Invitae: One-on-One with CEO and CFO CML

We spoke with the CEO and CFO of Invitae on 5-5-2021 and after much thought and consternation, we have decided to demote it, again, from a numbered Spotlight all the way down to a Top Pick.

(We will name a number three Spotlight Top Pick replacement after earnings season.)

We did a similar thing last year and then raised it back up to a numbered pick, but this time, I see little chance of that occurring again without a total change in mode of operation.

This takes Invitae from the inner most circle of this logic diagram to the outer most. However, other than semi-arbitrary labels, Invitae remains a Top Pick for now.

We added Invitae (NVTA) to Top Picks on July 4, 2016 for $7.42.

This entry date and price has been verified by the third-party audit firm Krost. Please feel free to visit their website.

As of this writing it is trading at $29.95, up 304% since then but down 28% YTD.

Preface

We realize the ‘lede’ section is a rather abrupt change from the dossier published just five-days ago, but contrary to popular opinion, our CEO interviews for CML Pro are not rubber stamps.

They are critical pieces of the entire analytics process and when the CEO and CFO change their tone, we too change ours.

We press when we see a need to press.

It’s our great privilege to share this access with you and to do our part in breaking the information asymmetry that has benefitted institutional investors at the expense of retail investors for far too long.

Our stock research isn’t for fun and we are relentless in our pursuit of betterment.

When we spoke with CEO Sean George and CFO Shelly Guyer we had pointed questions, and the answers we received were, at times, insufficient for us to maintain our extraordinarily elevated status of the company.

I found governance to be troubling on the one hand, and the desire to maximize shareholder value lacking on the other.

We have discussed it before with CML Pro rather transparently, but we believe a part of these observations come due to Invitae’s largest shareholders.

In our opinion, these shareholders hold the company as a sort of ‘venture’ investment — one with tremendous upside but also the potential for economic failure.

In that venture status, rather than support the company in a way that maximizes the likelihood of success, they are treated as “win big or go home” type of investment.

In that paradigm, the CEO and CFO own very little stock and have little incentive to focus on shareholder value but rather are incented to build the company as large as possible commercially, irrespective of the value destruction (or creation) in that endeavor.

We now turn to some of the comments just in the last conversation, that have cemented a once lingering apprehension.

Story
First, we had an unpleasant taste in our mouths when the Q4 numbers came out in February, because one specific non-financial metric that Invitae had introduced to investors as material, suddenly disappeared.

In February of 2020, for the earnings report for full year 2019, we got this snippet:

Increased test volume by nearly 60% year-over-year, driven by an expanding customer base with approximately 3,500 new accounts added to previous base of 4,900 and strong re-order rates of 80% across new accounts in 2019.

And, since this is so impactful, we have included a literal snapshot from the press release with those words:

 

So, we got two new metrics — one was account growth and the other was a re-order rate.

In our interview with the CEO later that year, he noted that investors had asked for more non-financial metrics and that since Invitae is a growth company, it should demonstrate growth metrics.

These were two wonderful new metrics that gave us a window into both growth and recurring revenue potential, both of which are critical to the Invitae long-term story.

The company noted that it was not going to share it quarterly, but rather share it once a year with its Q4 numbers.

Well, as February 2021 came around and the full report for 2020 earnings, we got no such metrics.

But, alas, as Q1 was reported on May 4th 2021, suddenly the metric, which was only supposed to be reported once a year, reappeared, albeit ever so vague.

This time the disclosure was as such:

For example, we added over 2,600 new accounts in the first quarter alone, and we’re seeing durability in our customer relationships once established.

So, now the metric has returned, but this time without a re-order rate and in a quarter that no such disclosure was supposed to be made.

Even further, we don’t even have the base on which to compare the 2,600.

Are these 2,600 new or are they accounts that lapsed as an account due to some three-month look back window?

Should we think of these, in fact, as reactivations as opposed to new accounts?

Why is this information not freely available this time, when it was all inclusive the last time we got the metric?

This feels, rather obviously, to be a metric that the company will share when it’s good news, and not when it’s bad news, which makes it no metric at all.

But even then, even if it’s selectively shared, then we would have expected the full metric information — accounts and re-orders.

So, I asked Sean about this during our most recent call, in multiple ways.

First:

…[F]or the 2,600 new accounts or whatever the number was, were any of those marked as new accounts, but they were in fact accounts that had canceled, or were inactive during COVID and now they have come back?

