MantHealth (NH) offers cancer molecular profiling solutions that enable personalization in a number of cancer treatments. This business, which has been lingering for a couple of years has received an important FDA approval which makes approval for Medicare and Medicaid use very likely. This, together with the sale of their Connected Care business has boosted the stock price significantly, but we think it's not too late to step on board.
The company is also is enabling a more integrated and data-driven healthcare solution through its two SaaS platforms, which are growing and account for most of the company's revenues to date.
These proven integration solutions are offered to an industry, which as they claim (and, dare we say, not without reason) suffers from a host of unnecessary complexity and inefficiencies, most notably:
Because of these inhibitions, the healthcare system is struggling to make the shift towards a more holistic, data-driven approach, the culmination of which is individualized medicine.
Personalized medicine is based on personalized data that is increasingly becoming available through advances in molecular medicine and real-time biometrics (remote monitoring devices and the like).
These solutions, like the company's own GPS business, generate a veritable deluge of data which, for a coordinated and individualized approach need to be collected, analyzed and distributed, and it's here where the company's SaaS solutions intervene and add value. We'll quickly introduce the company's solutions below.
From the 10-K:
GPS Cancer is a comprehensive molecular profile that integrates whole genome/exome (DNA) sequencing of tumor and normal germline samples and whole transcriptome (RNA) sequencing, providing oncologists with insights into the unique molecular signature of a patients cancer to inform personalized treatment strategies.
What GPS Cancer does is comparing the patient's whole genome/exome sequencing of a persons tumor sample with their normal sample in order to highlight molecular alterations that are specific to their tumor DNA.
These alterations are then subsequently confirmed by RNA sequencing. All this enables the matching of these alterations with drugs that might be effective against tumors containing the specific change. And these solutions are constantly fine-tuned by machine learning.
This is the company's blood based test that allows non-invasive profiling of tumors and monitoring quantitative response to treatment, from the 10-K:
Liquid GPS looks beyond cfDNA to cfRNA, which allows profiling and trending of actionable biomarkers that cannot be assessed through cfDNA alone. In addition to providing molecular insight into key guidelines-based biomarkers (e.g., EGFR, ALK, ROS1, KRAS), this powerful RNA-based approach enables a variety of capabilities and applications not typically available from a liquid biopsy test.
It is able to monitor targeted therapies, immunotherapy and chemotherapy responses.
This is the company's SaaS based decision support system which provides evidence-based clinical decision support for physicians who are threatened to be overwhelmed by today's rapid advancements in molecular and biometric medicine.
Eviti centralizes stuff like clinical content, treatment cost from Medicare reimbursements and treatment toxicity data. It has access to over 7600 clinical trials and 4000+ evidence-based treatment regimes.
NaviNet Open is a payer-provider workflow collaboration platform in order to increase efficiency, lower cost, improve provider satisfaction and enable communication between health plans and providers.
The company sold its Connected Care business for $47M in February to Masimo (MASI), exiting DCX, VCX, HBox and Shuttle Cable. The Connected Care business generated $1.2M in sales in Q1, a small part of overall revenue ($23M).
While operational performance has improved, the company hasn't been able to grow much in the past four years:
Data by YCharts
After the sale of its Connected Care business, the company has two revenue categories:
To date, the company's SaaS revenue generates most of its revenue but it does gain some revenue from sequencing and molecular analysis. However, last quarter saw a big decline to just $59K (down from $814K a year ago).
The stagnant revenue in part is just appearance as the company's SaaS business has been growing, from $60.7M in 2017 to $65.6M in 2018 to $72.8M in 2019, because the company de-emphasized its GPS business as costs were outweighing revenues. The company keeps on adding new customers (like here and here) to its SaaS businesses, a few were mentioned on the Q1CC.
The company keeps improving their products and adding new Eviti and NaviNet features.
For this business to take off, the wait is basically for a positive coverage determination from CMS, from the Q1CC:
we expect to continue to see minimal sequencing and molecular analysis revenue impact until we receive a positive coverage determination from CMS.
However, that event seems near, from the 10-K (our emphasis):
In the fourth quarter of 2019, we received FDA 510(K) authorization for Omics Core, the nations first FDA authorized whole exome tumor-normal in vitro diagnostic (IVD) that measures overall tumor mutational burden (TMB) in cancer tissue, completing a key step towards achieving Medicare coverage.
