Cabot Small Cap Confidential 259

This month we’re jumping into a company that specializes in precision medicine for cancer.

It has developed a sequencing platform that is able to analyze over 20,000 genes, far more than most competitor solutions. Even better, this platform allows analysis of both tissue biopsies and liquid biopsies.

Ultimately, the company is going after a roughly $40 billion market. Yet its market cap is a mere $1 billion today.

This company is still unknown, but that’s likely to change as it brings new products to market and continues to transform the market for personalized cancer vaccines and next-gen cancer immunotherapies.

All the details are inside. Enjoy!

Cabot Small Cap Confidential 259

[premium_html_toc post_id="221053"]

The Big Idea
For the last nine months the world has been mostly focused on the Covid-19 pandemic and the related importance of testing, treatments and, hopefully, an effective cure in the form of vaccinations.

But while the pandemic has taken center stage in 2020 there remains a huge need for advance testing, treatment options and cures for other diseases, including cancer.

Today we’re digging into the market of personalized medicine for cancer. Specifically, we’re investing in a company that provides genomic sequencing and analytics solutions that help companies develop personalized cancer vaccines and cancer immunotherapies.

At the heart of this opportunity is a massive need to understand as much as possible about the specifics of an individual’s cancer. That’s the only way to tailor treatments that work for that patient, to understand if the treatments that are being given are effective, and to figure out what new treatments are needed if nothing else is working.

Just like with Covid-19, this means a ton of testing, both during clinical trials that are designed to bring new compounds to market, and for ongoing monitoring for patients that are being treated with previously approved therapies.

One of the keys to advancing next-gen cancer therapies is to use tissue biopsies and liquid biopsies in tandem. Doing so can give a picture of what’s going on locally in the body (i.e. from a tissue sample), as well as throughout the blood stream (i.e. with a blood plasma sample).

The trick here is that that clinicians don’t always have the time and resources to use a variety of different technologies to figure out what’s going on, what will work, what won’t, etc. What they often need is a one-stop solution that can do everything they need.

That’s the vision the small company we’re investing in today is working toward – from tumor profiling to monitoring to diagnostics, and even a massive database of analyzed samples (i.e. population sequencing).

Since 2012 it has been analyzing tissue samples for the U.S. Department of Veterans Affairs. More recently it has expanded its offerings to biopharma customers. Early this year it released its first liquid biopsy solution, and it has more on the way.

In short, its vision is fast becoming a reality. Most of the top 10 oncology pharma companies have noticed and placed orders, but Wall Street is still largely unaware that this company exists.

I think that will change in 2021 and beyond. Let’s jump in now while the company is still flying under the radar.

The Company
Personalis (PSNL) is a cancer genomics company offering next-generation sequencing (NGS) solutions and data analysis services to support personalized cancer vaccine and cancer immunotherapy development. It also provides sequencing and data analysis to support population sequencing initiatives. Personalis has a market cap of $1 billion.

Customers of cancer genomic services are primarily pharma and biotech companies, universities and non-profits. Customers of population sequencing initiatives are primarily government entities, led by the U.S. Department of Veterans Affairs (VA).

The value of this company derives from its proprietary ImmunoID NeXT Platform, which provides customers with complex genomic info from both tissue and liquid biopsy samples.

Customers send samples to Personalis’ lab, which is equipped with robots and Illumina’s NovaSeq instruments to permit rapid analysis at scale, then Personalis sends genomic data and analytics back to the customer.

This data is used in clinical trials for initial testing and ongoing monitoring ($7 billion market), by pharma and biotech companies to help select personalized therapies and for ongoing monitoring ($29 billion market), and for population sequencing ($2 billion market).

Altogether, Personalis is going after a roughly $40 billion market, based on test prices that range from $2,840 to $4,000 a pop. Its main markets are in the U.S. and Europe, though a recent partnership has opened the door to do business in China.

