Renalytix AI and Kidney Disease Diagnostics
People often confuse “invest in what you know” with “invest in domestic stocks only.” Index provider MSCI builds an all-encompassing global index called the “MSCI ACWI IMI AC Index.” Forget about what all those cryptic acronyms mean, all you need to know is that 99% of all stocks around the globe from 49 countries are found in the 14,625 members of this index. If you’re a U.S.-only investor, this means that you’re not looking at 6,288 stocks out there found in 48 countries around the globe.
Most individuals and institutions don’t look outside their own countries when making investment decisions, something that’s so strange they’ve coined it “the equity home bias puzzle.” It’s particularly bad in ‘Murica because that’s where the majority of equity investment opportunities lie. Why look elsewhere when there’s enough stuff to look at in your own backyard? Why get a passport when you live in a country that is so geographically varied? Why idolize people that do great things for mankind – scientists, doctors, researchers – when you have the Kardashians?
Given the American tendency towards ethnocentricity, foreign companies are often forced to list shares on American stock exchanges so they start falling under the radar of investors. One such company is RenalytixAI (LSE:RENX) which is a pure-play AI healthcare stock.
Founded in 2018, RenaytixAI is a $374 million company that debuted its initial public offering (IPO) in November 2018 on the London Stock Exchange (LSE). Since that IPO, the share price has risen +325%. (Short-term price movements like this only reinforce the notion that volatile tech stocks can rise as quickly as they fall.) What’s all the excitement about? Probably KidneyIntelX, the company’s diagnostic platform which uses artificial intelligence (AI) algorithms to digest data inputs – blood-based biomarkers, inherited genetics, electronic health records, etc. – and generate a unique patient risk score for people with chronic kidney disease (CKD).
In last year’s article on How to Solve the Kidney Transplant Problem, we talked about some of the problems associated with kidney failure which this slide from Renalytix sums up nicely:
Perhaps the most relevant stat given above is that around half of patients with advanced kidney disease are unaware of the severity of their illness, meaning that they often don’t receive treatment until their condition reaches critical levels. The problem is so large that Medicare spends over $120 billion per year, or over 20% of its total budget, on the treatment of CKD. In response to this substantial kidney disease burden, a U.S. Presidential Executive Order on Advancing American Kidney Health was issued in July 2019 to support change in kidney disease care. It’s no surprise to see that Renalytix has been granted breakthrough device designation by the FDA along with a distinct CPT reimbursement Code 0105U, $950 national Medicare pricing, and private payor coverage at commercial launch (expected to happen in the third quarter of calendar year 2020).
As the diagnostics platform rolls out, benefits for stakeholders include:
- Patients – Early detection and intervention can lower the risk of progressing to life-altering advanced disease.
- Physicians and specialists – An easy-to-understand, reportable patient risk score with specific guideline-driven clinical recommendations designed to maximize patient treatment and compliance outcomes.
- Insurance payers – Using KidneyIntelX would generate a positive return for health insurers in under 24 months and deliver cost savings of up to $1.3 billion over five years per 100,000 DKD patients.
Any solution that promises lower healthcare costs and improved patient outcomes is an easy sell, no matter where you sit in the value chain.
Where Are the Revenues?
As we talked about in our recent articles on ArcherDx and Invitae, we don’t like to invest in companies that have no traction in the form of revenues. That’s opposed to the “skate-to-where-the-puck-will-be” types who argue that investors need to anticipate which companies are on the path to revenue growth greatness, something that’s difficult because you need to trust management to deliver on their promises. When there are only promises of revenues, we want to know who is making those promises. If they happen to have failed miserably in prior ventures, we pass on that grass. In the case of Renalytix, the management team looks like they can deliver.
Delivering on Promises
Leading the charge at Renalytix is co-founder and CEO, James McCullough, who was co-founder and CEO at Exosome Diagnostics, a venture capital-backed firm which was acquired in 2018 for $575 million. That company was working on a urine-based test called ExoDx Prostate which is used to help clinicians determine whether a patient needs a prostate biopsy. Mr. McCullough also co-founded Page.ai, a startup we featured in our piece on “7 AI Cancer Diagnostics Startups Digitizing Healthcare,” and he also sits on the board of LungLife AI. He probably has many other accomplishments too, but we’re starting to get a bit depressed about how little we’ve accomplished in our own lives, so let’s move on. The key takeaway here is that this man has a track record of success that makes the promises of future revenues much more credible.
People often express their frustrations on Twitter about how venture capitalists don’t fund people on physical characteristics – gender, race, height, weight, sexuality, eye color, hair color – when in many cases it’s just that the person pitching their great idea has no chance at all at executing on that idea, no matter how much money you throw at them. That’s why serial entrepreneurs – people with proven track records of success – are particularly appealing to investors in much the same way an employer vets your resume before deciding to hire you.
The RenalytixAI “IPO”
“Kidney diagnostics developer Renalytix AI files for an $86 million US IPO,” was the title of an article by Renaissance Capital which seems a bit misleading. This isn’t an “initial public offering” because shares of Renalytix have been trading on the LSE since 2018. It’s not even an initial public offering in the United States, as shares of Renalytix have been traded on the OTC market as an ADR under the ticker RTNXF. It’s simply the first time the company plans to list on Nasdaq. If this offering is completed successfully, Renalytix will trade on Nasdaq under the symbol RNLX.
In the same way that investors need to consider the entire universe of available stocks, medical professionals need to consider all the data available when making optimal treatment decisions. Machine learning is becoming pervasive in the medical industry because there is so much data – much of it located on disparate data islands – that can provide insights into how to achieve better outcomes while lowering costs. Regardless of whether you’re a doctor or a Kardashian, that’s something everyone can appreciate.
Despite what the pundits say, FAANG stocks (Facebook, Apple, Amazon, Netflix, Google) don't give you real exposure to AI. Read about 7 stocks that give you true pure-play exposure to AI in our guide to investing in AI healthcare companies, freely available to Nanalyze Premium subscribers.