NAUT - Nautilus Biotechnology: Trades At Net-Cash And Investment Value With Proteomics Upside

2023-10-23 07:23:28 ET

Summary

• Nautilus Biotechnology is developing a molecule protein fingerprinting system with applications in pharmaceutical development and diagnostics. They have important patents.
• The potential market size for Nautilus is conservatively estimated to be around $1.1 billion annually, not including some potentially low-hanging fruit in diagnostics of diseases like cancer.
• The company trades around its net cash and investment value, there is a margin of safety, but we are underweight cash-burners, especially with dilution overhangs.
• At least, while reflexivity risks are present, they are not as bad as they could be given that they are well capitalised considering run-rate cash burn. Further dilution shouldn't be as aggressive as in most post-SPACs.

Nautilus Biotechnology ( NAUT ) is trying to make molecule protein fingerprinting systems for the benefit of pharmaceutical development and diagnostics. It's a proteomics play. The market size could be rather large, and Nautilus trades at about net-asset value, with its market cap barely exceeding the net value of cash and investments. We think the environment remains perilous for any businesses that are going to be cash burners for the next phase of the cycle. Their annualised fundamental burn is $50 million or so which is not that scary against a $300 million or so net cash and investment value. But while we definitely pass, we recognise that there is an above-average fundamental case here, even if it's a below-average segment of the market.

Innovations and Product

Consulting people in the medical field, we can first of all tell you that a proteome is a set of proteins produced by a biological system, the context for example being a human, or even just a specific cell in a human. They want to make a system for being able to identify proteins and their respective functions. But how are they planning to do it? The first step is to make proteins reachable through the process called arraying single proteins on the surface . This process works with a molecule called a SNAP (Structured Nucleic Acid Particle) which is one of their core patents.

After making proteins reachable, the next step is to recognise the identity of each protein, comparing it to a bioinformatics database, because we know most of the proteins that we should expect to see. By being properly surfaced, we can get that unique signal from each type of protein by exposing the proteins to chemical stimuli. Each type of protein will react the same way as other proteins of the same type, but differently from proteins of different types, giving you an identity scheme. Comparing these fingerprints of proteins to a database of known proteins will let us calculate the abundance of each protein in a particular sample, which can give researchers a lot of information about what is going on in a system - for example in response to the introduction of a drug or biologic.

Let's talk about the use cases. Nautilus mostly talks about Pharma implementation (drug design, development, and evaluation) which is understandable, because with protein fingerprinting pharmaceutical companies would have a clearer picture on how the drugs affect protein expression, as well as a "new dimension" in evaluation of drug performance. Since so many drug pathways are conducted through cascade protein signals or at any rate result in a protein being produced, the use of this is very broad and can concern theorised actions for a plurality of drugs.

Also, another interesting point to consider is potential biomarker discovery . The ability to identify and quantify a wide range of proteins in samples from various organisms can facilitate the discovery of novel biomarkers. That could eventually enhance the diagnostics in medicine, especially in the cancer field, where biomarkers play a huge role in cancer diagnosis as an example.

Market Sizing

It's best to take an independent approach to market sizing. Consider that it costs around $2.3 billion for a top 20 biopharma company to develop a drug. It might take about 10 years on average to develop a drug, and considering there are around 50 drugs approved per year (in the US), that is annually about $11.5 billion spent per year on drug development. Since Nautilus addresses reducing the cost and increasing the efficiency of drug development with bioinformatics, Nautilus' market is some proportion of this $11.5 billion annually. Assuming a conservative 20% efficiency gain through shorter development cycles, but with only half the drugs approved every year requiring close analysis of proteins related to a biological pathway, the value capture potential might be around $1.1 billion. Proteomics isn't a field solely occupied by Nautilus, so there will likely be some other players capturing the value here, but Nautilus has established patents that definitely address a good way to monetise and practically implement proteomics.

Also, there are multiple markets for this including some outside clinical research and development. There is traditional research, non-medical applications, and there are also medical applications and diagnostics to consider. Cancer diagnosis alone is a massive market, and furthering proteomics is a meaningful help. The $1.1 billion of revenue annually for the market size is a somewhat conservative figure. The figure the company gives is quite a bit bigger. It's reasonable to assume that somewhere in between makes sense.

Bottom Line

There's also the valuation angle. The market cap is just under $300 million, meanwhile, the net value of cash and investments is just under $300 million as well. Naturally, there is an outstanding burden to develop their products, and that is a latent liability that should be considered and will be reflected in ongoing cash burn, but it's a good source of margin of safety for the valuation.

To slightly mitigate that positive argument is the fact that this company went public as a result of a SPAC merger. That means the typical major shares outstanding for stock compensation plans which you must always look for. There is a 30% dilutive effect hanging over the stock which is not small.

While there is a fair argument for market size and still defense in the balance sheet, ultimately investors should remain underweight cash-burning enterprises in our opinion, as reflexivity effects aren't to be trifled with, and the probability of them triggering in another bout and accelerating already seen declines in VC style exposures is relatively high considering the persistent problems faced by markets of high rates of inflation, and the need for higher for longer cost of capital rates. However, they have a pretty long horizon, around 5 years based on cash burn rates and current net cash investment value figures, to possibly get them past this depression in VC style exposures. So while reflexivity risks are definitely there, they are going to be less steep than other issues on the market. Within a weak segment, they are a strong case.

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