Die Genomics Revolution

Earnings

Auf was kurzfristig zu achten ist; Am 18.02.2020 sind Earnings. Wichtig sind folgende Punkte:

For Invitae, since we already know the revenue numbers and guidance, we need to watch:

– Gross margin % (or gross margin dollars) for the quarter ended 12-31-2019: Any number between 46%-50% would be considered in line, or as dollars, between $30.11 million and $32.73 million. Any significant miss here could spark a sell-off as it would imply that gross margins are worsening.

– Cash burn for 2020: In 2019 the company guided to $150 million cash burn and delivered $153 million, which in the words of the CEO was “close enough.” For 2020, any burn rate over $150 million would be bad news. Any cash burn number better than $125 million would be very (very) good news.

If cash burn is guided to $175 million or worse, I would not only drop the company as the number 1 Spotlight, but would likely drop it altogether.

Quelle: pro.cmlviz

Was macht NVTA?

Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool owns shares of Invitae and NeoGenomics, Inc. The Motley Fool has a disclosure policy

Interview mit dem CEO/CFO

Hello, all. This is Ophir writing.

Lede
Following the JP Morgan Healthcare conference in San Francisco, I met the CEO and CFO of Invitae for a final round up of the preliminary 2019 results and full year 2020 guidance.

We added Invitae (NVTA) to Top Picks on Sep 1, 2016 for $7.42. As of this writing the stock is trading at $18.85, up 154%.

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

Status
We maintain our Number one Spotlight Top Pick status on Invitae, but will revisit that view after the company reports its full results in February of 2020.

We still do not know what the intended cash burn is for 2020, and if that number comes in too high, it will hit the stock price, but far more importantly in the short-term, it could change our view.

We’re very bullish, but we also have clear concerns as well.

Remember, this is not an investment for everyone. This is a high risk / high reward speculation.

Preface
We just spoke with the company on 1-12-2020 in the dossier One on One With Invitae CEO: 2020 Guidance Pre-Announced.

On January 16th, I did the in person finale after the JP Morgan conference.

Takeaways
We usually conclude our dossiers with our final takeaways, but in the interest of utility, I’ll start at the end. Here are my opinions given the meetings over the last few weeks, and in particular, the latest one.

* Invitae’s ‘at least $330 million in revenue’ guidance this year sounded quite confident, and I will share a direct quote which elucidates where that subjective opinion was formed.

This does feel like a more conservative guide than last last year’s $220 million, meaning that in my opinion, the CEO is hedging his bets yet further so the upside potential is there.

Here’s one line the CEO noted:

“That is also the guide where, honestly, if we don’t get there it means something actually went wrong.”

* Invitae does not intend to turn cash flow positive any time soon, although the company maintains rather pointedly that it could turn to cash flow positive within a quarter (or two) if it needed to. The CEO emphasized this talking point emphatically.

* Should Invitae find certain levers working better than expected, so much so that the $330 million low mark would be beaten, now read this, does not intend to use the excess revenue as an apparatus to slow cash burn, but rather as an opportunity to take that excess cash to invest further.

This was presented to me following a series of questions, and it was not an absolute position, that is, the CEO let room for analyzing the market at the time if such an event does happen, but his inclination was toward ‘spend more to grow more,’ rather than ‘slow cash burn.’

I was not thrilled with that answer, but I was thrilled with the transparency.

As investors we can now decide what we want to do with that information, as opposed to with many other firms, where we find out later what the mindset was, and can only react after the fact.

Give and Take — Selected Transcriptions

Ophir Gottlieb (OG): How are you? It’s [JP Morgan conference meetings] almost over.

Sean George (SG) – CEO: The dialogue with investors has been changing for the better.

[We’re not talking about] company X says this, you say something different, explain.

Maybe the biggest takeaway this week for me, is that to any extent that there was any confusion that this is a different play than what people are used to — that confusion is gone and now people are just lining up on which side of that they like.

That is a good feeling compared to past years.

OG: Do think that’s because your revenue has hit a certain level?

SG: A little over two years ago when we suggested we could do over 500,000 samples people thought we were out of our gourds.

And, I think the fact that it just happened and other things, consolidation in the industry, payer activity in the space, XYZ competitor stumbling outright blowing up, the power of the quote unquote esoteric genetic diagnostics sector is coming into its own, and in it the idea of inherited testing and the role that genetics plays in healthcare, therapies, devices and everything else could all be tied with genetics front and center, is now not something that people are not doubting anymore.

