A Pure-Play Stock for Investing in Cancer Genomics
Saint Steve Jobs once said that the biggest innovations of the twenty-first century will be at the intersection of biology and technology. Look no further than next-generation sequencing (NGS) which now lets us read DNA, and artificial intelligence algorithms that help us understand DNA. If we think of a DNA strand as a 1.5-gigabyte chunk of computer code, then genes are code snippets which perform certain things – functions if you will.
The Creator, like every other developer out there, didn’t care much for putting comments in code. After six days of coding, the simulation was booted up, and here we are with only a minimal understanding of how all our genes function. One life sciences company working to solve that problem is Personalis (PSNL).
Founded in 2011, San Francisco based Personalis raised $75 million in funding before having their initial public offering in June of last year giving the company a present-day market cap of around $700 million. The company is in the business of providing their customers with information on all 20,000 human genes (that’s an approximate number), together with the immune system, in order to better understand how to treat cancer. Contrast this to the many cancer panels on offer from their competitors that cover roughly 50 to 500 genes. This capability is made possible by their flagship offering – the NeXT Platform.
The NeXT Platform
The NeXT Platform is a next-generation sequencing and analysis platform that enables two services: NeXT Tumor Biopsy and NeXT Liquid Biopsy (in development). The tumor biopsy offering analyzes tissue samples from cancer patients while the liquid biopsy does the same with blood samples (these are also referred to as cancer blood tests). Revenues from early customer pilots of NeXT Tumor Biopsy were recognized in Q4 2019 while the liquid biopsy will be released sometime this year. Using the tissue biopsy along with the liquid biopsy can create a synergistic effect resulting in more comprehensive data.
In addition to sequencing and analyzing all of the approximately 20,000 human genes, the NeXT Platform also provides the following benefits:
- Tumor and immune molecular profiling from one limited tumor sample
- Cost-effective and scalable, with rapid turnaround times
- Comprehensive coverage of all genes, DNA and RNA, tumor and normal tissue, and immune biology
- Covers a much broader set of biomarkers for new immunotherapies and traditional targeted therapies
The secret sauce that lets Personalis extract so much more genetic information is their patented ACE technology which provides coverage of difficult-to-sequence gene regions, filling in key gaps left by other NGS approaches. ACE is able to deliver more comprehensive coverage not by simply generating more data, but by generating higher quality data. The substantial majority of their revenues since inception, excluding revenues from the Veteran’s Affairs Million Veteran Program (discussed below), were derived from ACE Extended Cancer Panel and Cancer Research services.
Many biopharmaceutical companies are pursuing personalized cancer therapies, which are designed and manufactured, individually, for each patient based on genomic alterations in a given patient’s tumor. The detailed information being collected by Personalis will be a key input for such an offering. Personalis hopes that the comprehensive data they can extract from biopsies will put them a step above the many competitors who are also dabbling in precision oncology.
Personalis describes their primary competitors as companies offering genomic profiling services for either the tumor or the immune microenvironment. The company’s most recent 10-K lists the following primary competitors:
- Guardant Health (GH) – $9 billion precision oncology company with 2019 revenues of $214 million
- Foundation Medicine – Acquired by Roche in 2018
- Roche Molecular Diagnostics – Subsidiary of Roche
- NanoString (NSTG) – $1.5 billion company providing life sciences tools with 2019 revenues of around $125 million
- Personal Genome Diagnostics – Startup, founded in 2010, took in just under $100 million so far
- Adaptive Biotechnologies (ADPT) – Develops an immune medicine platform for the diagnosis and treatment of various diseases.
Aside from Roche, the biggest name in the list is Guardant, a company we last looked at when they had their IPO in September of 2018. Since then, the share price has been rising steadily with revenues more than doubling in 2019. We’ll look to do an update on Guardant shortly to see how they’ve been coming along, and what sort of threat they pose to Personalis.
A Key Customer
One red flag that pops up is the company’s over-reliance on the U.S. Department of Veterans Affairs Million Veteran Program (the “VA MVP”). With more than 825,000 enrollees to date, the VA MVP study aims to better understand how genetic variations affect health. It’s one of the largest population sequencing efforts in history.
Since 2012, Personalis has been contracted to provide DNA sequencing and data analysis services to VA MVP which began collecting samples in 2011. To date, Personalis has been contracted to deliver approximately 115,000 genome sequence data sets to the VA MVP with current contracts expected to extend through next year. While revenues are showing strong growth, almost 80% of 2019 revenues came from just two customers:
Providing services to VA MVP has been instrumental in helping to develop the company’s platform. Still, having such a high percentage of revenues coming from a single client is concerning. These are particularly uncertain times, and things like ‘Murica’s coming presidential election and “the rona” mean that anything can happen with government programs. Even if something unexpected does happen with the VA MVP relationship, Personalis has their sights set on other large-scale genomics projects.
The leading provider of ETFs that provide exposure to disruptive innovation, ARK Invest, upped their stake in Personalis this year by 87% making it one of the top-10 holdings in the ARK Genomic Revolution ETF. In a recent newsletter, ARK analyst Simon Barnettt talked about how Personalis is focused on something called “population genomics,” pop-gen for short. That’s all about nations and healthcare systems that want to sequence large groups of people to gain insights into how they can provide better health services.
In reading through the Personalis 10-K, lots of emphasis is put on how the company can operate at scale, sequencing, and analyzing up to 180 trillion bases of DNA per week. This past June, Personalis announced a partnership with Berry Genomics which will involve establishing a wholly-owned subsidiary in Shanghai with Berry Genomics providing support. In the coming years, population genomics may be a key driver of growth for Personalis in addition to their current focus on cancer genomics.
Personalis hopes to become a leading provider of the complex information needed to inform the development of targeted cancer therapies. Machine learning algorithms are only as good as the data they’re being fed. He who controls the data, controls the domain. (That’s the basis of the bullish thesis on Tesla.) We’re not overly keen about more than half of their revenues coming from a government program so we’re sitting on the sidelines for now. The next step is to look at what Guardant Health has been up to.
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