Capital Market Laboratories One-on-One Interview with the CEO of Invitae (NYSE:NVTA) - Invitae Acquires Advanced Modeling Technologies, Artificial Intelligence Company
Capital Market Laboratories One-on-One Interview with the CEO of Invitae (NYSE:NVTA) - Invitae Acquires Advanced Modeling Technologies, Artificial Intelligence Company
Date Published: 2019-07-30
Written by Ophir Gottlieb
Overview
* Invitae acquired Jungla for $15 million in cash and what looks like $35 million in stock
* Jungla applies advanced modeling technologies, including artificial intelligence (AI), to enhance scalable genetic variant interpretation.
* The combination is expected to further enhance Invitae's genetic variant interpretation and ability to deliver high-quality, more affordable genetic testing for use in mainstream medical care.
* During a 4-month pilot Invitae found that in hereditary cancer, with by the addition of Jungla's capabilities Invitae could lower its VUS [variant of uncertain significance] rate by 40%.
* As Invitae get moving into larger and large panels, and begins doing more exome, more genome, this acquisition becomes even more important because Invitae will find more VUS's and it will to need the ability to scale.
* Without Invitae's infrastructure, without the addition of Jungla, the CEO believes that while another company could attempt to replicate what Invitae has built, now getting into the scale and size of datasets, it's getting increasingly difficult for a team of experts, no matter how big, to do.
There is an envelope at some point where, if you're not doing what we're doing I don't think there is any catching us. We may have already pushed past that.
Invitae CEO Sean George
Invitae CEO Sean George
Lede
Number 1 Spotlight Top Pick Invitae acquired Jungla for $15 million in cash and what looks like $35 million in stock. I had an one-on-one interview with Invitae's CEO Sean George and CFO Shelly Guyer to discuss the acquisition and the future.
Preface
We added Invitae to Top Picks on 1-Sep-16 for $7.42. As of this writing it's closed at $26.51, up 257%.
Story
Jungla (the company just acquired) applies advanced modeling technologies, including artificial intelligence (AI), to enhance scalable genetic variant interpretation.
The company has developed a cloud-based platform that combines clinical knowledge with advances in functional genomics, biophysics, cellular engineering, machine learning, and distributed systems to help clinicians and patients understand the results of genetic and genomic tests.
The presser for the acquisition reads:
The combination is expected to further enhance Invitae's genetic variant interpretation and ability to deliver high-quality, more affordable genetic testing for use in mainstream medical care.
As we have noted so many times, genetic testing is not like a normal blood test -- not even close. And it takes a visit to Invitae headquarters to fully grasp the company's competitive edge. In early 2019 I visited the company and met with the CEO, CFO, COO, and head of Investor Relations.
I was given a tour of Invitae's proprietary technology on my in-person tour – something that Sean called "their Bloomberg terminal" for genomics, which is an accurate description.
It's a powerful dashboard that pulls in data, some of which is built with machine learning (ML) and AI, and an impressive repository of on demand research in real-time which is accessed with every sample and variant they receive.
Keep in mind that with each new sample they receive that's more data. More data means better results, which means higher utility, which will likely bring in more data, which will mean even better diagnostics. It is self-fulfilling.
I left that part of the tour thinking both that Invitae has a legitimate moat that no one really seems to understand, and that other genetic testing companies may be doing more harm than good. The acquisition of Singular Bio that we just noted ;last month and this one, today, of Jungla, get at the heart of this moat.
I also understand fully now that this field is not about collecting blood, running it through an Illumina machine, and getting a test result.
It's vastly more complex, and requires exceedingly high expertise per scientist and even then, would be in sufficient without the addition of exceedingly strong technology to help the scientist.
Further yet, a piece of Sean's "Genomic Network" became ever clearer when I understood that the ML and testing conclusions get stronger and more accurate as data grows, and that is exactly how other technology moats are built, like Facebook, for example.
More About Jungla
Jungla Inc. is an artificial intelligence (AI)-driven biotechnology company utilizing computational and cellular modeling to improve clinical genetic tests. Jungla's technologies are designed to continually optimize guidance for clinical genetic and genomic tests by combining advances in functional genomics, computational biophysics, cellular engineering, and computer science into its cloud-based Functional Modeling Platform (FMP). This integrated platform provides patients and healthcare providers with accurate, transparent, and increasingly mechanistic clinical guidance.
Jungla's technology can augment Invitae's ability to understand the impact of variants on molecular function, be they protein or RNA molecules, through the application of advanced methods in functional genomics, structural biology and biophysics.
This technology, coupled with Invitae's exacting, logical and reproducible approach for variant classification and interpretation, Sherloc, can help Invitae deliver more informative results to patients.
Before the Acquisition...
In November 2018, Invitae and Jungla successfully completed a four-month pilot study of the performance of Jungla's proprietary technologies in predicting the clinical relevance of differences in human DNA sequence (variants) found in individuals undergoing testing for hereditary disease.
