Description

With any home construction/renovation project take the cost and time estimates and double them right? It’s the same axiom to launch a diagnostic test – it always takes longer – sometimes way longer.  With that kernel of wisdom please meet Renalytix (RNLX): its shareholders are likely “singing soprano” after years of serial dilution and share price destruction for a highly compelling product.  All joking aside, 20% of the 850 million people worldwide with chronic kidney disease will progress to needing dialysis and/or a transplant and 63% of those people will do so in an unplanned fashion (i.e. they will “crash”).  Some of these patients could avoid this if they new ahead of time that they were at high risk.  This issue is especially frequently encountered in diabetic patients.  With a blood draw and a patented and patent pending machine learning-based analysis of several biomarkers, the RNLX test called “KidneyIntelX” can predict who is at high risk of progression in advance.  This information offers important health benefits and demonstrable savings to the health system.  The test is FDA approved as of 2023 (de novo pathway), has a reimbursement price and is included in clinical guidelines as of early 2024.

There are 14 million Americans with diabetes and CKD who could benefit from this $950 test ($13b market opportunity).  I have been monitoring the company for several years and I have wanted to get excited about it - but only now has the most important milestone for its product has finally been met.  It is somewhat technical but it is called a “Local Coverage Determination” or LCD and it was announced on June 14^th of this year.    With a LCD, Medicare is saying the test is reasonable and necessary and it complements FDA approval very nicely.  

And….RNLX has a tiny market cap of $25 million (or roughly twice that accounting for an out of the money convert that is amortizing into equity at a lower price-still tiny).  Its enterprise value is also around $25 million as it has $13 million of cash and $11.6 million of the aforementioned convertible debt that is slowly amortizing into equity and does not appear to be existentially predatory (for example it has a 9.9% blocker).  The implied conversion price of the notes is $0.18 based on a July 2024 amortization so applying that to the share count would lead to a market cap of $44.7 million.  The problem is sales – to date there just haven’t been very many of them.  It processed 806 tests last quarter of which 82% were billable.  That is a mere $500k of revenue.  To be fair, this company is only six years old and it is very hard to drive private pay sales for an unproven product, especially with a pandemic limiting hospital visits.  At a 70-80% gross margin and $20m of SG&A + R&D, the company needs to sell around 30,000 tests @$950 to break-even.  That seems very doable in the next few years with the FDA stamp of approval and placement in treatment guidelines (no one wants to take the risk of prescribing the test they want to be told to use it).  I was a reasonably early investor in Exact Sciences and elements of this situation remind me of that set up which went on to be a terrific success story (they sell Cologuard – watch the SNL fake ad if you haven’t seen it BTW).

With something like this it is hard to make specific projections and I generally think top down estimates based on the market size and a market share assumption is not usually the best framework to use.  That said, I do think that with FDA approval and Medicare reimbursement taken care of, being the only prognostic test for declining kidney function should be worth more than $50 million. It is enormous market need. With some traction I could easily see this being a multi-bagger from here even accounting for significant dilution.     

For reference RNLX is a UK domiciled company and has a UK listing as well – this write up refers to the NASDAQ listed ADS shares.          

Investment Positives

• All the pieces in place finally for a real launch of the product: the Local Coverage Determination (LCD) is a really big deal.  Per the CEO on the last earnings call “I think for all practical purposes an LCD finishes the game for us....so a final LCD means that we can service the entire Medicare population.”
• There is a need for this test with billions in savings to the health system – it would have possibly helped my mom who has T2D and  is now also on dialysis (she “crashed” like so many others but she is doing ok now so don’t worry mamma-styx fan club members)
• Newly hired President seems to know what he is doing commercially – he was hired in September 2023 as the Chief Business Officer and was appointed April 30^th as President (previous Pres left the company on that date) – he sounds great on the May 15^th conference call. 
• ATM in place for high volume days – note there was an outlier 85m shares traded ($30m of volume on July 11th).  I couldn’t find any subsequent disclosure around that so it could have just been some apes stonking their stonks (not that there is anything wrong with that!)  The company does not have to disclose ATM sales until the following quarter but if it doubled it share count I would think it would have to say something.  The stock traded only 1.9m shares on the LCD announcement.   
• Insider support: Mt Sinai (where part of the technology came out of) and RNLX’s Executive Chairman participated in the March 2024 offering.  They own 14% and 10% of the company, respectively. 
• Clear evidence of cost savings last quarter as burn was less than $5m vs $8-10m in the past.  The 3/31 10-Q also mentions that there is a plan to further reduce costs while preserving sales capacity.
• Astonishingly for a public company of this profile, there are no warrants outstanding.
• Possible non-US partnerships could provide non-dilutive capital. 
• Possible takeover? Per UK rules, the company was approached on March 4 and discussions are ongoing.  The stock initially rocketed up 70% on the news but has more than round-tripped since then as there has been no further update other than in the most recent quarterly press release which noted multiple potential acquirers are now in discussions.  

