Personalis: Deep Genomics Leader At A Good Price (NASDAQ:PSNL)

Investment thesis

With the recent launch of Liquid Biopsy, China expansion, machine learning platform later in the year and a slight pivot to attempting to sell population sequencing to more countries, Personalis has become an even more enticing opportunity.

Developments since IPO

On June 7, 2019 I published an article about PSNL doing a basic analysis of the company at the time of its IPO. Over the past 14 months since I wrote the article, the company has kept up a steady pace of announcements and innovations and going from strength to strength in its execution. The public markets have not been kind to the company. It has failed to hold its IPO price creating a great opportunity to build a position.

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Of all the events in the past year, two that stand out for me – the China launch and partnering with Berry Genomics and NeXT Liquid Biopsy, exome-wide liquid biopsy platform. Both will be instrumental in growing sales over the coming years.

Liquid Biopsy

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By adding the liquid biopsy capability Personalis can offer a one stop shop and with one sample providing detailed information to its customers about the sample. That is a definite advantage when compared to the competition which tends to be quite fragmented.

Here the company is describing the capabilities of the platform as it stands now:

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The company is not done with adding capabilities to the Liquid Biopsy platform and will continue adding to it for more focus on patients in treatment and to figure out mutations of tumors and compare that to drugs being used and more.

For further detail on the product, I refer to this page on Personalis website where there is considerable detail. NeXT Liquid Biopsy

The revenue implications are not quite clear yet but John West, CEO, has some insightful comments in the Q2 earnings transcript:

Yes. So our expectation is that this will lead to a significant increase in economics and also in the biological value of the data that we can deliver. We have a few customers now where we actually already provide data at multiple time points from the tissue. And in those cases, we’ve already had cases where customers have paid up to $16,000 per patient because they’re getting data from multiple time points via tissue. We think that kind of thing can expand quite substantially as we have more and more customers where it’s easier because then they have multiple time points.

And later on in the call Aaron Tachibana, CFO adds to it:

And so you had asked a question about the liquid biopsy. And so just to make sure that you’re calibrated. So our current pricing today for tissue with NeXT is ranging between $3,200 and $3,500 per patient. For liquid biopsy, the pricing is probably going to be somewhere between 15% and 20% more than that. And as John was explaining, we’re going to have the opportunity for multiple time points. So the average dollar per patient could be 5, 6, 7 times of what we’re getting for tissue when you look at it from a per patient standpoint.

And then the other question you had about what percent of our customers are on the old platform versus NeXT. So I had mentioned in the prepared remarks that NeXT revenue exceeded $2 million in Q2. So the NeXT revenue was a little more than half of our total biopharma revenue of $4.7 million. So we’re starting to ramp NeXT now. We’ll always have customers on the older platform because they’ll need to remain and keep having data consistent for clinical trial purposes on the old system, but – or the old platform, but we’re starting to see more and more convergence to NeXT at this point in time.

I highly recommend reading both earnings transcripts in 2020 well. John West, CEO, has lots of insightful comments on the business and the path forward.

The revenue impact of each sample becomes that much greater. What is also important is that with greater scale margins go up and that bring in more cash generation for the business to pay for further development and growth. This will likely be a game-changer for the company and I think this will push pharma revenue growth over the coming quarters.

Million Veterans Program – Population Sequencing

The mainstay of the Companies revenue over the last few years has been an agreement with the Veterans Administration to sequence genomes. Due to the scale and the automation of the work surrounding it is a positive margin business and thus supporting the R&D and Sales work being done to expand the rest of the company. On the same Q2 Earnings call John West, CEO, added some clarity on it going forward:

You can imagine that as the cost of sequencing keeps coming down, they continue to gain experience with this, you can imagine, in the future, it’s likely to be that they’ll want to sequence all veterans in the VA system. I think that will just become the standard. So we may have some more years for that. Right now, they have so many more samples than they’ve contracted us for. Even if they didn’t connect – collect those sample for several years, they could continue to contract with us because they’ve selected over 800,000 samples, but they’ve only contracted with us so far for 116,000, really related by the budget.

So we do continue to see ongoing bipartisan support for veterans. Both Republicans and Democrats tend to be outspokenly supportive of veterans and the VA. And so we anticipate that the budget for this has a lot of potential to continue to grow over the years. And this is a program that has many years to run. As we’ve said, we also have this thing right now; this is our one customer in this category. Given our experience here, we’re beginning to explore how we would expand into other population sequencing projects that could be in countries all over the world. And so we think this actually could be a pretty nicely growing business for us as we look out over the coming years.

Management has identified this as a possible service to offer to other countries/institutions and is exploring that as a possible expanding revenue source going forward. That could help push growth even faster with a second or a third major customer to support the future growth of the company. What could help push this business line faster is that newly announced NovaSeq 6000 v1.5 Reagent Kit which lower the pricing to $600. That could lower costs dramatically and accelerate investment in population sequencing by more nations and institutions. Perhaps China is a possibility due to the Berry Genomics partnership mentioned above. There certainly is an opportunity there across the world.

The downside of the MVP is the huge revenue concentration and uncertainty of future contracts. This is likely one of the factors that have kept the share price low. Hopefully, there is more clarity on a continuation of the contract at the end of 2020.

Total Addressable Market and other opportunities

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As can be seen in this wonderful slide from Personalis where the Total Addressable Market is estimated at about $40bn. With the company looking to make sales of under $100m in 2020, there is a lot of growth that can and likely will happen from

There are further opportunities for Personalis that I have not reviewed here. They have a Machine Learning prediction model for neoantigen discovery product coming out in Q4 that could be value accretive to customers. According to the 10-K they are building their own Biobank and Database with acquired samples to add value to their offerings and possibly understand new mechanism of cancer treatments. Both of those are value-creating and add more capabilities to the company.

Bright future

I am a fan of the company and its management. I think with the current and future projects within the company that it has a great future and can easily grow to become a much bigger company. With a war chest of $220-230m, it should have enough firepower to speed up development, marketing, and sales. It is the right point in time especially with the liquid biopsy out as that is the product that will draw in more and more pharma customers. The additional services make them stick around.

I have been long since early 2020 and intend to remain so unless something changes in my thesis.

Disclosure: I am/we are long PSNL. 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.

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