MRK - Personalis: Revisiting The Investment Thesis

2023-04-17 13:11:50 ET

Summary

• Today, we put diagnostic firm Personalis, Inc. back in the spotlight as the shares go for less than the company's net cash on the balance sheet.
• The company has brought in a new CEO and announced significant cost saving measures.
• An updated investment analysis on this potential turnaround story for Personalis, Inc. follows in the paragraphs below.

Keep in mind that many people have died for their beliefs; it's actually quite common. The real courage is in living and suffering for what you believe .”? Christopher Paolini.

Today, we circle back on Personalis, Inc. ( PSNL ) for the first time since our initial article on this small diagnostic concern back in June of last year. For starters, the company named a new CEO last month and it reported fourth quarter results at the end of February. Earlier that month, Personalis had inked a deal with Moderna, Inc. ( MRNA ) and Merck & Co., Inc. ( MRK ) to continue using Personalis' NeXT Platform as part of upcoming clinical studies testing cancer vaccine mRNA-4157/V940, which is being jointly developed by two large pharma concerns. Given the news flow around this small cap name, its seems a good time to put Personalis back in the spotlight. An analysis follows below.

Company Overview:

Personalis, Inc. is based in San Francisco. The company has basically two sides of its operations. Some legacy business that primarily serves the U.S. Department of Veterans Affairs Million Veteran Program or VA MVP and newer oncology tests developed using the company's NeXT Platform that was just in the news with the deal with Moderna/Merck. This development platform is designed to adapt to the complex and evolving understanding of cancer, providing its biopharmaceutical customers and clinicians with information on all of the approximately 20,000 human genes, together with the immune system, from a single sample. PSNL currently trades at just over three bucks share and has a market capitalization of just under $150 million.

Fourth Quarter Results:

Personalis, Inc. reported mixed fourth quarter numbers on February 23rd. Personalis had a GAAP loss of $67 cents a share, a few pennies worse than expected. Revenues fell just over 19% on year-over-year to $16.7 million, which was slightly better than the consensus. For the year, the company had sales of $65 million.

Only $900,000 of revenue came from VA MVP in the fourth quarter, as the company just started a new contract in September of last year. This compares to $5.3 million in 4Q2021. ' Core ' revenue rose to $15.8 million from $15.4 million in the same period a year ago. Leadership put initial sales guidance for FY2023 at $68 million to $72 million.

Analyst Commentary & Balance Sheet:

Since Personalis, Inc. fourth quarter results were posted, four analyst firms including Citigroup and BTIG have reissued Buy/Outperform ratings on the stock. Price targets proffered range from $5 to $10 a share. Morgan Stanley maintained its Hold rating and $5 price target on PSNL.

Just over four percent of the outstanding float in the shares are currently held short. Insider activity in the stock has been minimal so far in 2023. Two insiders have sold just less than $20,000 worth of shares collectively so far this year. The company ended FY2022 with just over $165 million in cash and marketable securities on its balance sheet after posting a net loss in 4Q2022 of $31.1 million.

For FY2022, Personalis had a net loss of $113.3 million. Management initial guidance for this fiscal year is a net loss of $103 million. More importantly, management expects cash burn to drop to approximately $75 million in FY2023 from $119 million in FY2022. The company has a negligible amount of long-term debt. In January, Personalis made the decision to slash its workforce by approximately 30% and took other measures, including closing their facility in China, that should chop payroll and other expenses by an estimated $20 million annually. Management believes these measures will give it a cash runway through 2025.

Verdict:

The current analyst firm consensus has the company losing $2.20 a share as revenues rise in the high single digits to just over $70 million. These firms see losses falling slightly in FY2024 to $1.90 a share as revenue growth comes in at the low single digits.

Personalis, Inc. is aiming at some huge markets. It has some product launches on the horizon such as the clinical launch of NeXT Personal Dx. This test is designed to find MRD, simply stated as infant testable traces of cancer, allowing for earlier detection of recurrence, as well as to inform and enable therapy decisions and earlier intervention. MRD - or Minimal Residual Disease - refers to the small number of cancer cells that are left in your body after cancer treatment. An MRD test looks for any cancer cells that were not killed by chemotherapy or other cancer treatments. It can assist in determining if a patient is in full remission, at risk of relapse, and if further treatment is needed. The stock also sells for less than the current net cash on the balance sheet.

That said, Personalis, Inc. is years away from profitability, has new leadership, and is in the process of implementing significant cost cutting measures. I would like to see more progress on lowering the company's cash burn rate before I would consider a small stake in Personalis. I would also want to observe much faster revenue growth as well. Outside a buyout, Personalis, Inc. stock is likely to trade sideways until both metrics are accomplished.

It is curious that physical courage should be so common in the world and moral courage so rare .”? Mark Twain.

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