 

To which the response was:

Yeah, there for sure is a little bit of noise in there, but I think, for the most part… it’s about a three-month ordering cutoff for stickiness, and we do, we

… know if it’s a recurring or an actual new account, for the most part.

There is definitely some, as you might imagine, some slop in there, but I think it’s the same. It’ll be the same as measured two years ago.

It was unclear to me what the new account number meant, and frankly, it still is.

Then I pressed a bit more, for the sake of understanding the company’s trajectory in 2021.

Okay. Can you share a measure of churn, or anything related to churn, with these accounts?

To which the response from Sean was:

We will. Again, it’s got that kind of a multi-month history that right now is kind of a little bit, it’s a little messed up from the COVID snap.

I think once we kind of push out, I’m pretty sure in two or three quarters that that metric will be meaningful, and that we’ll be discussing it.

But the company did discuss it — just this quarter.

So, with so little information to work with for my forecasts, I pressed again.

So, on my side, as an analyst of record, there’s a sort of code of requirements. And the general guidance is that our job is to kind of help information flow from the company to investors…. So, in the full year of 2019, of course Invitae did share new accounts and this lookback period, or this reorder thing.

… The company held back from reporting it in 2020.

Obviously, COVID was … was a disaster in many ways, but in particular, on this metric, it made it perhaps less meaningful. But now the company’s reporting it again in 2021.

So, I have to ask, regarding non-financial metrics, if some of them were formally reported, and they’re going to be unreported based on whether the numbers fit a trend, is that something that we have to be aware of?

… I speak to a lot of companies, of course, and COVID … impacted many companies. And some of the metrics they reported were just … awful.

… [H]ow do you guys feel about having not shared 2020, even though there was a COVID impact?

And the final part of this back and forth ended in discomfort for me:

When asked how we feel about 2020 not reporting it, I’ll be perfectly honest, Ophir.Dealing with 2020, we just didn’t even look at it…. I’ll be perfectly honest, it was not important at the time, so we didn’t even look at it. And that’s probably the most direct answer on it.

I’ll move on to further analysis of our conversation, but the answer that it wasn’t important rings like bad governance to me. In fact, I’ll just say it — this is bad governance.

I believe that a CEO looks at account growth year over year.

We then discussed the latest filing for an ATM worth $400 million in stock sales that had been opened.

I asked CFO Shelly Guyer:

[C]an you remind me how the last ATM played out? Was the facility tugged on for the full amount? And what was the full amount?

And she responded:

Yeah, over time, I think it started at 150 or 175 [million]. We upped it maybe to 250 [million], which you can do. And we took down all of that over a three-year period of time.I think the aggregate, in the end, was about 250 million. And we do it when the stock price is at a range and a price that we think is useful, and when we have good uses for that cash.

But the most instructive feedback we received from the CFO came with a discussion of the uses of that ATM.

We used it sometimes when investors wanted to get blocks in, and they couldn’t buy in the public market. So, we got a couple of our really good long-term shareholders through that technique at one point.

This is another reality that has us less than thrilled.

The implication here is that a large investor did not want to purchase through the normal means of the open market in order to avoid the natural disruptions in supply and demand, namely, a new large demand for shares with unchanged supply.

These types of purchases push the stock price higher as the investor accumulates shares. It’s called an open market transaction.

But, Invitae decided it better to alleviate the demand disruption by adding supply.

The new shareholder received shares with little market liquidity risk and left the other shareholders with dilution.

This is perfectly allowed and is not so uncommon in public markets, but it’s also not something that we view as standard behavior when a company already has over $1 billion in cash on the balance sheet and a roster of large shareholders.

This type of transaction is generally seen as a new “strategic investor,” when a growing company looks for meaningful shareholders and extra capital.

With 88.74% of outstanding shares owned by institutions, Invitae, in our view, needed neither extra capital nor a new meaningful investor.

At the very least it’s not obvious to us that facilitating a new large investor through dilution creates value for other shareholders and we could argue it creates equity value destruction.

In sum, filing the ATM is reasonable, but filing one for $400 million, with a history of upsizing and using it for means like the transaction described above, means this company, with $1.5 billion in cash, is nowhere near ready to turn cash burn down and we’re not convinced has an eye toward shareholder value.

This not just elevates investor risks, but also elevates risks to employees and patients because it raises the odds of an ultimately unsuccessful Invitae if the company faces a lowers stock price.

