Personalis: Multibagger Long-Term Opportunity

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About: Personalis (PSNL)
by: Birgir Magnusson
Summary

A massive $5bn market opportunity.

Supporting the growth of targeted cancer therapies.

Sticky business for the customers, one stop shop.

Personalis (PSNL) is a growing genomics company that focuses on

"Providing a comprehensive molecular data about each patient's cancer and immune response."

In effect, a one-stop shop for the analytical services of the immune system. As the current market is very fragmented, Personalis could become a market leader in liquid biopsies. A huge market opportunity.

https://conference.ncri.org.uk/wp-content/uploads/2015/02/Personalis_logo.jpg

About Personalis

Personalis was founded in 2011 by John West and four professors at Stanford University. John West is the CEO of the company and has been in leadership positions over a number of companies in the field since the 1990s, including SVP of DNA sequencing at Illumina (NASDAQ:ILMN). Under his leadership Personalis has raised $89.6m from investors, the most notable ones are Lightspeed Ventures and Abingworth. The company aims to raise another $115m in the IPO itself.

The basis of what the company does is to analyze samples of cancer and try to get as much information out of it as possible in one go. As there is a limitation on how often a sample can be used to extract information, getting as much information on the first go is important and is a part of the value proposition from the company. The other part of being a one-stop shop simplifies all the logistics surrounding getting information out of samples.

The market they are after is big and growing quickly. In the Prospectus the company mentions 5 reasons why they are valuable to Biopharmaceutical companies:

Our tumor and immune molecular profiling capabilities provide an unprecedented breadth of data from a single limited tumor sample

Our platform enhances the opportunity to conduct translational research by analyzing tumor tissues from patients in clinical trials, rather than animal models or in vitro cancer cell lines, which have historically limited cancer research.

The information we provide to personalized cancer therapy companies can be used to design therapeutics.

Our enterprise-grade operational infrastructure is scalable, enables rapid turnaround times, and is tailored to meet the unique workflow needs of our customers.

We are developing a complementary liquid biopsy test, which also offers broad 20,000-gene coverage versus more narrowly focused liquid biopsy tests that are currently available.

I recommend spending some time on Home and looking at the information available on the products they have, the applications of it and the technology behind it. It is important to understand both who they are targeting and what they can offer.

The major market of the services Personalis provides going forward is supporting clinical trials and the market size is roughly $5bn according to the information provided in the prospectus. It has grown massively since immunotherapies came to the market and is still growing. It will also helpful for clinical trials in targeted therapies and personalized cancer therapies. The more samples they process the more information they will have and can possibly monetize that going forward.

Financials

If we dig a little bit into the finances of Personalis, we see fast revenue growth. There is 50% more revenue in Q1 2019 than the whole of 2017.

Source: Prospectus

The downside is the cost of revenues is quite high, but margins are improving. In 2017 the contribution margin was negative. Q1 2019 has a 28.6% margin while all of 2018 has 31.25% margin. Personalis has a service agreement in place with Illumina where Illumina is a subcontractor on a number of the projects they run. This probably means that a fair amount of the margin is lost in the contract but over time and with more resources Personalis can bring that in-house and increase its own margins. Including by buying the machines, they are contracted to from Illumina, NovaSeq 6000, as well as. It would be good to get management guidance on what they expect the margin to be going forward.

In 2012 Personalis signed a large contract with the Veterans Affairs Department (NASDAQ:VA) for the Million Veteran Program which aims to sequence and analyze the DNA of a million veterans. The aim is to deepen the understanding of genetic variations upon health. It is expected that the total enrollment in the program will be 1 million before 2021, over 750 thousand have already enrolled.

In September 2017, we entered into a one-year contract with three one-year renewal option periods with the VA for the VA MVP, and received orders under this contract in September 2017 and 2018. This relationship with the VA MVP has enabled us to innovate, scale our operational infrastructure, and achieve greater efficiencies in our lab. It has also supported our development of industry-leading, large-scale cancer genomic testing. The substantial experience that we have and expect to continue to develop in whole genome sequencing also optimally positions us for what we anticipate to be the longer-term strategic direction of the cancer genomics industry, which may include whole genome sequencing of tumors.

Source: Prospectus

The contracts with the VA within the MVP have been material in helping the company scale and improve its offering but as a result, most of the revenues from 2017 and 2018 came from the VA as seen in this picture below:

Source: Prospectus

This means that it is unlikely that revenue from VA will continue beyond September 2021 but in the meantime, the company can grow revenue from other sources.

When looking at the Cash Flow statement of the company we see that Cash Flow from Operating activities is positive for both the full years 2017 and 2018 as well as Q1 2019. Part of that is likely driven by customer pre-payments or as they are known in the Balance Sheet, Contract Liabilities. It is worthwhile following this number in the Balance Sheet as it might be an early indicator if sales are slowing or picking up pace. A fair amount of cash is spent on acquiring new equipment and I suspect that will be the case going forward to improve capabilities and margins.

The company owes a $20m Growth Capital Loan it took out on 22 March 2019. It used it to pay off older smaller loans and to provide further working capital for the company. The terms of the loan are disadvantageous with an effective interest rate of 15.23%. The use of proceeds section of the Prospectus it seems unlikely they will pay it off at the IPO. The terms of the loan mean it does not have to be fully paid up until 1 March 2023, thus limited short term liquidity worries surrounding it. It can be repaid at will.

With about $33m in cash at the end of Q1 and the $115m to be raised in the IPO, it is unlikely another fundraiser will be coming before the middle of 2020.

Prospects

My evaluation of the available information is that Personalis is an exciting long term holding. I have a hard time putting a valuation on the company as I feel I need to know more about the offering price and management expectations going forward. I personally will wait until the first public earnings release to assess the company further. To see the movement in the contribution margin and the forward-looking statements of the management.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.