CM Life Sciences II: SomaLogic Is Great, But Post-Merger SPAC Dilution Should Frighten Investors
Summary
- CM Life Sciences II, Inc. is the second life-sciences-focused special purpose acquisition company from the Casdin-Meisters team launched in Feb 2021.
- CM Life Sciences II has announced its acquisition target as SomaLogic, a pioneer in proteomics technology, with the $651M transaction expected to close by Q3 2021.
- SomaLogic is a commercial-stage leader in proteomics technology with over 300+ established industrial partnerships and customers and revenues of $55M (2020).
- CM Life Sciences II SPAC shareholders are significantly disadvantaged with only 14% of SomaLogic ownership allocated post-merger.
- In summary, the author does not project CM Life Sciences II, Inc. as a buy for short- to medium-term investors.
Graphic Source: CM Life Sciences, Inc./SomaLogic
Introduction: What is CM Life Sciences II?
CM Life Sciences II, Inc. (NASDAQ: CMIIU) is the second life-sciences-focused special purpose acquisition company from the Casdin-Meisters team launched in Feb 2021. CM Life Sciences II was founded to take advantage of the fragmentation of the innovative life sciences industry where many companies are "under-resourced" and "under-scaled". In March 2021, CM Life Sciences II announced its acquisition target as SomaLogic, a leader in AI proteomics technology.
They completed the definitive business combination agreement in March 2021 with closing expected by Q3 2021. This transaction carries a lot of optimism as the science behind SomaLogic's proteonomics platform is seemingly quite strong, but the SPAC ownership dilution post-merger makes the upside too unlikely in the short term.
SPAC's Target Company: SomaLogic
SomaLogic is a commercial-stage leader in proteomics technology with over 300+ established industrial partnerships and customers. SomaLogic has developed an exceptional technology platform that is uniquely-positioned to becoming a universal proteonomics solution. SomaLogic is currently targeting three industries (basic research, translational research/biopharma development, and clinical diagnostics) worth a combined $90B. SomaLogic is quite far from tapping the potential of this market but has proven itself, albeit to small-extent, with revenues of $55M (2020).
SPAC's and SomaLogic's Management
CM Life Sciences II brings together two unique leadership forms and a variety of experience from Eli Casdin's expertise in Life Sciences (from Casdin Capital) and Keith Meisters' business expertise (from Corvex Capital and Ichan Enterprises). They launched their first SPAC successfully in 2020, CM Life Sciences I (CMLF), and are now doing it again, but in partnership with ex-surgeon, veteran-CMO, and CEO of SomaLogic, Roy Smythe, M.D.
Eli Casdin, MBA, is the CEO of CM Life Sciences II and founder / CIO of Casdin Capital, a life sciences investment fund founded in 2011. Casdin brings a wealth of life sciences/healthcare investment experience having invested for over 17-years in disruptive technologies including Illumina (ILMN), Flatiron Health, Invitae (NVTA), and Ginkgo Bioworks amongst others. Before CM Life Sciences and Casdin Capital, Casdin worked for Alliance Bernstein in their LS/Healthcare investment group, Bear Stearns, and Cooper Hill Partners, another healthcare-focused investment firm.
Keith Meisters is the Chairman of CM Life Sciences II and Managing Partner/CIO at Corvex Management, a New York-based generalist hedge fund which he founded in 2010. Before Corvex, Meisters served as CEO and in various other positions at Icahn Enterprises (IEP) from 2003 to 2010. He also has served on 14 boards of public companies managing over $80B in transactions with experience in spin-offs, asset sales, and M&A amongst others.
Roy Smythe, M.D., has led SomaLogic as CEO since 2018 and brings a wealth of experience as a biomedical scientist, academician, health system administrator, and most recently as an entrepreneur. Starting out as a trained surgeon, Roy spent several years in academia related to surgery and then transitioned to the corporate world. He first served as Chief Medical Officer at Valence Health, a provider of solutions for healthcare providers, covering patient management and financial responsibility.
He also worked at the healthcare tech accelerator AVIA and then most recently as Global Chief Medical Officer at Royal Philips where he was involved in strategy and partnerships. He doesn't have the most impressive biotech background in terms of broad experience, but he seems to check the boxes of the diverse coverage that SomaLogic requires.
SPAC's and SomaLogics's Financial Position
SomaLogic is financially quite strong with revenue in FYE 2020 reaching $55M and is expected to grow by a massive 5-year CAGR of 40%, expanding its current 300+ industry partnerships and customers. In terms of resources deployable, the SPAC reverse merger with CM Life Sciences II is bringing SomaLogic an additional $651M (PIPE: $375M) netting the cash post-transaction to $686M, a substantial sum which the company aims to use for catalyzing both organic and inorganic growth in order to expand their proteonomics work. This brings the pro-forma enterprise value to $1.23B.
Risk Discussion
CM Life Sciences II is a special purpose acquisition vehicle and with it comes strong integration requirements. Not only legally speaking, but in satisfying shareholders with the selection choice and ensuring ownership interest in the SPAC are protected. Investors should understand that the financial projections outlined above are from the company's estimates and given the limited public data regarding SomaLogic, there may be deviations.
