Shares of a precision medicine company Guardian Health (NASDAQ:GH)which specializes in liquid biopsies for cancer diagnosis, fell 10.6% by 10:05 a.m. ET Monday morning.
Monday was the first trading day for investors to react to a late Friday announcement by Guardant that the company plans to sell shares and raise $400 million in fresh cash to fund its operations.
Guardian needs money
Guardant’s announcement came in the form of an 8-K filing with the Securities and Exchange Commission (SEC). “From time to time, in our sole discretion,” Guardant said, “May Offer and sale (emphasis added) of up to $400.0 million of new shares at market prices.
At Guardant’s current market capitalization of $3.2 billion, this means the company will increase its share count by about 12.5% - and dilute existing shareholders by the same 12.5%. And Guardant won’t even be able to keep the entire $400 million. Three percent of the money raised will go to the investment bank Jefferieswhich organizes the sale of shares.
Why Guardant needs cash
Investors are understandably concerned about the potential dilution of their shares, but they shouldn’t be surprised. Guardant may be growing fast — annual revenue has roughly tripled in the past five years and now stands at $644 million — but it’s still not profitable. And it’s burning cash.
Quite a lot of cash.
Total cash burn over the past 12 months is approaching $300 million. While this is slightly less than last year, it is not yet positive, and most analysts agree that Guardant is not become will continue to have positive free cash flow for several years – more precisely until 2028.
To reach this point, analysts believe Guardant will need to roughly double its annual revenue. So there is still a long way to go. And until Guardant is big enough to generate the necessary money on its own, investors will have to expect further share sales and capital raising.
And yes, also an additional dilution of the share prices.
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Rich Smith does not own any stocks mentioned. The Motley Fool owns and recommends Guardant Health and Jefferies Financial Group. The Motley Fool has a disclosure policy.
Why Guardant Health Stock Just Plunged 10% was originally published by The Motley Fool
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