Small Cap Covid Stocks : Stick, Twist or Fold?
“…And yet amidst all the uncertainty the market – as ever – presents good opportunities for investors prepared to look carefully at those companies promising to add long term value to the fight against Covid…”
We all want to simply wish it away. But the tenacity of the shapeshifting Covid-19 virus continues to test the world’s patience and resolve.
Global equities wobbled last week as investor unease over the relentless spread of the Delta variant came to the surface. Concern that the gathering economic recovery will overheat and spark a new era of inflation gave way to a sinking realisation that we are not actually out of the woods yet, as the Tokyo Olympics opened under a state of emergency, Australia reintroduced lockdowns, and much of Europe reimposed restrictions on cafés, bars and nightlife. Death rates have risen to their highest level since the start of the pandemic in parts of Asia and Africa, where access to vaccines remains limited and governments cannot afford to fund expensive lockdowns and economic support packages.
“…While the vaccines developed by big pharma have got most of the headlines, the pandemic has been transformative for those smaller biotech companies that have been able to adapt to its demands through the development of effective diagnostics and new treatments…”
Here in the UK the successful vaccination programme has been severely tested by surging infection rates, obliging the government to pull the brakes on elements of the much trumpeted reopening day earlier this month. Hundreds of thousands of workers have had to stay home to self-isolate after coming into contact with someone who tested positive, forcing authorities to scramble to avert public service shutdowns and empty supermarket shelves.
Although share prices soon bounced back US Treasury yields remained on the floor, an index of underlying fears about the prospects for a strong global recovery. Though vaccines are indeed reducing hospitalisations doctors are becoming increasingly concerned about the future health burden from ‘long Covid’, the symptoms of persistent breathlessness, joint pains, brain fog and fatigue that continue to baffle analysis. Up to 60pc of hospitalised Covid patients in India suffer ongoing conditions for up to 12 weeks, some 10pc to 15pc struggling with long-Covid afflictions after three months. In the UK nearly 40pc of people who contract Covid-19 are still dealing with one or more symptoms 12 weeks later. More worrying still, most of those treated were previously healthy individuals in their 30s, 40s or 50s. An international study of 3,700 sufferers from 56 countries highlighted the virus’s mysterious power, patients reporting more than 200 symptoms across 10 organ systems.
Though vaccines have so far resisted everything that Covid variants have thrown at them, we still don’t know for sure how long they will be effective, or whether they will protect against new strains. Leading vaccine makers BioNTech and Pfizer are planning a trial of a Delta variant vaccine in August, and have suggested that a third dose of the existing vaccine ‘may be beneficial’ to maintain the highest levels of protection.
Indeed many scientists doubt that societies will ever achieve herd immunity, even when there is an abundant supply of vaccines. When they were first introduced scientists hoped the threshold for immunity might be reached once 60pc of a population had been vaccinated. Now that proportion is creeping up, US health agencies estimating herd immunity will require a vaccination rate of 75pc to 80pc. If the vaccine-hesitant cannot be persuaded to change their minds and the virus continues to evolve Covid will linger for the foreseeable future. A YouGov survey earlier this year of 14 countries found that only about six in 10 people were willing to take a vaccine, after concerns about a rare side-effect from the AstraZeneca vaccine hit confidence. A powerful anti-vaccination movement has emerged, fuelled by the speculative science and conspiracy theories readily available online.
In a world in which it seems we will have to learn to live with Covid, testing and treatments for those suffering from ongoing effects are set to become as important as vaccines for managing the disease. The UK’s increased focus on testing to break transmission chains is indicative of the future. Everyone in England, including those without symptoms, can now take a free rapid coronavirus test twice a week: 1.2 million Covid tests are now taken every day. Workplaces and schools require regular testing, and if infection rates remain high, entrance to some venues and sporting events may become conditional on testing.
While the vaccines developed by big pharma have got most of the headlines, the pandemic has been transformative for those smaller biotech companies that have been able to adapt to its demands through the development of effective diagnostics and new treatments. Last year the biotech sector posted a 29pc rise, compared with a 12pc fall in the FTSE All-Share index. Small biotech companies raised over £1.1bn, three times more than the previous year. But their share prices have oscillated wildly as the unpredictable course of the pandemic makes continually new demands, thrusting a changing cast of companies in and out of the spotlight.