Investors should also be aware that SPACs tend to have increased volatility in days leading up to the reverse merger finalization, which is estimated to occur in 3Q 2021. There is no guarantee that SomaLogic will utilize funds in a value-enhancing way nor be able to properly expand product volume or growth with proper cost management. Investors should understand that this is a serious transition for SomaLogic which will receive 13x its FYE 2020 revenue in a one-time cash infusion and must handle expanding operations while maintaining shareholder value.
Investment Thesis
SomaLogic certainly possesses great technology and can reasonably be assumed to be the leader in proteomics. Following the massive transaction, they'll certainly reach an enviable growth trajectory, but they are starting from a small position of $55M in revenue, which is primarily from biopharma research. The cash infusion should unlock strong upside, but as will be expanded on later, the 14% ownership allocated to CM Life Sciences II shareholders doesn't create a strong investment thesis for short- to medium-term investors unless substantial inorganic growth is consummated post-transaction.
The industry is right and the technology is truly an advance even in the genomics era which may just usher in the proteonomics era. But regardless of how exceptional SomaLogic is, CM Life Sciences II is a high-risk investment too early on with significant post-merger dilution that is not recommended before the transaction.
SomaLogic's Business/Products (Expanded)
SomaLogic is quite a complex commercial-stage proteomics company that has ambitious product expansion plans whereby the product offering known today will certainly not be the same post-transaction.
Graphic Source: CM Life Sciences, Inc./SomaLogic
SomaLogic's products/services stem from the proteonomics platform they have developed into a universal proteonomics solution aided by a valuable database. SomaLogic aims to expand its operations in two-large segments, 1) Research and 2) Diagnostics.
SomaLogic Research Segment
Graphic Source: CM Life Sciences, Inc./SomaLogic
SomaLogic's research segment has been where most of the $55M in revenue during 2020 was derived. Stemming from their exceptional database and advanced AI platform, they are able to consult and assist across both basic and translation research. This includes wide-ranging applications from genomic and proteomic discovery to validated clinical trial research which Novartis seems to be actively involved with transitioning initially from drug discovery to a suite of other services. The segment is aiming to target an extensive market worth $70B.
SomaLogic Diagnostics Segment
Graphic Source: CM Life Sciences, Inc./SomaLogic
In SomaLogic's other segment, they offer an advanced suite of diagnostic tests and applications ranging from disease identification and monitoring to "multi-omic" product-development. This is a growing segment expected to be worth around $40B. Currently, SomaLogic is offering a suite of disparate diagnostic tests available here, but post-merger it's assumed to expand significantly both organically and inorganically. This segment will radically develop and should be monitored. Currently, Somalogic's bioinformatics algorithms and the 450K+ samples already in their database are the key value-drivers.
For more information on the wide array of complex products and services being rolled out now and post-merger, please see the most recent investor presentation (March 29, 2021).
Valuation
Table Source: Self Created | Data Source: CM Life Sciences, Inc./SomaLogic
Evaluating SomaLogic is quite complex, to say the least. The company has outlined an industry average multiple (24.5x Price/Sales) to which they developed as what appears to be a result of their direct competitors in the industries they "plan" to operate in. As can be seen above, by multiplying the company's forecasted revenues adjusting for 30-40% CAGRs from the $85M expected by FYE 2022, there may not be much value in the early-years for SPAC-investors who paid a significant premium.
Obviously, compounding at such high growth rates (30-40%) as is expected by both the company and SPAC management, the value of ownership will grow, but for the short-term SPAC investor, this may not be the play. This negative-thesis is primarily driven by the measly 14% ownership allocated to SPAC shareholders.
Graphic Source: CM Life Sciences, Inc./SomaLogic
The above price forecast is certainly too conservative, but the point was to showcase the financial value of SomaLogic when you remove outsized expectations and return to the numbers. In the early years, it showcases that CM Life Sciences requires too high a premium for 14% of a company with only $55M in revenues. Even if SomaLogic's 30-40% expected CAGR will be realized after the $651M cash infusion, it'll require a substantial premium or 2-3 years of growth to match the $12/share price now before the ownership dilution post-merger.
Following the transaction, another valuation may outline promising returns with grounded figures and a deeper dive into their new products, but it would most likely showcase a likely 3-4 years till any substantial return can be realized without pushing the premium 2-3x the industry median (24.5x).
Conclusion
In conclusion, althoughd the promise of SomaLogic is exceptional and the proteomic-specialization and AI platform will certainly be the industry of the future, the current SPAC isn't the right play unless further information can be gleaned about other value-inducing factors such as inorganic post-merger growth.
SomaLogic certainly holds great upside, but it appears the 14% ownership outcome puts existing SPAC shareholders in a tricky position whereby the earlier they enter the more premium must be paid by follow-on investors to compensate for any worthwhile return. It is a great company, but not for CM Life Sciences SPAC shareholders with a 1-3 year investment time frame.
In summary, the author does not project CM Life Sciences II, Inc. as a buy for short- to medium-term investors.
This article was written by
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Comments (10)
i am not sure all of them live up to expectations yet.