Progenity (NASDAQ:PROG) is a San Diego-based biotech company that specializes in gastrointestinal health and oral biotherapeutics. Right now the company has no real revenue to speak of and is burning through cash. If Progenity can cut its burn rate, PROG stock might have a chance of rebounding.
Year-to-date (YTD) the stock is down 48.78% from $5.31 at the end of last year to $2.72 as of Oct. 20. That is not going to reflect very well on the company.
However, the stock seems to have bottomed out as of Aug. 20, when it hit 67.4 cents per share. It has been slowly rising ever since then. If the company can lower its cash burn rate, PROG stock might have a chance of moving even higher.
Where Things Stand Now
As far as good news, it doesn’t hurt that Progenity recently announced it had received four patents. These were related to its ingestible technologies for the delivery of therapeutics via the gastrointestinal (GI) tract.
As a result, Progenity says it now has 96 patent families. This includes 180 issued patents and more than 220 pending applications. These patents relate to drug delivery, GI (gastrointestinal) sampling and diagnostics. They also cover disease, protein, and molecular tools, methods, assays and diagnostics.
This is nice, but so far this huge portfolio has not led to any real revenue. The company is hoping that these recent patents can be used by a major drug company. For example, one patent titled “Ingestible device for delivery of therapeutic agent to the gastrointestinal tract,” and other related patents could be a candidate for several large pharmaceutical firms.
For example, Progenity is working closely with AbbVie (NYSE:ABBV). One of its patents is being tested for the delivery of Humira in an ingestible capsule version of the drug which alleviates moderate to severe Crohn’s disease.
Progenity also has a capsule for one of Novo Nordisk’s (NYSE:NVO) drugs called Saxenda (for excess weight loss) and Victoza (for Type 2 diabetes).
Cash Burn at Progenity
The problem the company has is its huge cash burn rate until one of its patents starts to produce large amounts of revenue. In the last six months, according to the latest 10-Q, Progenity had a loss in cash flow from operations of $84.25 million.
That can be seen on page 5 of its latest 10-Q in its Consolidated Cash Flow Statement. After deducting capital expenditures of $853,000, its total cash burn in the first 6 months was $85.1 million.
This obviously cannot keep going on. For one, Progenity had just $65.991 million on its balance sheet. This will not last another six months.
As a result, the company both raised more cash and indicated it was going to lower its cash expenses. Since the end of Q2 Progenity appear to have raised another $60 million in equity capital. This was done in two equity tranches of $40 million and $20 million at $1 and $1.50 per share, respectively. I suspect that it may have to continue to do at least one more equity raise.
In addition, on Aug. 12, when the company released its Q2 earnings, Progenity said it was going to cut its expenses. It indicated these measures would result in approximately $97 million of cost savings on an annual run-rate basis.
What Will Happen With PROG Stock
So let’s do the math. Right now the burn rate is $85.1 million every six months, or $170 million annually. The company claims it will reduce this by $97 million to $73.2 million. It had $66 million in cash and raised it by another $60 million to $126 million.
That means it can last a little over 1.72 years ($126 million / $73.2 million), or nearly one year and nine months in terms of net cash burn. And that is without taking into account fees from the cash raise and frictional costs getting the $97 in cost-cutting into play.
This could have a beneficial impact on PROG stock, especially if the market believes that the cost-cutting will start immediately and be helpful.
What to Do With PROG Stock
When Progenity releases its Q3 earnings, analysts will be paying particular attention to its cash burn rate. If the company can show that revenue is rising and its ongoing negative cash flow is improving, it’s possible that the market could push the stock higher.
The problem is that at $2.72, the stock already reflects a lot of this projected good news. Nevertheless, for the time being, the company seems to have a plan that can last a year and three quarters. So this gives it a leash to work with and get its financial act in order.
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On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.