Which, together with the sale of the Connected Care business, explains the rally in the shares, from FinViz:
It's GPS business generated $2.55M in revenues in 2017, $3.13M in 2018 and $1.73M in 2019. Here too, apart from the FDA approval for Omics Core, there are other developments and improvements.
The company launched a new AI platform which can automatically distinguish sub-types lung cancer pathology and improves on that ability, from PR:
Derived from deep-learning models, together, the findings demonstrate a novel AI-based method for subtyping lung cancer pathologies which impacts treatment options for patients and improved methods of identifying tumor infiltrating white cells found elevated in lung cancer.
Accurately identifying and quantifying tumor-infiltrating white cells is extremely important for prognosis and treatment decisions in this era of personalized medicine, yet it currently requires manual review of whole slide images by medically trained pathologists, and incurs significant delays and cost, explains Dr. Patrick Soon-Shiong, MD, Chairman and CEO of NantHealth.
And they are working on a similar solution for breast cancer. In principle, their TMB (tumor mutational burden) test capability is a generic capability with wide application scope, here is a description of the mechanics from company PR:
Omics Core reports a cancer patient's overall TMB by sequencing and comparing 19,396 protein-coding genes targeting 39 million base pairs of the human genome from a tumor sample and a normal sample, typically from blood or mucosal membrane. TMB indicates the sum of all acquired gene-coding mutations in a tumor genome and is increasingly used to predict response to therapy and identify tumors that could benefit from immunotherapy. In addition, the test reports somatic mutations in 468 cancer-relevant genes accurate to 2% allele frequency, to inform clinical decisions about patient treatment. "Tumor mutation burden ... is now recognized as a key biomarker across multiple tumor types," said Patrick Soon-Shiong, chairman and CEO of Nanthealth. "Studies have shown that immunotherapy treated with high TMB had better outcomes compared to those with low TMB."
And here is a description of a peer reviewed article how this improves targeting capabilities of treatments. It's the more general applicability of TMB and the FDA approval that shareholders are rejoicing.
According to management, two things stand out (PR, our emphasis):
Nanthealth is positioning its tumor-normal test as an advancement over competitors like Myriad Genetics Inc., Color Genomics Inc. and Invitae Corp., which have limited gene panels to look at hereditary risk. By sequencing the whole exome, "we have the ability to identify things that others are missing, and that's particularly critical for drug development," Sandeep Reddy, Nanthealth's chief medical officer, told BioWorld MedTech. "We know about maybe cancer risk, but what do we know about autism or Alzheimer's? By getting that information, that becomes transformative."
As described in that PR, the company's TMB test spots things that other solutions don't, resulting in a more personalized approach to what therapies might be more successful, and it has applicability beyond screening for cancers.
But from a financial point of view, things are also going pretty well.
Data by YCharts
GAAP margins have been trending up and gross margin was much better than a year ago (60% versus 49%), up on product mix (the shift towards its SaaS business).
Operating expenses declined from $20.2M in Q1 2019 to $16.8M in Q1 2020, but $1.1M of that decline is related to the sold Connected Care business.
While cash flow is still negative, there has been tremendous improvement in the last 2.5 years.
Data by YCharts
The net cash burn in Q1 was still around $5M, but this included various closing costs and other front-end loaded costs in relation to the sale of the Connected Care business.
And with that sale the balance sheet has improved a lot, with the company having $47.5M in cash on the books, although the company does have a substantial $95.3M in long-term debt, from the 10-Q:
Data by YCharts
The valuation has jumped along with the share price recently but we think it's still not excessive, it has been much higher in the past on a much more distant promise of monetizing their TMB solutions and in the meantime the company developed a successful SaaS business with their Eviti and NaviNet platforms.
With a backwards looking EV/S of 8X for a company with a unique product that is about to get monetized and a successful SaaS business is high, but not overly so. Analyst still expect EPS losses, $0.23 this year falling to -$0.18 next year, but the company doesn't burn much cash and has plenty of it.
While much is uncertain about the potential of the company's GPS business and the economics of it, the company does have unique capabilities that are likely to become important tools in fighting a number of cancers and the underlying capabilities seem to have wide applicability.
Add to that an attractive SaaS business a declining cash burn and the sale of its Connected Care business providing enough cash to keep the company going for the foreseeable future, and we think we still have an attractive proposition for shareholders, even if it looks like the shares might want to have to digest recent strong gains.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Excerpt from:
NantHealth Points To The Future Of Healthcare - Seeking Alpha