Invitae: What Happened At The JP Morgan Health Conference (NVTA)

Investment Thesis

Last week, JP Morgan hosted their 41st annual health conference in San Francisco. This year, the meeting focused on topics such as the role of technology in healthcare, physician shortages, and how to navigate healthcare reform best, incorporating presentations from healthcare start-ups to well-established industry leaders. One of the highlights was a presentation by Invitae (NYSE:NVTA), a leading genetic testing company in the Cancer Risk Screening market. Present at the meeting were CEO Kenneth Knight, CFO Roxi Wen, and CMO Dr. Bob Nassbaum, with Julia Qin, a healthcare analyst at JP Morgan (who has a sell rating on the stock), serving as moderator. The management team shared their vision for the company and an overview of the top revenue drivers and pipeline opportunities. Here are a few highlights from the presentation.

The Company’s Vision

Kenneth Knight started the presentation with an overview of NVTA’s mission, vision, and values, focusing on expanding genetic testing into mainstream medicine while enhancing healthcare equality and access. He believes that current genetic testing practice is primarily fragmented and siloed by disease state and that further integration of genetic testing is required to accelerate the impact of this testing in healthcare.

To that end, NVTA has been focusing on building a comprehensive molecular diagnostic portfolio supported by solid IT infrastructure and partnerships with leading Electronic Health Record system providers, including Wisconsin-based industry leader, Epic Systems, leveraging recent advancements in DNA sequencing, making its business model economically feasible.

I share NVTA’s vision, and I believe that the natural trajectory of medicine is toward greater integration of genomics testing and data analysis to drive more efficient treatment decisions and improve patient outcomes. However, I see significant impediments in the short run and a notable first-mover disadvantage as NVTA and many pioneers sharing its mission spent hundreds of millions on awareness campaigns, lobbying, and education only for others to reap the benefits. The market entry barriers are shallow, and I believe that NVTA needs to have a moat to protect its market share. We are yet to see significant changes in physician workflow to incorporate genetic testing. Even on staffing, I don’t see a meaningful response by healthcare providers to increase genetic counselors.

The CEO proceeded to brief the audience on the company’s portfolio and pipeline, as discussed in more detail below.

Market Position

NVTA is the market leader in the Hereditary Cancer Risk testing market, with over three million patients tested up-to-date. Cancer Risk Assessments are genetic tests that measure the risk of developing cancer-based on genetic makeup. For example, patients with a BRCA mutation have about a 40% to 85% probability of developing breast cancer.

The market grew significantly after a US Supreme Court ruling rendering Myriad Genetics’ (MYGN) patents over BRCA genes (and any naturally-occurring biological substance) invalid in 2013. Subsequently, some businesses, notably 23andme(ME), rolled out their tests relying on a direct-to-consumer model, while others, like NVTA, sought clearance to sell Hereditary Risk test as a Laboratory Developed Test “LDT” from the Center for Medicare and Medicaid Services CMS.

Although the marketing pitch of Hereditary Cancer Risk assessment has the elements of success, including the urgency element and desire to know one’s genetic predisposition to develop cancer, most of the industry’s revenue is derived from patients who already have cancer whose care providers are interested the cancer prognosis; whether their DNA was a factor of them developing the diseases.

One reason for the low market share of DTC market participants is the lack of awareness of the value of genetic counseling among the general population and the fact that most people are afraid of what they might discover from their genetic test, or they simply choose not to know for fear of worrying themselves too much. One can’t also ignore the Labor shortage in the genetic counselors market.

Another reason is the challenging reimbursement landscape and the lack of unified guidelines from key opinion leaders. The CMS’ reimbursement decisions carry significant weight in the market, and many private insurers follow their choices when designing their coverage policies. For now, the CMS and major health insurance companies are covering hereditary risk screening for patients with cancer. However, the full-scale population-wide screening that NVTA envisions remains years away.

In previous articles, I talked about cases where women underwent unnecessary mastectomies and oophorectomies because they received a notification that they were at increased risk of developing breast or ovarian cancer from specific genetic variants in their DNA before finding out that what was believed a risk actually had no clinical implications at all. The FDA’s warning about the accuracy of molecular genetic testing last year is one factor to consider when assessing NVTA’s potential

Strategically, companies such as Exact Sciences (EXAS) and Guardant Health (GH) have a more solid regulatory foundation than NVTA, with the majority of their income coming from FDA-approved tests, contrary to NVTA, whose CILIA-waved tests are only regulated by the CMS.

On the competitiveness front, one should note that the correlations between gene mutations and disease risk are unpatentable, leaving little competitive moat or barriers to new entrants. It has become expected for gene testing companies to share their findings regarding the impact of genetic makeup on health with the public, driven by patient advocacy groups and key opinion leaders, especially after the Supreme Court decision that invalidated the patentability of these findings. NVTA is a major contributor to ClinVar, the US national genetic library. Given these dynamics, one can’t help but question the company’s willingness to provide its tests without monetary compensation for the sake of amassing genetic data, an endeavor that underpins its historically negative gross margins in the five years spanning 2012 – 2017.

During the conference, the JP Morgan analyst asked about the implication of the competitive dynamics of NVTA’s late entry into the Minimal Residual Disease “MRD” business on its market position. Company executives answered that their test is as good as any other. This might be true, but the fact is, Guardant 360 is FDA-approved, while NVTA’s test is not.

Balance sheet and Cash Burn

The JP Morgan Health conference comes on the heels of management’s realignment plans that aim to reduce cash burns and operating expenses. During the meeting, management pointed out that it foresees a significant decrease in operating expenses going forward after it exited non-core segments, including the majority of its international operations.

Last week, NVTA released a Q4 earnings purview, noting a decline in revenue from $126 to $122 million due to these restructuring initiatives, including a reduction in headcount in its sales organization. Cash balance as of December 2022 stood at $555 million, essentially flat from the prior year. This is a significant improvement from the preceding quarters when cash burn exceeded $175 million per quarter. The company will release q4 results in February, where we will understand the underlying dynamics behind its capital requirement going forward.

Summary

Since our last article, NVTA announced positive news regarding its cash burn, which had declined significantly since the third quarter and start of 2022, when it was approaching $200 million per quarter. As a result, shares appreciated 25%, and if the company’s results show that the decrease in cash burn is a result of fundamental improvements in efficiency, there is a chance that the company shares will increase even further. However, any appreciation in the share price will be met by aggressive equity raising as the company continues to seek ways to enhance its balance sheet, which is in poor shape right now, especially given its $350 million convertible noted due in 2024.