CEO SUMMARY: In its first five years of offering clinical tests, Invitae has outspent revenue by $330.7 million. Yet its executives are confident that their company is on a path to becoming one of the dominant players in the genetic testing sector. This profile of Invitae will help pathologists and lab administrators understand more about the company when its sales reps show up to ask for genetic test referrals. Its strategy is to spend to grow fast now and make money later.
IN THE CURRENT MARKETPLACE for genetic testing services, there is much optimism among investors and the executives running the handful of genetic testing companies that are considered frontrunners in the race to gain market dominance as physician utilization of genetic tests expands.
That optimism was reinforced recently when it was announced that Konica Minolta would pay up to $1 billion to acquire Ambry Genetics, the genetic testing company based in Aliso Viejo. It confirmed for many in the genetic testing industry that investors would continue to provide the funds needed by other genetic testing companies to continue their expansion.
One genetic testing company that is determined to carve out a major slice of the genetic testing marketplace is San Francisco-based Invitae Corporation. Most clinical lab administrators and pathologists know the company by name, but are unfamiliar with its business model. In just the past 12 months, the company has more than doubled both the number of accessions and the number of lives covered by its managed care contracts.
Invitae began operating in 2010 and launched its first assay in November 2013. Its current Chairman is Randal W. Scott, PhD, who previously was CEO at Geneomic Health, Inc. Invitae’s CEO is Sean E. George, PhD, who is also a co-founder of the company.
Invitae conducted a successful initial public offering in February, 2015. It raised $116.8 million in gross proceeds. Its shares trade on the New York Stock Exchange under the symbol: NVTA.
Growth in Accessions
It may be true that specimen volumes are flat or declining at most of the hospital and health system labs throughout the country. That is not the case at Invitae. In the 12 months ending in June, 2017, it saw accessions skyrocket from 12,500 in Q2-16 to 30,500 in Q2-17. That’s an increase of 244% in just 12 months.
During this same 12-month period, Invitae reported that the number of lives under managed care contracts increased from 95 million to 203 million. That’s an increase of 214% and includes Medicare lives.
Four Charts Tell the Story of Rapid Growth In Volume of Genetic Tests Performed at Invitae
In just 12 months, Invitae’s accessions increased by 244% from 12,500 accessions in Q2-16 to 30,500 accessions in Q2-17. This is rapid growth in the workload that the lab team must handle.
During the same 12-month period, from Q2-16 to Q2-17, Invitae expanded its managed care contract coverage from 95 million lives to 203 million lives. Competitors say that Invitae is offering very low prices and health insurers are adding them to their networks, then telling other genetic testing labs that they must match Invitae’s low prices.
COGS per Sample
In the 12 months shown, Invitae lowers its cost of gene sequencing per sample by 31%, from $500 to $345. It accomplishes this even as it adds more sequencing data by increasing the number of genes covered by its tests.
This chart shows how Invitae has increased the number of genes covered by its menu of tests from 200 genes in 2014 to 20,000 genes in 2017.
Charts from Invitae Corporation, second quarter 2017 earnings report.
Low Price Strategy
Competitors gripe that Invitae is using very low prices for its genetic tests to generate new business and win additional managed care contracts that make it a network provider. That pricing strategy is familiar to clinical lab managers, as it is virtually identical to what Laboratory Corporation of America and Quest Diagnostics have done over the past two decades by offering payers deeply-discounted prices for clinical lab tests in exchange for network status.
But that low-price strategy has come with a cost for this genetic testing company. Invitae has outspent revenue every year since it entered the market. For the years 2012 through 2016, it generated total revenue of $35.2 million. During these same four years, the company lost a collective $271 million.
The story is similar during 2017. For the first six months, Invitae’s revenue totaled $24.7 million and its net loss was $55.5 million. As of June 30, 2017, Invitae reported that its accumulated deficit was $330.7 million.
More Capital From Investors
Invitae has covered this revenue gap by raising funds from investors. For example, at the end of July, Invitae announced that it would sell $73.5 million of stock in a private placement. Much of the money will come from existing shareholders.
The company is also willing to spend heavily on sales in order to increase test referrals. During the first six months of 2017, it spent $24 million on sales and marketing. That was almost the exact amount of the company’s total revenue of $24.7 million for the same six months.
Another cornerstone of Invitae’s growth strategy is to continually expand its menu of genetic tests and genetic test panels. During its second quarter earnings call, Invitae executives reported that, whereas the company’s test menu in 2014 included about 200 genes, by 2017, its test menu expanded to include 20,000 genes.
In many respects, Invitae is following the popular growth strategy that has emerged from the Silicon Valley during the past two decades. In simplest terms, the “growth first, revenue later” strategy says it is necessary to spend heavily in the early years to become the dominant company in that space, despite incurring substantial losses.
Market For Genetic Tests
Recognizing that the clinical market for genetic testing is still in its infancy, Invitae wants to become the major provider of such tests. That way, as the market grows and matures, it holds an unassailable market position. Amazon is an example of this. Founded in 1995, it lost money for almost two decades. But it became dominant in multiple industries and its share price continues to go up.
Most pathologists and lab administrators tend be conservative in how they manage their clinical laboratories and pathology groups. Incurring costs that create substantial losses quarter after quarter is an uncomfortable business concept for them.
In fact, some lab professionals will look at the company’s rapid growth and ongoing losses as a factor that may have contributed to the systemic error in its genetic tests that happened during the past year. They know how chaotic a lab can be while it is rapidly adding staff and instruments to accommodate increased volumes of specimens.
On the other hand, Invitae does have momentum in the genetic testing market. Assuming it can continue to raise the needed capital to offset its current operating losses, it does hold a strong position from which to expand its market share.