Invitae: Underdog turned core player — On the future of genomic testing
Part 1 — Bull case on Invitae and how genomic testing could become a winner-take-most industry
Hi friends 👋
Welcome to Health & Wealth — your weekly source of the latest health research and biotech trends. As a genetic counselor, my goal here is to provide perspectives beyond your typical financial analysis on Invitae — which I find a bit surface-level and/or short-sighted. The full piece is too long for email, so I will release part 2, the high-level bear case, next week. Happy reading!
Invitae hopes to become the one-stop shop for genetic insights for everyone at all stages of life. They have already transformed the industry by making genetic information cheaper, more accessible, and actionable.
Despite consistent execution at scale, Invitae’s stock price has dropped over 80% from its peak last year, causing many to question their long-term prospects and road to profitability.
Bulls believe in a winner-take-most outcome for Invitae as they expand the market by aggressively building a full-spectrum genome management platform.
Bears doubt Invitae’s ability to achieve market dominance against competitors and question how their collected data will become a revenue-generating asset.
When it comes to using genetics to help answer questions about our health, accurately reading our DNA is just the beginning. A lot more legwork is needed to take that genetic data and translate it into something that can be useful and acted upon.
Invitae (NVTA) aims to do just that by bringing “comprehensive genetic information to mainstream medicine to improve healthcare for billions.”
More concretely, Invitae delivers genetic insights from cradle to grave — from understanding your genetic risks and preventing disease to diagnosing disease early and selecting the best treatments for you based on your genetics. This is what they refer to as “genome management.”
Those in the genetics field who were around long before genomics stocks became trendy recognize Invitae's herculean transformation from underdog to a core player in the genetic testing space.
In just a few short years, Invitae and a few other startups like Counsyl turned the tides — away from >$2,000 tests looking at only one or two genes at a time reserved for select patients and towards 10-fold more affordable, comprehensive tests for everyone. Along the way, this cohort of young labs challenged incumbents and got the entire field to think differently.
Low-cost, high-volume clinical genetic testing was once laughed at and thought impossible but is now the industry standard.
As a genetic counselor, I have tremendous respect for what Invitae has already accomplished. I've worked in hospital institutions like UCSF Cancer Center in which the overwhelming majority of tests ordered were through Invitae, outstripping competing labs by a landslide. They've driven down barriers to accessing genetic information on many fronts — cost, awareness and education, genetic counseling, clinical guidelines, insurance reimbursement, etc.
But the company's long-term prospects are far from certain. Today, Invitae willingly loses money and dilutes their shares in an aggressive pursuit of a "winner takes most" genome management future. However, at some point, it needs to deliver profitability. Market consolidation with Invitae as the clear winner is not guaranteed.
The stock price has also taken a beating of late, dropping over 80% from its peak last year:
So where does Invitae go from here? Let's start by understanding both sides of the coin:
The bull case for Invitae
The bear case against Invitae
The big picture
The bull case for Invitae
The bull case is built on the conviction that delivering genomic information is a winner-take-most industry. Bulls believe the market will eventually consolidate, and when that happens — Invitae is well-positioned to gain the lion's share of the future market.
Many believe that similar to new tech markets, the genomics industry will transition from the “develop” phase to the “dominate” phase over the next 5-10 years:
Invitae’s CEO Sean George also thinks this is the case:
“10 years ago, there were 300+ providers of genetic tests. The periphery is gone today. There’s still a large number of names, but it’s going to tighten up real quick. Consolidation is going to be the name of the game here for the next decade. We’ve now transacted 16 acquisitions. That’s unusual for the historical precedent for our space, but going forward, that’s going to be the norm.”
Let’s dive into reasons why this winner-take-most outcome might be the case. To become a leader in genome management, Invitae bulls believe three things hold true:
It’s not about how well a company can do one test or a handful, but becoming the go-to trusted scientific partner whenever people have a question about their health that genetics can help answer.
Genetics is still not well characterized and is underutilized in medicine. A platform-based approach is needed to grow the pie, rather than bickering over how to slice the existing pie.
Genomic innovation cycles turn over quickly. A leader needs to invest heavily in lowering input costs and expanding their growth trajectory, which comes at a cost in the short term.
Expanding on each a bit:
1. It’s not about how well a company can do one test or handful, but becoming the go-to trusted scientific partner whenever people have a question about their health that genetics can help answer.
The genetic testing industry remains highly fragmented and siloed. There are companies just focused on one thing — somatic tumor or prenatal genetic testing, etc. And they will say, “we are the best at doing X.”
Historically, they would be right. Hyperspecialization does lead to niche expertise. And some may argue that’s necessary to develop new commercial products because genetics is so complex.
But Invitae is taking a fundamentally different approach. For them, it’s not about a single test, piece of information, therapy, or diagnostic. It’s about delivering genomic information to people at the right place, at the right time.
To do that, Invitae offers a breadth of tests to answer patients’ questions in all stages of life.
