It's been an eventful 30 days for Invitae (NVTA). That might be an understatement.
The genetic testing pioneer announced a major strategic pivot July 18. The business replaced its CEO, laid off one-third of its workforce, and deprioritized its hyper focus on growth. It also provided guidance that lowered expectations through 2024. It was painful, but necessary.
Invitae announced second-quarter 2022 operating results August 9 that exactly matched guidance from July. The next day shares roared 277% higher on an epic short squeeze. It was bizarre, but fun.
The volatility may have investors wondering where the business goes from here. Perhaps the best move is also the most unpopular: Invitae should divest ArcherDX and triple down on hereditary cancer screening. The $1.4 billion acquisition was only announced in June 2020, but offloading it could save the core business and pave the way for an acquisition.
Is ArcherDX Still a Good Fit?
Invitae made a name for itself by disrupting hereditary cancer testing. The market was previously dominated by Myriad Genetics (MYGN), which infamously patented genetic mutations and then charged sky-high prices for screening diagnostics. The business model relied on high selling prices and low volumes. A Supreme Court ruling invalidated that approach, which opened the door for new business models.
From the start, Invitae's approach relied on low selling prices and high volumes, essentially making clinical-grade genetic testing available to the masses. It quickly became the volume leader and maintains that label today.
Then, management got a little sloppy.
The genetic testing company expanded outside its core focus area in oncology and started expanding to dozens of countries. It also expanded beyond hereditary cancer screening and into monitoring individuals with a confirmed cancer diagnosis. That was the primary goal of the $1.4 billion acquisition of ArcherDX.
ArcherDX was a high-profile multi-omics start-up. In fact, it was preparing for an IPO when Invitae came knocking. The start-up developed tools for detecting molecular signals in both blood and tissue samples through personalized cancer monitoring (PCM). The technology platform was pursuing various market opportunities in cancer monitoring, including:
- Minimal residual disease (MRD): This ongoing testing can detect the first signs that cancer is making a comeback in patients previously declared tumor free.
- Therapy optimization: PCM can help oncologists find the best treatment options based on the molecular composition of an individual's tumors. It includes real-time feedback on the effectiveness of current treatments, as well as responses to treatment changes.
- Clinical trials: PCM could also be used to test novel hypotheses in clinical trials, such as testing the effectiveness of an experimental therapy in reducing a clinically-meaningful biomarker.
These had a combined market opportunity of $45 billion internationally and $19 billion in the United States alone, providing a significant increase to Invitae's total economic opportunity.
Things quickly unraveled.
ArcherDX was sued for patent infringement by Natera (NTRA). The legal saga, ongoing as of this writing, may have played a role in Invitae discontinuing some products and rebranding others in 2021.
More important for investors, ArcherDX encountered regulatory delays for its most lucrative products. To better understand just how far behind the platform has fallen, consider that diagnostic tools have three designations:
- Research use only (RUO) tools are the least regulated and accompanied by the lowest selling prices. These cannot be used in commercial products by customers.
- Laboratory-developed tests (LDT) are only allowed to be used if they're designed, manufactured, and processed within a single laboratory. The U.S. Food and Drug Administration (FDA) takes a relatively hands-off approach to regulating LDTs, although it does establish general guidelines for the laboratories themselves.
- In-vitro diagnostic (IVD) tools are the highest classification diagnostic and the only ones that require FDA approval. They earn the highest selling prices and can be processed in centralized facilities or at a customer's lab.
The delays meant the company could continue selling RUOs and gradually launch LDTs in select markets, but IVD launches were pushed into 2023 or later.
That dropped ArcherDX and Invitae well below peers in the competitive landscape of liquid biopsies, which includes nearly two dozen companies. Many have or will soon have FDA-approved IVD products, including Guardant Health (GH), Exact Sciences (EXAS), NeoGenomics (NEO), Roche (RHHBY) , Natera, and many startups.
It also calls into question whether the $1.4 billion acquisition remains a good fit for Invitae. There's a strong argument for offloading the assets.
Why Invitae Should Divest ArcherDX
I'd argue Invitae's best path forward is tripling down on hereditary cancer screening. It's already the market leader by volume. For comparison, at this point ArcherDX is unlikely to become a major player in liquid biopsies or PCM. Recent delays could relegate it to one of the bottom feeders.
Meanwhile, Invitae doesn't have the proper commercial infrastructure to achieve success in liquid biopsy markets. That includes relationships with doctors and commercial payors, as well as the geographic footprint of its facilities. The business is furiously attempting to slash cash burn in 2022 and 2023, so taking on the expensive initiative of building out commercial infrastructure seems unlikely – or simply a bad idea.
It's also worth considering whether the presence of ArcherDX limits the list of would-be suitors. Invitae's strategic pivot is likely an attempt to get itself acquired in the next 36 months.
Many companies could be interested in acquiring the market-leading platform in hereditary cancer screening, assuming the economics improve and the price is right. However, most of them already own liquid biopsy portfolios. Anti-trust obstacles alone could exclude Exact Sciences, Guardant Health, Roche, Natera, Illumina (ILMN), and many others across the competitive landscape.
That suggests the best path forward for Invitae is to divest ArcherDX in its entirety. The move could provide hundreds of millions of dollars of cash, extending the runway into 2025 or later and delaying the need for further share dilution. Such a transaction would also refocus the business on its core strengths, improving the economics of the overall platform. That would make the business more attractive and reduce the obstacles for an acquisition – likely at a price that wouldn't be possible otherwise.
Management certainly has its hands full. But as financial conditions tighten and meme-stock mania fades away, investors might be looking for an acceptable exit. Offloading ArcherDX would likely provide the best chances for success.
