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Guardant Health is seeking financial resources, and in lieu of generating enough revenue, it is turning to the stock market to raise funds.
Shares of Guardant Health (GH -11.41%), a pioneer in liquid biopsy technology for cancer detection, plunged by 10.6% on Monday morning, following an announcement made late Friday about its intention to issue new stock and secure $400 million to support its operations.
Financial Strategy Shift
The news of Guardant’s stock sale came via an 8-K filing with the Securities and Exchange Commission (SEC). In the filing, Guardant stated that it “may offer and sell up to $400.0 million” in new shares at current market prices, maintaining flexibility in its approach.
With Guardant’s existing market capitalization at $3.2 billion, this new financial maneuver could lead to an approximate 12.5% increase in the total share count, which would result in a similar dilution for current shareholders. Additionally, the company will not retain the entirety of the funds raised, as 3% of the total will be allocated to Jefferies, the investment bank facilitating the sale.
Understanding the Need for Cash
While the dilution of shares raises concerns among investors, it should not come as a shock. Guardant has experienced substantial growth, with annual sales surging to $644 million over the past five years, but profitability remains elusive. The company is currently facing significant cash outflows.
Over the past year, Guardant’s cash burn has approached $300 million, which, although slightly reduced compared to the previous year, still necessitates scrutiny. Analysts do not foresee the company achieving positive cash flow until 2028, indicating a long road ahead.
To reach break-even operationally, it is estimated Guardant must roughly double its annual revenue. Until the company can scale effectively to secure necessary cash independently, stakeholders must brace for potential further stock offerings and the accompanying dilution of shares.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Guardant Health and Jefferies Financial Group. The Motley Fool has a disclosure policy.
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