Investment Concerns

• Company needs to raise funds and has a negative shareholders’ equity as well as a going concern qualification – with participation from insiders the company has always been successful at keeping the lights on and I believe this will continue. 
• Still needed if everyone is on wonder drug Ozempic anyway? May 2024 New England Journal of Medicine Article indicates that CKD/T2D patients slowed progression.  See: https://www.nejm.org/doi/full/10.1056/NEJMoa2403347  I believe with such a large market that there will still be a need and perhaps the GLP-1 drug class could even raise awareness.  LLY & co would be great partners since a high risk KidneyIntelX patient would be an excellent candidate for Ozempic.  
• 10% sales royalties due to institutions that invented the technology although 5% (as in half) drops off in 2029.  
• Sales very small and not growing yet– is this pre-launch noise or excuses? The LCD is only effective 8/1/24 so maybe it hasn’t really been “go time” yet. 
• The test was available in 2019 for $970 with a payer-driven coverage determination and no one seemed to want it:  https://www.cdphp.com/newsroom/2019/10/10-17-renalytixai-partners-cdphp-kidneyintelix - is that because there wasn’t sufficient evidence yet and it was just an LDT (a different less rigorous approval pathway for tests)?  The pandemic could also have thrown a wrench into plans.   
• It is great to be in the clinical guidelines but KidneyIntelX is only mentioned once in a single table within a very large document.  I suppose it has to start somewhere and one would not expect it to be on all 200 pages even if it was standard of care. 
• Recently changed CFO and auditor – through not necessarily a bad thing (esp. since the auditor change was for cost savings) it is still worth flagging.
• $11.7m debt but looks like investor doesn’t want control given 9.99% blocker and principal amortization and interest are being paid quarterly through equity issuances.
• Options out of the money so will need to issue more (and account for in valuation).
• Cash balance is a little confusing because a portion of what is discussed in the financial disclosure did not get raised until after a shareholder meeting that took place as a subsequent event to the last 10-Q but the above amount is correct. 
• Issued IP only goes to Dec 2029 although there are other patents pending including US2023/0080350 which was docketed for examination at the USPTO on 5/16/24. 
• In 180 days the company might be delisted from the NASDAQ Global to a lesser exchange in the NASDAQ family- this is less of an issue than being kicked off to the pinks. 

For more info:

• Here is an investor presentation that is out of date (2022) but tells the story:  https://investors.renalytix.com/static-files/69f600fa-0965-43b8-9cde-382069285d51
• Here is the LCD info:  https://www.cms.gov/medicare-coverage-database/view/lcd.aspx?lcdid=39726&ver=3
• Here is the peer-reviewed body of data:  https://pubmed.ncbi.nlm.nih.gov/?term=kidneyintelx&sort=pubdate 
• Here are the 2024 Clinical Practice Guidelines which list KidneyIntelX on p. 87.  https://www.kidney-international.org/article/S0085-2538(23)00766-4/fulltext 
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Disclosure 

We make no claims, promises or guarantees about the accuracy, completeness or adequacy of the contents of this document and expressly disclaim liability for errors and omissions in the document.  We have no obligation to update this document.  We may change our position at any time without posting an update.  The views expressed here are merely the opinion of the author.  Readers should do their own research.

Catalyst

Evidence of early sales traction with LCD in place

Awareness of the disparity between the market opportunity and the market cap

Acquisition above current price