Updated: Oct 4, 2021
IN THIS ISSUE
Possible short squeeze ahead, alongside strong disruptive technology in the medical field. Look at my last article on Vinco Ventures (BBIG) to see that we correctly predicted a possible outcome, it came a month or so after publication, these short squeeze events seem to be drawn out longer than expected.
Preecludia (Preeclampsia rule out test in pregnant woman)
OBDS (Drug Delivery System)
Cash burn rate thoughts and analysis.
Progenity Inc: PROG
The short squeeze possibility:
Progenity has fallen from it’s IPO and has reached very low levels as the market looked unfavorably on it with it’s history of a low margin genetics lab and an uncertain future. In the recent week $100 million was added back to its market cap totaling to $213 million dollars. At day 1 on the stock exchange they were valued at 1 billion. During that time, investors were thinking this was going to go to $20 a share and thought that buying in at $8 was a steal. Now we sit below $2.
The stock has risen from $1 to $2.10 as many new investors have found home to this stock and see the value in it from the fundamental technology that they have proven on time as they have kept to their promises. The uncertainty in their future is starting to become a certainty and we believe this is going to be a quick recovery which will fuel the fire of the interested shorting to cover their positions as this makes a rapid ascension. This will only push the stock to move higher beyond expectations. The current retail consensus is $8 a share if the squeeze does happen, however this could theoretically hit $10-15 due to my suspicions that Athyrium capital has bought short insurance to box their losses. Athyrium Capital owns around 60% of the stock of Progenity, and they have an interesting history of selling the companies that they invest in. Here’s Athyrium’s website so you can take a look for yourself. We think Athyrium may cover their shorts around $3-4 a share as that is where their dollar cost average is. They have been buying Progenity's stock for over a year.
This is speculation, so take it for a grain of salt, we think if Progenity hits around the $3-5 range, watch for a daily uptrend as Athyrium may cover slowly which would send this to the $6-8 range if they have truly boxed their losses and are looking to get away from the short interest fees that they receive by holding short shares.
Derivative volume in Call options can possibly gamma squeeze the stock as well. There is a large amount of Call volume which can tick the stock higher.
With more attention and more hedges funds piling in this could possibly run to $15 a share, however this scenario is a hard possibility to reach. If a short squeeze does happen, it may take a bit longer to unfold than we currently expect. This may be a month long process from my recent history.
Other factors for fuel to the possible short squeeze:
Here are some small facts, but something to consider at the beginning of a stock exploding in value: Within the week, my reddit community page has boomed from 100 members to around 400, and at the same time the amount of Stocktwits watchers on the PROG page have blossomed from 6,000 to 11,400 watchers (at the time of writing). Assuming that folks are going to be continually buying in, we could see this stock price rise back to previous levels.
Trading volume has picked up which means this opens an outlet for larger investors to buy large lump sums due to the liquidity of the stock. This means they will have less slippage and can buy the stock at $2 a share vs $3.5 to fill their order.
Technology: The fundamental future annual cash flows (if progenity can execute) are well beyond the 1 billion a year annually (>$17 a share). We project that this company in 4 years will be making over $122 million annually with just Preecludia, when you consider the implications of OBDS (technology pill) they could be well beyond our expectations.
Preecludia: This patented test rules out a hypertension condition in pregnant women that leads to mortality. There were 3.6 million births in the US in 2020. If this becomes part of the standard of care in the lab tests that mothers receive, you could expect around 700,000 tests a year which could bring in $175 per test. (I made up the lab test value, but that's what you’d expect from any other normal lab test to cost) *The 700,000 comes from Progenity’s website. With some back of the napkin math: $175 x 700,000 mothers = $122 Million a year
Typically biotechs trade at a 5x multiplier which would give PROG a fundamental stock price with just Preecludia being 600 million, the stock would trade at around $5 a share.
OBDS: This is the opto-electrical pill that can go through the digestive tract and do multiple things at the same time. Currently they are focused on the drug delivery aspect as it is the highest margin approach. You will also see the pill referenced on their website as DDS2 as they have discussed multiple variants of it.
