It is not a great time to be a shareholder in Renalytix (LSE: RENX) — which I am — as the share price has lost over a quarter of its value in today’s trading as I write this. That means that, over the past year, it is down a painful 89%.
What has caused this – and what should be my next move as an investor?
Weak results
The immediate cause for today’s fall is the company’s most recent quarterly trading statement, which it published this morning.
Revenue was just $0.8m. That is an increase from $0.6m in the same period a year ago. But it is still miniscule.
Meanwhile, the company continues to spend heavily. The profit and loss account is ugly. General and administrative expenses for the quarter almost doubled compared to the prior-year period, reaching $10.8m.
Other costs also grew, leading to a $14.7m loss for the quarter. That looks uncomfortably large for a company with a market capitalisation of just £92m.
At the end of March, the company had $32.2m in cash and cash equivalents. Since then, it has raised nearly $27m in financing. Still, at the current level of cash burn, that liquidity is barely enough to see the company through another year.
I have always felt Renalytix needs to grow sales fast to reduce its losses. But with revenues still as low as they are, the current level of cash burn looks unsustainable unless the company raises more money in the coming year. That risks diluting shareholders if it takes the form of a rights issue.
What comes next?
I continue to be optimistic about the outlook for the Renalytix’s kidney disease diagnostic platform. The company is rolling out the technology to a wider range of healthcare providers. It has also secured coverage from a growing pool of insurance providers.
Renalytix expects revenue this year to come in at $2.9m, almost double what it managed last year. That is an impressive growth rate, albeit from a low base.
Still, selling expenses continue to be a big concern for me. Even if sales double this year, and do the same again next year, the company will still be lossmaking if it keeps its current cost base.
The costs of a salesforce are necessary to grow sales fast – but they are eating into a shrinking cash pile. While the projected revenue growth for this year is good, it still will not fix Renalytix’s problem of spending far more than it earns.
My move on the Renalytix share price
Renalytix is different to most shares I own. Normally I like a company to have a proven, profitable business model before I invest. By contrast, Renalytix is spending to grow. That makes it heavily lossmaking.
I think the technology is strong and continue to see potential. With the Renalytix share price just over a tenth of what it was a year ago, I am actually considering investing a little bit more in the company as I do think its long-term sales potential is very strong. But I recognise there is a real risk that, if Renalytix cannot grow sales fast enough to cover its cost base, at some point the shares could go to zero.