Mersana Therapeutics, Inc. (NASDAQ:MRSN) Not Doing Enough For Some Investors As Its Shares Slump 69%

Mersana Therapeutics, Inc. (NASDAQ:MRSN) shareholders that were waiting for something to happen have been dealt a blow with a 69% share price drop in the last month. For any long-term shareholders, the last month ends a year to forget by locking in a 78% share price decline.

Since its price has dipped substantially, Mersana Therapeutics' price-to-sales (or "P/S") ratio of 2.2x might make it look like a strong buy right now compared to the wider Biotechs industry in the United States, where around half of the companies have P/S ratios above 9.9x and even P/S above 60x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

Check out our latest analysis for Mersana Therapeutics

How Mersana Therapeutics Has Been Performing

Mersana Therapeutics hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Mersana Therapeutics.

How Is Mersana Therapeutics' Revenue Growth Trending?

In order to justify its P/S ratio, Mersana Therapeutics would need to produce anemic growth that's substantially trailing the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 15%. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, despite the drawbacks experienced in the last 12 months. So while the company has done a great job in the past, it's somewhat concerning to see revenue growth decline so harshly.

Shifting to the future, estimates from the ten analysts covering the company suggest revenue growth is heading into negative territory, declining 7.4% each year over the next three years. Meanwhile, the broader industry is forecast to expand by 109% per annum, which paints a poor picture.

With this information, we are not surprised that Mersana Therapeutics is trading at a P/S lower than the industry. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What Does Mersana Therapeutics' P/S Mean For Investors?

Having almost fallen off a cliff, Mersana Therapeutics' share price has pulled its P/S way down as well. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Mersana Therapeutics' analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless there's material change, it's hard to envision a situation where the stock price will rise drastically.

Before you take the next step, you should know about the 4 warning signs for Mersana Therapeutics (1 doesn't sit too well with us!) that we have uncovered.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.