Can the Novacyt share price quadruple once again?
“…Novacyt’s share price soared from just under 300p to a stratospheric 1,194p by the end of October. The company entered 2021 with broker Numis discussing a target price for the shares at £14, more than a hundred times higher than 12 months earlier…”
Novacyt (AIM:NCYT), the Anglo-French clinical diagnostics group, made headlines at the outset of the pandemic last year when it developed a PCR testing kit for Covid-19 just weeks after the virus was first identified.
The kit, which quickly secured regulatory approval in more than 50 countries, eligibility for World Health Organisation (WHO) procurement, and the award of a £150m contract with the UK government, sparked the company’s remarkable 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 increased its manufacturing capacity a hundredfold, took on more than 200 new staff, launched nearly 30 Covid-related products, filed more than 20 patents, and entered into collaborations with AstraZeneca, GSK, and University of Cambridge. Novacyt’s share price soared from just under 300p to a stratospheric 1,194p by the end of October. The company entered 2021 with broker Numis discussing a target price for the shares at £14, more than a hundred times higher than 12 months earlier.
Those expectations seemed somewhat inflated, and so it has proved, the company falling back down to earth in the face of fierce competition in an increasingly tough market, and embroilment in a costly dispute with the UK’s Department of Health and Social Care (DHSC) over its second supply contract. In September Novacyt said that although it ‘continues to work with its legal advisers to progress the dispute and believes it has strong grounds to assert its contractual rights’ it had prepared the ground for possibly writing off the contract. It will not recognise H1 2021 revenue of £40.8m from the DHSC, which accounted for more than half of sales in Q1, and will take the further hits of recognising manufacturing costs of £6.9m relating to the disputed sales, and an exceptional one-off cost of £28.9m to write down the inventory that the company had built in anticipation of further DHSC demand and to terminate supply commitments from third parties now possibly rendered redundant.
Another threat to the company’s UK revenue surfaced this autumn with the Government’s Coronavirus Test Device Approvals (CTDA) process, which requires suppliers of COVID-19 tests to submit data on their tests for validation if they wish to continue to sell them in the UK. Earlier this month the company confirmed that it had submitted 11 products for CDTA review and that to date only one product, the company’s PROmate Covid-19 test, has been named on a temporary protocol, allowing it to remain on the market while validation is being processed with an extended deadline of 28 February 2022. If no other products are added to the CTDA register Novacyt will lose £3m from full-year revenues for 2021.
Novacyt’s strategy
With the lucrative revenue channel it enjoyed through sales to the NHS no longer guaranteed the company has been placing greater emphasis on its aspirations to make inroads into private testing market. We don’t know how long the pandemic will linger, but it seems that the market for Covid testing is here to stay for the foreseeable future. One study by analysts BCC Research forecasts the market for Covid diagnostics will grow from $84.4bn this year to $195bn by 2027, a compound annual growth rate of 15pc. Antigen and antibody testing has grown exponentially in the UK, from a seven-day average of 27,744 tests in April last year to 933,234 a year later. That, perhaps, was the high watermark, but the process has become part of everyday life, and may well become as established as seasonal testing for influenza.
Novacyt set out its current strategy in its most recent interims. The company intends to continue to rapidly expand its diagnostics portfolio, drawing on an automated bioinformatics system that allows it to evaluate over 30,000 full genome sequences each day, and a vertically integrated PCR capability that enables it to design, develop and manufacture instruments and reagents in-house. The company also wants to commercialise elements of the testing systems it has developed, by offering workflow solutions to third parties. And it is aiming to expand its geographic footprint, leveraging the international relationships it has established over the past 18 months.
The company has launched 18 new products this year, tailored for private testing markets, primarily, for now, in the UK and Germany. And it is positioning itself to meet higher demand for testing generated by the onset of winter and the gradual opening up of international markets and travel. This autumn it launched a CE Mark Winterplex PCR test to diagnose Covid respiratory syncytial virus and types of influenza, and a CE Mark Escapeplex PCR test to diagnose four new Covid variants. It also announced CO-Prep, a workflow solution for clinicians and laboratories testing for the virus, which could be adapted for other diseases. In addition the company is expanding its lateral flow test (LFT) portfolio following the launch of its PathFLOW SARS-CoV-2 antigen and antibody LFTs for professional use earlier this year.