The how is also becoming very clear. There’s this way to do it, niche market, IP, clinical trials, high prices, high margins.

And then there’s this. All the marbles, everybody served. That is nice to see. It’s happening.

OG: [After going on the lab tour for the third time], What you’ve built is very, very impressive, but nobody outside Invitae understands it. I don’t know if it’s going to be financially fruitful, but it’s very impressive.

This isn’t IP as in a biotech [and a patent].

But you look at it and you realize, no one else is going to do this. They can’t. By the time they do it, it will be seven years later, and nobody has to say that when you see it with your own eyes. But when you say it, it goes in one ear and out the other.

I mean, people say there are deep pockets everywhere, but, no, that’s not really right. You can’t rush this [with any amount of money.]

I just wish other people could have seen this. Or, if I could take what’s in my brain and communicate it in a way that I simply unable to.

SG: We actually spoke with [analyst / name hidden] and he had some really great input. We’re considering turning in it into a ‘podcasty’ downloadable type video. It’s a great idea.

OG: Everybody knows that genetics is going to change the way we do medicine and diagnose and cure disease. It doesn’t need to be said anymore.

For presentations going forward, I think there needs to be more ‘operator’ and nuts and bolts.

I think investors need to hear the nuts and bolts.

SG: I have a feeling that if we walk investors through that, and they actually saw just how many different test types we do, how many type come in, and then the complexity of the data generation, the quality control and the variant interpretation, and then the delivery back — and then, oh by the way, for a stat cancer panel that’s in a crushing time frame of four days — I think you’re right.

Just understand the infrastructure it takes to do this.

OG: It’s very easy to say that you are the low cost provider or that you are the highest quality.

It’s very difficult to explain that it’s a tautology that you must be the highest quality because you are the most efficient.

And that’s not how it works, normally. McDonald’s doesn’t sell sushi for a reason. They know what they do. It is antithetical for them to sell sushi.

Invitae is McDonald’s [low cost] and sells sushi [high quality] because when you combine AI, ML, and automation you necessarily are more accurate and are necessarily less expensive [because AI, ML, and automation reduce mistakes and increase throughput].

SG: I’ve always kind of viewed it a little bit like this. And it’s a loose analogy.

If you take clinical laboratory medicine, the skill sets involved and the processes involved, super high quality and produced a product that was good but boutiquey, not totally reliable, and certainly not standardized, and then think about that by way of the U.S. automotive industry circa 1950s, 1960s.

And then up comes the rise of Deming and the Japanese. And there, if you can do this fast, you can do this well.

If you can do this at scale, then you can do this with quality.

I think we brought the same shift to laboratory medicine which is, look, if you can do this at crushing speeds, at crushing scales and under a cost pressure that previously people were not thinking about, you have to do it well.

OG: How do you view your cash position on the balance sheet for the next year barring any undisclosed acquisition plans and investments [$400 million]?

SG: I feel great.

As of fall of 2018 we have been in the comfortable position and will remain in the position where we will have enough cash on the balance sheet where we can tilt the company to operating cash flow positive.

While our burn was high, we burned $153 million last year, we told the street we would burn $150 million, I would call that close enough, while the burn is high, with that much cash we remain in the same comfortable position.

That allows us to stay invest on — to keep investing in the areas that we are confident will bring forward immense valuation for the company.

As time marches on, we will always be in a place where we can say, is it time to pull back future investments to tilt toward cash flow positive, or are there interesting opportunities, we see consolidation continuing and accelerating in 2020, to invest.

Do we take advantage of that, yes or no.

So, we can ask ourselves those questions. Provided our investors are still interested in what we believe is going after one of the largest TAMS [total addressable markets] in diagnostics, and have a belief that we are uniquely positioned to be the winner take most in it, we feel we will keep investing.

If nothing presents itself, if, if, there are a lot of ifs, and we need to, [we will] pull back future investment.

What would happen is we immediately pull back on R&D and commercial stuff that is going to be future generating. You probably pull back on a bunch of product introductions that defacto have higher COGS [cost of goods sold].

So when you pullback on that, immediately your gross margins go up. We can keep pretty considerable growth going for a few years with dramatic reduction in cash investment in the business.

At this point in time, with $400 million cash in the bank and how the industry looks, we do not believe now is the time to do that.

