Why We No Longer Like Personalis Stock

As our tech investing methodology evolves, new rules help us better avoid risks and pitfalls by choosing companies that have proven their potential. Meaningful revenue of $10 million per year or more demonstrates traction, provided it’s not in the form of government grants. The larger the company, the more likely they’ll be able to raise capital with favorable terms and enjoy economic benefits that come with size, like economies of scale. We’ve drawn a line in the sand at $1 billion. If a company doesn’t have a market cap of $1 billion, it shouldn’t be on our radar. So why is Personalis (PSNL) listed in our tech stock report as a like when it’s valued at just $225 million?

The last time we looked at Personalis was nearly two years ago in a piece titled A Pure-Play Stock for Investing in Cancer Genomics. At that time, we weren’t overly keen on more than half the company’s revenues coming from a single government program – the U.S. Department of Veterans Affairs Million Veteran Program (VA MVP). Today, we want to see if that situation has changed and evaluate the company’s ability to survive in the face of today’s bear market.

Revisiting Personalis Stock

The core offering from Personalis is their patented “ACE technology” which provides coverage of difficult-to-sequence gene regions, filling in key gaps left by other NGS approaches. Sounds a whole lot like long-read sequencing, but it’s more comprehensive. While firms like Oxford Nanopore and Pacific Biosciences offer equipment and consumables for longer genetic sequencing reads, Personalis offers a whole genome sequencing solution comprised of tools and software from various life sciences vendors. In just over a decade, the firm has led the industry by sequencing over 150,000 whole human genomes, the most of any for-profit company in the United States. Much of that progress was made as a result of their contract to deliver over 140,000 genome sequence data sets to the VA MVP. Said the company:

This relationship with the VA MVP has enabled us to scale our operational infrastructure and achieve greater efficiencies in our lab. It has also supported our development of industry-leading, large-scale cancer genomic testing. The substantial experience that we have developed in whole genome sequencing also optimally positions us for what we anticipate to be the longer-term strategic direction of the cancer genomics industry, which may include whole genome sequencing of tumors.

Credit: Personalis

The VA MVP program was used as a cash cow for Personalis over the past years and accounted for a substantial amount of their overall revenue up until this year when the percentage contribution is expected to fall to 11%.

  • 67% in 2019
  • 71% in 2020
  • 53% in 2021
  • Expected: 11% in 2022

The single customer risk we pointed out several years ago came to fruition when the VA MVP indicated there will be no RFP process in 2022 and Personalis “does not expect to receive any new orders from the VA MVP this year nor to recognize any revenue from the VA MVP beyond the current order and contract.” With 850,000 enrollees in the program, 140,000 were sequenced by Personalis leaving us wondering why the program ceased moving forward. It’s not a good vote of confidence for the future of population genomics, though some projects are still moving ahead such as the Qatar Genome Programme and the 100,000 Genomes Project that Illumina (ILMN) is working on.

The work being done by the VA MVP is referred to as population genomics — the large-scale comparison of genomes within a population – and it formed a significant chunk of ARK Invest’s bull thesis on the stock. Today, Personalis is pivoting their focus towards cancer testing. So far that hasn’t gone too well given the company has had multiple products on the market since 2018, none of which seem to be enjoying much growth outside of major customers. The company has high hopes for the NeXT Personal liquid biopsy test that was launched late last year (more on this in a bit).

Personalis' NeXT Personal liquid biopsy test that was launched late last year
Credit: Personalis

As the VA MVP cash cow dries up, gross margins are becoming compressed which leads us to believe the program was more lucrative than the cancer testing services they’re focusing on now. Below you can see gross margins over the past five quarters which most recently came in at the mid-20s.

Bar chart showing Personalis Gross Margin Trend
Credit: Nanalyze

The Personalis Business Model

A recent interview with Personalis CEO John West points to a services company rather than a software or equipment company. They talk about having “one of the largest sequencing labs in the world” with “more than 20 advanced laboratory pipetting robot systems” and point to the first six Illumina NovaSeq instruments they acquired in 2018. Earlier this year, they acquired the first Ultima Genomics instrument which is probably a story in itself (Ultima has built a next-generation sequencing machine that directly challenges Illumina on price). According to a blog post on Omics! Omics! this past May, Ultima has 10 paying “early access” customers with seven machines installed, one of which is being used by Personalis. All this equipment is being used to provide services to clients, one being a $5 billion diagnostics company called Natera (NTRA) which they’ve entered into a partnership with.

Natera and Personalis

It’s been a long time since we looked at Natera and the non-invasive prenatal testing (NIPT) thesis which we never found overly compelling. Over the years, the company has diversified their offering into other areas such as molecular residual disease (MRD) testing. This involves examining a patient’s blood using their own personalized tumor profile and looking for signs that there are cancer cells present, even after treatment. This allows healthcare providers to detect cancer recurrence earlier than ever possible before. For example, 88 out of 100 times Natera’s MRD test – Signatera – can predict recurrence with an average 8.7-month lead time.

Infographic showing 88 out of 100 times Natera's MRD test - Signatera - can predict recurrence with an average 8.7-month lead time.
Credit: Natera

Personalis received $6.8 million in revenues from Natera in Q2-2022 implying that the test is now being used by healthcare providers. The question is just how sticky the Natera/Personalis partnership is.

Looking back at the portfolio of products on offer from Personalis, the most recent launch is their own MRD test offering – NeXT Personal – which seems similar to the one being offered by Natera. This creates some confusion as to why these companies would collaborate, though the implication is that Natera doesn’t see the competing offering from Personalis to be much of a threat. They’re probably more worried about the competition coming from other firms like Guardant (GH).

Going Long Personalis Stock

Key customer risk hasn’t gone away. Natera has replaced the VA MVP program and – as of Q2-2022 – accounts for 38% of total revenues for Personalis. Another 22% accounts for the remainder of the VA MVP program which is tailing off in 2022 meaning Natera’s concentration should increase, all things being equal. Providing a service to a single company is a risk, not to mention we question what gross margin looks like once the VA MVP revenues trickle to a stop. Sure, Natera could step in and acquire Personalis, but what exactly are they acquiring that couldn’t be replicated by purchasing equipment and software from various vendors? The growth Personalis has enjoyed this year has entirely come from Natera and other pharma customers are actually spending less.

The increase of $10.1 million in revenue from all other customers during the first six months of 2022 compared to the same period in 2021 was driven primarily by an increase of $10.4 million in revenue from Natera due to increased sample receipts during the period

Credit: Personalis

Conclusion

Personalis is too small to be on our radar, their business model doesn’t appear to be overly lucrative, and the customer concentration risk we identified several years ago hasn’t gone anywhere. Investors who believe whole genome sequencing is the way forward are probably better off investing in long-read sequencing companies, though it remains to be seen how Illumina’s recently released long-read solution will be received by the community. Maybe Illumina should stop pissing off regulators and focus on addressing the threat Ultima Genomics poses to their 87% market share in next-generation sequencing machines.

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