SOPHiA GENETICS Stock – A Play on Data Driven Medicine

When artificial intelligence (AI) algorithms are able to predict how proteins fold based on amino acid sequences, it makes one wonder why it’s taking so long to move from spray-and-pray medicine to data-driven medicine. Today’s AI algorithms are certainly sophisticated enough, and there’s plenty of delicious big data to be found. The problem lies in aggregating the data from all the disparate silos where it currently lives. One company looking to start mankind down the path toward data-driven precision medicine is SOPHiA GENETICS (SOPH).

About SOPHiA GENETICS Stock

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We first came across SOPHiA GENETICS several years back in a piece on The Top-10 Artificial Intelligence Startups in Switzerland, and then again in our piece on 9 Genomics Startups for Investors to Watch. After raising just over $250 million in disclosed funding, SOPHiA made the move to become a publicly traded company just days ago, having raised an additional $234 million in their initial public offering (IPO), giving them a current market cap of around $1 billion. This means we’re now able to learn more about the company by perusing their lengthy S-1 filing document and extracting all the interesting bits.

Clinical and Biopharma

In 2014, SOPHiA launched the first application of their platform to analyze genomic sequencing data for cancer diagnosis. Today, they have 330 applications for precision medicine across areas such as oncology, rare diseases, infectious diseases, and cardiology. Their platform has analyzed more than 770,000 genomic profiles for 780 hospital, laboratory, and biopharma customers, though only 365 of those customers have generated revenue over the past 12 months. The platform is built on a decentralized model in which they “push” data analytics solutions to customers’ sites, rather than a centralized model that requires samples to be sent to a central location. Customers generally perform testing on their own samples, while retaining custody of both the sample and the data.

SOPHiA’s platform can be split into two primary areas; clinical and biopharma.

Credit: SOPHiA GENETICS

SOPHiA released initial applications for the biopharma market in 2019 which included making their genomics data available for drug development, a trial matching offering, and companion diagnostics (drugs that target specific genomic profiles). As of last month, they had seven biopharma customers generating a small unknown percentage of total revenues.

Revenues That Underwhelm

There’s an obvious disconnect between customers who use the platform (780) and paying customers (365), which might be explained by SOPHiA’s pay-per-use model in which customers can access their platform free of charge, while paying for each analysis performed. On the other hand, their land-and-expand approach seems to be making up for that, as the average yearly spend per customer has increased over time.

Credit: SOPHiA GENETICS

This is a good segue into talking about revenues. Unfortunately, SOPHiA gives us just two years of revenue history, with growth from 2019 to 2020 coming in at a paltry +12%.

Credit: SOPHiA S-1 Filing

Around 70% of 2020 revenues from clinical customers were attributable to oncology applications. In addition to genome sequencing data, the platform can process and analyze data from any type of three-dimensional medical imaging technology, including CT, PET, MRI, and SPECT scanners. Genomics data and medical imaging data can also be analyzed together to further enhance the richness of the analysis. All of this data and analysis can then be attached to a patient’s electronic health record (EHR) leading to an era of true data driven precision medicine.

Questioning the Competition

SOPHiA says their main competitors are “institutions that collect multimodal data that have developed in-house analytics solutions,” such as Tempus Labs (an $8.1 billion unicorn), and Roche through its acquisition of Foundation Medicine and Flatiron Health. In a piece last year titled Tempus Uses AI and Big Data for Precision Medicine, we talked about how Tempus Labs is doing something very similar to SOPHiA.

Tempus also attacks cancer at the molecular level by genomic sequencing of tumors but leans on AI to organize and analyze diverse datasets, from oncology notes and pathology reports to radiology and pathology images. The result, the company contends, is a data-driven treatment customized for each patient. 

Credit: Nanalyze

If they consider Foundation Medicine a competitor, then why not Guardant (GH), a company that in their own words is “conquering cancer with data?” In that same group you might also put Grail, or any other company developing liquid biopsies. And what about Invitae (NVTA) and their acquisition of ArcherDX, a company promising precision oncology for all?

You could argue that 30% of SOPHiA’s revenues come from non-cancer use cases, or that they’re also offering imaging analytics while liquid biopsy companies aren’t, but we’d argue that the amount of traction they’ve realized over the past decade isn’t very compelling. Perhaps their lack of market penetration in the United States (less than 10% of total revenues in 2020) could also be limiting their growth potential.

To Buy or Not to Buy

When customers who use the platform decide to engage SOPHiA GENETICS algorithms for insights, the company gets paid. We question how resilient such a business model is in times of crisis. Look no further than the drop in usage that occurred when The Rona reared its ugly head.

SOPHiA Platform Usage by Quarter – SOPHiA S-1 Filing

If SOPHiA’s platform is critically useful for customers, then why in times of crisis does usage drop off so dramatically? It makes us question the value of the platform from the customer’s perspective. It’s easy to understand how the end-patient benefits from precision medicine, but how does this platform help customers either reduce costs or increase revenues? One clue is given when SOPHiA says they expect a “significant portion” of their revenue will be derived from sales to customers for research and development (R&D) applications. In times of economic turmoil, purse strings tighten, and R&D budgets get cut.

Opting to not pursue a software-as-aservice (SaaS) model puts SOPHiA in a precarious position should their customers stop using the platform for any reason. The S-1 mentions an interesting incident involving the company’s ex-CFO whose team was trying to collect on minimum usage fees which a whistleblower didn’t believe were enforceable. That’s water under the bridge now, but implies that there aren’t any such contracts in place now.

Another concern is around revenue growth. While there may be a large $35 billion blue ocean total addressable market (TAM), SOPHiA certainly isn’t capturing market share very quickly. For a platform that’s been in operation for a decade, having $28 million in annual revenues seems weak. Sure, everyone gets a pass because of The Rona, and SOPHiA does appear to have rebounded quite well based on platform usage, but they need to move a whole lot faster in capturing the opportunity.

We like the idea of data-driven precision medicine, but think this stock should be avoided in favor of other private and public companies that may – now or in the future – provide a better way to play the data driven precision medicine theme.

Conclusion

Somewhere in our future is a world where your genomic profile is sequenced in its entirety and fed to a vast assortment of AI algorithms that then use that information to produce precision medicine for whatever ails you. Of course by that time, gene editing at the germline will have eradicated all hereditary diseases, and your smart toilet will detect cancer and tell your smart fridge to sort you out with a morning smoothie that quickly eradicates out-of-control cell growth. It remains to be seen if a centralized or decentralized model is the optimal way to achieve that vision.

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