Zomedica Pharmaceuticals (ZOM -0.84%) has been one of the most intriguing (and best-performing) healthcare penny stocks in the past year. In fact, an investment of $10,000 in its shares last March would be worth well over $85,000 today. What's behind such astonishing gains?
As it turns out, the company has built a device that detects hormonal disorders in pets. If that doesn't sound exciting at all, well, investors think otherwise. Zomedica is now a billion-dollar company by market cap. Are shares on a path to take investors to the promised land? Or is the opportunity to make money on Zomedica stock largely over?
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What's with the hype?
With no product revenue, an annual loss of $16.9 million, and roughly $90 million in assets, Zomedica is clearly still in the very early stages of commercialization of Truforma, a device that measures cortisol levels in dogs and cats via bulk acoustic wave detection technology. But analyzing a company isn't just about looking at its financials. A firm's intangible assets, especially if newly developed, have the potential to generate cash flows in the future, and that's what we need to look at.
This quarter, the company signed an agreement with Miller Vet Supply, the oldest veterinary distributor in the country, and it sold its first device in March. The chief operating officer of Miller Vet said that Truforma is "an industry-changing" technology.
There are 70 issued and pending patents for Truforma. The beauty of the product is that it allows for adrenal and thyroid testing on the spot at a veterinary clinic, so vets don't have to wait for lab results. Truforma is slightly smaller than a desktop printer.
Despite being heavy and costing up to $18,500 per device, immunoassay systems on the market have their own unique advantages. They can detect everything from cardiac abnormalities, endocrine disorders, and chronic diseases to tumor markers, for starters. What's more, the vast majority of the global $3.7 billion pet diagnostic market consists of screening for hereditary diseases and polymerase chain reaction (PCR) testing for tumors. Hence, unless Zomedica can expand its device into testing for these conditions as well, Trufoma won't be a true replacement for the industry standards.
Even though the company is fully funded until 2023 and expects to turn a profit by then, nothing is stopping it from taking advantage of its high stock price. Indeed, over the past year, its share count has increased from roughly 100 million to 972.02 million.
What's the verdict?
At this point, I'm not convinced that a single pet diagnostic device that can operate in a limited fraction of the testing industry should have a market cap north of $1.6 billion. Investors should know that it's best to consolidate the gains and take profits after such a spectacular run-up. I would definitely wait for the commercialization results to roll in before placing too much faith in Truforma and, in turn, Zomedica stock.