The results demonstrated that support from Jungla's FMP can markedly increase the molecular understanding of variants while maintaining the high accuracy of Invitae's classifications, thereby significantly increasing the efficiency of interpretation and scalability of genetic testing with enhanced quality of test results.
In addition, the prospective integration of Invitae's knowledge-base and Jungla's technologies is expected to optimize clinical guidance, leveraging the data from each patient to improve results for the next.
The results show that Jungla's technologies can clarify the interpretation of variants, moving them from the uncertain category to pathogenic or benign status.
And now, on to my conversation with CEO Sean George and CFDO Shelly Guyer.
One-on-One CEO Interview
Here is a partial transcription of my interview.
Capital Market Laboratories
When I was at your facility you showed me that software and process that you called your "Bloomberg terminal." In that you showed me the value of the network -- more tests, more data, more variants, accuracy, lower costs, greater utility, and on with the cycle.
Is this acquisition, in particular the advanced modeling and AI, a part of that process?
Sean George
That's right. What we showed you was what we have built over ten-years of investing in infrastructure. We have been investing in that platform. We have our own AI team. We have our own [machine learning] ML team building out our capabilities. And we have scouring the landscape for partners or assets that could help accelerate.
And in Jungla, we hit it off early on. They saw in us some capabilities that could uniquely benefit the capabilities they had done.
We did a four-month pilot with them using our data and infrastructure and training set. With the benefit of having our infrastructure running in parallel and seeing how it could help. In the training set we used, in hereditary cancer, we found that by the addition of their capabilities we could lower our VUS [variant of uncertain significance] rate by 40%.
The VUSs tend to be the trickier ones that incur more labor. They're not super satisfactory clinical results when you get one and it's a position where more information move it one way or the other.
So, yes, that's the right way to think about it. This was a clear by versus build decision. Given the results of that pilot, why spend four years working on what they had done?
They are a great cultural fit. Our teams quite along and they saw in Invitae a way to jump start and accelerate what they wanted to do and we saw it us a way to put even more distance between us and everybody else.
Shelly Guyer (CFO)
The one thing I would add is that as we get moving to larger and large panels, and begin doing more exome, more genome, and things like that, it becomes even more important because you're going to find more of these [VUS] and we are going to need the ability to scale -- not only as the number of tests increase but also as the complexity and the depth of those tests increases -- the broad coverage of those tests.
This is super critical as we think about scaling the company in those two regards.
CML
From that four-month trial you saw those VUS rates. Is that what you expect to see across the board or do you have to go bit by bit and discover the impact?
SG
Yes. In cancer it's instructive and that's how it will work. We have no reason to believe it can't work them same in other disease areas but again, in the process of integrating we will turn on all those other disease areas. It is very disease area specific so it will probably bounce around a little bit by disease area, but any percent improvement in that step is what we hope for.
Just in how we can use it today is well worth it in cost of goods, and as Shelly pointed our, more interestingly, as we built our infrastructure to scale for a time when everyone is getting a genome done - this is the kind of thing that enables you to do it.
CML
Exome was announced and released a while ago. Is exome going to start coming back to the conversation?
SG
Probably not immediately, but certainly next year you're going to hear more - particularly as the payors are outright reimbursing exome and as the genome, in our hands, starts to approach price parity with the cost of exome, we will be making the switch over to genome and that will happen in the next year to 18 months. So, yeah, you will be hearing more about it and it will be exciting.
CML
The combination is expected to further enhance Invitae's genetic variant interpretation and ability to deliver high-quality, more affordable genetic testing for use in mainstream medical care.
We talked about no patents in your business unlike say, a bio/pharma, and how hard it can be for people to assign value to your intellectual property or even understand the unique IP. Does this widen your moat in this area?
SG
We do indeed have patents filed on some of our processes. They may or may not withstand a fierce [IP] battle. We do have IP that came along with the Good Start acquisition -- some of the core assay methodology that they originally licensed. There is IP surrounding the Singular Bio acquisition -- it's probably half methodology but half very solid materials, design, and chemistry patented.
With all that said, it's more instructive to think about the IP that we're forming and stitching together as a pretty healthy mix of trade secret and more traditionally thought of intellectual property.
It's also very important to understand there are a dozen ways to do molecular biology, there are a dozen ways to do the pipeline and analysis and so the more important piece of it is the execution and the scaling.
I try to point out where there is IP and where there is not but it is not straight forward.
CML
Does this put Invitae on a path where you will simply be able to perform tests and deliver results in a way no other firm is capable of doing? That is, beyond economies of scale getting to lower COGS, the quality of the product is also going to be unmatched? Is that where all of this is going -- or already is?
SG
That's correct. Without our infrastructure, without the addition of Jungla, could somebody do what we're doing and interpreting the variants and deliver the answers? I suppose, but you're now getting into the scale and size of datasets, it's getting increasingly difficult for a team of experts, no matter how big you make it, to do.
There is an envelope at some point where, yeah, if you're not doing what we're doing I don't think there is any catching us. We may have already pushed past that.
