Value Investors Club / BERKELEY LIGHTS INC (BLI)

Description

Berkeley Lights – (Rapidly Growing) Baby Thrown out w/ the Bathwater – Long Thesis

Summary

Berkeley Lights (BLI) is a recent IPO and was a life science investor darling upon IPO that has been crippled by the poorly-timed combination of a lockup expiration and growth selloff exacerbated by heavy ownership by Kathy Griffin’s Ark ETFs. Since going public, BLI shares have fallen dramatically (now at 2x its IPO valuation vs 5x in December) despite a series of beat-and-raise quarters and new product releases since then. I believe that nothing fundamentally concerning has happened with the business to justify the price movement, and that BLI can easily re-rate back to its former levels by continuing its already-strong exection.

Company Description

BLI’s name is a homage to its founding in Berkeley, CA, and the core function of its technology: to move individual cells with lights. Its flagship product, Beacon, is a large instrument (box) that takes the input of a chip loaded with a liquid sample full of cells. The chip contains hundreds of microwells to which a scientist can use the instrument to move individual cells to, allowing him/her to observe what goes on in each well separately, usually in search of cells that proliferate more quickly than others or ones that react differently during a reaction. These cells can then be retrieved and analyzed. This has applications in several fields, the most notable of which are drug discovery (for antibodies and cell/gene therapies) and process development (which works with figuring out how to scale small amounts of producer cells viably into much larger volumes that could support a commercial drug production process). BLI gets its revenue from several sources:

Instrument Sales: The sale of the Beacon (or its miniature cousin Lightning for $1.5M-$2M and $500k respectively), either directly of via a subscription model. The company has recently shifted its business model to heavily emphasize subscription due to the nature of the target customer (increasingly small biotech companies that don’t want to pay up for an instrument and would otherwise try to outsource these functions). This is important because the one negative point of feedback most experts give on the technology is the difficulty of use. As BLI iterates the product to make it easier to use, the subscription model should also be effective at drawing adoption ahead of said changes as it creates customer buy-in (much like how a gym membership makes people go to the gym) to support the commitment without the overhead expense.

Service Revenue: Revenue tied to the placement of the instrument to support education & maintenance.

Consumables: BLI gets paid on every use of its machine, with the chips being the blade in the razor-and- blade model. Historically BLI has averaged ~$150k in consumables per system.

Collaboration/Milestones: Some companies have opted to partner with BLI, either to prompt the company to create new applications for its instrument or to trade economics in the event of a drug success for upfront costs.

Capital/recurring mix is ~60/40 today, but can easily get to 30/70 over the next 5 years given the unit economics of the system.

There are several scientific techniques to isolate cells, as well as many companies offering different forms of antibody discovery services. However, none of the techniques can operate at the scale BLI allows one to operate at and no drug discovery company directly competes with BLI – some companies can choose to outsource cell screening/process development to these companies, and the ones that don’t will likely use BLI over time. Over half of the 25 largest biopharma companies in the world use at least 1 Beacon, as do many of the major outsourced clinical trial and contract manufacturing businesses. These can likely be repeat customers for additional systems, and the opportunity is large given the fact it is tied to both drug discovery and subsequent commercialization.

Discussion of TAM

BLI cites a TAM of >$20 Billion across several end markets. The way I arrive at my TAM assumptions rely more closely on the number of customers and likely maximum instrument purchases they would do in order to sanity check these figures. While there is much BLI can do (and is doing) to bridge the gap and access more of its stated TAM (which I believe to be based on wallet share), I am comfortable that $2.9 Billion is a conservative TAM that BLI can penetrate in a reasonable timeframe and with upside.

As you can see, while not $23 Billion, the TAM at BLI is likely still significant enough to support $1 billion in revenue over the next 5-7 years, which would imply a valuation 3x-5x higher than where it is today at around 35% penetration. This includes no revenue tied to BLI’s milestone business, which would be

pure upside if BLI were able access drug-related revenue streams in the form of royalties.

Why does this opportunity exist?

I flagged a risk to several of my close colleagues during the massive growth run throughout last year, which brought a lot of positive attention to the Ark ETF funds. This risk was to Ark's SMID holdings – Ark owned over 8% of several companies by the end of last year across sectors, most notably in life sciences. In a world with persistent inflows to Ark, this would be supportive of some illiquidity-driven spikes in several stocks. However, this started to reverse at the beginning of the year as the funds started changing allocations a bit (to own large caps as a cash proxy), and subsequent outflows exacerbated this effect.

Ark AUM is down about 25-30% from its peak on both performance and outflows. This has had a profound effect on many of the genomics smid-cap companies owned in the company’s portfolios, one of which was BLI. During the same period, BLI’s post-IPO lockup expired, and after earnings were released in March, every private shareholder of the company was able to sell. The result has been that the stock is off about 60% from its December highs and 35% off of its post-IPO close.

Catalysts? You already got one. Now it’s all earnings.

The catalyst component of the story isn’t a major event – the event that has already happened is what set the stock up for the run I think it can have over the next 12-18 months. Today, BLI sits at ~21x NTM EV/Sales with a multi-year growth profile of 30-40%+ in front of it.

Don’t shoot me for calling a 20x EV/Sales company cheap – this is a fantastic relative valuation where companies with similar growth have multiples about 50% higher for the same growth (PACB, TXG, TWST, GH to name a few). Even the most mature businesses in the space, TMO and DHR, have command 4-5x EV/Sales for 8% STM growth for the last 5+ years.

BLI has been clever about following the beat-and-raise playbook since IPO, and took a break from doing so on the ‘raise’ front last quarter despite beating estimates due to uncertainty around when the last 10-15% of utilization in the R&D markets will come back from COVID. I think this will resume over the

next couple of quarters, which should draw a lot of positive attention to a story with no real hair on it. Over the 4 quarters it has been public for, BLI has beaten street estimates by an average of 12%. Since IPO initiations, street 2023 sales estimates have also climbed 20%.

If this plays out, BLI can easily re-rate to 30x fwd sales on higher numbers, creating upside of 25-50% on multiple and another ~20% on forward estimates. Over the longer term, I believe BLI has a disruptive technology that can speed up the drug discovery process and change the way scientists do process development, both of which are desperately needed. If this proves to be the case, $15B is not an unreasonable market cap to expect vs the <$3 Billion it’s at today.

Risks include adoption hurdles such as customer education and competitive entrants. I am comfortable with these risk given the IP protection on the system and the shift to a subcription model that removes the effective price tag and incentivizes utilization/learning simulataneously.

It multiples are a concern, pair w/ short positions in high-growth genomics companies such as TXG, PACB, and TWST, which trade at 33x, 31x, and 26x for similar growth profiles.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

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			2021	2022
Price:	43.54	EPS	na	na
Shares Out. (in M):	65	P/E	na	na
Market Cap (in $M):	2,838	P/FCF	na	na
Net Debt (in $M):	-230	EBIT	0	0
TEV (in $M):	2,508	TEV/EBIT	na	na