The genetic testing space has been a source of incredible growth in recent years. Invitae (NVTA 650.00%) didn't depart from that trajectory in the first quarter of 2019. While year-over-year revenue growth of 47% was much lower than the triple-digit increases it enjoyed in 2018, that's to be expected as the numbers grow larger.

More importantly, Invitae continued to deliver on multiple parts of its long-term strategy. Direct sales to patients increased. During the quarter, the company decreased its cost of goods sold per test and signed eight new biopharma partnerships, bringing the total to 40. All the progress has made management confident enough to say the business is on track to exceed full-year 2019 revenue guidance, which tops out at $220 million, and then deliver more than $500 million in revenue in 2020.

Achieving this will require a surge in investments and increases in operating expenses and cash burn, representing a subtle but important change to the business model investors are used to. Can Invitae pull it off?

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Image source: Getty Images.

By the numbers

Invitae disappointed Wall Street with its results this quarter. The average of eight analyst estimates for Q1 revenue was $47 million, according to Yahoo! Finance, but the business only reported revenue of $40.5 million. On the earnings conference call, CFO Shelly Guyer cited several reasons for the lower-than-expected sales figure including fewer one-time customers, lower Medicare rates, and a lag between the number of tests received, and the number of billable tests.

Guyer said direct sales to patients have a lower average price compared to tests ordered through doctors. With direct sales at roughly 15% of billable tests, up from 10% at the end of 2017, the customer mix has begun to take a toll on revenue growth. Considering that direct-to-patient sales are the driving force behind the company's growth strategy, that's something analysts and investors will need to take into account.

Invitae continues to drive down the cost of goods sold, which can partially offset revenue decreases from lower average selling prices.


Q1 2019

Q1 2018

Change (YOY)

Total revenue

$40.5 million

$27.7 million


Cost per sample




Gross profit

$19.3 million

$9.6 million


Gross margin



37% (relative)

Operating expenses

$55.5 million

$46.1 million


Operating income

($36.2 million)

($36.5 million)


Net loss

($37.7 million)

($36.1 million)


Data source: Press release. YOY = year over year.

Investors will be pleased to see the sharp jump in gross profit, but the entire year-over-year improvement was swallowed up by growth in operating expenses. Invitae is spending heavily to increase sales, marketing, and research and development efforts. While that drives revenue growth, it also drives operating losses and burns considerable cash. The company told investors to expect both to increase in the coming quarters.

Management originally said it would pare back cash burn in the second half of 2019, but reversed course after tweaking its near-term strategy. It started when Invitae raised $197 million in gross proceeds in March, which allowed it to exit this quarter with a cash position of $287 million. CEO Sean George explained the rationale and new growth strategy:

So why the raise? Our main rationale for our March raise was to fund the further acceleration of our investments in some very specific areas as we transform the genetics industry. ... Rather than drive toward near-term profitability, we have elected to make the investments that will put even more distance between Invitae and our competitors and allow us to reach our aspirational 2020 goals and our investors agree.

Where are we focused? We have laid three main areas: the expansion of our oncology offering; more aggressive commercialization of our direct channel, which we'll launch this quarter; and further investment in our engineering capabilities to reduce cost, add new content, and enhance quality.

Management decided to keep its foot on the gas for about 18 months longer than previously expected, now expecting cash burn in 2019 to grow up to 50% year over year. George said if it's successful, then the business can deliver over $500 million in revenue in 2020 and achieve profitability "with the capital we have on hand and our access to additional debt should we elect to do so."

Going all-in for a bigger growth opportunity

The decision to plow significant capital into further growth and put off profitable operations is a bold one. Invitae's management must be pretty confident in the strategy, however. After all, the current outlook calls for a more than doubling of revenue between 2019 and 2020. Much of that growth is expected to be driven by the new consumer market launching this year, which would be the first of its kind. While there's ample uncertainty, investors can't discount Invitae's strong track record of execution.