Pfizer’s news Monday that its Covid vaccine was 90% effective and is now awaiting regulatory green light not only pulled US stock futures and the FTSE higher but also shone a light on a myriad of Covid testing companies which saw spectacular gains this year. It provided a very useful insight into what might happen to these stocks going forward and how to play this market in respect of the news flow.
Take Anglo-French biotechnology firm Novacyt [LON:NCYT], a diagnostics firm which is also one of the main suppliers of Covid tests to the NHS. Novacyt’s stock plunged over 40% to 600 pence on Pfizer’s news before bouncing back above 712 pence. At the time of writing, it stood at 614.
Having rallied 21,000% in the space of 12 months Novacyt is one of those stocks that everybody wishes they had invested in while the company was still an unknown and traded at 6 pence (October 2019). What allowed it to make such a spectacular advance was first mover advantage; the diagnostics company started working on a Covid test when the infection first hit China and before it even spread to Europe or the US.
The firm became one of the first companies to gain regulatory approval and one of the first to start selling and exporting tests. Shortly after, it signed its first contract to supply the NHS and it is one of its top suppliers today. The first contract was to get tests to centralised labs, but Novacyt then signed a second contract worth £250 million running in parallel with the first one to deliver more localised tests, this time directly into hospitals.
Are Novacyt shares being oversold?
This leads us back to the share price. Many investors assume wrongly that a vaccine will mean a quick end to the pandemic and will eliminate further need for testing. However, this is probably a slightly too optimistic view of the future with Covid. There are numerous vaccines being developed and after Pfizer there will be other companies announcing vaccine solutions over the coming months. But given the intensity of the spread this autumn not only in Europe but also in the US, testing will not stop.
Only last week the government decided to make Liverpool a testing guinea pig, rolling out a pilot programme during which the city’s entire population of 500,000 will be tested over the next ten days and then once more over the next three weeks. After Liverpool there are plans to roll this out across the UK as an alternative to lockdowns and other restrictions.
Medical experts have already pointed out that once the vaccine is ready to be widely used it will likely be deployed in layers, according to priority, with NHS staff, teachers, elderly and the vulnerable in the front of the queue and the rest waiting behind. The process of widespread vaccination could take anything between six to 12 months to complete. The need for testing will still exist while this is going on, and even once Covid is put in a box there will be more sensitivity towards needing to test in future crises.
Choppy trading ahead for Novacyt stock
For the Novacyt share price this means a lot of choppiness, with further plunges likely every time there is a major breakthrough in vaccine development, and with renewed rallies in the periods in between.
In the process Novacyt will emerge as a much stronger company. Its full year revenue in 2019 was just over €13 million while in the first six months of this year it made €72 million, and that is before its latest €250 million contract. The tests themselves have a very high margin of over 80%.
In the meantime the company has also bought its long-term partner IT-IS International, the exclusive manufacturer of the group’s polymerase chain reaction (PCR) instruments, for £10.1 million in cash. The move will turn Novacyt into a diagnostic platform instrument and reagent manufacturer well positioned for future testing demand.
Although this year’s rally is unlikely to be repeated again, it might be too early to write Novacyt off just yet.
