and genetic counseling for a wide range of health conditions and stages of life, from prenatal to adulthood. It generates healthy gross margin, but incurs a relatively high level of selling and marketing expenses.

NeoGenomics, focused specifically on cancer-based testing services, is the opposite. It primarily sells tests directly to clinics and pharmaceutical companies, which requires more stringent processing of the tests. That results in relatively low gross margin, but only moderate sales and marketing expense.

Myriad Genetics is somewhere in between. Its legacy business of proprietary cancer tests looks similar to NeoGenomics, but it's pouring money into newer products across a range of diseases and life stages, like Invitae.

To normalize the differences across business models and product mix in the genetic testing industry, individual investors can simply focus on two metrics: operating income and operating margin, which show how much revenue is trickling down the income statement as profit after all expenses. Here's how the three companies compare for the three-month period ending Dec. 31, 2018, which was Q4 2018 for NeoGenomics and Invitae, and fiscal Q2 2019 for Myriad Genetics.   

Data source: Company press releases. YOY = year-over-year.

While Invitae isn't profitable, it began to shrink year-over-year operating losses in the third quarter of 2018. That suggests it's finally on the path to profits, assuming it can continue to successfully scale. Management remains confident, as evidenced by full-year 2019 guidance calling for revenue of at least $220 million, which would mark year-over-year growth of around 49%.

NeoGenomics has been delivering choppy operating margin, but the business is profitable nonetheless. A huge acquisition puts the company on track to generate revenue in the neighborhood of $387 million in 2019, which would mark a 40% increase from last year.

And Myriad Genetics is still frustrating investors with sky-high operating expenses, but double-digit revenue growth instilled confidence that the business can outgrow its low profit margin over time. It expects full-year revenue in fiscal 2019 to grow 11% to approximately $860 million.

Check out the latest earnings call transcript for NeoGenomics, Myriad Genetics, and other companies we cover.

Now what

Investors with long-term positions in the genetic testing industry have generally done pretty well over the past three years. Shares of Invitae, NeoGenomics, and Genomic Health have increased by at least 155% in that span as each business has successfully scaled its platform. That has come at the expense of former industry leader Myriad Genetics, which has seen its shares fall 21% in the last 36 months. For better or worse, the increased competition is here to stay, but investors can likely look forward to plenty more growth in the years ahead.