Investors started to lose confidence in genetic-testing company Invitae (NVTA) in late 2021. The business had become bloated and inefficient, and was trying to move in every direction at once.
In an attempt to make sense of the complexity, management unveiled a dashboard of metrics that could be used to track progress against various ongoing initiatives.
The effort didn't work.
Invitae on July 18 said that its longtime CEO would be stepping down, it would cut a third of its workforce, and it would simplify the portfolio to focus on core products.
Can a newer, leaner business regain the trust of investors anytime soon?
Invitae's Critical Error – and Admission
Invitae powered through the easy-money era of the past decade by pursuing a growth-at-all-costs business model. Management held up revenue growth as the only metric that mattered. Investors loved it, but the bill always comes due.
The fallacy of the growth-at-all-costs model can be summarized by the rapid deterioration of gross margin, or the profitability of revenue.
The genetic-testing company tripled its revenue from fourth-quarter 2018 to second-quarter 2022, but grew gross profit only 7% in that span. That's not exactly a winning strategy.
The restructuring unveiled earlier this month is an important admission that the pursuit of growth and discounting of other metrics, like profitability, was misguided.
What's the Goal of Invitae's Restructuring?
The company's goal is to become a more sustainable business.
A series of moves are expected to reduce annualized cash burn by $326 million. These include paring 1,000 employees, exiting noncore products, reducing spending on external services, and reducing the geographic footprint from 100 countries to fewer than 12.
Even with this much-needed restructuring, investors must be realistic. Invitae expects to report a cash burn of $150 million for Q2 2022. For the full year, the business expects to burn at least $600 million of cash.
The figure is expected to improve in 2023, to a range of $225 million to $275 million.
Considering management expects to have ended June 2022 with roughly $737 million in cash, the new guidance suggests Invitae will end 2023 with less than $200 million on hand. That will likely provide less than 12 months of runway. That puts the business, and investors, in a precarious position.
Invitae has sharply lowered revenue-growth guidance for the rest of 2022 and the next few years. Previously, the business penciled in 40% sales growth per year. Now, it expects no revenue growth in the second half of 2022, flat revenue again in 2023, and growth of 15% to 25% a year after 2023.
The reduced growth expectations are due to focusing on fewer products. Invitae expects to devote resources in the core hereditary-cancer-testing platform, women's-health products, liquid biopsy tools, and selling genetic data.
Will Invitae's Turnaround Succeed?
Invitae has little room for error. With profitability still a ways away and annual revenue growth and gross margin both near 20%, it's possible to argue Invitae pivoted a few years too late.
It's also possible to argue that Invitae is cleaning up operations for a potential acquisition.
The new operating structure might still not be sustainable, especially against a backdrop of rapidly tightening financial conditions.
A larger peer might be interested in acquiring Invitae's remaining operations, but investors shouldn't hold their breath. If an acquisition does occur in the next 24 to 36 months, then it likely wouldn't be for a major premium. (The stock at last check was a bit below $2. Last September it touched just under $33.)
