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Invitae Corporation (NVTA) faces significant challenges in addressing its liquidity concerns. The firm is exploring multiple strategies to stabilize its financial and operational footing. These strategies encompass potential capital raising, asset divestitures, strategic refocusing on core business and R&D activities, curtailment of capital spending, operating cost reductions, and managing debt commitments.

The company’s current cash position and rate of cash burn substantiate the recent negative trend in its financial performance.

Asset sales to Natera

Invitae has entered into an Asset Purchase Agreement (APA) with Natera, involving the sale of specific assets in the reproductive health (RH) sector. These assets encompass Invitae’s customer list in the RH category and associated contracts strictly tied to the company’s testing services, including carrier screening and non-invasive prenatal screening. Additionally, Natera has absorbed a number of Invitae employees specializing in the RH segment.

Under the terms of the agreement, Natera has provided an initial payment of $10 million to Invitae. The deal also includes potential further payments totaling up to $42.5 million, contingent upon certain conditions. This includes up to $20 million related to the outcome of the Natera v. ArcherDx case, payable in either cash or as litigation-related credits. Moreover, there is a performance-based milestone payment of up to $22.5 million, conditional upon Natera’s success in retaining a specified volume of testing services. This milestone is assessed based on a comparison of the number of specific tests Natera performs for RH customers during a defined 30-day period against a pre-agreed baseline.

Invitae retains all liabilities and obligations connected to its reproductive health business incurred prior to the transaction’s closure. Natera will assume responsibilities only for services rendered after the conclusion of each contract.

The agreement also includes a Non-Competition Covenant, prohibiting Invitae from offering Testing Services in the RH category until March 18, 2027, subject to certain exceptions. Furthermore, Invitae is obligated to assist Natera in securing necessary consents, approvals, or waivers pertaining to the RH-only contracts and will provide transitional services until March 17, 2024, with additional limited support extending to July 15, 2024.

Divestiture of Citizen

Invitae has executed the divestiture of Ciitizen, a patient-oriented health technology platform, transferring its assets to a newly established entity. This entity is spearheaded by Ciitizen’s existing leadership team and is backed by venture capital funding. As a result of this transaction, Invitae maintains a minority equity stake in the newly formed company.

The divestment does not alter Invitae’s ongoing commitment to its primary operations in genetic data, which encompass sponsored testing programs, biopharmaceutical research services, and rare disease discovery.

Concurrently, Invitae has implemented substantial cost-reduction strategies. These include workforce downsizing and various other initiatives aimed at curtailing operating expenses. Collectively, the financial impact of Ciitizen’s divestiture and these austerity measures are anticipated to yield annual savings for Invitae in the range of $90 to $100 million, exclusive of one-time severance costs.

Balance sheet

The firm has secured approval from the holders of its Series A and Series B 4.5% Convertible Senior Secured Notes due 2028 to revise the conditions of the indenture governing these notes. An indenture is essentially a formal agreement outlining the specifics of a bond issuance. These notes are a debt instrument capable of being converted into the company’s equity and are secured by collateral.

An adjunct to the original indenture has been agreed upon, facilitating amendments to the notes’ terms. Such revisions are typically sought in scenarios where a company is grappling with financial challenges and requires enhanced flexibility to handle its debts. Basically, the company and its subsidiaries have now been granted the latitude to divest select assets and business divisions. This action is pivotal for an entity facing liquidity constraints.

Additionally, the alterations to the indenture modify the company’s ability to accrue new debt, impose liens on its assets, make restricted disbursements (such as dividends), and undertake investments.

In essence, these measures indicate the company’s recognition of its fiscal distress and its efforts to navigate its liquidity crisis. By revising the conditions of its convertible notes and authorizing asset sales, the company is strategically seeking to bolster its financial adaptability and tackle immediate cash flow challenges.

Valuation and Risks

The primary risks Invitae faces are bankruptcy and dilution, with either scenario appearing increasingly probable. The company’s recent actions suggest a state of acute distress, indicative of a survival mode strategy. These include asset disposals, which bear the risk of losing valuable elements of the business, and throwing the baby out with the bathwater.

Our analysis estimates Invitae’s current cash burn rate at approximately $170 million, adjusted for factors like write-downs, amortizations, and stock-based compensation.

In an optimistic scenario, assuming Invitae retains a cash-flow positive segment of its business and can reduce its current cash burn rate, it may possess sufficient liquidity to sustain operations until 2025. However, the exact impact of the asset divestitures on the company’s revenue stream remains uncertain.

Irrespective of these factors, it is evident that Invitae will need to secure additional liquidity to navigate through its financial challenges.

(Click on image to enlarge)

(Source: Seeking Alpha)

The company’s potential strategy to secure additional funding at its current market valuation poses significant dilution risks for existing shareholders. To raise approximately $300 million, about 750 million shares would need to be issued, inflating the total share count to over 1 billion. This would result in a substantial dilution, reducing current shareholders’ equity to roughly 25% of their present holdings.

Despite the severe dilution, this influx of capital could realign the company’s trajectory towards growth and profitability. Assuming a modest recovery in sales multiples to around 5x, and baseline revenues of approximately $450 million without the burden of a significant cash burn, the company could generate around $0.45 per share in revenue. This scenario could potentially uplift the stock value to $2.25 per share, surpassing its current price. Therefore, a higher degree of dilution might not be entirely detrimental; it could potentially disrupt the company’s ongoing financial decline.

However, at this juncture, the company presents a high-risk investment. It should be approached with caution until there is clear visibility on a capital raise that ensures adequate funding. This needs to be coupled with the company’s ability to reduce its cash burn and maintain a portfolio capable of generating robust cash-flow growth. Only then could the stock be considered for a revaluation opportunity. But before any investment consideration, the company must successfully navigate through this critical phase of financial instability.

Sources:

Current report filing, Dec 11, 2023

Current report filing, Dec 14, 2023

Current report filing, Nov 17, 2023

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