After all, the company has $1.15 billion in debt due in 2028, and while the company seems to behave as though that debt will convert to stock (the stock must be above $43 for that to happen) and have no impact on cash balances, every transaction like the one listed above makes it more difficult for the stock to rise.

We’re not sure what Invitae looks like in 2028, but as of today it has immense cash burn that is growing and could face a balloon payment that it cannot service.

Of course this is several years in the future.

In all we see the company behaving as its largest investors would like — as a venture company piling on risk of failure while adding potential for tremendous outsized success.

When the balance of the payout scales are weighted heavily on extreme outcomes, we get a venture payout.

And to the point on cash burn moving forward, the CFO noted:

And so, when you think about how much we’re going to be burning [in 2021], it’s going to be up above … 400 [million dollars]. And I think we wanted to be pretty clear with people about that.

We appreciate the transparency from the CFO, but we don’t love the news.

Invitae is going to generate above $450 million in revenue this year, per the most recent guidance, and it does appear the company is headed toward a $450 million burn.

If we assume the company hits its gross margin per cent goals of 50%, then we would see $225 million in gross profit yet yielding new cash burn of over $400 million. That’s over $625 million in operating expense.

Finally, with the acquisition of Archer DX, Invitae now has a germline (passed onto offspring) business and a somatic (cannot be inherited (only tissues derived from mutated cell are affected)) business.

This was a great move and a needed one. But, the disentangling of where revenue is coming from has become nearly impossible because after Q4 2020 (the earnings report prior), the company has stated it will not break the business down by organic versus inorganic growth.

While there are reasons that such a distinction is not trivial, if not nearly impossible, there is still some transparency the company could share.

I asked about it:

So, with no real metrics to help anymore, you had provided, but to help us see essentially the organic germline business, let’s say, versus, a somatic Archer side…It makes it difficult for me to, in my analysis, to answer questions about whether Invitae is buying revenue growth to hit the targets of 50 to 60% growth for the foreseeable future.

To which Sean responded:

We are going to disappoint people with the transparency needed to answer that question. However, we have told people as of Q4 last year, what the Invitae oncology business was, and what the Archer oncology business was.And we appointed the figures to 60% overall growth for the company going forward. And we will continue to answer questions about how much of our top-line, how much of our business is oncology.

Interestingly, as you will read below, that conversation led to a deeper one surrounding Invitae’s history with massively successful acquisitions and how a small spend on reproductive based companies has turned into a $150 million business already for Invitae.

My issue is not so much with trust, as the company has delivered stellar results with prior acquisitions, but my issue lies instead with a pattern of poor transparency on one side, and a failure to allow for more detailed estimates due to this lack of transparency on the other side.

I am on a razor’s edge in deciding if I feel that I can provide analysis to the investing public through Refinitiv I/B/E/S that is anything more than a regurgitating of the company’s guidance.

I think of each covering analyst as a brick in a paved road that connects investors to the executives.

It’s our duty to pave as direct a road as possible, knowing that we will never be fully accurate.

At this stage, I’m not sure if my brick does anything.

I cannot continue as a regurgitator and without color on new accounts or re-order rates (other than when the company finds convenient) nor a better breakdown of the Archer business as a stand-alone for at least three more quarters.

I do ask myself what value I add.

I don’t know how many accounts Invitae lost or had go inactive during COVID so I have no estimate for return rates.

I don’t know how many of the new accounts the company shared in Q1 are returns or new or how their behavior has changed.

In the same breath, I can’t manufacture an estimate of how many accounts left Invitae during COVID and have now gone elsewhere, or, how many went bankrupt, unable to sustain business during COVID.

Plucking numbers out of thin air isn’t analysis… it’s plucking numbers out of thin air, and I won’t do it.

You can see our consternation.

We don’t beat the governance or transparency drum for the sake of it — we do it because we all know less about this company now than we did just one year ago solely for the reason that the company will not share it.

And, for it’s worth, I can’t imagine an executive team ‘just didn’t even look’ at new accounts for an entire year.

So, Why is Invitae Still a Top Pick At All?
We do see genomics as likely the largest total addressable market (TAM) we cover — and we do see Invitae as the leader and the leader by a long shot.

Governance concerns like this would normally drop any company from Top Picks as would something turning into a venture bet driven by its largest shareholders rather than an investment.

While we do believe the commercial entity will survive and stretch the bounds of what is possible to help all people in the medical field, we can no longer say we are so bullish that we think the stock price will be worthy of a number three SpotlightTop Pick designation.

