Mad Hedge Biotech and Healthcare Letter
September 15, 2022
Fiat Lux
Featured Trade:
(A LONG-TERM HIGH-RISK STOCK)
(ILMN), (GRAL), (EXAS), (NVTA), (GH), (NTRA)
Posts
As Warren Buffett says, it’s wise to be greedy when others are fearful. This is excellent advice these days since we’ve been dealing with fearful times. Even the best growth stocks have been struggling from economic headwinds and the rising panic over interest rate hikes.
That means there are several opportunities for enterprising investors to take advantage of the uncertainties and set themselves up for long-term success by buying quality stocks at discounted prices.
One stock that has been battling issues lately is Illumina (ILMN).
Over the past 10 years, Illumina has delivered 380% returns—resoundingly beating the market’s gain of 241.6%.
To achieve that success, the company sold, installed, and serviced over 20,000 gene sequencer devices, which hospitals and other biomedical centers use to analyze genetic data.
Unfortunately, Illumina’s luck has turned in the last 12 months. The company has been underperforming and has investors worried about the future.
Illumina’s dominance in the sequencer market is one of the significant reasons to invest in its stock.
After all, the significance of genetic information is projected to expand over time. That makes Illumina the clear candidate for a long-term hold despite its current underperformance.
However, it’s understandable for investors to be anxious, especially with the recent move of Europe’s antitrust regulators to bar the $8 billion acquisition of Grail (GRAL).
Here’s a brief background about the deal.
Grail has created a lab test that can identify over 50 types of cancers at their early stages using only a simple blood draw. This is called the Galleri blood test.
Since screenings do not exist for most kinds of cancers, many are not diagnosed until they’re already spread and are, therefore, more challenging to treat.
Although Grail’s test does not promise to detect all cancers, it can catch the 12 most fatal types with roughly 76% accuracy, while its false positives are lower than 1%.
Needless to say, these tests could save thousands of lives annually if adopted across the globe.
This is where Illumina comes in. Since the company develops platforms that sequence genetic tests for various fetal abnormalities and even COVID variants, it has the technology to expand Grail’s operation.
Moreover, Illumina has extensive experience negotiating insurer reimbursements, which means it could accelerate the commercial adoption of Grail’s technology. At the moment, most insurers refuse to cover the costs of Grail’s test.
This resulted in only $12 million in revenue for the company, with over $187 million in operating loss. Grail’s underwhelming performance is one of the reasons investors are baffled over the move to block the acquisition.
Another is that the acquisition does not fall under any of the categories for antitrust reviews under the EU bylaws because Grail does not operate or do any business in Europe.
However, the commissioner decided to invoke a provision under EU’s merger rules that allow member states to reach out to the commission when their governments do not have jurisdiction over the matter. Six countries did so, which led to the review.
The commission is tag-teaming with the US Federal Trade Commission, which also moved to stop the deal in 2021. Both regulating bodies claim that the agreement could impede competition in the embryonic multiple cancer-early detection industry.
According to the EU commission, this acquisition would cut off all of Grail’s rivals in the segment.
This is a tad confusing, though, because Grail has no rivals in the field.
The entire debacle has the scientific community wondering over the real reason, especially since Illumina developed the technology Grail used. Then, it was spun off for financing purposes, but Illumina still retained 20% ownership. Now, the company is merely taking it all back again by acquiring it.
It remains to be seen what will happen in the following months as Illumina plans to appeal the decision.
But why is Illumina still pushing through with this deal?
The reality is that the genetic testing industry is a bloodbath. It can take years for a single genetic test to complete clinical trials, receive regulatory approval, and achieve insurance coverage. This struggle is apparent in so many clinical laboratories such as Exact Sciences (EXAS), Invitae (NVTA), Guardant Health (GH), and Natera (NTRA). Even Grail lost so much while developing its cancer blood test.
Meanwhile, Illumina chooses to market clinical tests its clients have already pioneered. That way, it can still gain profits as a supplier of sequencing tools.
Hence, having Grail back in its portfolio would be a cherry on top of its current strategy.
Looking at the situation right now, it’s a mess. Nevertheless, Illumina’s main line of business is a significant segment to be a part of in the coming years.
I don’t think the company would spend this much time and effort on Grail unless the future payoff would be substantial. Think about it: detecting cancers early? How incredible is this technology? How many lives would be saved because of it?
The long-term investing thesis for betting on Illumina is that it’ll most likely continue to deploy its gene sequencing devices globally, generating more recurring revenue flows in the process.
Simultaneously, the company can expand its domain knowledge and gather a copious amount of data for R&D that would equip it against competitors.
Basically, it has found a way to lock in customers for years while being several steps ahead of its rivals.
As confusing and grim the situation may be, for now, I believe Illumina stock is an excellent investment with or without Grail (but I hope it finds a way to be with it).
