Is it really game over for Omega Diagnostics ?
“…with manufacturing capacity on hand the company remains poised to pick up where it left off if the DHSC has a change of heart. In the fast changing environment triggered by Omicron that could happen. At such a low price, therefore, investors might want to keep a close eye on developments at Omega…”
Omega Diagnostics (AIM:ODX) is one of several small cap diagnostics companies seeking to find its bearings after being caught up in the unexpected turbulence of the pandemic.
After touching freakish heights around the turn of the year the company’s share price has plunged as it has become increasingly apparent that Covid may not prove as transformative for it as first seemed possible. But if investors can look at Omega through a different lens they might be able to discern a company with long term prospects that is more than a straightforward Covid play. And as the Omicron variant looms, there is a possibility that the it may yet have a significant role to play in the fight against the pandemic.
Led by CEO Colin King, who has worked in the medical diagnostics industry for 23 years, Omega develops diagnostics products for professional and personal use in more than 75 countries. The company is organised into two divisions. Its Health and Nutrition business produces a range of food intolerance tests designed to allow healthcare professionals and their patients to identify lifestyle and dietary changes. Prior to Covid Omega’s Global Health division was focused on its VISITECT CD4 Advanced Disease test, designed to give people living with HIV in low- and middle-income countries access to rapid, convenient and affordable tests for monitoring white ‘CD4’ blood cells that play an important role in the immune system.
A £374m contract?
Last year, however, the company was recruited to the campaign against Covid, joining the UK Rapid Test Consortium to jointly develop and manufacture an antibody test as part of the Government’s five pillar national testing strategy. Omega went on to develop the VISITECT COVID-19 Antigen test, which promised to prove transformative for the company when it led to an agreement this February with the Department of Health and Social Care (DHSC) to manufacture Covid lateral flow antigen tests to help meet the Department’s target of producing two million lateral flow tests per day. Under the agreement Omega would start manufacturing as soon as they were approved by the DHSC. The Government wasted no time in loaning the company the manufacturing equipment it would have needed to quickly ramp up production to approximately two million tests per week by the end of April. Anticipation grew the following month when a UK Public Sector contract disclosure indicated the contract was worth some £374m. Although Omega took the time to state that ‘this number necessarily represents a maximum of the potential value of the contract’ and that ‘care should be taken not to use this number as an estimate or forecast of the actual likely value of purchase orders to be received’ the figure inevitably became affixed in investors’ minds.
By early summer, however, it was clear all was not going plan, with Omega still waiting for confirmation on which test it would be required to manufacture, and conceding that it was ‘not in control’ of a process that was ‘taking longer than originally expected’. And by the publication of its half year results last month the company was acknowledging that the order may never be placed, stating that it was ‘very disappointed with the lack of progress and commitment’ from the DHSC. There had been no confirmation from the Department regarding the test they wanted the company to manufacture, and although ‘both parties remain in dialogue’ and Omega still has access to the manufacturing capacity supplied by the Government, the company is uncertain as to how it will be used.
Omega is attempting to move on, establishing a partnership with Lansdown Strategic Capital to sharpen its focus on commercial rather than public sector opportunities for Covid testing. The shift began to bear fruit last month when the company announced a partnership agreement with DAM Health Limited, an established UK Covid testing laboratory, for the exclusive use sale and promotion of Omega’s test through a network of some 100 clinics across the UK and Europe. DAM is currently using approximately 200,000 in-clinic COVID tests per month and has placed an initial purchase order worth £0.75m. Although – like other Covid diagnostics producers – Omega is waiting for the UK Health Security Agency to approve the test under the new Coronavirus Test Device Approvals Regulations Act, the company expects to get the green light soon and is ‘hopeful that the partnership can be broadened to cover Omega products beyond the Covid space’.
The company has also made progress towards gaining approval for the use of its Covid diagnostic for self testing as well as professional use. It has submitted the necessary documentation to regulators to secure approval for CE marking, allowing it to sell the test for home as well as professional use. Omega is also seeking approval from the US Food and Drug Administration (FDA) to sell the product for professional use in the United States. A feasibility study regarding the costs associated with the submission of self-test use for FDA approval is currently underway, although the company concedes the cost of gaining approval may be prohibitive.
