Investors are starting to warm up to those biotechnology companies developing treatments and diagnostics at the genetic level. Edidas Medicine (NASDAQ:EDIT) and CRISPR Therapeutics (NASDAQ:CRSP) were the hot stocks last year but faded in recent months. Conversely, Invitae (NASDAQ:NVTA) is hovering near 52-week highs, despite a $125 million recent equity offering of NVTA stock. Markets have much to like with this company.

Invitae is in the business of genetic screening — carrier screening, preimplantation genetic testing, prenatal testing, neonatal testing, and testing adult inherited diseases. In the last decade, it moved from niche, fragmented markets toward a single platform. The company grew from 229 samples in 2013 to more than 300,000 in 2018. This growth has afforded Invitae with two distinct advantages over its competitors.

One advantage is that by cutting the cost of goods sold to below $250, it delivers the highest quality testing at the most affordable price to its customers. The second advantage Invitae enjoys is the scalability of its business model. As the market grows, the company increases the number of patients that have their genetic information put to use. Combined with a falling cost profile as volume grows, the company is on track to reach a million samples next year in 2020.

Strong Fourth-Quarter Results

Invitae reported fourth-quarter revenue grew 78.6% to $45.4 million. GAAP EPS came in at a loss of 40 cents, which beat consensus estimates by 3 cents. For the year, volumes grew 102% to 303,000 samples. Exceeding its forecast of 285,000 samples, the company looks set to continue growing its revenue faster than costs. Chances are good that the company will report a profit sooner than expected.

NVTA stock investors should take note that the company still needs to improve on its collection rates from third-party payers, including Medicare, and institutional and pharma partners. This group accounted for 23% of the company’s 2018 revenues. In the fourth quarter, Invitae recognized $1.9 million in revenue from Medicare payments for Lynch syndrome. This is a result of catch up payments for tests that were done in the first half of 2018.

Falling Costs Over the Long Term

Declining COGS is a good trend that Invitae investors like to see. COGS fell from $322 per sample in 2017 to $243 last quarter, down 24%. As the company invests in automation, this number will keep falling. Meanwhile, Invitae has enough demand from customers to keep prices at the same levels. It might even raise prices if customers are willing to pay for the introduction of new content and features. Conversely, adding new screening tests may limit the decrease in COGS in the near-term.

Invitae expects that for the short-term, as it introduces an IPS, or non-invasive prenatal screening, cost of goods sold might go up. Once the test adoption phase ends, higher efficiencies and an increase in screening volume will drive costs lower.

For 2019, Invitae management sees operating expenses increasing at first as the company invests to grow to 1 million patients. Still, the operating expenses will increase no more than the ~35% experienced in 2018.

Invitae expects to continue spending on sales and marketing, with much of the cost coming from the addition of 140 staff to the sales team. As expected for a growing firm, R&D activity will continue at similar levels to that of 2018.

The Takeaway on NVTA Stock

With cash, cash equivalents, restricted cash and marketable securities worth $131.9 million, why is the company selling $125 million worth of NVTA stock? Additional liquidity on the balance sheet will give the company plenty of operating flexibility as it carries out its growth. More importantly, Invitae stock’s 52-week highs suggest the timing is favorable to sell shares when the market is willing to bid a higher price.

Invitae has a solid business model that will lead to market share growth. Revenue is poised to keep growing at current rates, which is impressive. Invitae stock could face some profit-taking on concerns of valuation. Since NVTA stock trades close to analyst price targets, investors may continue holding on to this high-flying stock.

Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.