Personalis was founded in 2011 when it was spun out of Stanford University by a team of NGS specialists. In 2012 the company became the sole whole genome sequencing provider to the Department of Veterans Affairs Million Veterans Program (VA MVP), for which it has completed over 90,000 whole genomes. In September the VA MVP announced a new order for up to $31 million, bringing total orders to date to roughly $175 million.

The VA MVP population sequencing initiative seeks to improve the lives of Veterans by learning how genes, lifestyle and military exposures affect health and illness. This program, which accounts for the majority of revenue (roughly 70%), helped launch Personalis from incubation stage to commercial sequencing player. Management has since leveraged the program to fund development of a broader portfolio of sequencing solutions.

Since the company’s IPO in June 2019 Personalis has launched five new products, including the company’s first liquid biopsy offering that launched in August 2020.

Personalis now has 39 customers (up from 32 in Q2 2020), including most of the top 10 oncology pharma companies. Even better, the size of orders is growing. Until recently pilot orders were often around $50,000. In the last couple of quarters Personalis has received orders ranging from $100,000 to even $1 million.

The company also has a collaboration with Merck (MRK) to ID and develop novel biomarkers for cancer therapies, a collaboration with Sarepta Therapeutics (SRPT) for rare diseases, a partnership with Indivumed to support database development and a partnership with Berry Genomics for their China Lab expansion.

Big picture, Personalis should do well because there is a growing need for genomic data in immune-oncology and cancer drug development. The opportunity in liquid biopsy is especially exciting. While the company is early-stage and has faced challenges due to the Covid-19 pandemic, the pipeline of new products and a likely boost to volumes post-Covid-19 portend good things in the second half of 2021 and beyond.

Products & Platform
There are many forms of cancer for which immune checkpoint inhibitors (i.e. immunotherapy drugs) have been approved. A short list includes breast, bladder, cervical, colon, head and neck, liver, lung, skin and stomach cancer, as well as many solid tumors, and Hodgkin lymphoma.

Immunotherapy drugs can drive massive beneficial responses in cancer patients. In some cases, these therapies effectively cure the disease.

But they don’t always work. Sometimes there is no discernable benefit at all.

Personalis is on a mission to change that by providing clinicians with a more complete picture of a patient’s cancer. That should help improve clinical development success rates for cancer treatments, which have been close to just 5%.

The key is its ImmunoID NeXT Platform. Let’s talk more specifically about that, and the products Personalis is developing on it.
Immuno-Precision Oncology
ImmunoID NeXT

Personalis’ ImmunoID NeXT platform is an end-to-end next-gen sequencing and analysis platform for Immuno-oncology and all precision oncology applications. It combines the company’s NeXT assay, sophisticated analytical engines, and data analysis support. It is the ecosystem within which new products are being developed.

The platform provides comprehensive molecular data regarding each patient’s cancer and immune response, driving insights that can improve patient response rates from existing immunotherapies and assist in the development of new therapies.

Using just a single sample, oncology researchers can analyze a tumor and its microenvironment using a single assay technology that covers all the roughly 20,000 human genes, together with the immune system. In comparison, many other cancer panels only cover 50 to 500 genes, meaning researchers need to use multiple assay technologies and reporting formats from several sources to get the same insights they can get from the NeXT Platform.

Personalis currently offers three ImmunoID NeXT analytics modules for tumor and microenvironment analysis: NeoantigenID, RepertoireID and ImmunogenomicsID. The image below provides some insights into what each of these modules cover.

NeXT Liquid Biopsy
Solid tumor biopsies are the gold standard for analyzing the cancer genome, but liquid biopsies – which are non-invasive and taken from a simple blood sample – are showing there is often more to the story. This can be especially true when tissue biopsies are only taken from a single site.

That said, liquid biopsies alone may not capture the entire story either, especially if healthy cancer cells are not shedding content into blood circulation.