It is in these two colliding realties that we downgrade Invitae, but maintain its Top Pick status and active status in the tracking portfolio.

We do, now, leave the door open for a full drop from Top Picks if governance worsens from here, or if large acquisitions continue without color as to what is happening with distinct parts of the business.

We don’t swallow whole without chewing at CML Pro, and we never will.

Now, please enjoy the full transcription of our conversation, which will certainly add color and context to the snippets that were shared above.

One-on-One with the CEO and CFO of Invitae

Ophir Gottlieb:
Continuing loss from operations, R&D, selling and marketing, G&A, all showed operating leverage relative to revenue.

So, I’m talking for the three months reported that ended March 31st, 2021 versus 2020.

Should we expect to see this continued improvement in operating leverage?

What I mean to ask is that, should we see this essentially every quarter, and measure this as the company meeting financial goals, beyond revenue and billable volume?

Can I start putting pins in that? And maybe quarter-to-quarter is a bit much, but to say, hey, this trend should be improving.

Sean George (CEO Invitae):
Yeah. Quarter-to-quarter, I don’t think that’ll be useful. Yes. So, in the next three years, yeah, absolutely.

OG:
Okay. How about year-to-year?

SG:
Yeah. Yeah, I think year-over-year, right?

Those numbers, as you take, where we’re going to end up being this year, the leverage will be better the year after that, the year after that, the year after that. And then at some point therein, you’re going to cross the operating cashflow barrier.

And then at a minimum, it will just be measuring operating cashflow.

OG:
Okay. A little bit in the weeds here, sorry. In Q1 2021, there was a substantial drop in G&A expense. And I know Shelly, you said it was basically due to acquisition-related expenses, which were present in 2020.

Shelly Guyer (CFO Invitae):
Yeah. Look at the Non-GAAP numbers, and it’s not 9 million, it’s more like 37 million for the G&A. So, that’s the number you should really look at. It takes out all the noise of the acquisition stuff.

OG:
Okay. Right. Okay, so you mean for 2020?

Sh G
I mean, when you go back all quarters, but mostly 2021. Now we had a large, large reversal, because of stock changes, and it all flowed through G&A.

So, look at the G&A on a Non-GAAP basis, and you get like 37 million instead of the 9 million that’s on the case of the financial statements.

OG:
Okay. I missed that.

Sh G
Does that make sense?

OG:
Yes. Super helpful. Thank you.

All right. I want to talk about account addition.

So, I think, was it 2,600 accounts in Q1 2021? That seems very strong, considering that all of 2019 saw 3,500 new accounts, which then was 70% growth.

So, I have two questions on that. First, for the 2,600 new accounts or whatever the number was, were any of those marked as new accounts, but they were in fact accounts that had canceled, or were inactive during COVID and now they have come back? Or are those actually new institutions, new accounts?

SG:
Yeah, there for sure is a little bit of noise in there, but I think, for the most part, we’ve got a, it’s about a three-month ordering cutoff for stickiness, and we do, we … know if it’s a recurring or an actual new account, for the most part. There is definitely some, as you might imagine, some slop in there, but I think it’s the same. It’ll be the same as measured two years ago.

I don’t know, Shelly, if you have any more detail? I think, we’re not measuring it any differently. But, yeah.

Sh G
No, I have no detail. I think that’s right.

OG:
Okay. Can you share a measure of churn, or anything related to churn, with these accounts?

I know for the full year 2019, in January of 2020, you had this sort of, I think it was called like a reorder rate or something like that? Do you have anything like that?

SG:
We will. Again, it’s got that kind of a multi-month history that right now is kind of a little bit, it’s a little messed up from the COVID snap.

I think once we kind of push out, I’m pretty sure in two or three quarters that that metric will be meaningful, and that we’ll be discussing it.

OG:
Okay. So, on my side, as an analyst of record, there’s a sort of code of requirements. It’s not necessarily written down, but when you join Refinitiv IBES, they kind of let you know.

And the general guidance is that our job is to kind of help information flow from the company to investors. That’s pretty broad guidance.

They don’t say very much else other than that.

So, I preface that because my next couple of questions could feel like criticisms, but I don’t mean them to be.

SG:
Sure.

OG:
Okay, fantastic.

So, in the full year of 2019, of course Invitae did share new accounts and this lookback period, or this reorder thing.

