ProKidney Corp.

Moat: 1/5

Understandability: 3/5

Balance Sheet Health: 2/5

ProKidney Corp. is a clinical-stage biotechnology company focused on developing therapies for chronic kidney disease (CKD) and other renal diseases. The company aims to deliver treatments that slow or halt the progression of these diseases, improving outcomes for patients.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: ProKidney Corp. (PKD), a clinical-stage biotech, is focused on developing cell therapies to treat chronic kidney disease (CKD). Unlike traditional small-molecule drugs or protein-based biologics, ProKidney is focused on cellular therapies, aiming to repair and restore kidney function at the cellular level. Their lead candidate, REACT, involves using a patient’s own kidney cells to promote regeneration and to improve patient outcomes for kidney diseases.

Revenue Distribution As a clinical-stage company, ProKidney does not currently have recurring revenue from product sales, as its therapeutic candidates have not received regulatory approval. Therefore, ProKidney’s primary sources of income are limited to funds received from equity offerings and collaborations. Future revenues are contingent on successfully completing clinical trials and obtaining regulatory approvals. Once a product reaches the commercial stage, revenue is expected to come from sales of its cellular therapies, primarily to medical professionals and institutions in the US, Europe, and other international territories. Currently, revenue is zero and all funds are allocated to R&D.

Industry Trends The kidney disease market represents a substantial area of unmet need with millions suffering from CKD globally. The market is experiencing a notable shift toward regenerative medicine, particularly cellular therapies, as a new approach to treat severe conditions. The demand for treatment is also spurred by the growing incidence of chronic kidney diseases and the lack of effective methods in slowing or reversing these conditions, with the most available therapies focusing on management of the symptoms and providing treatment for only some of the root causes. In this landscape, cell therapies have emerged as a promising field with significant growth potential. Companies like Vertex, CSL Vifor, and AstraZeneca also show that there is an increasingly competitive dynamic, with many of them exploring the kidney disease market with innovative new approaches. As well, the rise in GLP-1 agonists will likely contribute to the progression of kidney disease, further pushing demand for effective therapies like those being developed by ProKidney.

Competitive Landscape: The competitive landscape in the kidney disease therapy market is crowded. A few prominent players include:

  • Otsuka Pharmaceuticals: Focuses on products for the treatment of polycystic kidney disease
  • Travere Therapeutics: A biopharma company focused on rare kidney diseases.
  • Calliditas Therapeutics: develops therapies for autoimmune kidney diseases.
  • Vertex Pharmaceuticals: Provides cell and gene therapies focused on genetic kidney diseases, but doesn’t specifically treat the major causes of CKD
  • Novartis and Astrazeneca: Invest in pharmaceutical and biotechnology with a focus on clinical trials to find viable treatments for kidney conditions, and could become future competition.

What Makes ProKidney Different ProKidney aims to achieve therapeutic effects by using autologous cell therapies, meaning a patient’s own cells, that are intended to regenerate kidney function. This approach is different from pharmaceutical or biologics strategies. By utilizing a patient’s own cells, ProKidney seeks to minimize risks of adverse events and enhance the potential for long-term efficacy and to be a sustainable and personalized treatment strategy. The company is also addressing all causes of CKD, unlike others who are focusing on narrower target groups or particular conditions. This makes ProKidney unique in its value proposition, but also adds to the execution risk because the trials will not have been tested on all of those segments individually. It is a high risk / high reward plan.

