PSNL - Personalis: Looking For A Potential Turnaround In 2023

Summary

• Personalis is a small-cap cancer genomics company with a next-gen cancer diagnostics platform whose stock has lost over 80% of its value over the past twelve months.
• Personalis is reporting substantial losses, however, the company’s strong balance sheet could provide them with enough runway to prove they are a legitimate player in a $30+B market.
• 2022 was a transition year as the company's Veterans Affairs Million Veteran Program started to slow. This had a huge impact on earnings and the share price.
• The company reported that the VA has offered Personalis another contract, which should revitalize that revenue stream. In addition, the company's oncology business is growing.
• I believe the company is poised for a turnaround in 2023 with the potential of the share price following suit.

After a short break, my search for oversold and undervalued small and mid-cap healthcare tickers moves into 2023 as the selling pressure continues to reveal great trading opportunities. It didn’t take long before I discovered Personalis ( PSNL ), a small-cap cancer genomics company with a next-gen cancer diagnostics platform, Personalis NeXT Platform. Despite the company’s potential upside, PSNL has lost over 80% of its value over the past twelve months and is technically oversold with a discount valuation. Indeed, the company is reporting substantial losses; however, the company’s strong balance sheet could provide them with enough runway to prove they are a legitimate player in a $30+B market, which could justify a higher valuation than its current ~$108M market cap. I believe the stock’s current disorder is a great opportunity for me to grab a small position to put in my Compounding Healthcare “Bio Boom” portfolio for a quick trade that could turn into a long-term investment.

I intend to provide a brief background on Personalis and the company’s recent performance. In addition, I discuss why the company could pull off a turnaround in 2023. Then, present why I believe PSNL is a solid candidate for the Compounding Healthcare “Bio Boom” portfolio. Then, I point out some of PSNL’s downside risks that investors need to consider. Finally, I reveal how I plan to establish a small speculative position in PSNL in the immediate term.

Background on Personalis

Personalis is focused on helping unlock next-gen precision cancer therapies and diagnostics. Personalis was founded by former Illumina ( ILMN ) executives, who have helped develop the company's Personalis NeXT Platform. The company’s technologies and tests have the potential to change how the world will fight cancer by providing patients, providers, and its biopharmaceutical customers with the information provided from a single sample.

The company has several approved tests on the market including NeXT Personal, NeXT DX, NeXT Liquid Biopsy, and ImmunoID NeXT. The company also has NeXT Personal DX slated for launch in the second half of this year. Personalis gets a large share of its revenues from the U.S. Department of Veterans Affairs Million Veteran Program “VA MVP” contract for testing genetic samples collected from VA sites.

Personalis has sequenced over 150K whole human genomes, which they “believe is more than any other for-profit U.S. company.” Personalis has applied this know-how to be a leader in the whole genome tumor-informed minimal/residual disease “MRD” testing and achieve a high level of sensitivity.

Recent Performance

In terms of performance, Personalis reported their Q3 earnings with a beat on EPS and revenue. In Q3, all of the company’s revenue came from the company’s oncology business, which was up 73% over the same period as the prior year. In terms of the gross margins, their Q3 margins declined about 19.5 points thanks to a drop in VA MVP volume.

Personalis recently reported their preliminary revenue Q4 results, with their biopharma and other customer revenue estimated to come in at $15.8M, which is up from $15.4M in Q4 of last year. This was primarily due to $8.2M in revenue from Natera during the quarter. The VA MVP revenue is estimated to be $0.9M, which is down from $5.3M from the same period last year.

The $0.9M is initial revenue from the new VA MVP contract for up to five years announced this past September. The company also reported that their preliminary year-end cash, cash equivalents, and short-term investments are projected to be $167M.

For the full-year 2022 results, Personalis expects revenue to be around $65M, exceeding their guidance of $63M-$64M. Personalis expects oncology revenue to be $56.6M, which is up 42% from $39.8M for the full-year 2021. Meanwhile, VA MVP is projected to be $8.4M for the full year of 2022, which is down 82% from $45.7M in 2021.

A Potential Bio Boom Candidate

The Bio Boom Portfolio is comprised of healthcare companies that are typically not profitable and are highly speculative, nevertheless, these tickers offer significant upside because of a potent looming catalyst, projected revenue growth, or a potential turnaround. Typically, these are small to mid-cap concerns with unpredictable tickers that will create numerous trading prospects that can produce substantial profit while amassing a “house money” position over a period of time. These tickers are traded provided they are still in play or until the company advances to the “Bioreactor” growth portfolio.

