Invitae Inviting as Undervalued Growth Play

In today's Small-Cap Friday column, we look at Invitae , a small but rapidly growing genetic testing concern I recently added to my portfolio. Invitae, based in San Francisco, provides diagnostic services to assay hundreds of genes in order to detect genetic disorders associated with cancer and various neurological, cardiovascular, pediatric and other rare diseases. Invitae is what I like to call a broken IPO. It came public early in 2015 at approximately $20 a share and currently sells at about $7 a share with a market capitalization of $280 million. Genetic testing is currently a $3 billion business that is expected to triple over the next five to six years, so Invitae is in the middle of a secular growth theme. It started out primarily offering oncology tests, which are growing at 200% annually and 25% quarter over quarter as the company takes market share in a growing space. The company has expanded into offering tests in cardiovascular, neurology and other disease areas. These offerings are growing much faster than the company's oncology tests, albeit off a much smaller base. These new tests also have higher average selling prices than the cancer offerings. Its primary clients are large insurers such as Aetna and UnitedHealth . The company continually has driven down the cost per test as volume expands. Invitae's growth trajectory is impressive even as it continues to post considerable losses as it ramps up to scale. In the recently completed third quarter, revenues came in at $6.3 million, nearly triple the same period a year ago. However, total costs and operating expenses were $31.2 million in the third quarter of 2016 compared to $24.6 million for the third quarter of 2015 as the company expanded its testing footprint. Revenues are tracking to about $25 million this fiscal year compared to less than $8.5 million in fiscal 2015. The consensus has Invitae producing $60 million to $70 million in revenues in fiscal 2017. Based on recent run rates, I expect Invitae to be at the top end of that range and quite possibly slightly exceed it. The company ended the third quarter with more than $70 million in cash and marketable securities on the balance sheet. It then raised another $45 million via a secondary offering in November. Cash was reduced by $18.8 million in third quarter, and this cash flow burn rate should go down consistently and substantially in the quarters ahead as revenues and billable tests continue to expand exponentially. This trend should keep any financing concerns off the table until 2018 at least, and given the way the company is growing I would not be surprised if this turns out to be the last raise of capital InVitae will need to do. Although Invitae is not yet profitable, the company and its stock seem poised for big things in the quarters and years ahead. Also encouraging is that the CEO threw in another $400,000 of his own funds in the recent secondary offering. The noted health care investing firm, Baker Bros., also added more than $4 million in the same offering. Genetic testing is seeing explosive growth and is a secular theme to which I want to have exposure. When the company came public, investors believed it was worth $20 a share. All the company has done since its IPO is execute marvelously against its growth plan and is a more attractive asset than when it first hit the markets, although that is not currently reflected in its stock price. If Invitae continues to show exponentially revenue growth while continuing to reduce costs per test and expands reimbursement coverage, I think that situation will change in the near future.

Invitae Inviting as Undervalued Growth Play

The rapidly growing genetic testing concern is executing its growth plan marvelously.

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