Myriad Genetics Stock vs. Invitae Stock
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If you stick your neck out and make a long-term call on a stock that turns out to be right, expect to hear nothing but crickets years later when you’re proven right. If your call turns out to be wrong, people will be lining up around the block to point out what an idiotic buffoon you are. That’s human nature man, and it’s partly explained by the concept of loss aversion – people feel the pain of a loss twice as much as the joy of a gain.
One man who should be recognized for making a good call is Maxx Chatsko over at Motley Fool who wrote a September 2016 piece warning investors in Myriad Genetics Inc. (MYGN) about a small up-and-coming test firm, Invitae (NVTA). He warned that competition was increasing, particularly, with the arrival of Invitae.
Chief among the antagonists is Invitae, a tiny $240 million company that posted just $5.6 million in revenue in the most recent quarter. Considering the $186 million in quarterly sales Myriad Genetics raked in, you may be inclined to think Wall Street is overreacting to the potential threat posed by Invitae. But you should think twice before overlooking the tiny competitor.
Credit: The Motley Fool
That tiny $240 million company now has a market cap of $4.5 billion compared to Myriad Genetics with a $2.5 billion market cap. As for revenue growth, Invitae is quickly catching up to Myriad which hasn’t been able to grow revenues for ten quarters in a row now.
That was a remarkable call Mr. Chatsko, well played. We can only imagine all the Myriad Genetics bulls who criticized your thesis are lining up to admit they were wrong and congratulate you on that call.
Mr. Chatsko went on to talk about how Invitae’s business model was to provide “affordable, high-quality genetic tests for a wide variety of diseases directly to doctors.” That threatened Myriad Genetics which had monopoly pricing power on a single cash cow – the BRACAnalysis test which looks for a hereditary cancer gene that causes breast cancer.
Falling costs, which are good news for patients and doctors, are horrible news for Myriad Genetics, which is heavily dependent on monopoly pricing for a single test — BRACAnalysis, a hereditary test for breast and ovarian cancer. It generated nearly 90% of the company’s total revenue in fiscal year 2016.
It’s remarkable to think that the BRAC test was almost the only money maker for Myriad back then, and how that’s changed in just five years’ time. Looking at their most recent quarter, we see Myriad is now dabbling in a slew of other tests, not just BRAC. Here’s a breakdown of revenues by segment for Myriad Genetics as of Q3-2021.
As Myriad continues to try and get their growth mojo back, Invitae is being punished by shareholders who aren’t happy with the most recent quarterly earnings report.
Invitae’s Very Bad Quarter
We’ll start this out with some background. We’re currently holding shares of Invitae based on reasons outlined in a piece titled Invitae Stock – A Pure-Play on Genetics Testing. The reason we brought Myriad Genetics into the picture today is because these two companies are competitors in the precision medicine space. Keep your friends close and your enemies closer. Based on what we’ve seen with Myriad’s inability to generate growth over the past 10 quarters, we’re hoping they’re becoming less of a threat to Invitae as time goes on. Now, back to Invitae.
As we alerted Nanalyze Premium annual subscribers today, one reason investors punished Invitae was because of their indecisiveness. Here’s what they effectively said.
- Q2-2021 – We’re halfway through the year and things are going great so we’re raising our revenue guidance range – $475 million to $500 million
(Three months pass.) - Q3-2021 – Actually, we were wrong about that optimism, so we’re lowering guidance now – $450 million to $475 million
That inability to pick a guidance and stick with it doesn’t bode well with investors who don’t like surprises. The second bit of bad news was that Q3-2021 came in at less than Q2-2021, something that doesn’t bode well when investors are accustomed to every quarter showing growth (The Rona being the obvious exception here).
Still, it’s not that bad. Let’s say Invitae hits the lower end of their guidance range at $450 million. That’s a 5-year compound annual growth rate of 46%, hardly shabby by any measure.
Investors are probably concerned about why quarterly growth has stalled. If Invitae hits $450 million in 2021 revenues, here’s what their quarterly revenue growth would look like.
Perhaps Wall Street’s reaction is short sighted. If we look at the bigger picture, Invitae is moving extremely fast to capture market share, having made four life sciences acquisitions this year alone.
- Medneon – combines AI and human insights with actionable information regarding an individual’s cancer risk to inform precision prevention and management over time at the point-of-care or through telemedicine.
- Ciitizen – patient-centric consumer health tech company working to build a global platform to help patients collect, organize, store and share their medical records digitally.
- One Codex – data platform for applied microbial genomics. Adds capabilities across microbiome and infectious disease testing capabilities.
- Genosity – a genomics and laboratory services company offering software and laboratory solutions that enable the deployment of complex sequencing-based cancer testing.
They’ll need some time to aggregate all the financials, find all the dead bodies, and see what they’ve really ended up with. Once they plug everything in, we can see how the below revenue segments are affected.
In today’s earnings call, the CFO talked about how “Invitae’s business model is highly differentiated, complex, and ambitious,” and that they hope to provide more clarity to investors going forward such as providing revenue segment trends. It’s great to see they’re responding to feedback and engaging with investors.
It’s a Risky Business
We don’t give investment advice, so you need to do your own analysis to see if Invitae is a good fit for your own portfolio. That said, we would feel confident adding to our current position while acknowledging that the entire genetic testing domain is risky business. Invitae has raised $1.2 billion from SoftBank giving them plenty of dry powder – $1.25 billion in cash on the books – but they’re also blowing it like drunken sailors.
The company’s ambitious business model relies on offering low-cost genetic testing products to increase adoption, something that probably involves subsidies and the like. They’re acquiring other companies very quickly, and they failed to manage the expectations of Wall Street analysts while doing so. Understanding these risks, we don’t see any reason not to add to our position because our underlying thesis has not changed. When we do, Nanalyze Premium annual subscribers will be the first to know,
Conclusion
Nobody watches a stock drop -20% and thinks to themselves, “what a bargain.” We’re always prone to start questioning our original thesis and checking to make sure things haven’t changed. It’s the safest thing to do as risk-averse investors. After checking in with Invitae, we believe our thesis hasn’t changed a bit. Stocks that grow like mad don’t always do so in a linear fashion. We’ll trust that management knows what they’re doing and expect to see growth eventually continue. Onwards and upwards.
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Thanks for the alert. Much appreciated.
On a personal note, my son passed away 1year ago from esophageal cancer. He inherited a rare genetic disorder called Li Fraumeni, from me. The disorder was discovered only after he was diagnosed, which eventually resulted in extensive testing within the family. Invitae has done all the testing for my family and I must say they are wonderful. I invested a few weeks ago based on your evaluation and my personal experiences with countless employees, all amazing. We increased our position today, again based on your insight and the slight dip. You guys are great.
We’re sorry to hear of your loss Mike. That’s quite a powerful story, thank you for sharing it with us all. Having a personal experience with a company’s product can often be a good way to find investments. In the same way, successful entrepreneurs are often those people who are so frustrated with a problem they create the solution themselves. We appreciate your positive feedback and thank you for your financial support!