Because both tissue and liquid biopsies working in tandem is the ideal, Personalis developed the NeXT Liquid Biopsy. As with tissue biopsy, the company’s liquid biopsy analyzes all of the approximately 20,000 human genes in each blood plasma sample. It is particularly useful for providing additional DNA mutation information. Because it is non-invasive it is incredibly helpful for monitoring therapy response over time.

Oncology Clinical Diagnostics
NeXT Dx Test

Personalis launched the NeXT Dx Test in January 2020. This diagnostic test helps oncologist identify potential therapies and clinical trial options for cancer patients. It is one of the first tests of its kind to profile roughly 20,000 genes in both the tumor exome and transcriptome, meaning a far more comprehensive panel than many competing tests.

Growth Initiatives
Liquid Biopsy Assay: In August 2020 Personalis launched its NeXT Liquid biopsy assay. The first pilot order has come in and revenue is expected to ramp up in 2021. Management sees major growth in liquid biopsy in the coming years and will be launching additional offerings including a personalized Minimal Residual Disease (MRD) offering to be called NeXT Personal.

Expand into Diagnostics: Personalis sees its NeXT Platform as a one-stop, universal tumor molecular profiling test for cancer patients. Part of that is to expand into diagnostics for advanced cancer therapies. To that end the company launched the NeXT Dx Test in January 2020. Expect more on this front.

Berry Genomics for their China Lab expansion: Personalis is expanding into China through a partnership with Berry Genomics. Its new lab is expected to start generating revenue in 2021 then scale up through 2022.

Grow VA MVP Program: At roughly 70% of revenue this program is meaningful, but it can get bigger. The September expansion ($31 million) represented a 22% increase from cumulative orders to date. The program can also be leveraged into additional population sequencing opportunities.

The Business Model
Personalis generates revenue from sequencing and data analysis service. Revenue is generated through contracts with pharma, biotech, healthcare and government customers, not through reimbursement with healthcare payers, which is more common with diagnostic and/or therapeutic companies. That could change over time if the company ramps up its diagnostics business.

The Bottom Line
Personalis generated revenue of $65.2 million in 2019, up 73%. Adjusted EPS of -$0.80 fell 25% from -$0.64 in 2018. In 2020, revenue is expected to grow by 23% to $80 million, while adjusted EPS is seen falling to -$1.13. Consensus estimates for 2021 are not available, but a reasonable baseline estimate is around $92 million, up roughly 15%. Adjusted EPS will be around the same level as in 2020 as Personalis is investing in new products, testing capacity and lab automation. Personalis has no debt and ended Q3 2020 with $206 million in cash.

In the most recent quarter (Q3 2020), revenue was up 16% to $19.8 million while adjusted EPS of -$0.27 was down from -$0.22 in the year-ago quarter. Revenue from the VA MVP grew 9% to $14.1 million (slightly below expectations) while revenue from biopharma customers grew 35% to $5.7 million (well ahead of expectations).

VA MVP revenue growth is due to higher volumes of sample testing, which is supported by an increasingly automated lab. While Covid-19 has hampered sample collection, management says it has enough samples from the VA to process over the next two to three quarters.

Growth from biopharma was driven by retrospective clinical trials, plus a $500,000 contribution from a research collaboration in the gene therapy space that was a one-time deal. Looking out a few years management sees the newly-launched liquid biopsy as a major growth driver.

Risk
Reliance on VA MVP: Representing 70% of revenue, the VA MVP is clearly important. Program funding depends on availability of funding, enrollment of veterans, VA priorities, etc. Anything that negatively impacts this program could be damaging.

Covid-19: The pandemic has impacted supply chains for some of the consumable materials Personalis needs. Also, some customers and partners have restricted visitors, which has created challenges for sales teams. Then there is the risk of Personalis employees contracting Covid-19. On the Q3 call management said it is handling all these risks fine, but we should expect ongoing disruptions as the company navigates the pandemic.