Eventually, their hope is to be the one-stop shop for providers and patients in the realm of genome management. Whether you’re an expecting parent, proactive health nut, or recently diagnosed cancer patient, Invitae aims to meet you where you’re at. They’ve also reduced friction for providers by making ordering tests and managing results much easier.
Oncology (still mostly germline testing) remains their core market, followed by women’s health, rare diseases, and to a lesser extent, data & services (we’ll get to that later):
Content areas where they have a small foothold but intend to grow and expand include fertility, cardiology, neurodegenerative disease, pharmacogenomics.
Fundamentally, Invitae believes in the value of distilling information for the end-customer in a way that actually answers people’s questions:
“If you’re worried about breast cancer, when you go online to order our test, it answers the question: ‘do you have a genetic risk for breast cancer or not?’ And it answers it full stop in a way that’s the best quality and use of technology you can get.
If you expose all the complexity... you’ve already lost the customer and haven’t actually delivered the actual product.”
2. Genetics is still not well characterized and is underutilized in medicine. A platform-based approach is needed to grow the pie, rather than bickering over how to slice the existing pie.
Despite all efforts, we’ve only uncovered the tip of the genomic iceberg. It’s both humbling and daunting to think about:
Given we only know a fraction of what the entire genome could actually mean for people’s health, Invitae believes that to enable the full impact of our genomes, they need to build a network of patients’ health data to accelerate the flywheel of providing useful information.
In practice, this means bringing together automation, software, a database, and expertise to properly read, analyze, store, and deliver genomic information in a comprehensive platform.
This is where things start to get complicated and murky.
Many investors either start to handwave by saying “more data = more value! Duh 🙄 ” or conclude that it’s all bogus. The truth lies somewhere in between.
In their effort to build an ecosystem, Invitae has become a giant octopus with many tentacles. I will break down each of these tentacles in a later post, but let’s first ask the question, “is this capital-intensive, platform-based approach even worth it?”
Invitae seemed to ask themselves this very question in the early days. They even considered being a B2B company providing only automation tools to existing labs like LabCorp and Myriad:
“When it became clear this was going to be much more of a foot race, one major pivot was deciding we’re going to go all the way to the clinician and patient — build a brand, build the whole thing soup to nuts, which of course is going to take 10x more capital than the B2B play. It’s also what increased the complexity and size of the company.”
[Stanford Seminar 2015: Sean George]
There is some historical precedence that Invitae’s focus on growing the size of the addressable market through a multi-pronged approach has paid off. For instance, hereditary cancer has expanded dramatically in recent years. Invitae played a keystone role in making this happen. And they intend to continue pushing the envelope, rather than just offering tests that support medicine as it was.
However, the unfortunate reality is that these efforts don’t show up and turn into an addressable, highly reimbursable market right away. They show that their TAM is Huge with a capital H, but getting there will take a long, long time.
Their philosophy all makes sense for the industry to shift as a whole, but I’m not yet convinced Invitae’s platform alone makes them immutably defensible. Hard to replicate, certainly, but not impossible to displace.
3. Genomic innovation cycles turn over quickly. A leader needs to invest heavily in lowering input costs and expanding their growth trajectory, which comes at a cost in the short term.
In the last decade alone, the genomic space has seen seismic shifts.
Having challenged (and to some degree beat) previous incumbents, Invitae is not ignorant to the possibility they too could be threatened by another company. They recognize innovation cycles happen faster than we think, and that the next change is always just right around the corner.
There seems to be a healthy level of paranoia embedded in Invitae’s culture. When I visited their HQ in San Francisco in 2019, I saw they had a plaque saying “Sense of Urgency” underneath all of their clocks. They have 2000+ employees, but Invitae is in no way complacent.
As such, Invitae invests aggressively in their own innovation. Nearly half of their operating expense is towards R&D and acquisition costs. Bulls are betting that high R&D spend translates into new revenue streams, operational improvements, and assets that can lead to Invitae’s market dominance.
Recent acquisitions include ArcherDx (acquired for $1.4B), Ciitizen ($325M), and Genosity ($200M). Investment growth has been a divisive point for investors. In a later post, I will highlight some key acquisitions and how these chess pieces might fit into the broader picture. Critical to study where the money goes if you want to evaluate Invitae’s potential.
Bulls also like to point out that in the recent biotech bear market, there’s a significant discount:
Invitae has proven consistent execution at scale, generating revenue of $460.4 million in 2021 — a 65% increase from revenue in 2020. They are projected to grow revenues by 40% to $640 million in 2022.
At a ~$2 billion market cap, that’s less than 4x sales with ~40% revenue growth year-over-year.
So what’s next?
At its current discounted valuation, I see this as a potentially attractive long-term investment with tremendous upside.
But a smart investor needs to understand both sides of the debate. Next week, we’ll turn our attention to the bear case and what the bulls may be missing.
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Part 2 is now published. Thanks for reading!