The reason this pill is a very powerful technology is that it can allow drugs that you’d normally have to give as a shot to be digestive, which is safer and has more efficacy capability. You can now make IV drugs such as chemotherapies, monoclonal antibodies, and macro molecules as oral solutions. These drugs normally can’t be given orally due to the harsh conditions of the digestive tract. The gel pills have different release points as everybody’s digestive enzymes are different. This causes instability and no way to pass clinical trials in some cases because they cannot target the area where the drug needs to be digested.
This also would be an amazing analytical tool that doctors could have patients take every year to check their colons instead of doing the time consuming and expensive procedure. This would also allow people who don’t normally get these due to monetary reasons or any other reason to have an alternative route to check their digestive help.
I can’t put a price on how much they could sell the pill for, but the cost of a colonoscopy is roughly $1000-3000, if you have an alternative which is $300 and allows you to do it from home it may be able to become a good approach to digestive tract health.
As you can see there are many avenues they can go down with this technology, and it should be high margin (relying on my engineering background) as the pill is not much material and components can be mass produced from what I have seen. I think that they could make over a billion a year in the next 5 years with this product. Depends on their execution and what approach that they take with it. I know that they need to partner with larger biotechs, these are also potential catalysts for the stock price.
The ugly past that is now behind: The business had questionable actions such as lawsuits and history that did raise my eyebrows as that was pointing to fraud, however, they have removed (closed that portion business which was low margin anyway) those liabilities and settled them in court. This set them back in their finances and are now working their way out of their trouble discussed below.
Also one other point before moving on, they have met their schedule to date on all of their projections on when they will hit milestones. This is a good sign which leads me to believe that they are on a truthful path. Another piece of evidence is their patent that was approved for their Preecludia lab test. This shows that the intellectual property is sound and has been approved by a 3rd party source stating that it is novel and will actually work.
We look at cashburn to see how long this business will survive as they are not making any money yet and also ultimately, you want to know if they are going to possibly dilute you.
The quick answer from my thoughts below is: Approximate cashburn is $30 million and they have enough money not to dilute shares for the next 3-6 months.
Cashburn (underlined in blue) as of Q1 report was $48 Million, This was in the middle of them cutting half of their employees and closing down their non-profitable business portion. These cost the company quite a bit to give out severance packages and they even now have a CEO that left that was being paid a few million a year. Harry Stylli (ex-CEO) is still receiving 1 year of full pay which is very interesting and not typical of someone leaving on their own interests as stated in the company press releases. This could lead some to speculate on a potential buyout of the company.
We should expect the cash burn to slowly come down to $15-20 million a quarter as they have half the employees and are not running a low margin business. This means that we should expect $100 million a year in cash burn for this business. With this is mind, now what is their current burn rate? I am expecting it to be about $25-30 million a quarter at the moment.
Their current cash on hand in their March Q1 report was 65 million
In between now and then they added the $40 million private placement and then diluted investors for another 40 million. This totals $145 million.
From this, we can see if they burned another $40 million in Q2 and then $30 million in Q3,
They should have currently: 75 million. If they can get the spending to around 25 million, this gives them until mid year in 2022 before they go bankrupt. I think that they will be bought out before this ($17-30 a share) or will be making money with Preecludia which will pull them out of their negative cash flow. They also could receive more money to continue the OBDS development as well. We should get an even better picture of their cashburn around November 17th after-hours (expected earnings date).
Current Price: $1.79, $1.70 after hours
3 Month Price Forecast: $7-10
We think that the stock price of Progenity will rise to a range of $7 to $10 within the year of 2021. The company seems to be increasing their business runway as they raised 40 million by diluting shares and then cut their operating costs to around $20 million a quarter. They have a genomics business (Avero) that we think they can sell for 80 million - 100 million being conservative which will increase their cash runway for the next 2 years.
Price Target in 1 year: $12 - 15 As the market catches up to the reality that this company could bring to healthcare, we may see it go over a billion dollar valuation again.
Final thought on PROG: This company we think is sound for appreciation. Whether a short squeeze/buyout or even business turnaround, we think this stock price will appreciate in the near term and could possibly ascend quickly under conditions.
Disclosure: We do own PROG securities/shares at the time of publication.
All stocks talked about we have invested in, and do not intend to give advice nor recommend acting upon the information.
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Until next week,
and the Optifinancial Team
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