Renalytix: Laying The Foundations For Growth

Summary

• Renalytix has grown its revenue but it's still miniscule. That should change this year.
• A stronger sales function combined with mounting clinical data could help sign on new healthcare users and drive scale.
• I remain bullish on the prospects for the company and see price upside this year.

Ika84/E+ via Getty Images

Kidney diagnostics specialist Renalytix (NASDAQ:RNLX) had an underwhelming 2021 in terms of share price performance. But the underlying potential for the business has moved forward in the past year.

The Company Has been Moving towards Commercialisation

At first glance, the company's commercial results to date still look minimal. In the most recently reported quarter (July to September), revenue came in at only half a million dollars. That's not to be sniffed out, though. It was only in 2021 that the company started to ramp up its commercialisation efforts. That has resulted in a number of developments, none of which I think is highly significant in isolation but which taken together show gathering momentum for Renalytix. As of the end of September, these include:

• A 10-year government-wide contract with the U.S. General Services Administration at $950 per test;
• The Centers for Medicare & Medicaid Services awarding a national price of $950 per test;
• 27 state Medicaid program authorization contracts and 20 private payor coverage determinations;

- Partnerships announced with the Mount Sinai Health System, University of Utah, Atrium Health, Wake Forest Baptist Health, and Capital District Physicians' Health Plan (CDPHP);

• New York State Department of Health approval; and
• A distinct Common Procedural Terminology (CPT) Code for reimbursement granted by the American Medical Association.

As well as a small but growing user base, the conceptual sell has been burnished by multi-center, peer reviewed clinical studies that found the company's platform to be 72% more effective than the current care standard in identifying early-stage patients at high risk for kidney disease progression and failure. The company currently has utility studies underway at institutions including Wake Forest and the University of Utah. Hopefully these could further boost the clinical support for Renalytix's KidneyIntelX platform.

So Renalytix has clinical proof of efficacy, reference clients and pricing guidelines, which could allow it to ramp up its sales efforts considerably. To that end, it has invested heavily in building its sales and customer support capability this year. That helps explain why general and administration expenses roughly doubled in the company's most recent quarter to $8.1m compared to $4.1m in the comparable period the prior year.

The company has started 2022 with an announcement that it is partnering with the American Diabetic Association in a joint programme to improve overall kidney health among US type 2 diabetes patients. That group is already 34m strong and is expected to grow close to 60m in 2060. Details of the shape this will take and what it could mean for the business were limited. But I see it as positive. Not only will it help the company develop its patient pathway helping its future sales effort, the partnership with such a well-established medical association further burnishes Renalytix's credibility within the medical community, in my view. The company is scheduled to present next week at the JP Morgan Healthcare Conference presentation.

All of this sets the stage for faster sales growth across 2022 and indeed beyond.

Laying the Foundations for Growth in 2022 and Beyond

There are more than 12m people with diabetic kidney disease in the US and the company reckons it can target them through establishing partnerships with a wide range of healthcare providers, which it has already started to do. In the most recent quarter at the original Mount Sinai site, the company said it saw the conversion (the percentage of doctors who order KidneyIntelX testing for their patients in response to a centralized Population Health suggested or pretended order) reaching a rate as high as 80%. That bodes well for adoption in other healthcare systems once the platform is made available within them.

Rollouts are now being done quicker. I see a virtuous circle in this, as rollouts provide further clinical efficacy data which in turn engender higher adoption rates and support the conceptual sell for rollouts in other healthcare systems. The company has said that it expects to announce more partnerships across the New York region in 2022, and there could be more than 20,000 patients across 2022. The company is targeting 20 large healthcare systems, although what percentage of them it may actually signs up remains to be seen (on their earnings call, though, Renalytix management said, "we said 20 is a target for 2022, I very much believe that is doable. If we end up with success to VA Medical System, we may exceed that." The company has also said it may start receiving revenue from pharmaceutical companies in the first half of 2022 (it previously recorded a minor amount of revenue from AstraZeneca).

Renalytix Valuation is Looking Attractive to Me

Renalytix ended 2021 almost exactly where it began. Over the course of the year, however, the shares had several periods of strong performance before giving up those gains.

Source: Google Finance

Set against that, I think that the momentum in the business improved notably across the year, as outlined above. I reckon the future outlook now is stronger than it was a year ago, as we have another year of progress and positive momentum commercially and in terms of proof of efficacy which I see as critical to the business's future success.

At the current price, the company has a market cap of around $633m. Given its current small profits and heavy losses, that seems high to me. But looking ahead to the future potential size of the business how does it look?

At around $950 a test give or take (if anything, smaller systems may well pay higher prices), 20,000 tests at commercial pricing would mean the company could get to revenue close to $20m in 2022. In reality I don't think that will happen, as I doubt all of the tests will be sold commercially and instead expect some to be provided as part of a trial in a longer-term sales process. But in 2023, commercial sales would be more likely and given the current sales effort ramp up I think the business could multiply by a factor of multiples, so 2023 could feasibly see $50-100m of revenue if things go well. Earnings may take a few years, especially with the fast-growing cost base, but the scaleable nature of the technology means that once revenue gets up to a decent level, this could turn out to be an attractively profitable business. While it's hard to put a value on it, given all the variables, a $633 market cap seems cheap to me if Renalytix continues to scale and fulfils its early potential. There are risks it won't, and I would still like more evidence of sales growth, but I think we'll see that in 2022. I remain bullish.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in RNLX over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.