The big vaccine pioneers have not been spared. AstraZeneca is up just 3pc over the past year, and Pfizer up 22.5pc, compared with almost 38pc for the S&P 500. In the year to the end of May the MSCI World Healthcare Index rose 18pc compared to 41pc for the MSCI World Index. As governments respond to the moral and political imperative to inoculate the world normal commercial rules may not always not apply, as illustrated earlier this summer when the Biden administration supported a waiver on IP rights for Covid jabs. Although the move had more immediate consequences for Pfizer, BioNTech and Moderna, pioneers of the groundbreaking mRNA vaccines, any change in the wider IP environment has significant implications for smaller biotech innovators that are totally dependent on accessing capital from investors who invest only on the premise that their IP will be protected.
And yet amidst all the uncertainty the market – as ever – presents good opportunities for investors prepared to look carefully at those companies promising to add long term value to the fight against Covid. In this article we look at five small caps that seem well placed to benefit from the next phase of the battle, the focus on diagnostics and anti-virus treatments.
Avacta Life Sciences
Avacta Life Sciences (AIM:AVCT), a cancer immunotherapy researcher, adapted itself quickly after the onset of the pandemic to develop a lateral flow test for Covid suitable for administration by health professionals.
The company has made robust progress this year towards bringing the test to market. A distribution agreement has been reached with Calibre Scientific Inc, a global provider of life science products, encompassing the UK and the European Economic Area, and Abingdon Health has been appointed as manufacturer. Last month a peer-reviewed study showed the test detects the Delta variant, and earlier this month Avacta secured the go-ahead for its manufacture and distribution by achieving ISO 13485 certification, the medical device industry benchmark for quality.
The company’s share price rose from 150p at the outset of the pandemic to peak at 274p after the test was announced. As with all of the biotech stocks that secured a Covid bounce, it fell back, in Avacta’s case to around 130p. But after heavy investment in its R&D capacity last year, which contributed to a reported loss of £18.9m (2019: £15.6m), the company seems well positioned to benefit from the roll-out of the test. Fundraisings last year brought in £53.8m, and the company ended 2020 with a cash balance of £47.9m (2019: £8.8m).
Novacyt
Diagnostics company Novacyt (AIM:NCYT) hit the headlines last year when it produced one of the first Covid PCR tests, the world’s most common testing system.
The Novacyt test has gone on to received regulatory approval from more than 50 countries, and has the green light from both the US Food and Drug Administration (FDA) and the World Health Organization (WHO). Last September the company won a £150m UK government contract to supply 300 PCR test machines, with the prospect of supplying a further £100m worth. Novacyt has launched nearly 30 Covid-related products and filed more than 20 patents. It has rapidly scaled its operations, increasing its manufacturing capacity a hundredfold, and taking on more than 200 new staff. And it has entered into strategic collaborations with AstraZeneca, GSK, and University of Cambridge to support the UK’s Covid testing programme.
The company’s transformation fuelled a stellar 2020 financial performance. Novacyt’s revenue increased more than 20 times to £277.2m, up from £11.5m for 2019, and its operating profit soared to £167.4m compared with a loss of £1.6m for the previous year. Cash at year end was £91.8m compared with £1.5m in 2019, the company ending 2020 debt free after paying back loans of £7.1m in H1 2020.
The picture was clouded somewhat in April when the company announced it was in dispute with the Department of Health and Social Care (DHSC) in relation to its second supply contract, the DHSC refusing to pay invoices worth £73m for the product supplied. Novacyt ‘believes that the contract should allow it to replace the product in dispute and a product warranty provision has been made accordingly’, and thereby keep any loss to £19.8m. The company says it had unaudited sales of £88.4m for the five months ended 31 May 2021 – but this does not reflect losses that might be incurred due to the dispute. It expects a profitable year regardless as demand for private testing increases (Novacyt’s lateral flow tests are also suitable for home use). If demand continues on its current trajectory sales of approximately £100m could be recorded.
The company’s share price has had a remarkable ride, rising from just under 300p last September to a stratospheric 1,194p by the end of October. The price has since bounced all the way down to 340p, not least due to uncertainty regarding the DHSC dispute. But the fundamental strength of Novacyt’s position to supply tests around the world would seem to augur well for the company’s longer term prospects.