Mad Hedge Biotech & Healthcare Letter
September 14, 2021
Fiat Lux
FEATURED TRADE:
(IS THIS THE BIGGEST WINNER IN A WINNER-TAKE-MOST MARKET?)
(NVTA), (ARKK), (ARKG), (SFTBY), (AMZN), (EXAS), (AAPL), (MSFT)
One of the most underappreciated names in the biotechnology sector might just be the biggest winner in a winner-take-most market today: Invitae (NVTA).
Despite being at the receiving end of a seemingly endless flogging since the year started, Invitae remains an attractive stock for the likes of Cathie Woods.
In fact, this San Francisco-based company is one of the Top 20 holdings of ARK Innovation (ARKK) and ARK Genomic Revolution (ARKG).
Described by Woods as "probably one of the most important companies in the genomic revolution," Invitae is the sixth-largest holding of the ARK Investment portfolio with more than $1 billion worth of exposure.
Aside from ARK, Invitae also recently attracted the attention of Japanese tech conglomerate SoftBank (SFTBY), which came in the form of $1.2 billion worth of convertible bond investment.
Amid all these, why is Invitae still under-appreciated?
First, it’s essential to understand that biotech companies opt to target particular niches where they aim to maintain high prices and maximize profitability for as long as possible.
That way, they can maintain and continue to boost their profits.
This results in highly prohibitive costs in the healthcare innovation section, which in turn cause rationing of cases because only a select group of patients can actually afford the exorbitant fees for the innovative drug or therapy.
While rationing care and maximizing profits are obviously great for investors, this makes the innovations inaccessible to people who could not shell out the cash to take the tests or treatments.
This is where Invitae comes in.
Basically, Invitae is taking a completely different approach compared to its peers in the biotechnology world.
According to the company, its mission is "to bring comprehensive genetic information into mainstream medicine to improve healthcare for billions of people."
How will Invitae achieve this?
Instead of choosing a single genetic variant to test, which costs over $1,000 each, the company is developing a testing platform that can identify thousands of genetic variants.
The clincher? This will only cost less than $250 for the entire test panel.
This nonconforming approach to biotechnological innovations is what has primarily led to Invitae’s under-appreciation.
However, Invitae’s mission holds incredible potential.
What it means in medical terms is that the company can help about 1 in 6 people suffering from a medical condition with an inherent genetic factor.
What it means in financial terms is that the company holds the possibility of generating several hundred dollars per year from over 2 billion people—a jaw-dropping market opportunity worth $4 trillion.
One of Invitae’s key ideas is to grant people access to their genetic information and then interpret it for them.
To me, this indicates the company’s goal of doing for genetics what Amazon (AMZN) has done for book buyers.
The next question is this: Can Invitae truly accomplish this?
Let’s consider the company’s growth trajectory along with the catalysts ahead.
So far, three catalysts can push the company towards its goals.
First is the steady growth in testing volume. As with most medical procedures, the volume of genetic testing went down during the COVID-19 pandemic. However, this is now rebounding gradually.
In the first quarter of 2021, the billable volume went up by 72% year over year, with roughly 259,000 tests in that quarter alone.
Traditionally, genetic testing is generally driven by orders from doctors and the cooperation of health plans to cover the tests.
Moving forward, we expect pharmaceutical firms to play more significant roles in promoting and even paying for these tests.
Approximately 90% of the pharma pipelines these days are based on genetic conditions.
As these new and innovative genetic treatments gain FDA approval, the pharma companies would have additional vested interest in ensuring eligible patients receive testing. That way, they can drive demand for the therapies they developed.
The second catalyst comprises the oncology sector.
Genetic testing has become the trend, particularly for cancer—an undoubtedly massive and financially lucrative market.
To leverage this growth, Invitae acquired ArcherDX in 2020 in an effort to expand its offerings.
With this purchase, the company can help major cancer centers implement their testing systems while also offering support to healthcare providers who opt not to do their own testing.
The availability of these comprehensive services will serve as critical drivers of income and profitability considering the historically proven high reimbursement rates in the oncology testing segment.
Apart from this, Invitae recently announced its decision to acquire Ciitizen, a consumer health tech firm, for $325 million.
This move will allow Invitae to expand its patient database through the genomic and clinical information gathered from Ciitizen’s platform.
Thus far, Invitae has announced 13 acquisitions over the past 5 years.
The third catalyst is the continuous global growth of Invitae.
Evidently, the mission of reaching 2 billion people requires worldwide expansion—something that the company has been working on.
In fact, roughly 18% of the total billable volume of Invitae in the first quarter came from international transactions, which have the potential to grow faster than their business in the US.
To date, Invitae has been expanding its operations in Japan, Israel, Europe, and Australia.
Meanwhile, Invitae’s incredible potential has attracted other companies as well. Exact Sciences (EXAS) has been linked to the company for a potential merger among the firms interested.
