Invitae (NVTA) in the next two years does not have much for investors to look forward to. Then again, the bar has been set so low that even minor improvements to the turnaround timeline could be meaningful.
The genetic testing pioneer announced a strategic pivot this summer. Pursuing a growth-at-all-costs business model took its toll on the health and long-term viability of the business. Invitae reported $460 million in full-year 2021 revenue, which marked an impressive 119% leap from two years prior. The downside is the sales growth was accompanied by an operating loss of $654 million and operating cash outflow of $560 million in 2021.
The board of directors stepped in to remove the long-time CEO, reduce headcount by 33%, scale back operations to preserve cash and reduce cash burn, and reset expectations for more sustainable long-term growth. It was the right thing to do. But it also contributed to the stock's 84% year-to-date tumble.
Sentiment is about as gloomy as can be right now, but that doesn't mean a positive surprise is off the table when Invitae reports third-quarter 2022 operating results in early November.
Can Invitae Accelerate Its Timeline?
Invitae dug a pretty deep hole over the years. It will take time to climb out of it. That's exactly what management's forecasts suggest:
- Full-year 2022 cash burn is expected to be at least $600 million, while full-year 2023 cash burn is expected to be at least $225 million. That's still uncomfortably high, but it's a sharp improvement.
- Second-half 2022 revenue is expected to equal the first half's total. That suggests full-year 2022 revenue will grow by low double-digits compared to 2021.
- Full-year 2023 revenue is expected to equal full-year 2022 revenue. Growth achieved next year will only offset sales lost from exiting certain countries and deprioritizing several products.
- Adjusted gross margin is expected to climb in 2023.
But perhaps operations can improve a little faster than suggested on certain metrics.
- Invitae will absorb one-time charges related to severance packages and realignment of up to $75 million. However, first-half 2022 cash burn of $316 million makes it possible for the business to burn less cash than its full-year target. Burning nearly $600 million in cash is still pretty terrible, but it could set the stage for further improvements in 2023 and 2024.
- The bar for revenue growth is relatively low, which provides room for upside. Keep in mind almost every peer in hereditary genetic testing has also set low expectations for full-year 2022 and 2023 sales, suggesting Invitae may not be setting the bar too low.
- Gross margin is where there's the most room for a positive surprise. The primary reason for adjusting the cost of revenue is to exclude amortization and depreciation charges from acquired assets, but Invitae wrote off $2.3 billion in goodwill and intangible assets in the second quarter. Investors should always focus on GAAP (not adjusted) metrics. The asset impairment suggests GAAP gross margin will start to more closely match non-GAAP (adjusted) gross margin, which is a good thing for the long term.
There's a sour mood surrounding Invitae right now – and the poor sentiment isn't surprising. It will take time for the business to meaningfully improve and regain the trust of investors. A strengthening competitive landscape and tighter financial conditions could complicate the turnaround, too.
Nonetheless, the genetic testing pioneer must start somewhere. Investors can watch the metrics above to gauge progress and, possibly, see the first signs that the company's timeline could be accelerated over the course of 2023.
