Prospects for Omega Diagnostics were looking fragile last November, when Richard Sneller, former fund manager at Baillie Gifford and major investor in the company, decided to cash out.
Omega’s in-house broker finnCap had issued a note suggesting disappointing revenues from its role as the manufacturing partner in a government-sponsored consortium developing a rapid antibody testing kit, on which investors had pinned their hopes. The company’s financial outlook was not looking rosy.
Since then, Omega Diagnostics seems to have turned a corner. This month it was selected by the UK government as one of three UK companies to produce Covid-19 lateral flow antigen tests, as part of the UK government’s target of producing two million tests per day. The Omega test was shown to have a 97.3% accuracy, which compared well with other samples showing an accuracy of 92%. As part of the deal, and to ensure Omega Diagnostics can hit a target of two million tests per week by the end of April, the Department of Health and Social Care is loaning it specialist manufacturing equipment to ramp up production.
Department of Health deal is transformational
The DHSC deal is transformational and, as finnCap says, “a significant endorsement of Omega’s capabilities and competencies”. The deal means Omega Diagnostics becomes a key supplier to the government, which is as much as Omega’s patient investors could have hoped for. The UK Rapid Test Consortium work developing the AbC-19 Rapid Test, which uses only a drop of blood from a finger-prick and provides results within 20 minutes, was certainly good news for Omega Diagnostics but it meant revenues were shared.
Omega’s successes are reflected in its share price, which has jumped 36% this month alone, closing last week (19/2/21) on 89.00p. The past year has seen the share price surging 563%, despite poor revenues. Its unaudited interim results for the six months ended 30 September 2020 showed a fall in revenues of 29% to £3.16m (2019: £4.46m), margins narrowing to 42.9% (2019: 67.5%) and an Ebitda loss of £1.29m (2019: profit of £0.25m).
For this financial year to end of March 2021, which won’t reflect the antigen supply contract, Omega Diagnostics expects group revenues of about £9.3m, with an Ebitda loss of up to £2.3m. But the next financial year, to 31 March 2022, promises to deliver substantial revenue growth.
Government contracts look critical to Omega Diagnostics’ performance
Government contracts are crucial to the continued success of companies such as Omega Diagnostics. The question for the investor is whether Omega’s revenues – and the share price – will slump once the Covid emergency is over and the government contracts dry up.
We expect government contracts will sustain the Omega Diagnostics’ share price for at least a year or more, as the prospect of more Covid variants coming onto the scene cannot be discounted. Omega also has an open-ended prospect of continued revenues from the government’s plans for increased workplace testing when restrictions are eased, and has growth opportunities in its profitable food intolerance business, its Visitect testing product for people living with HIV and its in-vitro diagnostics products for hospitals and laboratories, which are being distributed to more than 75 countries.
The past year has been difficult but everything seems to be going right for Omega Diagnostics at the moment and, with the government contracts set to continue for next year or more, Sneller may be wishing he had stayed on.