Admittedly, Invitae’s mission to offer affordable and accessible genetic testing to 2 billion people will require many more years before it comes to fruition.
When that day comes, the company will join Apple (APPL), Amazon, and Microsoft (MSFT) as part of an elite group with $1 trillion and over market cap.
The long wait for Invitae to achieve this ambitious goal would be worth it for patient buy-and-hold investors.
Mad Hedge Biotech & Healthcare Letter
March 11, 2021
Fiat Lux
FEATURED TRADE:
(THE TESLA STOCK OF GENETIC TESTING)
(NVTA), (CRSP), (TDOC), (RHHBY), (ILMN), (ABT), (DGX), (ROKU), (SQ), (SHOP), (TSLA)
Invitae (NVTA) is one of the biggest, albeit erratic, movers in 2020, but only a handful of investors know about the stock.
In March 2020, the stock was trading at $7.43 per share only to shoot to a whopping $61 by mid-December.
A year since then, Invitae stock sits somewhere at $40—a price that could go right up again in the months to come.
Despite the volatility, Invitae continues to generate excitement among its investors.
In fact, Invitae, which has $7.6 billion in market capitalization, is grouped in with bigger healthcare and biotechnology companies like CRISPR Therapeutics (CRSP), valued at $9.36 billion, and Teladoc Health (TDOC), valued at $28.7 billion.
Its potential is even said to match the likes of up-and-coming tech stocks such as Roku (ROKU), Square (SQ), and Shopify (SHOP), which have market capitalizations of $45.7 billion, $103.07 billion, and $134.6 billion, respectively.
Given its growth in the past months and its impressive 226.8% three-year revenue increase, the projections for Invitae look well-grounded.
In fact, I think it’s reasonable to say that Invitae could be the Tesla (TSLA) of the genetic testing industry.
The genetic testing market is estimated to be worth over $21 billion by 2027, growing at a compound annual growth rate of 10% until then.
In 2020, Invitae reported a 29% year-over-year increase in revenue at $279.6 million.
The company also saw a rise in its testing volume by roughly 41% to reach 659,000 billable units—this, despite the headwinds brought about by the COVID-19 pandemic, when the demand for genetic tests took a back seat to make way for COVID-19 diagnostic and other related medical concerns.
Although some of the tests offered by Invitae are covered by insurance carriers, those that are not covered can be availed for as low as $99 for services like noninvasive prenatal screening and $250 for diagnostic, carrier, or proactive testing.
To put things in perspective, people nowadays are more than willing to shell out at least $100 to discover their ancestry, which in most cases is something they already have an idea about.
So, why would these people be reluctant to spend a bit more than $100 to check if they have to take particular precautions to keep themselves safe from diabetes or heart disease?
In the future, Invitae is well-positioned to offer high-quality genetic tests at more affordable prices as well as cater to higher volumes.
One of the most notable moves by Invitae so far is buying ArcherDX for $1.4 billion in cash and stock in October 2020.
This is a telling move for Invitae in terms of its plans for the future.
ArcherDX is another genetic testing company, which specializes in oncology.\
Specifically, ArcherDX focuses on personalized cancer monitoring as well as liquid and tissue biopsy analysis.
Simply put, ArcherDX specializes in developing tests that determine the most suitable drugs to use for cancer treatments.
To date, there’s already a growing number of competition in the genetic testing market, making Invitae’s acquisition of ArcherDX is a smart move.
Most of them are bigger companies like Roche (RHHBY) with a market cap of $269.57 billion, Illumina (ILMN) with $58.28 billion, Abbott (ABT) with $205.28 billion, and Quest Diagnostics (DGX) $15.6 billion.
Invitae, which only has a market capitalization of $7.6 billion, is considered as one of the minor players.
With the addition of ArcherDX in its portfolio, Invitae’s growth could be fast-tracked as the combined companies could ramp up sales on top of queuing additional genetic tests in their current lineup.
Invitae’s shares have jumped by almost 100% in 2020 but saw an over 25% fall last month. Although it has yet to turn a profit since its creation in 2013, Invitae remains an attractive investment thanks to its top-line growth.
Digging into their numbers, Invitae has actually managed to cut down on its cash burn by roughly $20 million from the first quarter of 2020 through the last quarter, excluding the ArcherDX deal.
That’s a notable improvement for a company and indicative of its capacity to veer towards the right direction.
Invitae has a very strong cash position at the moment, with a massive equity offering just last January. Right now, the company’s stockpile is nearly $800 million, which could carry them for quite some time.
Looking at its path of profitability, the company is also projected to be on track for a 50% to 60% growth in the next few years.
For 2021, Invitae is looking at over $450 million in annual revenue, which is 61% higher than 2020.
At this point, Invitae offers an attractive purchasing opportunity for those who want to get in on the industry before it explodes.