Which I think people thought, okay, this is material for investors beyond things that you have, financial metrics, right?

The company held back from reporting it in 2020.

Obviously, COVID was, I mean, it was a disaster in many ways, but in particular, on this metric, it made it perhaps less meaningful. But now the company’s reporting it again in 2021.

So, I have to ask, regarding non-financial metrics, if some of them were formally reported, and they’re going to be unreported based on whether the numbers fit a trend, is that something that we have to be aware of?

Because usually, so I’ll give you an example. I won’t leave it so open-ended.

I speak to a lot of companies, of course, and COVID, it impacted many companies. And some of the metrics they reported were just, if you looked at them on their own, they were just, they’re awful.

I mean, business just stopped. But they continued to report it. So, I have to ask, how do you guys feel about having not shared 2020, even though there was a COVID impact?

SG:
Yeah, I would, this is a number, just to be clear, we line up exactly, in the metrics side of things, we line up what is guidance, obviously, that is something that we both are planning on and report on reliably.

We also have laid out, then, what we will continue to give by way of numbers going forward, right?

Billable units, rough percentages of business broken out by disease areas and geography.

And in this case, there was a time when people were really interested in new account information and we put a number out there.

I don’t actually consider this something we’re going to print every quarter, necessarily.

I view it as a public commentary on the business and the growth that we’re in. I think it’s a useful one, and I have a feeling we’ll continue to point to it and discuss it.

When asked how we feel about 2020 not reporting it, I’ll be perfectly honest, Ophir. Dealing with 2020, we just didn’t even look at it.

I mean, honestly, I’m sure somebody was tabulating it.

So, it was certainly within the base data analytics of our Salesforce.com stack.

We had other things to sort out, we had to let go a chunk of the people. We had to move a bunch of energy to direct sales and marketing.

We had to decide whether or not to risk [inaudible] the entirety of the sales force.

We had to raise money at $9 a share, or whatever, on April 1st.

I’ll be perfectly honest, it was not important at the time, so we didn’t even look at it. And that’s probably the most direct answer on it.

And I feel fine about it. What I’ll say, I think that it’s kind of useful, we want to provide that information going forward.

OG:
Okay. Thanks for that.

SG:
Put it differently, I view it a bit as, I was actually catching up with Kevin just a little bit comparing notes on the state of the world on sales reps.

And he mentioned they put out a number that 50-some percent of their reps were active and able to access accounts.

And I view it very much kind of like that.

I mean, that is not a number. I guarantee you that the number that they’re going to stick to, it’s not a number everyone’s going to adopt.

It’s helpful color commentary to describe the business dynamic, and I think it warrants polishing up, when appropriate.

OG:
Okay. I think I would just, I went on the IR site, and looked under filings. And I think I saw a filing for a $400 million stock sale with Cowen, or at least maybe an ATM. Is that, before I ask the question, that’s right? I’m reading this correctly?

Sh G
Yeah. It’s an ATM. And just so you know, sort of the pace historically, we’ve always put in an ATM, usually you put it in good housekeeping right after the 10-K is filed.

And you just do that when you’re out of it one year.

This year, we were blocked out, because we had done an equity offering, so we could not file a new ATM right after the 10-K.

This was the first period we could do so, and so, we filed it after the Q.

It is there for three years. We don’t have to use it.

But I would say it’s been a really helpful way over the last three years to sometimes boost the cash at the right times, let’s say, for a small acquisition.

So, in the fourth quarter, for instance, we raised some, 20 million or 25 million, and that was to pay for some of the acquisitions we were doing at that time. We raised it at over $50 a share.

So, it’s like, we will only use it as we need it.

We don’t see a need right now to be using it, but it gives us three years of optionality and financing options, should we need them, as we move forward.

It’s not intended to be a filing to do anything in the near term right now. It’s just good housekeeping, because we didn’t have one in place.

OG:
Okay, Shelly, can you remind me how the last ATM played out? Was the facility tugged on for the full amount? And what was the full amount?

Sh G
Yeah, over time, I think it started at 150 or 175 [million]. We upped it maybe to 250 [million], which you can do.

And we took down all of that over a three-year period of time.

We used it sometimes when investors wanted to get blocks in, and they couldn’t buy in the public market.

So, we got a couple of our really good long-term shareholders through that technique at one point.

We also used it when we needed to boost the cash in certain situations, if the stock price was high.