— New subject —

SG This year we decided we are not trying to predict the direct channel contribution — we’re not going to play odds on it. That direct channel could generate 5,000 to 10,000 samples this year, or we could do 200,000 samples.

OG: For your $330 million number, for all intents and purposes you’re just taking the low end of DTC (direct to consumer)?

SG: Yes. If we deliver 7,000 samples from that channel we’ll think, awesome, so, what did we learn.

For the most part, this year’s guide is, and this is a further iteration of our philosophy for guidance — as we’re going on further in commercial progression, we’re getting less visibility into our top line numbers.

We’re launching so many new products, so many new call points. We’re trying to commercialize them in different ways. We’re bringing in different ways, we’re doing package deals in different ways.

Our percentage of international, no other diagnostic company has had 10% of their business from international in the early stages of life, and so all of that told we realized we have less visibility — which is OK because the TAM is there.

The growth is there. We’re going to get it.

But then going to 2020 guidance the idea is, look, I’ll tell you what, why don’t we just guide assuming no change in business dynamic, assuming nothing coming from complementary cross selling, different pricing, new product introduction, the direct channel, we’re investing in international, but maybe it will take two years to materialize.

Let’s not do puts and takes on it and come up with an average. Let’s just say we went from 100 reps in [20]18, to 190 reps in [20]19.

We’re going to do a similar size increasing today [in percentage terms], assuming that and some nominal decrease in rep productivity, which happens every year, and no other change in our business, what can we absolutely see in front of us — and that means there is upside in cardio, Europe, gastroenterology.

If any of those start flipping — it’s upside. We’re not counting on it.

The direct channel that could work.

Maybe the $200 mailing fee internationally [was impactful and is now gone with reps in Europe].

All of these things we could have tried to estimate, we’re just saying the upside could be far greater but guiding to that doesn’t do us any good.

Within a two to three year time frame all of this starts kicking in and keeps the growth rate going.

There’s no sense in trying to time it.

OG: Would you say your 2020 guidance is more conservative than your 2019 guidance?

SG: I don’t like that word but that’s one way to describe it.

We are aggressively investing in growing this business.

That is also the guide where, honestly, if we don’t get there it means something actually went wrong.

It’s not like there is the range of possibilities, if we don’t get that something went wrong and I will be able to say, hey folks, here is what went wrong.

Maybe that’s conservative.

OG: This is my question about cash flow. I’m going to do my best to give you a question that you can answer.

All of the numbers I am about to say are totally hypothetical. You have not told me you’re going to beat by $100 million I’m just making up a number. You have not told me your gross margins will be 50%, I’m telling you [some contrived numbers].

SG: We’re targeting 50%.

OG: No problem.

With respect to cash from operations, let’s pretend that the company exceeds low end revenue guidance by $100M — I’m not saying you will, this is purely hypothetical — and from that $100M in revenue, $50M in gross profit was generated.

Would that $50M in excess gross profit, which is above and beyond 2020 guidance, essentially flow directly to EBITDA and cash from operations?

I’m asking if there is free cash flow leverage once, or if, the 2020 guidance is exceeded or if that excess revenue would be burdened by a similar negative cash flow margin.

SG: It’s certainly not going to be free money, but it’s certainly going to more leveraged.

In order for it to exceed we will have to spend a dollar on direct marketing to somebody.

Well, let’s talk about the hypothetical. If, by our sales deployment around the globe these accounts were just far more productive, then absolutely.

In reproductive, if indeed by seamlessly stitching together all of the tests together then all of a sudden that rep is selling four tests instead of two, sure it’s the exact same SG&A and the R&D drops all the way down to the bottom line.

Now that may or may not happen.

If it’s the direct channel, defacto you spent something to acquire that additional revenue, albeit it’s much better leverage.

So, yeah, it’s going to take some out of there. It’s not all going to drop to EBIDTA, but it’s going to be much less sales and marketing expense.

Therein would be a blend of all of that.

There’s billing and reimbursement. You’ve got to spend something to – the insurers don’t just say, ‘hey I took that phone call and since the answer was yes I’m going to send a check as well.’

Every dollar of revenue has some G&A attached to it.

In general if the question is, is there leverage — absolutely — it’s just not all going to drop to the bottom line.

OG: I was hoping that, in this totally contrived version of the world, there would be some point where that part of the revenue would actually be cash flow positive.

