It has not been a great time to be a shareholder in kidney diagnostics specialist Renalytix (LSE: RENX). The Renalytix share price has taken a big hit over the past year, as this chart shows.
But with the young company still in growth mode, could this be a good time to take advantage of the Renalytix share price and add to my holding? Or might the price fall further?
Growing pains
I think the issue here is a common one when it comes to investing in growth companies.
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On one hand, the firm has attractive technology with a growing client base and increasing proof of clinical effectiveness. Its potential target market is big and Renaytix has barely tapped into it yet.
But on the other hand, growing a business takes time – and money. Renalytix has spent millions on building a large salesforce to get out in the field and introduce its technology to potential customers. But a lot of that activity has not yet led to sales.
So while revenues have been growing fast (albeit from a small base), the lossmaking company continues to bleed red ink.
Moving forward
Some growth companies resolve that conundrum, getting their cost base in check and ramping up sales to the point where they can start to turn a profit.
Others simply do not make it, even when they have promising technology. Commercialisation is key when it comes to turning promising technology into a compelling business.
Thankfully, Renalytix continues to announce good news. In the past 10 days it has unveiled new insurance coverage with CareFirst BlueCross BlueShield, a large US healthcare plan provider. As the company continues to grow the number of health insurers who will reimburse patients for using Renalytix services, that ought to be good for revenues and profits.
Ongoing financial challenges
The issue I see is the economics of the business. In the first half of its financial year, the company recorded a loss of $22.6m on revenues of $2.1m.
That concerns me for several reasons. Expenses are vastly higher than revenues, which is not a sustainable business model in the long term.
On top of that, losses were close to last year’s $22.9m. I have been expecting Renalytix to cut costs sharply as it seeks to find a pathway to profitability. So far however, there is little evidence of cost-cutting having any impact on financial performance.
Long road ahead
So while I like the technology, I do not like the current business model. The lack of profitability is a concern for me and the scale of the losses is alarming.
Despite the share price falling 42% in a year, I think this could still be a falling knife to catch. If Renalytix can cut its losses sharply, today’s share price might ultimately turn out to be a bargain. For now though, that remains highly uncertain, in my view.
I have no plans to buy any more Renalytix shares in the absence of clearer positive proof of a move towards profitability.
