Progenity, Inc. (PROG) is a biotechnology company, which provides, develops, and commercializes molecular testing products in the United States.
Biotech stocks are well-known to be very volatile, and Progenity is no exception to this rule. It surged about 305% within a month. However, it is down about 24% for the year, despite this massive short-term rally.
I am bearish on PROG stock because of four key reasons, all of them being related to its fundamentals. (See Analysts’ Top Stocks on TipRanks)
Business News
On October 13, 2021, Progenity announced it had secured four patents for ingestible technologies.
Management appeared to be very enthusiastic about this news. “We believe we hold one of the most robust ingestible device patent portfolios,” said Eric d’Esparbes, interim CEO of Progenity. “The addition of these recent patents further strengthens our intellectual property position and underscores our commitment to innovation in advancing therapeutic discovery, development, and delivery.”
However, a more analytical financial analysis of Progenity stock reveals four worrisome fundamental trends.
Revenue Growth and Balance Sheet
In Fiscal Year 2019, Progenity reported about $144 million in revenue, an increase of 12.5%. However, revenue has declined to $40.9 million in the last twelve months. This represents a decline of 71.6% from 2019.
In addition, it has a very weak balance sheet. Progenity has a cash-to-debt ratio of 0.42 and an Altman Z-score of -11.5, signaling that it is in the distress zone. The low cash-to-debt ratio signals the company cannot pay off its debt using the cash on its balance sheet.
Profitability: Net Losses Widened Annually
Progenity is not a profitable biotechnology company. It has been losing money for the past three fiscal years. Net losses have widened drastically during this time with losses of -$129.1 million, -$148.0 million, and -$192.5 million in 2018, 2019, and 2020, respectively.
The most recent 10-Q report released on August 12, 2021, showed that for the six months ended June 30, 2021, Progenity had a net loss of -$110,795,000. This compares to a net loss of -$70,203,000 for the six months ended June 30, 2020.
Free Cash Flows: Burning Cash
Progenity is also burning cash, and this trend has worsened over the past three years. In Fiscal Years 2018, 2019, and 2020, it reported that free cash flows were -$69.9 million, -$110 million, and -$170.7 million, respectively.
The combination of negative free cash flows with net losses poses several red flags. Free cash flow is essential to continue business operations and pay off the debt Progenity has.
While recent news that Progenity will reduce its outstanding debt seems positive, a more detailed financial analysis shows that there is stock dilution of about 427,804 shares of common stock (the “waiver shares”).
Progenity has massively diluted its stock in 2021. For the six months ended June 30, 2020, the company reported that the weighted average number of shares outstanding was 6,840,321. For the six months ended June 30, 2021, Progenity reported an approximate 9x increase in the number of shares outstanding to 60,770,246. This is a massive stock dilution, which is very negative for the intrinsic value of the stock.
Negative Equity
Another important red flag for Progenity is that its balance sheet shows a deficit in total shareholders’ equity. For 2018, this deficit was -$36.97 million, which widened to -$83.87 million in 2019, and to -$106.99 million in 2020.
This means that the total value of Progenity’s assets is less than the total of its liabilities. Shareholders’ equity is very significant to investors because it reveals the company’s net worth. The ideal scenario for any company is to have a positive and increasing shareholders’ equity figure each fiscal year.
Wall Street’s Take
Turning to Wall Street, Progenity has a Moderate Buy consensus rating, based on two Buys and one Hold assigned in the past three months. The average Progenity price target of $3.67 implies 9.6% downside potential.
PROG Stock: Verdict
A massive short-squeeze this month sent Progenitiy’s stock price from $1.79 on the close of October 1, to $3.99 on the close October 26. Be very cautious of this short-squeeze as the fundamentals of the stock are too weak.
Progenity must deliver positive free cash flows soon in order to survive, or raise capital with stock offerings. I consider PROG stock too pricey and too risky at this time.
Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.
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