Stock Analysis

We're Not Very Worried About MEI Pharma's (NASDAQ:MEIP) Cash Burn Rate

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NasdaqCM:MEIP
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Just because a business does not make any money, does not mean that the stock will go down. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should MEI Pharma (NASDAQ:MEIP) shareholders be worried about its cash burn? For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for MEI Pharma

When Might MEI Pharma Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In June 2021, MEI Pharma had US$153m in cash, and was debt-free. Importantly, its cash burn was US$33m over the trailing twelve months. So it had a cash runway of about 4.7 years from June 2021. Importantly, though, analysts think that MEI Pharma will reach cashflow breakeven before then. If that happens, then the length of its cash runway, today, would become a moot point. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
NasdaqCM:MEIP Debt to Equity History November 4th 2021

Is MEI Pharma's Revenue Growing?

Given that MEI Pharma actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. Regrettably, the company's operating revenue moved in the wrong direction over the last twelve months, declining by 12%. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Easily Can MEI Pharma Raise Cash?

Given its problematic fall in revenue, MEI Pharma shareholders should consider how the company could fund its growth, if it turns out it needs more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

MEI Pharma's cash burn of US$33m is about 9.1% of its US$357m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

Is MEI Pharma's Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way MEI Pharma is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. Although its falling revenue does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. When you don't have traditional metrics like earnings per share and free cash flow to value a company, many are extra motivated to consider qualitative factors such as whether insiders are buying or selling shares. Please Note: MEI Pharma insiders have been trading shares, according to our data. Click here to check whether insiders have been buying or selling.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

What are the risks and opportunities for MEI Pharma?

MEI Pharma, Inc., a late-stage pharmaceutical company, focuses on the development and commercialization of various therapies for the treatment of cancer.

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Rewards

  • Trading at 96.9% below our estimate of its fair value

  • Revenue is forecast to grow 45.7% per year

Risks

  • Does not have a meaningful market cap ($41M)

  • Volatile share price over the past 3 months

  • Currently unprofitable and not forecast to become profitable over the next 3 years

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