Is Invitae a 10x company?
Napkin math valuation estimates for Invitae in 2022 — in search of a 10x investment
Hi friends 👋
Welcome to Health & Wealth — your weekly source of the latest health research and biotech trends. After publishing my bull and bear case thesis for Invitae, I received DMs asking me about the company’s valuation. Here are some of my current thoughts.
In case you missed it, take a look at the bull and bear case thesis I wrote on Invitae for more context about the genomic testing space:
Invitae: Underdog turned core player — On the future of genomic testing (estimated reading time: 10 mins)
Invitae: Challenges and competitors — Navigating the genomic testing space (estimated reading time: 7 mins)
The question I’d like to explore today is: does Invitae have a clear and probable path to a 10x valuation in the next 5-10 years?
Napkin math estimates for Invitae
To help us evaluate this question, here are some crude estimates on revenue, margins, expenses, and valuation — hence why I call it “napkin math.” I may be wrong, in which case I appreciate it when people tell me how I'm wrong.
Revenue predictions
How many genetic tests can Invitae sell in 5 years?
Reported volume of 1.16 million tests in 2021
Let’s expect volume to increase 40% year-over-year — growth estimate based on previous years’ volume growth. From 2020 to 2021, billable volume increased 76%, but that was also partially due to a prior dip in volumes from COVID.
I don’t expect the growth rate to slow significantly over time given genetic testing remains vastly underutilized relative to market potential. In the past few years, Invitae has been taking market share away from incumbents (see Myriad’s eroding revenue in hereditary cancer). However, it’s possible that as the overall market expands, competition heats up, causing Invitae’s growth to slow. I talk more about the possibility of market consolidation and a winner-take-most outcome here. I also explore the challenges and competition Invitae faces in this piece.
By 2026, estimate Invitae to bill for 6.2 million genetic tests a year based on 40% year-over-year growth in volume.
What’s Invitae’s projected revenue in 5 years?
Reported average sales price (ASP) per test is $377 in 2021
ASP may increase as Invitae introduces higher price oncology tests (ex. recurrence monitoring and therapy selection tests), but let’s conservatively keep the same ASP for our projections. We also know that more mature areas like germline testing for cancer and prenatal screening will eventually be a race to the bottom with payers expecting price reductions over time.
By 2026, estimate Invitae to reach $2.3 billion in test revenues (6.2 million tests x $377 ASP)
Gross profit predictions
Reported average cost per test as $296 for Q3 2021
Reported GAAP gross margin of ~25% in 2021
Invitae’s cost of goods sold (COGS) has declined significantly from 2015 to 2019 but has been bottoming out since 2019. If their investments to reduce costs play out in their favor, I can see COGS reach $200 by 2026.
Given ASP of $377 and COGS of $200, a predicted gross margin 5 years out can be around 45%. Management has expressed confidence they can reach 50% gross margins (they have in fact reached ~45% in 2018 and 2019), but let’s be more conservative.
By 2026, estimate Invitae to have $1 billion in gross profit (45% gross margin x $2.3 billion revenue)
Operating expense predictions
Reported operating expense of $220 million for Q3 2021. A breakdown of expenses (excluding the cost of revenue):
R&D: $97 million
Selling and marketing: $55 million
General and admin: $87 million
Note on operating expense projections: Invitae’s expense is somewhat erratic and difficult to predict due to their many large acquisitions. General and admin expense has also jumped significantly from $28 million in Q3 2020 to $86 million in Q3 2021. Their overall operating expense doubled in just one year.
I’m assuming Invitae will continue to incur high spending — based on their Q3 2021 operating expense, $220 million per quarter translates into approximately $880 million in annual expenses. This is what gets many investors worried that their road toward profitability is uncertain and difficult to pinpoint.
