Checking in With Seven Proteomics Stocks

ChatGPT writes a few canned emails and the market goes mental because generative AI is finally here. Where was the hype when Google’s DeepMind bested a top-ranking Go player, an incredible accomplishment described in the excellent free documentary AlphaGo? When those same algorithms then mastered the ability to fold all known proteins, the market hardly raised an eyebrow. But a mediocre chatbot with a clear political bias, and deep-rooted desire not to offend anyone, appears to have turned the entire stock market around. Such is life.

After mastering Go, DeepMind’s AlphaFold predicted the structure of almost every protein known to science, cracking one of the grand challenges of biology, and ushering mankind into a golden age of protein optimization. That was the idea anyways, and at least seven publicly traded companies focusing on proteins – what’s called proteomics – drew the attention of investors who saw a goldmine of opportunity. Then the bear market hit, and everyone started tightening their purse strings and setting aside “nice to have” projects in favor of those that impact the top or bottom lines.

As the Nasdaq sits at just 10% below all-time highs, investors are left wondering if this is the start of another bull market or a dead cat bounce. Who knows, but today we’re here to look at what’s been happening since our August 2022 piece on Seven Proteomics Stocks: Finding the Best One. For starters, here’s how the market caps of these proteomics firms have changed since our last piece.

Quanterix’s Turnaround Plan

We don’t invest in companies with a market cap of less than $1 billion, so why are we holding shares of Quanterix (QTRX)? That’s because the bottom fell out of this stock in summer of last year, something we discussed in our piece on Why Quanterix Stock is Dropping Like a Rock. The short story is that quality issues led to a drop in platform usage. A change in leadership was announced along with a plan to sort things out this year with double-digit revenue growth to resume next year. At the time, we felt it was “hard to justify wasting time and energy following a position that has lost its thesis and revenue growth.” Ultimately, we decided to stick with the company because it seemed as if the market had overreacted to the bad news. Today, the recovery seems to be progressing as planned as seen in the below slide pulled from a recent investor deck.

We like that Quanterix constantly mentions the turnaround plan in press releases and investor decks instead of sweeping past transgressions under the rug. In August, we’ll revisit the company as part of our annual checkup for stocks we’re holding and see if staying long until growth resumes still makes sense. Were we to exit Quanterix, then the only suitable substitute (based on our size rule) would be Sweden’s Olink (OLK). As it turns out, Olink has become a lot more appealing since the last time we checked.

Olink: Products vs Revenues

Olink doesn’t have to wait for revenue growth. It’s already here, but is it the type of revenue growth we’re interested in? Several years ago, we concluded that Olink wouldn’t make an attractive investment until “products surpass services as a majority of total revenues.” That’s now happened as “Kit” revenues are skyrocketing while “Service” revenues plummet.

If you’re considering an investment in proteomics, you’d probably skip Quanterix and their turnaround plan and opt instead for Olink, a company that’s executing against their growth plan while guiding towards 37% revenue growth this year. Given the progress being made, we’re changing the stock from an “avoid” to a “like” in our tech stock catalog while noting that it seems overpriced with a simple valuation ratio (SVR) of 20 (we wouldn’t consider investing in any company with an SVR over 20). With just $75 million in cash on their books, Olink’s target of reaching profitability this year is one to monitor. Speaking of cash burn…

SomaLogic’s Internal Turmoil

Claims to have first-mover advantage. Selling services. Supply chain issues have been wreaking havoc and mention is also made of a slowing in spend. We’ll check back in in early 2023.

Nanalyze – August 2022

That’s where we left SomaLogic (SLGC), a company with $500 million in cash thanks to their SPAC offering and slowing revenue growth based on 2023 guidance of $80 million to $84 million (2022 saw $97.7 million in revenues, an increase of $16.1 million, or 20%, compared to the prior year). Earlier this year, the CEO departed along with three board members which implies some internal turmoil as to the company’s best path forward. Cutting the quarterly burn rate of $40 million in half is on the cards for 2023, which would extend the company’s runway from around three years to five years. Having a first-mover advantage only works if you’re capturing market share and emerging as a leader, and SomaLogic now needs to quickly recover from whatever internal drama they had and resume growth. An article by GenomeWeb describing the turmoil talks about how “the firm’s collaboration with Illumina to produce a kit for a next-generation sequencing-based readout of its proteomics assays is on track for commercialization in 2024.” Illumina isn’t exactly a shining beacon of stability themselves, so checking back in with Somalogic next year seems like a plan.

No Revenues, No Interest

Nautilus is pre-revenue, so we’re on the sidelines with this proteomics stock. The SPAC deck promised us $4 million in revenues this year and $17 million in 2023. We’ll see if that happens first.

Nanalyze – August 2022

That’s what we said about Nautilus Biotechnology (NAUT) last year, and a quick peek at their latest earnings call talks about “the planned launch of our platform – instruments, reagents, and software – in mid-2024.” Next. That brings us to the third SPAC on our list of proteomics stocks, Quantum-Si (QSI), which saw revenue of $254,000 in Q1-2023 which is expected to “accelerate in the second half of 2023 based on robust business funnel.” With cash on hand of $322 million and a market cap of $216 million, an investment in QSI gives you around $100 million in net cash and a free proteomics business to boot. Or you can see it as we do – the market doesn’t have a whole lot of confidence in the future success of QSI’s proteomics platform.

Seer’s Related Party

“Product-related revenue for the first quarter of 2023 was $3.6 million, including $1.3 million of related party revenue, and consisted of sales of SP100 instruments, consumable kits and platform evaluations.” That related party is PrognomiQ, a new entity formed by Seer (SEER) in August 2020 which they retained a 15% ownership of that’s now accounted for as NIL on the balance sheet. This makes us question the potential of this related entity which consistently accounts for around one-third of Seer’s total revenues.

For 2023, Seer expects revenues of $23 million to $25 million, representing growth of 48% – 61% over full year 2022. With operating costs burning $20 million a quarter, and cash on hand of $410 million, the company has a runway of about five years. If we exclude related party revenues, the company’s simple valuation ratio sits at around 25 which is excessively overpriced. Like most proteomics companies we’ve covered today, Seer is just too small to be on our radar. Not to mention, receiving revenue from a company that’s valued at nothing on their balance sheet just rubs us the wrong way.

Codexis’ Customer Concentration

Codexis is showing promise. Doesn’t seem overvalued. Pfizer will represent at least half of total revenues in 2022. We want to see customer concentration decrease over time, not increase.

Nanalyze – August 2022

And decrease it did. The promise Codexis (CDXS) was showing seems to have evaporated as our customer concentration risk came home to roost. Below you can see how Pfizer’s 60% revenue contribution for 2022 has dissipated, causing the contributions from other key customers to rise above 10%.

The above revenue concentration risk might be acceptable, but we need to reset expectations as total revenues for 2023 are expected to decline by more than 50%. At the same time, Codexis believes “cash and cash equivalents will be sufficient to fund its planned operations through the end of 2024.” Gross margin this past quarter was 46% compared to 72% in first quarter 2022 which was “largely driven by variability in the product mix.” With both revenue growth and gross margin trending in the wrong direction, Codexis no longer seems to have much appeal from where we’re sitting.

Conclusion

For any given theme, we want to identify leaders to invest in. Market cap and revenues are great indications of leadership potential, and Olink seems to be pulling ahead in both, though there’s a price to pay for that potential. Were we to invest in proteomics today, we’d opt to invest in Olink over the rest. However, we’ve already placed our bets with an investment in Quanterix, one we’ll be revisiting this summer as we decide whether to stick with a company that’s seen growth stall as they try and turn their proteomics ship around.