QSI - Assessing Quantum-Si's Path To Commercialization

2023-05-12 18:33:13 ET

Summary

• Quantum-Si's proprietary protein detection platform has begun generating revenue, although it's not expected to significantly affect the cash-burn rate immediately.
• The company's financial stability extends till 2026 at the current burn rate, but rapid revenue generation and financial discipline are vital for survival post-2025.
• Quantum-Si's stock valuation presents a skewed risk/reward profile, with success hinging on commercial and manufacturing capabilities and the management of various risks.

As discussed in a previous article , Quantum-Si ( QSI ) is a life sciences company focused on transforming biomarker discovery and clinical research by providing access to the proteome and has developed a proprietary protein detection platform that enables Next Generation Protein Sequencing ((NGPS)). The platform is made up of several parts: The Carbon - an automated device for preparing samples, the Platinum - the actual NGPS instrument, some reagent kits, and the Quantum-Si Cloud software. This all became available for research purposes in December 2022, and by January 2023, they started shipping it commercially.

Here's the rub: the company, as of the close of 2022, hadn't yet started bringing in any revenue. That, however, changed with the initial shipments of Platinum in the first quarter of 2023. That's a significant milestone for Quantum-Si, and one can't help but see a glimmer of potential in their future. The company also has plans to release its Carbon sample prep instrument later this year.

However, it's important to approach this with a clear head. The initial revenue from these shipments isn't likely to drastically alter the company's cash-burn rate, at least for now. So, don't expect the financial landscape for Quantum-Si to transform overnight.

Now, let's turn our attention to the latest happenings around this company.

Product Development

Now, this is a field that's still in its infancy. Quantum-Si finds itself continually refining its technology, adding new binders to widen the scope of proteome coverage. Over the past year, their tech suite has developed the capacity to identify 15 out of the 20 amino acids - this has resulted in over 70% coverage of the Human Proteome and identification of up to 90% of proteins. In addition, they're working on their amino acid recognition systems, aiming to boost their proteome coverage capabilities in 2023. They're also sprucing up their customer-facing software and making tweaks to their software algorithms for superior peptide calls.

Now, how do they plan to turn this technological prowess into sales? The management team is adopting an evangelist approach for their products, bolstered by more peer-reviewed publications. An example of this is their protein sequencing technology, which got a nod in the esteemed Journal Science . This aims to validate their technology, and it's the first peer-reviewed paper on next-generation protein sequencing.

Moreover, Quantum-Si is stepping up its marketing game. They've recruited key personnel , for instance, Dr. Grace Johnston, who has joined as the Chief Commercial Officer. The company has started shipping instruments to their initial customers and is offering a proof-of-concept testing service. This allows potential customers to take the technology for a spin before they make a purchase.

On another front, they're gearing up for the launch of the automated sample prep instrument, Carbon, slated for 2023. They're planning to beta test it in Q2 2023, with a launch expected in the latter half of the year.

When it comes to ramping up production, Quantum-Si appears to have faith in its supply chain's ability to support both internal product development and external customer demand. Preparations for the Carbon launch are in full swing, with the company scaling up production and transferring manufacturing to their facility in Garnet Valley, Pennsylvania.

Financials, Valuation & Risks

The company presented quarterly results for the 1st quarter . The results were broadly in line, with cash burn confirming the figures mentioned in the previous article.

At present, my estimate pegs the annualized cash burn around the $110 million mark. Given that Quantum-Si closed Q1 2023 with $321 million in liquid assets, the company's coffers should last until early 2026, provided the burn rate remains constant.

But, let's not forget, the company is already generating some revenue from its recently shipped systems. Plus, they're expected to launch prep kits later this year, which should bring in a steady stream of revenue. That might alleviate some of the cash burn, although the success of this will be largely dependent on how well they can scale the commercialization of their products. For 2023, I wouldn't anticipate more than $3 million in revenue, which, relative to their cash burn, isn't much. It's also below the company's own forecasts.

Now, let's reassess my assumptions for this stock. While I maintain a degree of optimism about Quantum-Si potentially hitting its targeted $186 million in revenue in the long haul, I suspect the ramp-up will be a slow burn, unlikely to materialize before 2029 at the earliest.

It's worth noting that revenue ramp-ups usually happen in spurts, as illustrated in the analogues below.

So, I'm going to adjust my bull and bear scenarios. The first major change to my previous model is extending the timeline to 2029. The second change involves adding 206 million shares to the share count, as I anticipate the company will need to raise additional capital post-2025. Consequently, by 2029, the diluted shares will tally up to 391 million.

I'll maintain the revenue multiples for both the bull and bear scenarios. Considering the current stock price around $1.63, the following results emerge:

These results indicate a significant skew in the risk/reward profile. However, extending the timeline to 2029 does dampen the annual return, making it less enticing from a potential return perspective.

The key takeaways are this: we're still in the early stages of the ramp-up process, and it's a path riddled with uncertainty and volatility. Success will hinge on both commercial and manufacturing capabilities, which are being tested this year.

Commercial adoption presents a concentrated risk. Many factors could tip the scales toward success or failure. For instance, the hefty price tag could discourage adoption by public institutions and research entities, but if productivity levels are high enough, private companies may not be deterred. The marketing team will need to identify the right commercial segments and provide the right products. This phase of the ramp-up will be crucial in determining if the $186 million revenue milestone is feasible.

Moreover, the ability to generate revenue quickly and maintain financial discipline will be vital in mitigating cash burn. This will make a world of difference by 2025, when the company is likely to seek additional funding from the markets. The ability to raise capital is yet another major risk shadowing this company, especially at a time when capital markets are dwindling following a couple of bank scares.

In light of these factors, I'm not inclined to add any more shares to my existing holdings. I plan to bide my time and see how the ramp-up progresses in 2023. I'll use the model in this piece against near-future data points to verify (or refute) the revenue ramp-up bull scenario.

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