Renalytix ready to profit from data-driven kidney diagnostics

Big savings

The investment case for Renalytix is one of demographics as well as technological innovation. Diabetes is a major cause of chronic kidney disease. That means there is a huge benefit to regularly testing the health of diabetics' kidneys. And diabetes is a vast and growing problem, especially in the US where Renalytix's sales efforts are currently focused. 

The diabetes 'pandemic' is caused by the decades-long prevalence of high-sugar diets in rich countries. In the US, the Centre for Disease Control and Prevention (CDC) estimates that one in 10 people have diabetes and one in three have pre-diabetes. Of diabetes sufferers, 37 per cent have chronic kidney disease (CKD) but only a quarter of those with moderate to severe CKD even know they have it.

Not only is this a big problem in terms of the number of people affected, but it is a hugely expensive problem, too. And CKD is more expensive the longer it goes undiagnosed. This makes it responsible for one of the largest cost drivers in the US medical system. The reason for this huge bill is that as well as the cost of drugs, late-stage CKD patients can eventually need weekly dialysis sessions. Catching patients that are at risk early and providing them with treatments and lifestyle changes to prevent CKD worsening or even developing in the first place can therefore save huge amounts of money in the long run. And, more importantly, early action saves lives.

“Diabetics are already a financial burden on the health system and you don’t want them to become chronic sufferers that need weekly dialysis. If you can give them a Renalytix test annually in a doctor’s office you can manage the progression and keep the risk of kidney failure low,” explains Dr Gareth Blades, a co-manager of Amati UK Smaller Companies fund (GB00B2NG4R39), which counts Renalytix among its top 10 holdings. The fund is among the top quarter of UK Small Cap funds based on five-year performance.

The sales push

The long-term healthcare economics of KidneyIntelX is making it very popular with both public and private insurance providers. Renalytix has agreed a 10-year government-wide contract with the US General Services Administration for KidneyIntelX at $950 per test. This applies to more than 140 government agencies including a deal with the US Veterans Association (VA). The VA provides healthcare services to 9m veterans each year through 1,293 healthcare facilities. KidneyIntelX is also an accepted provider in 27 Medicaid State programs.

The private sector has taken a liking to the product as well. Coverage has been agreed with 20 private health insurance providers, including HealthFirst, one of New York State’s largest not-for-profit health insurance companies with more than 1.5m members.

Renalytix seemingly has a great product and the agreements with the insurance companies are very promising, but the business is still at a pre-commercial stage. In the full year to 30 June 2021, it generated just $1.5m in revenue. In the same period, administrative expenses and finance expenses were $33.3m and $7.95m, respectively, which contributed to losses for the period increasing to $31.0m from $9.25m.

The increase in administrative expenses has largely been driven by the hiring of salespeople. In 2021, it hired separate vice-presidents (VPs) to manage sales, commercial partnerships and marketing. Jed Fulk, an ex-army major and experienced sales executive, has also been brought in to lead the rollout to the VA and the plan is to hire 43 salespeople to support him.

Renalytix will be hoping its investment in business development will help it build in some of the success it had this year signing partnerships with hospitals. In September, Mount Sinai Health Systems announced it would be targeting 300 KidneyIntelX tests per week and estimated 6,000 tests to be complete by the end of 2022. At $950 a test this would generate $5.70m of annual sales for Renalytix.

Deals have also been signed with Atrium Health, Wake Forest Baptist Health and University of Utah, which all plan to be running live testing as early as December 2021 and will allow KidneyIntelX to be provided at 37 hospitals.

Dr Blades thinks the market will be expecting revenue to start ramping up soon: “The product is great, the main risk to the business is execution. Now these deals are in place and the company has invested in its business development, investors will want to see sales or they could lose patience.”

Consensus forecasts are for a significant growth in the next few years, with £18.5m of revenue expected in the 2022 financial year before jumping to £93.3m by 2024. Brokers are also expecting a profit for the first time in 2024, with an earnings per share (EPS) forecast of 1.05p.

First-mover advantage

Once Renalytix starts to cash in on its tests, you would expect other companies to attempt to enter the market to compete. However, the company's moat is about more than just customer relationships, patents and tech. As the first kidney diagnostic product that uses machine learning, Renalytix has the opportunity to build an important first-mover advantage too. The quality of a machine learning algorithm is only as good as the volume and quality of the data that is fed into it. Therefore, as more data is collected, the product should continuously improve.

As this data is collected, over time it can also be used to improve diabetes and kidney treatment. The company refers to this as longitudinal data. For example, if a patient is tested every couple of years using KidneyIntelX, the doctors will be able to evaluate the quality of treatment by looking at how specific blood markers change in response to it.

This information would be invaluable and could be used to assess the risk patients have of developing other, non-kidney diseases. Kidney disease is a comorbidity associated with other health problems, such as cardiovascular disease. Renalytix's data could be in high demand from other healthcare researchers. It has already partnered with AstraZeneca (AZN) to help “launch medicine strategies for cardiovascular, renal and metabolic diseases”.

“The attractive thing about Renalytix is the size of the market and the lack of competition in the early diagnostic space. Management don’t just want 5 per cent of all patients, they want to treat them all,” said Dr Blades.

The estimates are that chronic kidney issues affect 40m people in the US every year. If half of these were to receive KidneyIntelX tests every five years at the price of $950, that would generate almost $2bn of sales for Renalytix. Throw in the future commercialisation of the medical data collected over time and the upside is substantial. A current market cap of just under £500m could look miniscule if the full potential is achieved.