We certainly not going to stop and ask that question too many times -- we're going to keep going. But, yeah, there is no doubt the quality of our product, the speed at which we can deliver it, the extensive, comprehensive nature of our analyses, all of those things are 100% enabled by the technology infrastructure we have built and Jungla is a really great, swift addition.
Sh G
The only thing I would mention is on the quality and the capabilities there was a small little paragraph at the end about some supplemental RNA analysis we are doing - same thing -- it helps with the VUS resolution. It's for a smaller proportion of it, say 10% or below, but it's critical that we continue to expand our capabilities and keep pushing the science forward.
For instance, with the Jungla changes we will be making, we will be calling more VUSs, we put all of that on ClinVar, the pubic database and we have people debate that. So, not only is it helping our physicians to make better decisions but it's also helping to push the science forward.
New genes are understood all the time, new VUSs are understood with time and we're helping to push that science forward.
CML
In the presser it reads: "In November 2018, Invitae and Jungla successfully completed a four-month pilot study of the performance of Jungla's proprietary technologies in predicting the clinical relevance of differences in human DNA sequence (variants) found in individuals undergoing testing for hereditary disease.
The results demonstrated that support from Jungla's FMP can markedly increase the molecular understanding of variants while maintaining the high accuracy of Invitae's classifications, thereby significantly increasing the efficiency of interpretation and scalability of genetic testing with enhanced quality of test results."
Now that you have worked with the technology, is this less of a risk of failure for the acquisition -- you know how it works, and that it will work?
SG
Yeah. I think that's exactly right. The pilot was also [for Jungla] they weren't sure they didn't want to stay independent and give up what they wanted to do. The other is that they saw how powerful our platform was in combination and likewise it pushes them years ahead. There is a lot of mutual admiration and respect.
CML
Does that mean this is virtually ready to go, for cancer, into production? This is not a 18 month wait for impact type of acquisition?
SG
Yes -- it's not instantaneous, but it's certainly not more than a couple of months. We'll add other disease areas and this has an impact and implications on what we are going to release next year. So, it will be immediately useful and then overtime there will be more aspects in what we can do.
Sh G
I don't want you to think this was only tested in cancer. We did also test it in a number of other areas. Obviously we have more data on cancer, but we also found very strong results in neurological diseases. This is not only a cancer effort right now. It was useful across the board.
SG
It's going to be yet another thing to reduce COGS but like we've always said, we're just going to replace COGS with more content. I just want to be clear that we are not changing our path on COGS [company stated goal of 50% gross margin percent].
Risk: We Could Be Wrong
Invitae holds a special spot for CML as its number one designation is very much on purpose. We have spoken with the CEO now nearly ten times and we have watched it go from a company with $20 million in revenue to now a company that has guided to over $220 million for 2019 and $500 million for 2020.
Something or someone could interfere with the progress and it doesn't matter that we can't identify who or what that will be -- we just need to recognize that it could exist and it is possible.
We cannot tell the future -- but we have strong opinions about how it will form. That's the best we can do and fortunately for us, thus far, it has been a wonderful four years with our Top Picks in general and Invitae in particular.
Earnings Risk
We still think Q2 could be a "disappointment" to Wall Street but an actual beat for the $220 million 2019 full year guidance. Here is a snippet from a previous dossier:
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In Q1 the company delivered just under $41 million. If the full year is going to be $220 million (the lower end of company guidance), and Q1 with Q2 will make 40% of revenue [as Sean stated], while Q3 and Q4 make up the remaining 60%, simple math leads us to see that Q2 should be at least $47 million.
That would make Q1 and Q2 = $41M + $47M = $88M. If that's 40% of the full year, then Q3 and Q4 should be $132M and total $200 million, as the company has guided.
Wall Street analysts have a mean estimate of $51M for Q2. If we follow the company's guidance, a Q2 with $51 million in revenue would be above the company's guidance. So, in the world of CML, a Q2 of even $50 million would be a rather substantial beat, while Wall Street could see that as a miss and sell the stock off.
Just be aware. This is not a bullish narrative for the next 3 months, it's a bullish narrative for the next 10-years.
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Conclusion
There's a reason Invitae is our number one Spotlight Top Pick. We believe the total addressable market is enormous and will encompass every living and unborn person on planet Earth in 20 years, and likely 1-2 billion people in 5-10 years.
We believe the company dug a moat, and is widening it with every test that comes in the door and every strategic acquisition they make. To echo Sean's words from years ago when we spoke, the test-by-test genetic industry is dead. It's over. The companies that do it are the walking dead.
The future is a network powered by intellectual property, data, machine learning and AI. Invitae is the leader and the industry sure feels like a winner take all (or winner take most) set up. We have written about Invitae's move into the patient initiated testing realm at the same time that it bolsters its clinician initiated and institution initiated markets.
We maintain our number one position in Spotlight Top Pick status for Invitae (NVTA). Please be aware of the risk inherent in a company with such a small revenue base and that is cash flow negative.
The author is long shares of Invitae in his personal account and a trust account. He is long call options and recently purchased more call options.
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