Sema4 Stock – AI-Powered Precision Medicine

If you like buying special purpose acquisition companies (SPACs) at $10 a share, you’ll love buying them at $6.67 a share. A Sober Look at SPACs was a study last year by Stanford and NYU that revealed “by the time the median SPAC merges with a target, it holds just $6.67 in cash for each outstanding share.” So that whole “ten dollars a share is what institutional investors paid” thing isn’t so comforting anymore. Still, there are some SPACs that are worth a look, one of those being Sema4 which is planning to merge with a SPAC called CM Life Sciences (CMLF).

About Sema4

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Founded in 2017, Connecticut startup Sema4 took in $241 million in disclosed funding from investors with half of that coming from a July 2020 round led by asset management giant BlackRock (BLK). That money is being used to build a vision of AI healthcare that’s easy to imagine when you think about the future of precision medicine. If a company can get their hands on every single bit of medical data associated with an individual, they can then start to offer “predictive care” and “precision medicine,” but only if they have these data sets for a reasonable population of people (artificial intelligence algorithms can only learn if you feed them lots of delicious big data).

So, first Sema4 needs to collect some healthcare big data:

Credit: Sema4 Investor Deck

It’s easy to imagine the bull case here. McKinsey and others of their ilk have estimated that big data could save the healthcare industry $100 billion a year. It could be a conservative estimate when you consider the global healthcare industry is expected to soar past $11 trillion by next year – so less than 1% in savings. We don’t need a 35-page SPAC deck to convince us there’s an opportunity here. The question is how capable Sema4 is of capturing a good chunk of it.

It’s All About Execution

The first thing our eagle-eyed research team noted is a discrepancy between the glossy SPAC deck and the Schedule 14A filing made with the SEC. In the SPAC deck, we see an estimated $190 million in revenues for 2020:

Credit: Sema4 Investor Deck

And from the SEC filing, just over $179 million.

Credit: SEC Schedule 14A Filing Document

Since the above is said to come from “Sema4’s audited consolidated financial statement,” we’re fairly certain these are actuals. Maybe they hadn’t completed the audit before the investor deck was produced. Sure, it’s only off by 5.8%, but they also didn’t include 2019 revenues in the SPAC deck, as that would have shown 2020 revenues actually fell year-over-year. That’s information investors would have found useful. Since everyone gets a pass in 2020 because of The ‘Rona, it wasn’t a big deal to include all the information so we could make an informed investment decision. Has anyone else noticed how nearly all SPACs leave 2020 revenues as “estimated,” while some don’t include prior years? If these were IPOs, we’d have all the available data, not what the company cherry-picked.

If we go back to the SPAC deck revenue chart, there’s another concern we have regarding “women’s health” occupying a large majority of current revenues. (It also happens to be the segment with the slowest growth.) Women’s health and COVID make up what appears to be nearly all Sema4’s revenues in 2020. We’re told that oncology only accounts for “3% of 2020 revenues,” yet the number is expected to grow at a triple-digit compound annual growth rate (CAGR) along with three other segments. The result is that everything automagically comes together three years from now when they clear half a billion dollars in revenues. It’s hard to put any stake in these forecasts unless we know who is making these promises.

The Man Behind the Curtain

Founder and CEO of Sema4, Dr. Eric Schadt, has an academic resume that’s more than impressive. He’s currently the Dean for Precision Medicine at Mount Sinai where Sema4 was spun out of, so it’s no surprise the company has more than 10 million de-identified genomic profiles and patient records to work with, and probably more where that came from.

After completing his PhD, Dr. Schadt started working for Roche, then was hired as Chief Scientist at Rosetta Inpharmatics which was sold to Merck. When Dr. Schadt left Merck, he estimated that his group was responsible for half the drugs in the company’s development pipeline. He then founded a non-profit called Sage Bionetworks. Seven years after Merck acquired Rosetta Inpharmatics, they shut it down, donating the leftovers to Sage Bionetworks. Dr. Schadt then did a stint over at Pacific Biosciences (PACB) as their Chief Scientific Officer. Today, he’s leading the charge at Sema4.

That’s a summary of his bio from Wikipedia, and we’re assuming it’s accurate based on his high profile. The story isn’t overly compelling when you consider he hasn’t actually founded a company and exited it. That’s a skill you want someone to have that’s making big promises about triple-digit CAGRs. Still, all we’re doing is sitting around in our underwear complaining that this incredibly successful individual “hasn’t done enough,” so it’s time to take another rip off the vape pen and work on the most important part of this piece – the big decision.

To Buy or Not to Buy

Our biggest concern is that 86% of Sema4’s 2020 revenues come from offering direct testing for women’s health use cases. That story sounds a lot different from the precision medicine vision we imagined earlier. Sure, women’s health is just one part of the bigger picture, but a lot has to happen for the end result to materialize. In the meantime, the clock is ticking and the bank balance is dropping. While we don’t pay much attention to cash burn (we like to focus on revenues instead), Sema4 has been burning through a lot of cash – $242 million in 2020. With the $500 million they plan to raise from the SPAC, they should have at least a few more years of runway.

The aforementioned paper on SPACs talks about how “SPAC investors are bearing the cost of the dilution built into the SPAC structure, and in effect subsidizing the companies they bring public.” This implies that by paying the offering price which institutional investors pay – $10.00 a share – you’re still overpaying. It’s also a psychological trap.

It’s not uncommon for a new disruptive tech IPO to eventually trade at half the price it was initially offered at (that’s just the nature of tech stock volatility). Should that happen for any SPAC, novice investors will be led to believe that shares are “cheap” when the price tag on a share has nothing to do with a company being cheap or expensive. Should institutional investors like ARK Invest start unloading large amounts of shares, prices could sink even further (the ARK effect). In other words, there’s nothing to support the share price once the deal goes through. And ARK is an investor in Sema4.

We’re no longer interested in purchasing SPACs at what institutional investors are paying (with some exceptions, of course). That said, we don’t believe Sema4 is overvalued at $10 a share. Our simple valuation ratio – market cap / annualized revenues – shows us that shares are “not unreasonably valued” at $10 a share. (Right now it’s trading at $12.74 a share, down from nearly $26 a share when the deal was announced.) Here’s our calculation:

  • Implied market cap at $10 per share: $2.5 billion
  • 2020 revenues actual: 0.179 billion
  • Basic valuation ratio = 2.5 / 0.179 = 14

Compare that number – 14 – to some other life sciences companies we recently calculated ratios for:

CompanyMarket CapRevenue DataRevs BillionsRatio
Berkeley Lights2.91Q-2021*40.07439
Illumina582Q-2021*44.3613
10X Genomics18.61Q-2021*40.44841
MaxCyte1.084Q-2020*40.03036

And that’s where we want to leave this, on a positive note. Unlike most SPACs, Sema4 is bringing in some very meaningful revenues. Even based on the lower 2020 revenue number and the current share price of $12.74, you could still argue they’re fairly valued. That is, if all that future revenue growth actually happens.

Conclusion

A major concern we have about SPACs is what skeletons might be in the closet for companies that choose to quickly go public before the SPAC music stops. We’re in no hurry to buy into these visions of growth prior to seeing the dust settle following the transaction and some proper filing documents.

Speaking of which, the Sema4 reverse merger is expected to happen in Q2-2021 which doesn’t leave much time left. Before you even consider investing in a SPAC, wait for the deal to actually close. We’re sitting this one out and will check in a year from now to see if they hit that 2021 revenue target of $265 million. We’re happy to miss out on some upside in exchange for assurance that Dr. Schadt’s rocket ship is actually going to take off.

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