I started building my position in DermTech (NASDAQ: DMTK) in 2021. The share price was $53. Since then, its shares have fallen considerably, now valued at $1.69 apiece. This places it firmly in penny stock territory. A penny stock is a share of a company that is trading for a very low amount: under US$5 or £1.
I’ve consistently bought DermTech shares since then at an average price of $32.73. That means I’ve lost almost 95% of my total investment in its shares. This fact alone is a strong reason for me to reconsider my position.
However, I have started developing many other concerns with holding its shares.
Background
Back in 2021, DermTech was considered a promising growth stock, with huge potential.
This is because it created PLA, an innovative product with the ability to redefine the way skin cancer gets tested.
PLA is a small patch that is placed on the skin being tested for a few seconds. It is then sent to the company’s commercial lab for precise analysis. Within 72 hours, DermTech then sends a report to the patient’s doctor, who take the next steps.
What I like about this is that is it far superior to the status quo. Currently, skin cancer is diagnosed with a visual inspection and an invasive biopsy. This is highly inaccurate and most patients don’t enjoy the procedure.
However, PLA is much easier to use, more accurate, and non-invasive. For example, it has less than a 1% chance of reporting a false negative, compared to an 11%-19% chance from the visual inspection. It also detects 91%-95% of positive cases compared to just 68%-85% from the traditional method.
This is the reason I invested in DermTech stock in the first place. However, a great product doesn’t always translate to a great business.
Issues
For PLA to succeed, DemTech needs to convince doctors to start adopting it. However, it has been struggling with this for a while.
In fact, revenue has declined in the most recent quarter, from $4.23m a year ago to $3.98m this year. As an investor, this has been disappointing.
While this isn’t great, it’s even more alarming how much DermTech is spending to generate this revenue. It spent $3.97m in direct costs and $32.14m in operating expenses. These are up from $3.27m and $30.8m a year ago, respectively.
So, while the revenue it is making seems trivial in comparison to how much it is spending to make it, expenses are still continuing to rise even as sales fall.
In total, DermTech made a net loss of $31.36m in the last quarter. It only has cash of $42.79m left on its balance sheet. Therefore, it needs to start growing sales quickly or raise more cash. Otherwise, its future could be bleak very soon.
Now what
Ultimately, DermTech’s future is on the line if it’s unable to turn around its future anytime soon. My position in its shares is relatively small compared to what it once was, so I am planning on holding my shares.
DermTech is a highly risky play right now and it could all go wrong. However, if it doesn’t, its shares could really take off. It estimates that its total addressable market is $10bn. With a market cap of $61m, it only needs to take a sliver of this market for its shares to skyrocket.