SG: Well, let’s do it another way.

There is another way to do this. We have noted that if you only looked at our hereditary cancer business from top to bottom, it runs operating cash flow positive, and it’s not too hard to see why.

One is we’ve been there longer so operations scaling is there, the billing operation is more efficient, we’re getting paid more on a per test basis. I can safely say the COGS of our cancer test is at least one half of our average platform COGS.

Our sales and marketing — we’ve won those beach heads, it’s super sticky ordering.

It’s not like they are going in there fighting for every unit of cancer like they are for every unit of reproductive. And of course, our R&D is highly skewed to cancer.

So if you take that all, yeah, every unit sold or every dollar generated in our cancer franchise generates operating cash flow for the business.

Next will be reproductive health, once that scales.

Then cardio, and then neuro, and then all of these pharma partners. Every disease area they’re running. And then exomes, and then eventually somatic, and on and on and on.

That’s another way we think about it.

The commercial leverage gets better. The operating leverage gets better. As your experience with the testing goes, your billing gets better.

OG: When you put out your cash burn guidance in February, I want to think of it as, OK, if they do beat by $100 million, and it does drive $50 million in gross profit, will the burn rate go down?

SG: That’s a good question.

We’re in invest on. If that started materializing, then in mid-July when we have our four day scrub of the business, that’s when we will start making some decisions.

I can’t promise that I’ll say, awesome let’s just let it flow to burn. We may as is consistent with our strategic model say awesome, let’s hit somatic harder.

Awesome, let’s get liquid biopsy going six months faster than we planned.

I don’t know what decision we will make then. It will depend on a lot of things that we have no control over and frankly no visibility into.

But we’ll make that decision there. I cannot guarantee that it will let it drop [let the excess cash reduce burn].

If we use history as a guide, it would be put it to use.

OG: I think as long as you are taking capital from the equity market vis-a-vis either convert or actual stock, it does matter.

I’ve seen a company that we deal with right now where they ignored the stock market too much and the stock became a liability.

It was actually holding the company back. They almost went bankrupt and they are just now getting out of it.

It happens and it’s because they didn’t take care of their stock price.

They are now in a position with $200 million in cash and $1.2 billion in debt.

SG: We’re not going to do that. I can tell you right now we’re never going to do that.

That you can tweet.

OG: I have a great concern for investors that lean on me that Invitae now is about $2 billion [in market cap], but when it was $20 last time it was $1.4 billion [market cap].

So the upside is shrinking.

SG: This is where the dilution question comes up. There is what I believe a fairly esoteric conversation to be had where if you didn’t invest X amount, nine months from now would your stock price be the same regardless?

And here’s the thing. Guys like me don’t get paid to be on the wrong end of that.

We’re at a point where we do not need to raise capital to run this business.

If we see a great opportunity, we see acquisitions; if we see an investment. We will make those decisions very much with our investor’s appetite for investment in mind.

No one wants to fatigue investors. But again, we drive the business to meet the needs of the customer [Invitae laid out the markets and TAMs they are going after at the JP Morgan conference]. Our primary concern is to serve the customer in that TAM.

Next is to make the company awesome so great people want to come here and stay here.

And then third is the long-term shareholders that want the best total return to shareholder by far, from anybody, not measured against the index, not measured against some sector, we want that investor realize returns that would be gargantuan.

That’s how we will make that decision [financing].

That is exactly the rubric that will be used to make that decision.

We’ve been in the financing arena before, and you’re right, it could lead to some really dire times.

We’re not there. We’re never going there.

So this cash versus stock price discussion will very much be driven by do we have enough long-term investors that are interested and engaged and like the idea of pushing and pushing and pushing.

There was a quip by one of our competitors that they are the only profitable genetic testing company. I would ask — how is that working out?

Make no mistake.

There is one single financial metric that we are driving for and that is massive sustainable long term cash flows.

Conclusion
The optimism that CEO Sean George has is contagious, but as investors we need to be impervious to contagion.

My greatest concern for Invitae is not a few million dollars in revenue or a few thousand tests, it is, without a doubt, cash flow.

While the company has seen revenue increase ten-fold, its stock price has increased just two and half fold. Obviously, some of that is simply the market pricing in expectations and the company delivering, but some of it comes from the equity financing the company has done (read: stock sales).

This pushes the market cap up (more shares) but it leaves the stock price unchanged.

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

Thanks for reading, friends.

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