Omega Diagnostics Group
Omega Diagnostics Group (AIM:ODX), a medical diagnostics company with a long term focus on CD4 T cells, infectious diseases and food intolerance, moved into a new orbit last year when it signed a contract with the DHSC to provide manufacturing capacity for Covid lateral flow antigen tests.
The company’s AbC-19 test, which tests for immunity rather than infection, has secured regulatory approval for professional use, with self-test approval anticipated this year. Approval for emergency use has been submitted to the US FDA. Two peer-reviewed studies conducted by Ulster University published earlier this year found the test had 99pc accuracy, and achieved a positive user experience score from 1,544 participants who used it for self-testing. Omega has not yet however received final approval from the DHSC for manufacture, commenting that it ‘is not in control of this process and this is taking longer than originally expected but the Company will provide a further update once a test is confirmed.’
Omega spent heavily last year to refurbish its facilities and buy new equipment to increase capacity, recording a loss for the year of £2.1m (down from £6.83m). Revenue fell by 11pc to £8.73m (down from £9.82m) reflecting the pandemic’s impact on the company’s non-Covid core businesses. A fundraise of £10.5m, however, helped it to a cash balance of £5.8m.
Omega’s share price rose from just over 60p to peak at 107p after the DHSC deal. It has since zig-zagged, falling back to less than 50p at the turn of the year, rising to touch 100p earlier this year, then falling back to 50p again. But the company appears to be well placed to benefit from increased demand for testing.
Open Orphan
Open Orphan (AIM:ORPH) was able to draw upon its experience in testing vaccines and antivirals using ‘human challenge’ clinical trials to organise the world’s first Covid test involving volunteers.
Last year the company’s hVIVO subsidiary entered into partnership with Imperial College London, the Royal Free Hospital and the government’s vaccines task force, to design a test to deliberately inoculate some 90 volunteers aged 18 to 30 with a version of the virus, and thereby test its impact on the immunity system. Similar controlled human challenge studies have already played an important role in developing treatments or vaccines for several other diseases, including malaria, typhoid, cholera and flu. The trial was extended earlier this month to inoculate up to 20 further volunteers. The results are currently being analysed.
Q4 2020 proved an inflection point for Open Orphan as it successfully generated both an operating profit and positive cashflow after many years of losses. The company reported revenues of £22m (2019: £3.5m) with a reported loss for the period of £10.8m (2019: £5.7m). It is well capitalised following two placings raising a combined total of £17.9m cash and cash equivalents of £15.1m as at 31 May 2021. The company is targeting an operational profit for H1 2021 on the back of the contracts secured since the pandemic. It now supports a portfolio of eight human challenge study models for conditions such as RSV, flu, asthma and COPD, and has expanded its capacity to allow the screening of more than 500 volunteers per week.
Open Orphan’s share price climbed from just over 10p last spring to peak at 40p. It has since fallen back to 25p but looks set to benefit from the turn towards mass Covid testing.
Synairgen
Synairgen (LON:SNG), a respiratory company developing treatments for severe viral lung infections, has developed SNG001, an antiviral treatment with potential to address ‘long Covid’.
The treatment boosts a naturally-occurring protein – used widely in the treatment of multiple sclerosis – that orchestrates the body’s antiviral responses. The company reported positive results from its Phase II trial of SNG001 in more than a hundred hospitalised Covid patients last summer, and further analyses, some of which have been published in The Lancet medical journal, showed that patients with significant breathlessness were three times more likely to recover when receiving SNG001. A Phase III trial began last December. Trials are underway in 12 countries, including the US where it has been granted fast track status. Initial trial results are expected in H2 this year. SNG001 can be self-administered at home, reducing strain on healthcare systems, and can be stored in concentrated form in freezers for over six years, and in ready to use format for three years.
Synairgen increased spending on research and development last year by £12m, and recorded a loss from operations of £17.7m (2019: £4.8 million). But following two fundraises that brought in some £100m the company had cash of £75m at 31 December 2020 (2019: £2.5m).
Synairgen’s share price began to move when the pandemic started to take hold rising from just over 6p early last year, to just under 60p by the beginning of May. When the Phase II positive results came in the price rocketed to 246p by mid-August. As with the other companies covered above it has since dropped to around 154p. But Synairgen’s promising progress towards a long Covid treatment bodes well for its long term prospects.
