Shares of precision medicine company Guardant Health (GH -2.96%), which specializes in liquid biopsies to test for cancer, fell 10.6% through 10:05 a.m. ET Monday morning.
Monday was the first trading day in which investors got to react to a Guardant announcement late Friday, that it plans to sell stock and raise $400 million in new cash to fund its operations.
Guardant 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 at its sole discretion," said Guardant, it "may offer and sell (emphasis added) up to $400.0 million" in new shares at market prices.
At Guardant's current market capitalization of $3.2 billion, this therefore implies the company will grow its share count by about 12.5% -- and dilute existing stockholders by that same 12.5%. And Guardant won't even get to keep all of the $400 million. Three percent of the cash raised will go to investment bank Jefferies, which is organizing the stock sale.
Why Guardant needs cash
Investors are understandably wary of the potential share dilution, but they shouldn't be surprised by it. Although growing rapidly -- annual sales have roughly tripled to $644 million over the past five years -- Guardant still isn't profitable. And it's burning cash.
Quite a lot of cash.
Total cash burn over the last 12 months approaches $300 million. That's down a bit from last year, but it's not yet positive, and most analysts agree Guardant won't become free-cash-flow positive for several more years -- in 2028, to be precise.
To reach that point, analysts believe Guardant will need to roughly double the size of its annual revenue stream, so that day's still a ways off. And until Guardant achieves sufficient scale to generate the cash it needs all on its own, investors need to anticipate additional share sales and fund raises.
And yes, additional stock dilution, too.
