Yesterday, Invitae (Nasdaq: NVTA) made a rather significant announcement. The molecular diagnostic company is pivoting its entire business strategy, and now it’s shaking up its executive team to enact it.

The Flop (The Past)

We’re all investors, so let’s frame this in Texas Hold ‘Em poker lingo. We’ll start with “The Flop” — which is the first card that everyone gets to publicly see at the table.

Since its very founding in 2010, Invitae publicly revealed its strategic plan that it intended to follow. It was a 3-stage approach to bring genomic information into mainstream medicine. It started with making its tests as affordable as possible in order to collect as many patient DNA samples as possible. From there, it would draw correlation between specific genes and conditions. And finally, it would build a network infrastructure that would allow genetic information to be available to patients, doctors, and insurers.

Here’s a refresher on what that initial game plan looked like.

Source: 7investing Invitae Company Update

Co-founders Randy Scott and Sean George knew from the start this plan would be ambitious. Even after twelve years, Invitae remains only halfway up the hill in achieving its vision. It’s gone for the growth and has collected millions of genetic samples from patients, with more than a million more being collected every year.

From these samples, it has connected-the-dots and drawn correlations between genetic conditions and the gene(s) that cause them. And from there, Invitae could more accurately diagnose conditions for doctors to build treatment plans upon. Having a a broader-based test menu — as opposed to more narrowly-focusing on a specific disease or condition — allowed Invitae to collect more data points than other diagnostic competitors.

However, purchasing the necessary genetic sequencing machines from Illumina (Nasdaq: ILMN) and Pacific Biosciences (Nasdaq: PACB) and also acquiring the companies and their IP for the diagnostics was expensive. This was even more challenging because Invitae wanted their tests to be inexpensive in order to generate higher volumes. It led to Invitae capturing lower margins than its competitors and not having sufficient internal cash flows to fund its expansion.

It turned to the public markets to fund its growth, issuing secondary offerings and diluting shareholders along the way.

The Turn (The Present)

The plan was a good one and it served Invitae well during most of the past 12 years of our bull market. Stock prices rose, the company raised funds via equity, and its top-line performance was full-throttle.

Yet things are a bit more complex this year. On the business front, FDA regulations are increasing and insurance reimbursement guidelines are more stringent, making it harder for diagnostics to hit the market and for Invitae to actually get paid.

On the investment front, it’s becoming much more difficult to raise money due to a broader-market selloff wreaking havoc on stock prices. The selloff has been especially brutal on diagnostics companies — whose weak balance sheets and cash burns have become very out-of-favor.

All of these factors have led Invitae to its announcement described above. The company is pushing out its co-founder and CEO Sean George at the helm and replacing him with its COO Kenneth Knight. Mr. Knight does not have a life sciences background; he worked at General Motors and Amazon prior to joining Invitae in 2020. He appears to be an operations efficiency expert, who will likely prioritize profits and unit economics over top-line growth and market expansion. Invitae also announced that its other co-founder Randy Scott will be returning as its Chairman of the Board.

The River (The Future)

To continue reading Simon’s update on Invitae, as well as his conviction rating for the diagnostic company, simply click the link below.

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