I tried to do a couple write-ups the past few months, but didn't bother posting them because the stocks ran up while I was editing them (FSLR is one example). Here are a couple thesis that won't have that problem - they should take years to play out.
Natera (NTRA)
It’s a land grab right now in molecular diagnostics (the analysis of genome and DNA). Natera is a known player in non-invasive prenatal testing (NIPT) and carrier screening with their Panorama and Horizon tests, respectively.
When I read transcripts I like to scribble down sources of upsides at the edge. In the case of NTRA’s 2Q17 transcripts, I nearly ran out of room. I list them out below.
In the coming years, I expect revenue to accelerate as mix shifts toward higher growth products. There’s potential for great operating leverage from additional reimbursement (remember this goes straight to the bottom line), and from improved sales productivity as they add new product to the same sales touch points (fertility doctors, OBGYN).
SG&A is currently a huge drag on profitability and cash flows. I suspect this is all easy synergy for potential acquirers.
Quotient (QTNT)
Quotient is making a new machine, MosaiQ for the blood transfusion process. MosaiQ promises to making donor blood typing (determine if your blood type is A, B, O, or AB), as well as testing (checking for diseases) more efficient and more affordable. The plan is to launch 2018 in E.U., then 2019 in U.S. They have a $3bn addressable market, with $1bn in just its top 10 prospective customers.
The new product has been in the work for years and there were plenty of setbacks on the way. But the finish line is near. I particularly like the support from Ortho Clinical Diagnostics, one of the largest players in blood testing. Ortho will distribute MosaiQ for the patient testing market (with donor testing market retained by Quotient), and will make milestone payments to QTNT.
The combination of a fairly concentrated customer base, support from one of its biggest industry players, and ability to lower customer costs makes me think the product should sell well.
Management expects 60% operating margin. Conservatively, I assume they take just 20% of top 10 customers. That’s $200mm sales x 60% margin = $120mm EBIT.
Quotient has financing lined up to get them through the finish line. This includes raising $36mm from issuance of senior secured notes, as well as $49mm in FY2019 from warrant exercise. At $5.2 a share, QTNT current has enterprise value of less than $300mm, but given these capital structure change, EV by 2020 (again using $5.2 a share) would be in the $400-450mm range. That is still very cheap in my opinion.
Natera (NTRA)
It’s a land grab right now in molecular diagnostics (the analysis of genome and DNA). Natera is a known player in non-invasive prenatal testing (NIPT) and carrier screening with their Panorama and Horizon tests, respectively.
When I read transcripts I like to scribble down sources of upsides at the edge. In the case of NTRA’s 2Q17 transcripts, I nearly ran out of room. I list them out below.
- Operating leverage from improving reimbursement - only 10% of microdeletion panel reimbursed so far. Management estimated that they can make $30mm more a quarter if all jobs are reimbursed jobs – keep in mind 2Q17 revenue was only $54mm! Since NTRA already incurs the costs for these tests, any reimbursement goes straight to the bottom line.
- Increasing uptake in carrier screening, and shift to multi-gene screening. The number of Horizon tests ordered went up 63% yoy in 2Q17. Some of that was from increased sales focus and crossed selling, but there’s also a secular trend in carrier screening. This year the American Congress of Obstetricians and Gynecologist (“ACOG”) issue updated guidelines recommending carrier screening more than cystic fibrosis.
- New/recent product launches
- Vistara (NIPT for additional conditions)
- Signatera (cancer diagnostics, for research use only for now, but will have clinical use product as early as next year)
- Evercord, this is a cord blood banking service (they offer to store baby’s cord blood after birth, which can be later used for genetic analysis and potential transplants).
In the coming years, I expect revenue to accelerate as mix shifts toward higher growth products. There’s potential for great operating leverage from additional reimbursement (remember this goes straight to the bottom line), and from improved sales productivity as they add new product to the same sales touch points (fertility doctors, OBGYN).
SG&A is currently a huge drag on profitability and cash flows. I suspect this is all easy synergy for potential acquirers.
Quotient (QTNT)
Quotient is making a new machine, MosaiQ for the blood transfusion process. MosaiQ promises to making donor blood typing (determine if your blood type is A, B, O, or AB), as well as testing (checking for diseases) more efficient and more affordable. The plan is to launch 2018 in E.U., then 2019 in U.S. They have a $3bn addressable market, with $1bn in just its top 10 prospective customers.
The new product has been in the work for years and there were plenty of setbacks on the way. But the finish line is near. I particularly like the support from Ortho Clinical Diagnostics, one of the largest players in blood testing. Ortho will distribute MosaiQ for the patient testing market (with donor testing market retained by Quotient), and will make milestone payments to QTNT.
The combination of a fairly concentrated customer base, support from one of its biggest industry players, and ability to lower customer costs makes me think the product should sell well.
Management expects 60% operating margin. Conservatively, I assume they take just 20% of top 10 customers. That’s $200mm sales x 60% margin = $120mm EBIT.
Quotient has financing lined up to get them through the finish line. This includes raising $36mm from issuance of senior secured notes, as well as $49mm in FY2019 from warrant exercise. At $5.2 a share, QTNT current has enterprise value of less than $300mm, but given these capital structure change, EV by 2020 (again using $5.2 a share) would be in the $400-450mm range. That is still very cheap in my opinion.
