The Math Doesn’t Work: Zomedica Stock Has Further to Fall

We’ve seen a big pullback in certain overheated stocks and sectors. Unsurprisingly, that pullback has hit Zomedica (NYSEAMERICAN:ZOM). And in the case of ZOM stock, I believe it’s only getting started.

a smiling dog on a leash ZOM Stock
Source: Shutterstock

To be fair, Zomedica does have an intriguing story. Its Truforma platform should allow for point-of-care diagnostic testing for cats and dogs. That would be an improvement in some cases from tests that currently have to be shipped out to laboratories.

As I’ve noted before, Truforma is akin to a veterinary version of what disgraced startup Theranos promised. The difference is that Truforma actually appears to work.

Zomedica has had five assays validated, according to its filings with the U.S. Securities and Exchange Commission. More assays are in development which could expand capabilities from just thyroid and adrenal disease to more common gastrointestinal problems.

From there, Zomedica plans another platform to detect pathogens (mostly parasites) in companion animals. Given the size of the pet care market, and the spike in adoption driven by the novel coronavirus pandemic, some optimism toward ZOM stock makes sense.

The problem is that we’re long past the point of “some” optimism. ZOM stock has seen an absolutely staggering run, even inclusive of a recent 39% reversal. In a market suddenly paying attention to valuation, it’s almost impossible to justify the current price — no matter how you look at it.

The Stunning Rally in ZOM Stock

As recently as early November, ZOM stock traded at 7 cents. Now’s its more than $2, for a gain of 2,820%.

Even that figure doesn’t capture how dramatically valuation has changed. As of the end of the third quarter, Zomedica (again, per SEC filings) had 564 million shares outstanding. Warrants were “out of the money” as the exercise price was above the ZOM stock price.

Zomedica thus had a market capitalization around $40 million. Incredibly, it already had $52 million in cash. Even given that a chunk of that cash would be spent on growing Truforma, the market clearly was ascribing minimal value to the operating business.

Four months later, the story is incredibly different. At Feb. 26, Zomedia had 947 million shares outstanding and $277.5 million in cash. Even ignoring another 37 million or so options and warrants, the business even backing out the cash now is valued at $1.4 billion.

To be fair, the steep rise on its own doesn’t mean ZOM stock is overvalued. Stocks make big moves in bull markets. In the broader medical space, stocks can soar based on regulatory approval or changing prospects for sales. Covid-19 vaccine developers like Moderna (NASDAQ:MRNA) and Novavax (NASDAQ:NVAX) are obvious examples.

Listen to Zomedica Itself

The problem for ZOM stock is that nothing really has changed. The company announced its plan to focus on Truforma in January 2020. That plan has moved forward, which is good news. I’m not sure it’s that good.

Neither is Zomedica itself, as a passage from the “Risk Factors” section of the company’s Form 10-K is particularly telling:

…On December 31, 2020, the last reported sale price of our common shares on the NYSE American was $0.231 per share. We believe that the sharp increase in the trading price of our common shares is the result of a number of factors outside our control, including social media posts that have drawn attention to our company and increased trading in our common shares by retail investors. These social media posts were not sponsored or endorsed by us. There has been no recent change in our financial condition or results of operations that is consistent with the increase in the trading price of our common shares.

Using a stock price of just 23 cents, Zomedica is saying that the rally isn’t based on any change in the underlying business. Yet now we’re at more than $2 — more than 8x as high.

Yes, the company has raised capital, which is helpful. But it’s not as if the company was in dire straits at the end of 2020.

This is a rally that just looks unsustainable.

The Technology

Let’s try another angle, again using the 10-K.

Zomedica’s technology is licensed from third parties. In fact, Zomedica does not have any patents at the moment. (It does have applications pending for five U.S. patents and three international patents.)

Per the 10-K, here are the terms of Zomedica’s licensing deals so far:

  • The Truforma platform is built largely on BAW (bulk acoustic wave) technology licensed from Qorvo (NASDAQ:QRVO). Zomedica paid Qorvo $1 million and issued $4.4 million in stock. $10 million in milestone payments followed, for total consideration of $15.2 million.
  • The pathogen efforts use technology licensed from privately held Seraph Biosciences. Zomedica gave Seraph $1.7 million in cash and stock. Milestone payments would total a maximum of $7 million, moving total consideration to about $8.7 million.
  • Zomedica also has a “liquid biopsy” platform which is on the proverbial back burner. That platform is the result of a deal with a unit of Bio-Rad Laboratories (NYSE:BIO). That unit, Celsee, has received less than $2 million.

To be fair, Qorvo will make money from Truforma when that platform is commercialized. Still, a valuation of more than $1.3 billion, even excluding cash, rests on technology acquired for a total of just $26 million.

Maybe Zomedica simply executed brilliant deals. Maybe those three companies (Qorvo in particular) had no idea just how valuable the veterinary markets for their technologies were.

And maybe, a decade from now, Zomedica is a dominant force in veterinary diagnostics.

It’s possible. Zomedica has the product and has the cash. But this is a company with a market capitalization of $1.7 billion. There is frighteningly little evidence to support that figure.

On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article. 


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