China Expansion: The China expansion with Berry is an opportunity, but ramping up business in the country also entails risks, including IP protection, quality control, supply chain, foreign investment restrictions, etc.

New Product Release Hiccups: We’re expecting Personalis to release new products that will keep this growth story alive. If those products aren’t as effective as expected, or launches fall flat, the stock could suffer.

Competition
Competition comes from both commercial and academic organizations that provide similar services. In some cases, simpler product offerings are a competitive threat since some customers don’t need such comprehensive assays, or they lack the resources to interpret the more complex assays Personalis offers. Larger competitors include Guardant Health (GH), 10X Genomics (TXG), Foundation Medicine/Roche Holdings, NanoString Technologies (NSTG), Adaptive Biotechnologies (ADPT), NeoGenomics (NEO), Tempus, Caris Life Sciences and Personal Genome Diagnostics.

The Stock
Trading Volume: PSNL trades an average of 720,000 shares daily, worth about $20 million. Volume has been significantly higher over the last four months (and since a secondary offering in August) than it was over the summer, with nearly 20 days of over 1 million shares trading since the beginning of August.

Historical Price: PSNL came public at 17 on June 24, 2019. The stock jumped 68% the first day then steadily retreated until it bottomed at 8.5. Shares were recovering and trading near 12 when the pandemic struck, which sent PSNL to a low of 4.27. The stock recovered steadily and was back near 12 by mid-May, then it broke out with a vengeance in early July. A secondary offering priced at 19 in August was absorbed quickly then PSNL consolidated, mostly between 20 and 25, throughout August and September. Shares rallied to 31 in early October and since then have been bouncing around/consolidating mostly between 25 and 30.

Valuation & Projected Price Target: PSNL trades with an EV/2021 sales multiple of around 9.6. That’s a modest premium to the 8x multiple of a larger group of sequencing, diagnostics and contract research organization (CRO) stocks. However, if we look more closely at these stocks, including NSTG, GH, TXG, NEO and APPT, we see an average multiple of 24. Personalis has a blended business so it likely won’t achieve such a high multiple, but if new products ramp up as expected we should see accelerating revenue growth in 2021 and 2022, possibly into the mid-20% range. That could mean 2022 revenue near $115 million, which would likely warrant a higher multiple. Assuming a 15 multiple on 2022 revenue of $115 million a year from now implies a roughly doubling of the share price. That potential is certainly here. Let’s go with a price target of 50.

Buy Range: In the near-term look to buy in the recent trading range between 25 and 30. This stock can be somewhat volatile so average in.

The Next Event: Nothing on the immediate time horizon.

Updates on Current Recommendations

GlossaryPlease email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.

Buy means accumulate shares at or around the current price.
Hold means just that; hold what you have. Don’t buy, or sell, shares.
Sell means the original reasons for buying the stock no longer apply, and I recommend exiting the position.
Sell a Half means it’s time to take partial profits. Sell half (or whatever portion feels right to you) to lock in a gain, and hold on to the rest until another ratings change is issued.

The next Cabot Small-Cap Confidential issue is scheduled for January 7, 2020.

Cabot Wealth Network
Publishing independent investment advice since 1970.

CEO & Chief Investment Strategist: Timothy Lutts
President & Publisher: Ed Coburn
176 North Street, PO Box 2049, Salem, MA 01970 USA
800-326-8826 | support@cabotwealth.com | CabotWealth.com

Copyright © 2020. All rights reserved. Copying or electronic transmission of this information is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. No Conflicts: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to its publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Buy/Sell Recommendations: All recommendations are made in regular issues or email alerts or updates and posted on the private subscriber web page. Performance: The performance of this portfolio is determined using the midpoint of the high and low on the day following the recommendation. Cabot’s policy is to sell any stock that shows a loss of 20% in a bull market or 15% in a bear market from the original purchase price, calculated using the current closing price. Subscribers should apply loss limits based on their own personal purchase prices.