Written by Ophir Gottlieb
We added Invitae (NYSE:NVTA) to Top Picks for $7.42 on Sept. 1, 2016. As of this writing, the stock is trading at $13.82, up 86%.
While we recently updated Number 1 Spotlight Top Pick Invitae with an earnings pre-announcement, today, at the JP Morgan conference, we got more news - Invitae is going after a new $2.5 billion market.
Invitae announced that it will be going after the direct to consumer (DTC) genetic testing market.
While the company has built its moat and demonstrated explosive revenue growth, going from $25 million in revenue in 2016 to $144 million in 2018, that business has come from clinicians and bio-pharma companies.
Here’s how that looks:
The company just announced a new bar to the right that will be at $144 million.
Invitae is in a class of its own with respect to genetic testing and, in that vein, has built a foundation with the most serious practitioners of medicine. Today, however, the company is going after DTC sales.
Global Market Insights published research on the DTC genetic testing business on Dec. 11, 2018. Here are a few snippets:
The U.S. direct-to-consumer genetic testing market accounted for more than 91% revenue share of total North American industry in 2017.
Direct-to-Consumer (DTC) Genetic Testing Market size was valued at USD 601.5 million in 2017 and is expected to witness more than 18.0% CAGR from 2018 to 2024.
Rising awareness among patients pertaining to early disease diagnosis will result in timely treatment and reduced mortality rate. Additionally, technological innovations in direct-to-consumer genetic testing to offer enhanced efficiency, high sensitivity and accuracy will serve to be a significant impact rendering factor.
How Invitae Can Win
To date, much of the DTC genetic testing world has been for fun - 23andMe.com, ancestry.com, and other various sites. But the world is shifting quickly toward health, not fun.
In fact, if we look at the totality of personalized medicine, that market is forecast to hit nearly $3 trillion dollars by 2022 and fully $340 billion for personalized medicine therapeutics and personalized medicine diagnostics.
The use of consumer genomics is inflecting. This chart comes from Illumina, the hardware maker.
Even with that chart, this is so early, that last bar of "> 7M" is likely to look like one of those other bars before it as the new data comes out. This is rounding error, even today, with respect to what’s coming.
Or, I’ll say it yet clearer, I think that bar will reach near 2 billion within 10 years.
The global next generation sequencing market is forecast to grow from $4.15 billion in 2016 to $11.93 billion by 2024, or fully 187%.
But that chart is not even half the market. In total, the global genomics market is expected to reach $27.6 billion by 2025.
While Invitae has become one of the world’s leading genetic testing companies, it has also succeeded in generating strong operating leverage through the decrease in cost per test.
Here is a 3-way chart of revenue, COGS per sample and gross profit.
Note that Invitae has brought the cost to produce a ‘serious’ version of genetic testing down to $260 per sample. Soon, Invitae will approach a new $2.5 billion market in the DTC market, but with a giant moat.
The company has built a moat in many ways, but one of the easier to identify is the number of lives covered through insurance. This takes a couple of charts to see because the trend is so large.
First, we start with lives contracted, which is a fancy way of measuring the number of people whose insurance covers the genetics test that Invitae provides, but this is from 2016.
And the most recent chart I could find looks like this:
But from their financial disclosures, we get this:
As of June 30, 2018, we have entered into contracts for laboratory services with payers covering approximately 250 million lives.
So, Invitae has gone from zero insurance coverage in Q2 2014 to now over 250 million lives.
A further appealing part of this new DTC business is the reality of high quality medical grade genetic tests and ‘the fun stuff.’
Not all genetic tests are created equal
In a post from Invitae, we learned that:
Genetic tests that are not comprehensive may provide a false sense of confidence or risk for patients wanting to understand their potential for developing heritable breast cancer.
In that blog post, the company details how in a study data presented at the December 2018 San Antonio Breast Cancer Symposium (SABCS) showed that an astounding 88% of patients with a variant associated with increased risk of breast cancer would not have been discovered through a DTC genetic test.
That’s because DTC tests analyze just three variants associated with breast cancer - in stark contrast to the dozens of genes and thousands of variants known to be associated with breast cancer risk, and for which clinical laboratories test.
And it goes further. The second piece of data presented at SABCS examined the accuracy of DTC test reports. Invitae performed clinical confirmation testing for 102 people who had received a positive result from a DTC genetic test. 50% of these patients had received false-positive results from their DTC test.
It’s simply a matter of time that DTC genetic tests are going to leapfrog the novelty stage and get to life and death answers. In that realm, there is Invitae, and nearly no one else. The fact that Invitae has been able to get operating leverage to bring the price of these tests into the low hundreds is a magnificent achievement, and yet another piece of the moat.
Invitae is going to be the dominant market force in genomics and personalized medicine within that realm - we see a very bright future.
Winner Take All
The company set a mantra several years back to become “The Amazon of Genomics.” If they execute properly, Amazon’s (NASDAQ:AMZN) customer base will be a fraction of what Invitae has in front of it.
* In one of our many prior one-on-one talks, CEO Sean George said he believes the industry is going through “unqualifiedly the most unprecedented change in the history of our space.”
And by that, he means that the old version of the test by test approach, or the “lab test,” version of a business model, paid to answer specific questions at a specific time is over.
* He also said that the genetic diagnostic industry, as we know it is dead.
The future is a network, in which there will be essentially one winner, where information is used by the entire network and patients are treated throughout their lifetimes, likely, for some, from birth to death. Not to address just a one-time fear or event, but an entire life cycle.
In that vein, Sean firmly believes that:
[The] best way to build the future, is a network of information managed on a patient in order to improve health care at a lower cost. The more patients we can get with more novel information with more industry partners to improve their outcomes.
To help illustrate this view of the world even further, Sean had some great things to say when we spoke a couple of quarters ago (our emphasis is added):
That will basically move the entire world from a one-test, one-sample, one-person, type of business which is known today as genetic testing, to a feature which is where everybody in modernized care, roughly a billion plus people, at some point and time in their life get into our sphere of influence and we get information on them and we manage information on them on behalf of and in context of their care.
And in building that new business, building that new industry, the nice thing about going through the pain of all of this is once we build it and once we hit a certain scale, there is a network effect that will be put in place, where there will be no catching us.
In fact, right now we suspect we are already there on our infrastructure because of our cost advantage of providing genetic testing and managing it, we don’t see anybody gearing up to do so, and we’re absolutely confident that at some scale, and the ability to demonstrate the value of that network beyond just the initial genetic testing.
It will be apparent and obvious to everybody that we have created this new industry, are a clear runaway leader in it, and by the way, there will be no close second.
This is going to be a winner take most industry. That is what the true value potential of this business is. The faster we get there, the faster that we believe we will see that value inflection point happens.
There is no other genomics company that we’re aware of that has even conceived of the idea of a network, not to mention building one. Invitae is singularly focused on this, and for good reason - it’s the basis for a multi-billion dollar business. As DTC becomes another driver of volume, so the network grows.
What Else We Need
In my private meeting with the three top executives (CEO, CFO, COO), we also discussed how Invitae can demonstrate the value of their network. The company should make some network metrics available to us by Q3 or Q4 of this year.
We maintain our number one Spotlight Top Pick status on Invitae. Please be aware of the risk inherent in a company with such a small revenue base and market cap.
Thanks for reading, friends.
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Disclosure: I am/we are long NVTA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.