It has been a horrible year to be a shareholder in kidney diagnostic specialist Renalytix (LSE: RENX). Over the past 12 months, the Renalytix share price has collapsed 90%. It jumped 15% yesterday, though at the time of writing this on Wednesday, it has been sliding again.
What is going on – and how ought I to respond as a shareholder?
Good news
The reason for yesterday’s jump was the release of some good news by the company.
A new study showed that patients in the early stages of diabetic kidney disease who were being treated with the company’s flagship KidneyIntelX tool received higher follow-up medical visit rates within a month than those who were not. That may suggest that the tool’s diagnostic capabilities enable quicker treatment than for patients whose kidney disease goes undiagnosed for longer.
This is the latest in a growing pile of research that provides a clinical basis for doctors to use the tool.
Bad news
However, fast forward 24 hours to today and things already look less positive for the business. Renalytix released its latest quarterly results and they contain a lot of red ink.
The period saw a net loss of $12m. Revenue was only $969,000. Although that is fairly modest, it is more than double what Renalytix achieved in the same period last year. So revenue growth far outstripped the 18% increase in net loss.
Nonetheless, the mismatch between revenues and losses is huge. Renalytix is spending vast sums of money to make relatively modest sales. In the long term, that is not a sustainable business model.
Looking to the future
I think that mismatch between the top and bottom lines of the company’s profit and loss account explains the implosion of the Renalytix share price over the past year.
Spending heavily may be necessary to build the sales base for the company’s products. But if it is spending far more than it is making in sales, it will not be profitable. Instead, it will burn even more cash, raising the risk of shareholder dilution or ultimately even bankruptcy.
The latest trading statement contained an outlook with disappointingly little forward-looking analysis. Rather defensively, in my view, it reminded readers that building scale for the company’s product sales involves a lot of work and “it sometimes seems this set of milestones takes a long time to accomplish”.
That sounds to me like a cloaked admission that business development is not moving at the same high pace as cash burn, which is obvious to anyone who looks at the company accounts.
Although the company announced plans in August to reduce annual expenditures by over $12m, in the most recent quarter its general and administrative expenses actually inched up.
The share price could fall further
At the end of September, the company had cash and cash equivalents of $31m. Liquidity is not an immediate risk, but if costs continue to outstrip revenues substantially, that will change.
I think Renalytix has powerful technology. The latest research further shows that it could be helpful for hospitals to adapt it. But the business model remains woeful. I am keeping my shares because it is hardly worth selling them at the current price, given the dealing fees involved. But I will definitely not be buying any more!
