Seven Proteomics Stocks: Finding the Best One
If you’ve been on this planet for 70 years, you would have been present for four global recessions. The first would have been in 1975, and the last in 2009. The flames of warning are starting to flicker again says Reuters – higher interest rates, red-hot inflation, and energy crisis – and of course the coming food crisis we covered recently. Retail investors need to take a holistic look at what risks they’re currently taking (threats) and what quality companies might be purchased on the cheap (opportunities) as the market wallows in misery.
Our approach is to find a compelling thesis and invest in the market leader, something usually measured by market cap and revenues. The bigger the company, the more they enjoy economies of scale. The faster revenues grow, the quicker market share is being captured. That’s how we describe “best.” Today, we’re going to look for “the best” of seven proteomics stocks which provide exposure to the burgeoning life sciences field of protein engineering..
Seven Proteomics Stocks
We looked at the bull thesis for proteomics in last year’s article on A List of 7 Proteomics Stocks For Investing in Proteins. One of those companies was Codexis (CDXS), and several months back we looked at how their growth was largely coming from a pandemic pivot with Pfizer. Guidance given alongside Q2-2022 earnings puts 2022 revenues in the range of $135 million to $141 million with Pfizer being responsible for at least half of those numbers. With a market cap of $482 million, Codexis is just too small to be on our radar. That leaves us with six remaining names.
Senior-level exits are always a curiosity, especially when they telegraph unexpected departures. In October 2020, John Stark accepted an offer to become CEO of Quantum-Si (QSI). Six months ago, he resigned “in order to pursue opportunities outside of the Company.” The Chairman of the Board (in other words, Mr. Stark’s boss) is the current CEO while they search for a replacement. Whenever another CEO isn’t lined up, it shows that the event wasn’t planned. The latest 10-Q tells us that Mr. Stark forfeited $4.7 million in restricted stock unit awards which probably didn’t have a decent chance of vesting. Whenever someone leaves stock options on the table, they usually don’t believe in the company’s potential. Quantum-Si’s Chief Business Officer also left money on the table when he resigned several months ago.
Companies without revenues are not on our radar because they haven’t demonstrated traction, and the current bear market means funding will be difficult to come by. Quantum-Si promised their investors $17 million this year and we’re holding them to that.
If they can manage to hit their 2022 number, we’ll see that as a sign of competent leadership and revisit the firm. Until then, they fail two of our entrance criteria for new investments – we only invest in firms with a billion-dollar market cap or higher, and we never invest pre-revenue. Even with hard rules like these in place to minimize risk, we can still get side-swiped by unexpected problems because tech is inherently risky. For proof of that, look no further than Quanterix.
When internal issues become so impactful they can’t be hidden from the public, it’s best to let everything out in one swell foop. That’s precisely what Quanterix (QTRX) did in their recent Q2-2022 earnings call, something we covered in our recent piece on Why Quanterix Stock is Dropping Like a Rock.
Let’s start with declining revenues. The CEO talks about how “operations and ability to scale have not kept up with growth and customer demand for our Simoa technology. This has manifested itself into quality challengers that will in the near term have impaired our growth rates.” So, the first problem relates to product quality, something they’ll be working to fix into next year as revenues stay flat this year. Consumables revenue dropped around 30% as customers used the platform less. (Perhaps they caught wind of the quality problems.) At the same time, they’re also laying off 25% of their workforce – about 130 people – which is described as a “focusing” effort. Oh, and the Chairman of the Board resigned too.
As part of the strategic review that resulted in these dramatic announcements, the company revised how costs are being allocated – primarily rework and shipping costs – which resulted in gross margins dropping. That, accompanied by a drop in high-margin consumables, means this quarter’s gross margin was a miserable 28%.
It was tough to keep track of all the bad news released with Q2-2022 earnings, but a glimmer of hope was when senior management purchased more shares when they were trading below the $10 in cash each share represented. Now that’s a depressing thought. Investors aren’t even valuing shares of Quanterix based on the cash they represent, which means all faith has been lost. For those of you who are staying on board the floundering ship, Quanterix expects a return to double-digit growth in 2024. That’s the same year our next company expects revenues to arrive.
We’re not expecting much from the smallest company on our list – Nautilus Biotechnology (NAUT) – which seems to be behind the eight ball. The SPAC deck promised us $4 million in revenues this year and $17 million in 2023.
The most recent earnings call provides “guidance that anticipates the launch of the Nautilus proteome analysis platform – instruments and reagents – by mid-2024 with meaningful early access engagements and associated revenue to begin at the start of 2024.” We were promised $77 million in revenues for 2024, so that’s what we’re expecting. If by some small miracle that happens, then they’ll still be playing catch up to companies like Olink Holding, the largest proteomics stock we’re going to look at today by market cap.
Companies that command a higher valuation generally have higher expectations of future growth. Look no further than Snowflake’s constant valuation premium relative to other names in our disruptive tech stock catalog. When growth expectations aren’t met, shares will typically be punished for it. That’s why high-flying firms tend to react strongly around earnings time in a bear market as investors’ expectations are reset. When that happens, it presents an opportunity to add shares at a discount.
