It’s been a gloomy time recently to own Renalytix (LSE: RENX). While the share price has increased 20% over the past year, at the time of writing this article yesterday, it’s lost over half its value since May.
Could this be a buying opportunity for the kidney diagnostics specialist? Below I consider what has been driving the share price action and whether I should add Renalytix back into my portfolio.
The growth challenge
Early investor sentiment (including mine) on Renalytix was positive. Its proprietary diagnostic platform offered an attractive business model. Development costs could be substantial. But the platform’s scalability meant that if enough healthcare users signed up, the profits could be substantial.
I think that continues to be the case. But the Renalytix share price is now showing some impact from the challenge of meeting high growth expectations. To launch a service from a standing start requires substantial investment in things like sales capability. In a regulated industry such as healthcare, it can take a while for potential customers to start buying new services. That means revenue growth can be slow at first, while costs stack up.
That’s exactly the picture right now at Renalytix, as shown in the company’s latest set of quarterly results that it released this week. The company has expanded its sales force, begun clinical testing with a couple of new healthcare providers and increased the ordering base in its launch site.
Revenues remain very modest, but at $0.5m they do compare favourably to the zero revenues reported in the equivalent quarter last year. However, quarterly operating expenses also ballooned, from $5.4m to $12.1m. That led to a larger loss for the quarter than in the comparable period, of $10.1m.
Is Renalytix moving in the right direction?
What does all this mean for the company’s outlook? It’s hard to tell just yet. A growing sales force should lead to higher revenues over time. There are signs that things are moving in the right direction on that score, with increased testing and service rollout, albeit still on a limited scale.
But that’s coming in at a growing cost. Net cash outflow due to operating activities in the quarter was $10.5m. With cash and cash equivalents on hand of $54.3m at the end of September, the company has enough cash for around five quarters of such net cash outflow. But a growing cost base as headcount grows could lead to cash outflow quickening. One solution to that would be to raise more funds, for example by issuing shares. That risks diluting existing shareholders.
On balance, I think the company is making the right moves, but it’s too early to tell if they will produce the desired financial results. That explains the fall in the Renalytix share price, I feel. And I think it could fall further in coming quarters if revenues don’t grow substantially.
My next move
I continue to like the Renalytix story. It has a large addressable market and attractive proprietary technology with growing clinical proof to help attract healthcare customers.
But revenues are yet to take off in a big way, while costs are mounting. In the absence of further positive sales news, I won’t be buying Renalytix again for my portfolio right now.
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Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.