The financial picture
Omega’s hopes for a financial windfall following the award of the DHSC contract have been rather blown off course. The company’s half year report to 30 September published last month noted the impact of costs incurred in anticipation of the contract. Recruitment and training costs contributed to a reduced gross margin, down from 42.9pc in H1 2020 to 34.4pc, and an increase in administrative overheads from £2.55m to £4.35m. Omega recorded a loss for the period of £2.75m (H1 2020: £0.28m) and an adjusted EBITDA loss of £2.45m against as a loss of £1.29m for H1 2020. The company’s cash balance was down from £7m to £4.7m.
There were however brighter spots. Revenue increased by 81pc to £5.73m (H1 2020: £3.16m), and gross profit from operations to £1.97m (H1 2020: £1.36m). Commercial contracts for antigen test kits helped the company’s Global Health division record increased revenue of £1.56m, up from £0.58m (Covid revenues were up 136pc to £1.29m). Sales of the company’s CD4 test increased by a modest £12,000 to £167,000, but Omega says it had a ‘firm order book’ of over £0.8m as at the end of October. The company expects CD4 sales to continue to rise through its relationship with the Clinton Health Access Initiative and Unitaid, which are implementing the WHO Advanced HIV Disease strategy in more than 20 low and middle-income countries. The US President’s Emergency Plan for AIDS Relief, the world’s largest funding contributor to the global HIV response, is generating further demand. Omega is confident that its test has the potential to reach ‘4m to 6m tests a year within the next three to five years’, with ‘an opportunity to generate between £12m and £18m sales annually.’
Sales by the company’s Health and Nutrition division have returned to pre-COVID levels, rising 62pc to £4.17m (H1 2020: £2.58m). Growth is being driven by sales in North America, Europe and the Middle East, but Omega is focused on ‘substantial growth opportunities in both China and the US’, working to drive awareness of nutritional therapy through webinars focusing on naturopathic therapies, functional medicine and sports nutrition.
Omega and Omicron
The company’s aspirations to become a significant Covid diagnostics supplier may yet be realised, the emergence of the Omicron variant highlighting the sad necessity for continued extensive Covid testing. The variant’s longer term significance is as yet unclear: existing vaccines may well be able to confer protection against Omicron, but initial evidence indicates the variant proliferates on Covid’s ‘spike protein’ used by the virus to infect human cells suggesting that the current crop of vaccines may need to be modified next year. Moderna CEO Stéphane Bancel sounded a downbeat note earlier this week, warning that if existing vaccines do prove less effective at tackling Omicron than earlier strains it may take pharmaceutical companies some months to manufacture new variant-specific jabs at scale.
At present, however, Omega’s capacity to participate in the huge Covid diagnostics market remains frustratingly limited. In its half year report the company said it was scaling down its ambitions, stating that given ‘the outlook on COVID manufacture for the UK Government is uncertain, it is prudent for us to re-size this aspect of our LFT manufacturing capacity to meet current and future demand.’ Omega expects ‘to be more reliant on commercial partnerships than UK Government supply opportunities’. The company continues to promote its AIDS diagnostic and extend the market reach of its food testing products. It also expects to widen its portfolio ‘with the introduction of new offerings in the area of microbiomes and nutrigenomics’.
Outlook
The path of Omega’s share price has followed its shifting fortunes, its value reaching highs of around 100p last autumn and earlier this year as the prospect of becoming a major government supplier suddenly opened, a dramatic surge from the stock’s former range of between 15p and 20p. The price has fallen all the way back to 22.75p at the time of writing.
For Omega it almost seems as if Covid never happened, the company refocusing on its food testing and AIDS diagnostics interests, and now looking to the private rather than public sector for incremental Covid diagnostic revenues. Potential investors might well be advised to view Omega as longer term investment rather than a shorter term Covid prospect. And yet, with manufacturing capacity on hand the company remains poised to pick up where it left off if the DHSC has a change of heart. In the fast changing environment triggered by Omicron that could happen. At such a low price, therefore, investors might want to keep a close eye on developments at Omega.