I believe PSNL does display a number of characteristics that are common in Bio Boom tickers that point to significant upside potential. Primarily, I believe PSNL is trading at a discount for its current and future projected revenues. NeXT Personal has the prospect to be the best MRD test on the market, which should provide significant revenue in the coming years. In fact, the Street expects Personalis to report strong double-digit for the remainder of the decade and might hit around $419M in revenue in 2029, which would be a 0.30x forward price-to-sales.

It is important to note that the industry’s average price-to-sales is 4x-5x, we can say PSNL is trading at a discount for its forward revenue estimates. If the stock was to be priced with its peers, we could see PSNL trading around $45 per share near the end of the decade. Admittedly, Personalis is incinerating cash at the moment, so they will almost certainly have to perform some form of dilution, and we can’t rely on these estimates. Nevertheless, these estimations do illustrate PSNL’s upside potential, which is a vital feature of a Bio Boom ticker.

Another point to consider is the ticker’s oversold state as a result of the market-wide sell-off that has punished small-cap healthcare stocks. In fact, PSNL has lost more than 75% of its value over the past twelve months and has been slowly grinding lower since August of last year. If the small-cap stocks can catch a strong bid in the coming months, PSNL could go on a strong run once it gets above the anchored volume of around $5 per share.

A mean reversion move in the share could deliver an opportunity to book substantial profit and transition PSNL to a “house money” status.

Another “Bio Boom” characteristic is PSNL’s long-term investment prospects. Personalis appears to have the products to be a tough competitor in the cancer genomics industry. The company’s healthy cash position should be adequate enough to allow them to showcase their revitalized growth trend and allow them to fundraise at a higher valuation and possibly attract enough attention to be branded as an acquisition target.

Fundamentally, PSNL has the capacity to pull off a strong mean reversion move that could provide an investor with the opportunity to book a quick profit. However, the ticker still has some of the features required to evolve into a multi-bagger down the road.

Looking For A Turnaround

Throughout 2022, Personalis has been reporting year-over-year decreases in revenue as VA MVP subsided from 2021.

Obviously, the transition year weighed on the share price as investors fear that the revenue stream has dried up.

However, back in September, Personalis announced that they were awarded an exclusive five-year contract from the VA MV and a $10M initial order. The VA MVP is starting to return to its pre-pandemic operations and has also begun to enroll veterans in the program. In fact, they are up to around 900,000 enrollees, with a stated goal of 1M veterans this year, so it looks like Personalis should see additional orders in the future.

It is also important to reemphasize that the company’s full-year 2022 oncology revenue was up 42% year-over-year, so it is safe to say the company’s efforts to grow this segment is yielding results.

So, the company’s longstanding revenue stream is still intact, while their new revenue stream grows. Considering the share price fell apart as a result of declining revenue, one could propose the potential growth in 2023 should fuel a potential turnaround under the right market conditions.

Downside Risks

Despite the company’s current cash position, I think the obvious long-term risk here is the company’s financials. Personalis is burning through cash at a high rate, but the revenue growth is modest. Indeed, the gap was closing… but the VA MVP revenue appears to be shrinking, so it isn’t clear when the company is going to be able to report a profit, and the extent of dilution that will be needed to get the company across that line. Personalis is going to have to find a way to really accelerate growth from their oncology segment and hopes the VA MVP revenue can provide some meaningful revenue in 2023 if investors want to see the share price start to recover before the company needs to perform another round of financing. If not, the share price could possibly continue to deteriorate with little hope for a recovery for a prolonged period of time.

Considering these risks, I have assigned PSNL a conviction level of 2 out of 5.

Starter Game Plan

I would like to stress that this position will probably be laughably small compared to my larger positions, due to the company being quite a few years away from reporting a positive EPS. Therefore, PSNL will not be a primary piece of the Bio Boom Portfolio; however, I am convinced that the ticker could be a great trading vessel with several prospects over the course of the next several years. Indeed, like most of my Bio Boom tickers, I will attempt to keep a remnant of shares after each trade to build a small long-term position that is funded by the market.

At the moment, PSNL is trading just below $3 per share, which has become an area of support and resistance. So, I will be waiting for a break above or a possible rejection of the $3 mark to enter a position. If PSNL breaks above $3, I will look for a potential retest of $3 before pulling the trigger. On the other hand, a rejection of $3 will allow me to enter a position around the aVWAP of $2.30 per share. Once I have entered a position, I will continue to make diminutive add-ons sporadically throughout 2023 around $3 per share until we see a spike to around $5 per share, where I will look to book profits and switch PSNL to a house money position.

I have set the Buy Threshold at $3.00, with the Buy Target 1 and Buy Target 2 at $2.30 and $1.75, respectively. For the Sell Targets, I have $5.00, $7.40, and $9.80.

Regardless of PSNL’s upside potential, investors need to accept that the ticker is speculative with considerable downside risks at this time. It is conceivable an investor could lose the bulk or all of their investment.

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