We always have to announce in our 10-Q whether we’ve taken any down off of it, but it’s silent until you file your next public filing.

So, it’s not a public offering from that perspective.

So yes, we’ve used it historically.

I think the aggregate, in the end, was about 250 million. And we do it when the stock price is at a range and a price that we think is useful, and when we have good uses for that cash.

OG:
Okay. Thanks for that.

And then finally, so, this is hard. I know that the analysts, I think you were asked this like four different ways on the call.

I’m not sure why I feel the compulsion to ask it a fifth time, but I don’t know, that’s sort of my brain.

So, with no real metrics to help anymore, you had provided, but to help us see essentially the organic germline business, let’s say, versus, a somatic Archer side, and it would be great if they would divide it so evenly, but I know they don’t, so easily, I should say.

It makes it difficult for me to, in my analysis, to answer questions about whether Invitae is buying revenue growth to hit the targets of 50 to 60% growth for the foreseeable future?

Or if it’s, what feels like on the business side, the clear and obvious addition to a very big germline business, which it must have the somatic business.

So, I’ll just ask again, have you shared any metrics beyond Q4, of course? Have you shared any more metrics, or any kind of color about how we should be thinking about Invitae’s prior germline business, versus the combination now with Archer.

SG:
Yeah. Yeah. I can share metric and color commentary.

And maybe the statement, true, and yes, I understand, it’s not, if the question is, what exactly is the organic versus inorganic growth for Invitae’s oncology business over the next few years, true.

We are going to disappoint people with the transparency needed to answer that question.

However, we have told people as of Q4 last year, what the Invitae oncology business was, and what the Archer oncology business was.

And we appointed the figures to 60% overall growth for the company going forward. And we will continue to answer questions about how much of our top-line, how much of our business is oncology.

SG:
So, I feel, actually, everybody has everything they need to know, if you make some assumption of what the inputs were.

People know whether or not we are growing oncology or not.

And then the question, then, comes down to the relevant importance of whether or not it’s organic or inorganic, which I freely admit to differing in the relative importance of that answer to that question.

And I think actually, Shelly kind of, I don’t think it was on the call, but I think Shelly had a nice way to look at is, the Archer business is kits sold to decentralized customers who need the business’s LDTs, right now entirely in hereditary cancer.

The bulk of the growth in our oncology offering next year will come from LDT services using Archer technology and/or know-how.

But make no mistake, it is stood up in an Invitae infrastructure tech stack, and commercial channel clinical support, then you have the data flow underneath it.

And this is where what I would say is, the amount of time spent debating whether or not that’s organic or inorganic is something I just don’t care to go into.

And what I believe should suffice is, point to the top-line growth, and the breakout of how much is oncology.

And then the question is, is the company executing or not? I view it pretty simple.

If we go back a few years, I guess it’s about three or gosh, four years, Shelly, I don’t know when it … four years or so.

Sh G
Four years. Yep. Reproductive.

SG:
We had the exact same question and the exact same conversation about CombiMatrix and Good Start.

We announced the two acquisitions and a PIPE financing, all concurrently.

People were wondering like, well, one, why did you do that?

Once we got past all that, then it was like, “Okay, well, how much is organic? How much is acquired?”

And if you look today, now, reproductive health is, gosh I mean, it’s about 30% of our business.

So, if we only hit guidance, it’ll be a $150 million dollar top-line business. It’ll be a mix of former CombiMatrix CMAs, CombiMatrix amnio, CVS, miscarriage analysis.

Good Start, at the time, had a pretty limited carrier screening panel, of which some proportion of our carrier screening today is still a small number of disease areas.

And then we developed in a hurry and loaded on through that channel that we acquired, the Invitae comprehensive carrier screen. So, as we sit today, we took CombiMatrix as a $15 million dollar run-rate business. Good Start, I think was 20-something. Shelly, I don’t remember the exact amount.

Sh G
About 20. Yeah.

SG:
And, by the way, they were flat completely.

Our own reproductive effort was de minimis, but growing rapidly.

You combine the two together, and then four years later, we have a hundred-million-dollar top-line reproductive health business, including now NIPS and our own version of it.

And it’s growing at north of the company total.

We are going to do the exact same thing here in oncology, and thus the detail of where that reproductive comes from is neither important, nor is it helpful, from my perspective.

And so, just by way of kind of looking forward by looking backward, I think we’re in a very similar situation today.

