Shares of struggling biotech, Progenity (NASDAQ:PROG), have been on quite the run of late. PROG stock has been a meme favorite and shot up more than 140% in value over the past couple of months. Moreover, the company has undergone a strategic transformation and appears to be laser focused on commercializing its product pipeline. However, this strategy shift is incredibly risky as it wouldn’t have its testing portfolio to fall back on in case of failure.
Progenity had been laggard for the better part of the year until it caught the eyes of the retail trading crowd.
The primary focus is on its test called Preecludia, a new and innovative way to screen for preeclampsia. Preeclampsia is a dangerous blood pressure disorder that affects pregnant women. It is the second leading cause of maternal mortality in the U.S.
Progenity is essentially going all in on Preecludia, which is a strategy that may come back to bite it later. Here’s why.
The majority of the company’s current products are focused on genetic and pregnancy tests administered through its Avero Diagnostics subsidiary. Their testing volume had been on an positive trajectory before the pandemic played spoilsport. Though they partially offset the loss of revenues with Covid-19 testing, this was a significantly less profitable venture than its existing products.
Subsequently, sales decreased by roughly 50% due to a massive decline in volumes in the past year. Moreover, Progenity’s gross margins have also taken a substantial hit, dropping from 30% into the negative. Additionally, the company’s net operating losses widened by a hefty margin. The drop in revenues also had a major impact on its cash flows, weighing down its existing R&D initiatives.
Progenity will have to double its test volume and considerably improve its margins to generate profits again. Even if it reduces its R&D expenses, it will have to grow its top-line significantly to become profitable again. Naturally, it is banking heavily on its new products, such as Preecludia, to steer it out of its current mess.
However, it is likely to take years before these new products culminate into meaningful revenues.
Progenity’s Strategic Shift
As mentioned earlier, the company is undergoing a sweeping change in its business. As part of the plan, it will divest Avero and shut down its genetics lab in Michigan. This essentially means that it won’t be selling any of its existing products to its customers and will transition into a development-stage biotech.
Its biggest bet is Preecludia, which Progenity estimates to have a market opportunity of close to $3 billion. Preeclampsia affects close to 700,000 women in the U.S. The test should be able to single out preeclampsia from other conditions. Moreover, the company has recently received a patent pertaining to the test and wrapped up a validation study.
However, there are multiple question marks with regards to its development.
First, without a lab for testing, the company will need to find a long-term partner before commercializing the product. Second, it is unclear whether the test will be covered by insurance and when patients will need to get it done.
The Bottom Line on PROG Stock
Before the pandemic, Progenity wasn’t a big money maker by any stretch of the imagination. However, most investors would still prefer investing in that company instead of the “new” Progenity. Now, Progenity is focusing entirely on an undiversified product portfolio that could be detrimental in the long run.
Though the Preecludia bet may pay off in the long run, at this point, it seems unlikely that it alone will turn Progenity’s fortunes around.
Hence, it’s best to avoid PROG stock at this time.
On the date of publication, Muslim Farooque 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.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.