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Novacyt (LON:NCYT) shares tumbled in April on news that it had lost a major contract with the UK government, a useful reminder that much of the share growth of companies supplying diagnostic kits and other technology to fight the Covid pandemic has depended on securing and retaining government contracts.

Novacyt, a biotech group specialising in clinical diagnostics, had seen its shares surge from 14.00p on 4 January 2020 at the start of the Covid crisis to a high of 1,194p in October of that year, before falling back to 833.00p on 2 January 2021, giving a 12-month performance of 5,850%.


On 9 April this year, Novacyt issued a surprise statement that it had failed to secure an extension of its contract with the UK government to supply PROmate, an approved testing product, which sent its shares tumbling 42%, from 690.00p to 397.00p, with a possible ‘material’ impact on its Q420 revenues. About half of Q121 revenue was driven by sales to the government, the bulk of which came from the sales of PROmate, with the rest of Novacyt’s revenues coming from growth in international sales and expansion of the company’s private sector testing operations.

In its latest operational update chief executive Graham Mullis highlighted the continued development and expansion of their Covid-19 portfolios, with a number of launches due later this year, including: a PathFlow lateral flow test (LFT) to detect SARS-CoV-2 IgG antibodies; a genesig CE Mark three-gene target polymerase chain reaction (PCR) test; a two-gene target test and a test to identify E484K, a key mutation found in all current variants of concern, both from its PROmate PCR portfolio.

Already launched this year is the CE Mark VariPLEX assay panel to detect multiple variants from Novacyt’s SNPsig PCR genotyping portfolio, which with its eight other assays Novacyt believes to be “the most complete variant detection portfolio currently available to address the globally prevalent variants of SARS-CoV-2”.

Novacyt expects its PathFlow Sars-CoV-2 Antigen, a professional and home use LFT using nasal swab samples to provide a result in 15 minutes, to generate significant revenues. PROmate remains the only direct-to-PCR assay approved by the UK’s Technology Validation Group and enables near-to-patient testing with results in under 90 minutes.

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Novacyt building towards globally diversified revenue base

On the operational side, Novacyt is building on its commercial operations to ensure a globally diversified revenue base, while its subsidiaries Primerdesign and Microgen Bioproducts have been included in the Public Health England national framework, which means PHE and NHS hospitals can buy its products without the need for a direct contract.

Mullis described 2020 as a ‘transformational’ year for the company, as its full-year 2020 trading update shows. Novacyt reported a strong cash position at year end of £92m, compared with £1.6m for the previous year. Revenue for 2020 increased by over 20x to £277m, compared to £11.5m for 2019, while earnings for the year were £187m.

Last year, the group was able to pay down all outstanding debt, making the company debt free for the first time in its history. The strength of its balance sheet is also reflected in its acquisition of IT-IS International, a diagnostic instrument development and manufacturing company.

Novacyt’s success last year – and the growth of its share value – was mainly due to early mover advantage, but growing competition will make a repeat performance this year unlikely, while there is also a continued risk of contracts not being renewed. For now, the market for LFT tests remains strong, which competitor Abingdon Health estimates to be worth more than £10bn by 2025. Novacyt is a company with a strong balance sheet, a global revenues base, a busy product pipeline and the expertise required to respond to changes in market demand for medical products. Novacyt is currently trading at 457.4p.

Listen: Podcast with Ailsa Craig of the International Biotechnology Trust

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

James Norris

James Norris

James is a highly experienced writer and editor, gained from more than 20 years in the financial services industry, in particular wealth management and asset management.

He initially worked as a financial journalist for a number of leading media brands, including the FT Group, Financial News, Euromoney and Incisive Media, covering most aspects of the asset management industry. More recently, James switched to work as an in-house content specialist for fund management and wealth management groups, including JP Morgan Asset Management, Quilter Cheviot Investment Management, AXA Investment Managers and Invesco Perpetual.

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