Novacyt continues to sell to NGOs and governments. It has secured new or extended supply contracts with organisations including the World Health Organisation (WHO) and UNICEF, with which its agreement has been extended by 12 months to July 2022. And, the ongoing dispute notwithstanding, it has also signed a new contract worth up to £4.7m with the DHSC for the supply of its PROmate Covid tests to the NHS until 31 March 2022. The company’s extensive personnel changes – it now employs more than 275 staff – included the appointment in July of a new CEO, David Allmond, previously Chief Business Officer at global rare and orphan disease drug company Amryt Pharma (AIM:AMYT).
Finances and outlook
The company’s half-year report highlighted the financial damage wrought by the DHSC fallout. Its group gross margin before exceptional items was 71pc, delivering a gross profit of £38m, but after the exceptional DHSC related cost of sales gross margin was down to 4pc, and gross profit to £2.3m. It recorded an operating loss of £13.6m compared to a profit of £42.2m in H1 2020, and a loss after tax of £12.7m compared to a profit of £35.1m in H1 2020. But the group’s consolidated unaudited revenue held up against last year’s figures, £54m as against £63.3m, even once the £40.8m DHSC revenues had been excluded. That represents a 20pc or £9.2m growth versus the equivalent sales in 2020 if the DHSC revenue is excluded for the comparator period.
Growth has been driven by sales to private laboratories, the company reporting strong growth from its international distribution business, Primerdesign, which focuses on providing diagnostic tests and reagents on a reseller basis. In Europe (excluding the UK), Primerdesign delivered year-on-year revenue growth of £3.8m or 23pc, in the America’s year-on-year revenue growth of £1.7m or 54pc, and in Asia Pacific year-on-year revenue growth £1.2m or 51pc. Cash at 30 June 2021 was £77.2m with no debt, compared to £91.8m at 31 December 2020. The group’s operating costs and increased in the first half of 2021 by £5.4m, to £14.9m compared with £9.5m in H1 2020, reflecting ‘the step-change in investment in R&D, Sales & Marketing and General Admin over the past 12 months as the Company continued its significant scale up of the business’ – its headcount was 110 going into 2020. Novacyt delivered an adjusted EBITDA of £23.2m or 43pc in line with guidance given, £20m lower than in H1 2020, driven by a lower gross profit contribution of £14.6m as a result of lower sales and a reduced gross margin percentage, with the remainder being due to an increase in operating expenditure. The company has offered revenue guidance of £100m for the full year, again excluding DHSC revenues.
After its astonishing transformation in 2020 Novacyt faces the hard reality of securing its newly elevated position in an ever more competitive diagnostics market which – as the company’s experience has taught it well – governments are still racing to regulate. A Financial Times analysis suggested that ‘the government has created a market in PCR provision with few safeguards for consumers, enabling a Wild West to flourish.’ Travellers to and from the UK, for example, are directed to a government website with a list of 400 private providers of PCR tests, of which just 25 are actually fully accredited by the official watchdog. A cursory check by the Department of Health found that 85 providers displayed misleading prices, which can range in cost from tens to hundreds of pounds. Last month Covid testing operations at a private laboratory in central England were suspended after an estimated 43,000 people were given potentially faulty negative PCR test results by a European provider that had been granted more than £180m in contracts by NHS Test and Trace over the course of the pandemic.
Battle-hardened by the DHSC dispute Novacyt has an opportunity to establish itself as a reliable provider acutely aware of the need to pay stringent attention to protocols. Last year’s revenue boost allowed it to beef up its research and vertical integration capabilities. And the company’s finances indicate it is making progress into the private market. Novacyt’s share price has fallen all the way back down to 220p at the time of writing. If the company can continue to make inroads into an expanding private testing sector, and pick up government contracts, that price may be set to rise again.
