Description

May I interest you in a Cathie Wood experimental biotech SPAC with -152% margins, -50% YoY reported growth next quarter (“rule of -200!”), concentrated customers (top 3 >50% revs), sketchy related-party M&A, a history of misleading investors with ridiculous projections, zero managerial stability, and accounting problems? Long! 

SomaLogic is a net-net with a negative $100m EV, or net cash equaling 27% of market cap. $25m run-rate net interest income (a 7% yield on the current market cap) from $474m net cash compares to $80m 2023 sales. An NOL is also booked for $105m.

Overview

SomaLogic makes advanced protein assay tests to detect early signs of diseases and individual risks from small blood samples. The results are primarily used in clinical trials for drug discovery, particularly cardiology and liver failure. 160 customers include 10 of the top 20 in global biopharma and large academic research labs.

The business is progressing towards profitability following a near-complete turnover of management and board. The CEO, CFO, and COO got fired earlier this year and 4/9 board seats changed hands. Cash burn is now approaching $20m/Q, down from >$40m/Q late last year and <$7m prior to a 2021 SPAC. 16% of staff got laid off in December ‘22. Q2’23 opex was down 26% YoY. 

The primary investment thesis is that, provided the correct management team sits in place, SG&A can decline from >$120m this year to <$80m like 2021 without compromising recurring revenue growth.

SomaLogic was founded in 2000 as a science project and required 18 years to commercialize. Its SomaScan tests measure 7k proteins, the greatest depth in the industry. The tests’ proprietary synthetic ligands are also cheaper to produce in laboratories than alternatives. The newest SomaScan test rolling out in Q4 will cover 10k proteins (out of 20k total known human proteins) while commanding higher pricing. SomaLogic shares patient data with customers and its proprietary database has a catalog of >500k samples.

Competitors with less specialized, narrower assay offerings include Bio-Rad, Perkin Elmer, and Abcam. One legacy alternative method, the antibody test, records <50 proteins each. Another alternative, mass spectrometry (from Thermo Fisher and Danaher), requires more processing time and a larger blood sample.

This is a real product with major new revenue partnerships, including a licensing agreement with Illumina that included a $30m upfront payment to SomaLogic in 2022 (which isn’t recognized in ‘22 or ‘23 revenues). Illumina will market SomaLogic tests to its 17k active next-gen genetic sequencing sites. These revenue contributions begin next year and volumes ramp up in ‘25. The idea is that individualized protein phenotype data from SomaLogic enriches the usefulness of genetic sequencing.  

Following a 4/21 SPAC, SG&A increased 325% over two years as headcount more than doubled. Recurring opex/average employees was ~$750k in 2022. Prior management led a misguided push into diagnostics (partnerships with hospitals), away from Soma’s core biopharma research customers. The new CEO Adam Taich, from Thermo Fisher molecular biology, immediately exited diagnostics to cut costs upon taking over in March ‘23. He had initially joined SomaLogic in 1/22. I believe SLGC can become profitable by the end of 2025 with >20% organic revs growth, GM expansion leveraging volume growth, and the additional back-office cost cuts.  

Investors in the SPAC’s $375m PIPE included customers Illumina and Novartis, as well as SoftBank, Perceptive, Casdin, and of course Ark. Ironically considering the present need for an activist, Corvex was also involved in the SPAC but has since sold out. The pre-money valuation was a laughable $1.2bn at >14x forward sales. The financial projection for 2026 was >$400m revs at a 75% GM. 2023 was supposed to be -$31m EBITDA and breakeven by ‘24. In real life, EBITDA will be worse than -$100m this year. In 2020, there was an internal control material weakness. Except for Casdin, none of the characters responsible for these lies remain involved at the board or management levels.

https://www.sec.gov/Archives/edgar/data/1837412/000121390021018105/ea138502ex99-2_cmlife2.htm

The largest current customers are Novartis (27% of total ‘22 revs) and Amgen (19%), with contracts up to 10 years and required minimum annual sample volume purchases. BMS signed a material new deal in 2021. Gross margins have recently declined due to the volume discounts, but are likely to expand going forward due to new products and manufacturing leverage.   

Service revs are from test kit samples that customers mail to SomaLogic’s lab in Boulder, CO. Product revs are from on-site labs that SomaLogic sets up next to large customers, such as WashU, the NIH, and Chinese/European/Middle Eastern partners. (The intl side is now 35% of total revs.) A company focus this year is expanding product on-site labs from 8 to 16. Collaboration revs are from one Japanese partner, NEC. 

Financial summary

The 2023 YoY revenue decline is due to a 1x $21m royalty revenue recognition in Q3’22, from New England Biolabs, and another smaller 1x NEB contract upfront revenue recognition that year. Recurring revs are growing >10% in 2023. Product growth from the ramp in on-site labs will be the primary variable going forward in H2'23, followed by the Illumina partnership volumes beginning to accelerate growth in 2025. 

Historical assay revs growth has primarily been driven by sample volumes, though pricing was positive in 2021 before turning negative in ‘22 due to volume discounts for top customers.

Management

The board owns 15% of shares or >$50m, led by Casdin Capital with 10.5% (less than 3% of his 13F).

SomaLogic bought Palamedrix 8/22 for $30m in cash and stock, “an innovator in DNA nanotechnology” that is pre-commercial and losing money. Casdin owned >5% of Palamedrix.

It’s unclear to me whether the new CEO (still officially interim) is capable of doing the required purge. He has mostly said the right things on quarterly calls this year, committing to maintaining >$80m revs guidance and <$170m operating expense (-26% YoY).

Due to the net cash position and extraordinary recent opex growth, I believe this presents a great opportunity for an activist to demand faster cost cuts in 2024 or an immediate sale.

Catalyst

sale, cost cuts, activist, profitability