If Invitae adopted a leaner approach, by reducing selling and marketing / general and admin to $40 million each for a quarter, then by 2026, it’s possible to incur about $180 million per quarter:
R&D: $100 million
Selling and marketing: $40 million
General and admin: $40 million
This would mean Invitae could run at $720 million in annual operating expense. Realistically, based on historical spending, this may be a challenge for them to meet, but let’s be cautiously optimistic here. I would look at quarterly operating expenses in 2022 closely to see which direction they’re trending towards.
Given historical numbers and their propensity to spend, let’s assume their operating expense is $720 million a year in 2026.
Operating profit predictions
Based on these above assumptions, by 2026, Invitae can gain an operating profit of $280 million ($1 billion in gross profit - $720 million operating expense)
Future valuation projections
Given much of genetics is still not well characterized and underutilized in medicine, I would consider this a high-growth market. Based on the huge (yet under-penetrated) total addressable market, future investors might assign a multiple of around 30-40x.
By 2026, Invitae could reach an estimated market cap of $9.8 billion ($280 million operating profit * 35x multiple).
At the current market cap of $2.5 billion, Invitae’s valuation is looking like it would only be ~4-5x in 5 years.
Is there a probable path for Invitae to reach a valuation higher than 4x in 5 years?
By all intents and purposes, these are quite conservative estimates. A few reasons why:
These estimates are based on their core product alone — genetic tests. We’re also assuming growth is rather steady. In reality, certain catalysts can bring about accelerated growth in adoption. If mass adoption were to occur, growth rates could expand to as much as 100% year-over-year. Instead of a mere 6 million tests by 2026, Invitae could reach 30+ million tests with $12 billion in revenues — toppling a market cap of over $50 billion.
Examples of catalysts that could bring about explosive growth include:Primary care doctors (not just specialists) routinely make use of genetic information for more patients. Genetic testing becomes standard of care for most, not an exception for a select few.
Patient-initiated testing grows rapidly as the average informed consumer wants to take their genetics into consideration when thinking about disease prevention. While 23andMe doesn’t offer clinical testing, they drove a wave of growth not by appealing to health, but rather to curiosity. If anything, 23andMe deserves credit for identifying the key drivers for establishing brand recognition in a space that others have struggled to differentiate themselves.
Invitae is able to better control distribution by creating a direct relationship with customers. Doing so would ensure genetic information is not a commodity and sustain growth beyond just selling below cost.
Invitae experiences breakout international growth and takes a large market share in Europe and Asia.
The other arm of their business includes providing data and services to third parties. It’s difficult to look forward with any visibility how much this might contribute to their future operating profit. I previously wrote about how it’s unclear what Invitae’s database exactly consists of (that’s not open-source), why it's valuable, and how it will be monetized. Because I don’t have clear visibility, I didn’t include this opportunity in napkin math estimates.
We know that in Q3 2021, they generated $10 million in revenue from data and services. My guess is that their gross margin for data and services is higher — upwards of 60-80%. If it’s selling access to their existing database, that essentially incurs little to no additional cost for them. Their main selling point here is that they’ve achieved scale and vertical integration that few labs have. The main question mark is how much this part of their business will grow. A bit too early to tell at this point.
Takeaway from our napkin math
A 4-5x in valuation over the next 5 years for Invitae is reasonable. To reach more than 10x though, key catalysts such as those described above would need to happen.
Overall, Invitae is a promising company but in a difficult line of business. Genetic testing is capital intensive and by and large a race to the bottom in terms of pricing. Invitae can succeed primarily on two fronts — scale and vertical integration — but only if their unit economics work in the long run.
A reminder that I’m not a financial analyst — I’m a genetic counselor by training with an interest in life science investing. Rather than telling people what to do, my writing is about helping others think clearer and deeper by sharing my thinking process. My thoughts can change and evolve over time given more information.
Let me know what I’m wrong about or missed.
Feel free to suggest ideas for future pieces — reply to this email or tweet me @healthwealthgen
Thanks for reading!
Christina