Financials in Detail

  • Financial Summary: As a clinical-stage biotechnology company, ProKidney does not generate revenue from product sales; it only generates revenue through collaboration agreements. All revenue has been in the form of licensing revenues and is extremely sporadic. The company funds itself primarily with the sale of equity. The company’s financial position is thus heavily reliant on its ability to continue funding research and development from equity sales or to establish new partnerships with other firms that can provide revenue and the company is consistently burning money. The cash runway is estimated to be approximately one year from now, and a new capital raise will likely be needed to keep operations afloat. Also, the company does not break down financial statements in a way that allows easy forecasting and to determine the source of its profitability. There are several complex accounting methods used and management has used the “kitchen-sink” method of pushing large charges into the past, making it exceedingly difficult to do an analysis of the company in a typical format. For any analysis to be done for the company, one would have to go deep into the notes and accounting filings, which makes analyzing this company very challenging.
  • Cash and Short-term Investments: As of September 30, 2023, ProKidney had $331 million in cash and cash equivalents. This is a substantial sum, but given the company’s burn rate and continued losses, will likely be short-lived as the company will need to obtain more funding.
  • Debt: ProKidney has minimal long-term debt. Its short-term debt consists largely of liabilities from operating leases and certain other financial obligations that are short-term in nature. While debt is low, it still represents a significant obligation that must be met from future profits.
  • Equity: Equity was reduced by $1.117 billion over the 9 months ended in September 2023, which highlights the considerable losses the company has accumulated. Since the business is still pre-revenue, management is struggling with finding ways to create a profit. They rely heavily on the sale of stock for continued funding.
  • Net Loss The net loss for the nine months ended in September 2023 is $389.8 million which is staggering for a company of this size. This shows that there is currently no path to profitability without some kind of miracle or significant change to the current operations. The losses are large, and will have to be curbed in order to sustain the operations for the long-term. Furthermore, the lack of revenue creates a significant burden as these heavy losses cannot be offset with sales or product revenues.
  • Cash Flow: The company reports negative cash flow from its operations, demonstrating that it is a pre-revenue company that is reliant on external financing for continued funding. The company has also shown a trend of increasing negative cash flow over the last 3 years.

Moat Rating: 1/5

  • Justification: ProKidney’s moat is extremely limited and its long-term profitability is not currently clearly defined. The company is operating in a very competitive space that has many potential disruptors and established companies with immense knowledge, resources and brand. The barriers to entry appear to be extremely low, as more biotech companies are appearing every day, and management’s financial planning is not robust. However, given the limited data available, I would be very tentative to assume that it will be a strong value creator. Although it is a well-funded company, there are significant challenges it has to overcome to achieve consistent profits.

Risks to the Moat and Business Resilience:

  • Clinical Trial Failures: ProKidney’s valuation hinges on the success of its cell therapies in clinical trials. Failures or disappointing results can lead to a significant drop in stock price. This is especially concerning considering there are many new drugs trying to target the same conditions.
  • Regulatory Hurdles: Drug approval processes are long, complex, and highly uncertain. Any delays or rejections can put the company’s pipeline and financial health at risk. Also, it’s possible that the regulations change in a way that is not favorable for the products that the company is developing.
  • Competitive Pressures: Several companies are developing innovative therapies for CKD. Any breakthrough by competitors could diminish ProKidney’s potential. Also, since the business model is relatively simple (at its core, the company is selling its intellectual property), a superior product at lower cost may easily overtake the market.
  • High Burn Rate: ProKidney is consistently unprofitable, with high R&D expenditures and little to no revenue. The company will need more equity financing in the near-term, raising the risk of dilution. In addition, continued losses may lead to problems with sustaining business operations if the new investors do not materialize or are not satisfied with the future potential of the company.
  • Pricing Challenges: Even if a product is approved, competition, reimbursement policies, and pricing limitations could pressure margins.

Business Resilience: ProKidney’s reliance on its ability to maintain its operations and get its clinical trials approved and funded makes it a very high-risk, low-resilience business. Failure to any of the above will likely result in extreme financial hardships. Given the long time-horizon needed to take the products to market, investors would need to have a high level of patience and tolerance for risk to invest in the company.

Understandability Rating: 3/5

  • Justification: ProKidney operates in a complex therapeutic area and the technology underlying its products requires a fairly scientific understanding of cell therapies and their application in kidney disease. The financial statements also contain a number of complex adjustments. While the core concept of the business (cell-based regenerative therapy) is easy to describe, the intricacies of the regulatory landscape and clinical development processes can be hard to follow, making the firm difficult for an average investor to fully understand.

Balance Sheet Health Rating: 2/5

  • Justification: While the company has a substantial amount of cash, it has no earnings from sales and only generates sporadic income from grants and collaborations, which it then spends on R&D expenses. This has led to consistent yearly losses that require more funding to sustain. Given the lack of products currently on the market and continued reliance on debt and equity raises to fund the operation, I would not consider this a healthy balance sheet. While the balance sheet is relatively “clean”, the company’s income statement is not well-structured for traditional analysis. Also, given that the company is in a high-risk industry, and has no revenues to offset losses, their likelihood of needing to raise more capital is quite high, which may dilute current shareholder value. This reliance on equity raises for funding decreases the stability of the company and makes it a higher-risk balance sheet. The company also has a huge portion of its assets listed under intangible assets, further reducing its stability.