It’s interesting to note that Olink (OLK) has a much better valuation than when we last looked at the firm. Here’s what we said in August 2021 when Olink’s simple valuation ratio sat in the low 50s:
Were we to consider buying any proteomics stock right now it would be Quanterix, a company that’s much more reasonably valued with a simple valuation ratio of 18. Would we buy Olink at that same valuation? Not until products surpass services as a majority of total revenues would we consider answering that question.Nanalyze
Let’s address the last statement first. Services refer to “analysis and ancillary services for customers that prefer outsourced proteomics analysis.” The concern around services is that they won’t be able to scale the same as sales of a platform that generates high-margin consumables. Sales of biomarker panels as a kit-product constituted 26% of revenues last quarter, though the number varies considerably alongside the variability of overall revenues which seem to always overweight the fourth quarter.
Revenue unpredictability leads to volatility which equals risk. The company discloses the concerns we have around fourth quarter expenditures being more about blowing through unused funding than actual demand:
We believe that this seasonality results from a number of factors, including the procurement and budgeting cycles of many of our customers, especially government- or grant-funded customers, whose cycles often coincide with government fiscal year ends. For example, the U.S. government’s fiscal year end occurs in our third quarter and may result in increased sales of our products during such quarter if government-funded customers have unused funds that may be forfeited, or future budgets that may be reduced, if such funds remain unspent at such fiscal year end.Credit: Quanterix
Kits command a steady gross margin of around 86% while services saw gross margin decline year-over-year to around 60%. That’s still a healthy blended gross margin, but we maintain the belief that Olink needs to see revenue from kits at least match services before we’d take a serious look at the company. As for valuation, that’s fallen dramatically since the last time we looked for all proteomics stocks except the next one.
As we enter a bear market this year, nearly all tech stocks have seen valuations drop dramatically. The exception of the proteomics lot is Seer (SEER), a company we wrote about in a piece titled Seer – A Pure-Play Stock for Investing in Proteomics. Of the five proteomics stocks that actually have revenues, Seer is the most highly valued according to our simple valuation ratio.
|Market Cap||Annualized Revenues||Ratio|
Since that article, Seer hasn’t done much to grow their revenues which are on track to finally breach the meaningful revenue mark this year of $10 million. It’s hard to understand why they’re so highly valued when revenue growth is so unimpressive. For the first six months of this year, 31% of revenues came from a single customer – PrognomiQ – which was an entity formed by Seer and therefore is counted as “related party revenues.” We don’t look upon such revenues with high regard as they’re easily created by any firm that wants to manufacture revenue growth on demand.
Seer has plenty of dry powder to survive for a bit – $457 million – while investors grow impatient with share price performance. Since their initial public offering which took place in early 2021, shares have lost 84% of their value yet still command a valuation that exceeds that of high-quality software-as-a–service (SaaS) firms like Snowflake. The small size of the firm combined with their excessive valuation, snail’s pace revenue growth, and related party revenue situation mean we’re removing this stock from our tech stock report (where it was listed as a like) and leaving it in our tech stock catalog as an avoid. If revenues don’t start growing at a decent clip, they’ll just spin wheels while competitors capture market share.
Finally, we have SomaLogic (SLGC), a company we looked at earlier this year noting that “similar to Olink, the majority of SomaLogic’s revenues also come from offering services,” and “that’s expected to change as the company prepares to re-launch kits on their upgraded platform.” The company’s Q2-2022 weak results were accompanied by revised 2022 revenue guidance of $80 million to $90 million which shows quarterly revenue growth plateauing through this year (green bars show estimates based on lower end of guidance range):
The most recent earnings call talks about how supply chain issues have been wreaking havoc which particularly affects firms that provide services as opposed to a distributed platform (what we want to invest in). Mention is also made of “a slowing in spend from our active customers,” and that “customers don’t call you and tell you that they’d like to spend more money you have to go out and get that.” We were hoping for a proteomics platform that’s added enough value such that you shouldn’t have to convince people to use it. SomaLogic talks about how the data they’ve amassed provides them with a competitive advantage, but customers are hardly knocking down the door to access it. Our conclusion is the same as we reached earlier this year – we’ll check back in early 2023 unless something significant happens before then.
In the absence of a clear leader emerging from the pack, we had put some chips on Quanterix, and considered that a placeholder which represents our capital allocated towards the proteomics theme. Today, that proteomics capital allocation has largely been decimated as Quanterix is worth less than the cash represented by each share. The remaining proteomics firms out there are either offering services-heavy business models or are also stumbling as supply chain issues and tightening budgets rein in all the lofty aspirations. Barring any M&A events or major events, we’ll check in with the lot next year to see which firms were able to execute on the expectations they set with shareholders.
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I don’t understand why you downplay Seer’s revenue growth (of +9-10% per quarter!) when the other companies on this list have stagnant or declining revenues. It seems short-sighted to rule out one of the youngest companies on this list, with healthy revenue growth, just because their revenue hasn’t yet reached the level of their older and larger competitors.
The entirety of our comments focus on other things like customer concentration risk and an excessive valuation. They’re still pretty richly valued (simple valuation ratio of 18), but you bring up a good point. It’s probably time to revisit the lot, something we’ll try and get to in the coming months. We usually check in with firms about once a year.