Trailing twelve-month data shows us that Achillion Pharmaceuticals, Inc.'s (NASDAQ:ACHN) earnings loss has accumulated to -US$70.9m. Although some investors expected this, their belief in the path to profitability for Achillion Pharmaceuticals may be wavering. The single most important question to ask when you’re investing in a loss-making company is – will it need to raise cash again, and if so, when? This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that Achillion Pharmaceuticals is spending more money than it earns, it will need to fund its expenses via external sources of capital. Looking at Achillion Pharmaceuticals’s latest financial data, I will estimate when the company may run out of cash and need to raise more money.
What is cash burn?
Achillion Pharmaceuticals currently has US$233m in the bank, with negative free cash flow of -US$56.8m. The biggest threat facing Achillion Pharmaceuticals investors is the company going out of business when it runs out of money and cannot raise any more capital. Unprofitable companies operating in the exciting, fast-growing biotech industry often face this problem, and Achillion Pharmaceuticals is no exception. The industry is highly competitive, with companies racing to innovate at the risk of burning through their cash too fast.
When will Achillion Pharmaceuticals need to raise more cash?
We can measure Achillion Pharmaceuticals's ongoing cash expenditure requirements by looking at free cash flow, which I define as cash flow from operations minus fixed capital investment, is a measure of how much cash a company generates/loses each year.
In Achillion Pharmaceuticals’s case, its cash outflows fell by 15% last year, which may signal the company moving towards a more sustainable level of expenses. If Achillion Pharmaceuticals kept its cash burn rate at -US$56.8m, it may not need to raise capital for another couple of years. Even though this is analysis is fairly basic, and Achillion Pharmaceuticals still can cut its overhead further, or borrow money instead of raising new equity capital, the outcome of this analysis still helps us understand how sustainable the Achillion Pharmaceuticals operation is, and when things may have to change.
The risks involved in investing in loss-making Achillion Pharmaceuticals means you should think twice before diving into the stock. However, this should not prevent you from further researching it as an investment potential. The outcome of my analysis suggests that even if the company maintains this rate of cash burn growth, it will run out of cash within the year. An opportunity may exist for you to enter into the stock at an attractive price, should Achillion Pharmaceuticals be required to raise new funds to continue operating. Keep in mind I haven't considered other factors such as how ACHN is expected to perform in the future. You should continue to research Achillion Pharmaceuticals to get a more holistic view of the company by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ACHN’s future growth? Take a look at our free research report of analyst consensus for ACHN’s outlook.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Achillion Pharmaceuticals’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 30 June 2019. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.
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