Investors in Renalytix AI (LSE: RENX) had reason to cheer on Thursday, as the Renalytix AI share price jumped over 10% on the day. Over the past year, it’s more than tripled.
Here I look at what is behind the share price jump and what I’d do next.
Positive news for the Renalytix AI share price
On Thursday, the company announced that it landed a contract with the US government. It could run for up to a decade.
Specifically, the contract concerns the provision of Renalytix AI’s flagship product KidneyIntelX. It covers laboratory testing that can be provided in over 140 US government departments and bodies. There is no cap on the volume of services, and pricing is set at $950 per reportable result. Initially the contract is for five years, with an option for it to be extended for the same period.
How this helps Renalytix AI
I think this is big news for Renalytix AI.
First, the tests that could be supplied under the contract may add up to substantial revenue over time. There is no guarantee of revenue. But KidneyIntelX is the only artificial intelligence-enabled test that improves diagnostic rates of reduced kidney functionality among high-risk patients suffering from Type 2 diabetes. I think that means that there will be substantial demand for it from various parts of the US government, such as the military and veterans agencies. Over 29m Americans are estimated to have Type 2 diabetes.
The second reason I think the news could be very positive for the Renalytix AI share price is because it provides a proof of concept. That could help bring the KidneyIntelX to a much wider market, increasing revenue potential.
So far KidneyIntelX has had a limited rollout. But now that the US government has signed up to use the platform, I think that will reassure many potential customers.
Risks with the contract
However, while the contract sounds like good news, it is also worth considering that there are some risks involved. Ramping up to large-scale delivery can be a challenge. The test and trace programme in the UK is a recent reminder of that.
Additionally, a fixed price isn’t always a good thing. I don’t know what Renalytix AI’s projected profit margins are on the agreed price. But locking in a price years in advance can turn out to be bad if costs soar, for example, due to unforeseen challenges rolling out the product to a wide audience. That could affect profit margins.
My move on the Renalytix AI share price
This isn’t even the only good news this week for Renalytix AI. On Tuesday, it announced positive clinical outcome data for the product the US government has agreed to buy.
Previously I outlined my concerns about the Renalytix AI share price, such as possible production delays or slow commercial adoption. These are still risks, but this week’s news has assuaged some of my doubts.
I am now considering opening a position in the company.
christopherruane 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.