And I do believe like breaking out with the oncology and pointing [inaudible], we will answer all investors questions as to how we’re executing or not.

That’s probably a little longer answer, but I wanted to be comprehensive there, because I think it’s an important question. I fully acknowledge the importance of that question.

OG:
Yeah, I like the answer very much. Thank you. It was a lot of color. I appreciate it.

So, at the time of acquisition of Archer, the guide was, including Archer, so the combined entity was 50 to 60% revenue growth for the foreseeable future. Is that still the line?

SG:
Yep. Yep. And I think just to, I think something that people ask that was not explicit, that I would want to make explicit, was that we don’t differ between what’s acquired and what’s organic.

But buying a huge, we’ve bought $500 million dollars in revenue [we would break it out], and I don’t mean that’s fair, but yeah, that’s the expectations that we are operating under.

OG:
Yeah. I mean, what I was getting at is, that if it rolls over, then all of a sudden, it’s all organic again, because it’s all rolled in. This is really a 2021 issue, so to speak.

SG:
Correct.

OG:
That’s why I was just making sure that that guidance was still in place. And it sounds like it is. Okay.

Last question.

I think about 50% of the business now you’re talking about openly is oncology, and 30% is in women’s health.

So, that leaves about 20%. And I know these numbers are, it’s not a fine-tooth comb here.

So, this idea of as the company grows, there’s going to be sort of general inquiries, or screening for just general health, right?

Like people, long-term, this is the version of the world that Invitae is going after, and I think it’s a version of the world that makes sense.

So, I think the company anticipates that it will be part of the future. So, first of all, is that true, that’s how you see the future?

And also, can you share any metrics, even if qualitative, to give some color on the trend as it’s materializing? So, it’s not 2021, but is it bigger than 2019? Something like that?

SG:
Yeah, about 2% of our business is proactive.

And that’s going to be places like price, hospital, comprehensive solution, and patients’ inquiry in the comprehensive/proactive screening. And that will pick up.

So, in three to five years, that will be, in our view, much higher than 2%.

There are structural, as you know, nobody gets paid to prevent anything from happening.

So, the issue with that is, well, that is clearly the vision or the future.

You still have to kind of grind your way through a disease at a time, and then get the cogs rolling up where you can onboard everything else, and can ramp the model up to more of a lifetime documentation, which is [inaudible].

And that will show up in that 2% growing, pretty reliably now, over the next few years.

But we are making progress there. It’s a constant back and forth.

You can put a lot of capital behind that proactive, comprehensive health [inaudible], and again, we’ve all got kind of sort of personal commitment, but it’s just, the market is developing at a certain pace.

And I think we’re accelerating the market development by the work we’re doing in these areas and in the hardcore clinical diagnostic space. Those are needed from our perspective at this point, now.

OG:
Okay. It might be helpful to share kind of that metric knowing full well, it’s not, 2% is not super material, but it’s a really interesting view, because Invitae is leading the industry, maybe even leading the world.

So, it would be interesting to see Invitae’s numbers coming in, just to see.

Because my sense is, that it would be mostly organic, anyway.

You’re not going to spend a hundred million dollars on Google ads to get these people to do this.

So, anyway, I think it’s an interesting view, not just of the company, but of the industry as a whole.

But that was very helpful. Yeah. That’s all I have for the quarter. Is there anything else that I didn’t ask that you think I should’ve asked?

SG:
Oh, Shelly. We want to leave no room for uncertainty about investing burn this year, correct?

Sh G
Yeah. So, we have gone over that, and I think in my prepared comments talked a bit about if you started off at the burn that we had, which is the Non-GAAP burn, about $95 million dollars, and you quadrupled that, that’s a 400 million.

But we did talk about increasing our R&D investment this year.

And so, we outlined some of the things that we’re working on. And that’s consistent with what we said last quarter, and we’re continuing to increase those.

We’ll also spend more on marketing. We really laid low in the first quarter, and towards the end of last year, most of last year.

So, we do think that we will up that. And then the two other things that we recently announced, the PacBio collaboration.

Now that we do have cash, we think that that’s important to be the winner, and to be able to move to those whole genomes and long reads.

We will be accelerating our spend on that collaboration, that will come in under R&D also.

And then finally, the North Carolina site, which gives us not only business continuity and back-up, but also helps us to scale, because we’re bursting at the seams in San Francisco.

So, having a site on the East Coast not only allows you to reduce your turnaround time, exceed clients’ expectations, but also can bring some of those costs down over time with a new facility that is stood up as we want it to be designed.

