Why Admedus Ltd shares are crashing today

Credit: eFile989

Shares in regenerative medicine and healthcare products retailer Admedus Ltd (ASX: AHZ) crashed around 12% to 69 cents today after the company issued US$5 million of shares to a US institutional investor at 66 cents per share.

Admedus was recently forced to exercise a 1 for 10 security consolidation after the amount of shares on issue got out of all proportion to the company’s market valuation at around $154 million.

Prior to the consolidation this small-cap healthcare business had a whopping 1,874,163,064 shares on issues, or approximately 1 billion and 874 million – which has now been reduced to a mere 184,716,306 or 184.7 million. The ballooning amount of shares on issue was partly a consequence of repeated capital raisings conducted by the company to fund its spending on research and marketing its CardioCel product.

Not only do you need to have a firm grasp on numbers to be an Admedus investor therefore, but you also require a relaxed approach to the effects of repeated capital raisings that have a dilutory impact on the value of current investors’ shareholdings.

The company has long had big ambitions for its regenerative heart patch named Cardiocel, while it is also now also investing heavily in researching several therapeutic vaccines with the support of Professor Ian Fraser.

However, the big problem has been the high cash burn relative to the revenues received as the investment in promoting its CardioCel product delivered sales for the quarter ending September 2015 of just $3.03 million, with a net cash decrease of $7.3 million and a cash balance of $16.7 million.

Indeed the security consolidation always looked likely to precede further capital raisings and notably the company now appears to be turning to the largesse of US investors as many Australian investors headed for the exits a long time ago.

In my opinion Admedus looks a business for investors to avoid as the cash burn is too high relative to revenues, with the business so far having been long on promise and short on delivery in growing sales revenues for CardioCel.

Another biotech business struggling in the wake of too many capital raisings is Mesoblast limited (ASX: MSB). It too also recently turned to US investors for capital as it burns through cash in an attempt to commercialise its products. Mesoblast shares are down 61% over the past year, although it looks a superior bet to Admedus in terms of the risk / reward profile in my opinion.

The Internet is About to Go "Six Feet Under"... And You CAN'T Afford to Miss What Comes Next

In-the-know investors are dancing on the Internet's grave--and gearing up to cash in on an even BIGGER tech industry. Australia--and the world--will NEVER be the same. Dollar for dollar, insiders are calling for one of the biggest new markets in the history of modern business... NOW is the time to get in on the hush-hush industry that could be poised for growth of over 4,463%+ by 2020... And the 1 ASX stock that stands to grow YOUR money right alongside it! Simply click here to learn its name.

Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find Tom on Twitter @tommyr345

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.