So, that’s a big spend this year and next year. There are two phases of that project.

And so, when you think about how much we’re going to be burning, it’s going to be up above that 400.

And I think we wanted to be pretty clear with people about that.

OG:
Okay. Is there any like sort of timeline guidance on how long it takes to get something running in North Carolina? Like how big of a project is that? How long of a project is that?

Sh G
Yeah, I would expect that the first phase of it would be up and running by the end of this year. And then you can build it out over time.

You don’t want to put in all of your Novaseqs and 30 of them.

You might put in 15 at the beginning, and 15 next year.

So, something like that takes over a two-year period of time would be most of the investment.

And we were pleased that the State of North Carolina and the others in North Carolina are helping to support that effort, but we’ll have to put the cash out at the front end, and then they reimburse us over time.

OG:
Interesting. Okay, perfect. Thank you, guys. Enjoy the rest of your calls, and your week. I appreciate it.

Sh G
Thank you.

SG:
All right. Thanks. Take care.

Risk
The “Preface” and “Story” sections of this dossier discuss the risk we see in Invitae, but we can reprise what we wrote several quarters ago.

“[T]he top 60%, 70% ownership of the company is actually more interested in the TAM and our ability to grow into it; number one.” (Sean George, CEO)That means Invitae’s largest shareholders are supporting the company, or at least intend to support the company as of right now, with a back stop.

Historically, that backstop for Invitae has meant stock sales, and the largest holders appear to be saying, “we’re here to buy if you need to sell to raise capital.”

This has an impact on how any investor must view Invitae – for better or worse.

The company has never turned a profit, never been cash flow positive, and has been less and less cash flow positive with growth.

While the company has, at times, shown operating leverage (lost less per dollar of revenue than prior), it still has never shown a true ability to run this company without a safety net.

While the company has openly shown that it has pulled the cost levers down for specific periods of time (you can read our dozen prior Invitae CEO meetings on the Top Picks Tab), where we disagree is the conclusion that can be drawn from that pull back.

Sean believes that those specific periods of intentional cost reduction demonstrate that Invitae can, if it needs to, pull back spending further and turn into a cash flow positive company — albeit at the expense of future growth.

I don’t see it that way, necessarily.

 

Since that dossier in January the company has raised more than $1.5 billion in capital. That’s a wow.

Invitae now has done two massive rounds of stock sales in less than one-year and a $1.15 billion convertible debt deal (which may be stock in the future) and has $2 billion in cash and cash equivalents on the balance sheet.

The company has now filed another at-the-market (ATM) where it is authorized to sell up to $400 million in stock as it sees fit in the next three years.

The prior ATM initiated for $150 million and ended up getting upsized to $250 million and all of it was used.

The company appears totally disinterested in turning a profit or even demonstrating an ability to show smaller losses.

Since its largest shareholders are enablers of this behavior, we can expect the behavior to persist for several years into the future.

I expect roughly one dilutive event for every year for the next five-years with a total dilution of about 100% (another $9 billion).

Whether the current leadership has the ability to turn the company to profitability (eventually), we don’t know and we will not know for a very long time.

The ushering in of a new executive team is certainly possible at some point, but for now, this is the team, and this is the strategy — burn to grow at virtually any cost.

I think that the largest investors do not necessarily have the company’s best interest at heart — which is simply to say this is a moonshot investment for them and like venture capitalists treat their investments, they will forgo the ‘steady and safer‘ winner and risk a 100% loser for a 1,000% winner.

So, as shareholders, we must either accept this paradigm or dispose of the asset.

We are of the mind that, for now, it is still a bullish story, but it is less bullish than we felt just five days ago before speaking with the CEO by virtue of governance.

If the company succeeds, it’s $9 billion market cap as of this writing is still rather early in the potential outcome.

But, please note, we could be wrong — of course we could.

We don’t offer anything other than our deepest research and most thoughtful analysis of the research (along with an auditor verified track record, of course).

Accept the possibility that we could be wrong.

I do.

Conclusion
We remove the number three Spotlight Top Pick status on Invitae (NVTA) and move it to a non-numbered, non Spotlight Top Pick.

Having said that, please be aware of the risk inherent in a company with such a large and growing cash burn relative to cash balances, debt burden, and overall revenue.

Thanks for reading, friends.

The author is long shares of Invitae at the time of this writing.

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