Is the Avacta share price destined to explode?

Key Points

• The Avacta share price is down 51% in the past year.
• The company has two major proprietary technologies.
• Avacta received approval from both the UK and US for various medicines.

The Avacta (LSE:AVCT) share price is down 7.44% year to date, bringing its 12-month performance to a disappointing 51%. That’s quite a stark contrast from the stellar performance seen in 2020 and 2021.

Seeing such volatility from biotech stocks is not unusual. These are risky companies, after all. So, is this just a short-term tumble with renewed bull momentum on the horizon? Let’s take a closer look at what could be in store for the Avacta share price.

What does Avacta do?

As a quick reminder, Avacta is a clinical-stage oncology drug company that develops robust diagnostics solutions. Through its two divisions, the firm develops cancer immunotherapies and diagnostics based on its Affirmer and pre|CISION platforms.

Avacta’s therapeutic segment is working to generate more tolerable and durable treatment options for cancer patients who do not respond well to existing therapies. Meanwhile, the group’s diagnostic division develops Affirmer-based immunodiagnostics tests for professionals and consumers.

How has Avacta’s share price performed over the years?

The Avacta share price has experienced extreme volatility over the past 12 months. The stock has a pretty wide 52-week range of 38p and 262p. Needless to say, this level of volatility is pretty substantial.

In its most recent financial results, the business increased its revenue to £2.9m in 2021 as opposed to £2.1m in 2020. Despite this, there was a decline in the company’s cash and short-term deposit.

Pharmaceutical companies need to heavily invest in R&D to stay competitive. And the cash decline can be attributed to an increase in R&D manufacturing and investment in 2021. In the long run, if these investments pay off, it could send the Avacta share price to new heights. But there is obviously no guarantee.

Risks and challenges

A risk-free business does not exist. There are always threats to consider, and when it comes to biotech businesses like Avacta, the risks to its share price are plentiful.

Firstly, the sale of its Covid-19 rapid testing kit was paused in 2021 due to a lower detection of rate with the Omicron variant. Given the group’s revenue stream at the time was dependent on these sales, it’s not surprising to see Avacta’s share price plummet. The firm will always have to contend with obsolescence across its entire product portfolio.

Secondly, the company has therapeutic development programmes which are undergoing different clinical trials. If it fails to obtain final regulatory approval, funds spent would have been burned. Also, it has to protect the IP rights for its proprietary technology. Otherwise, Avacta’s ability to commercialise its technologies and treatments would likely be impacted.

Is Avacta’s share price destined to explode?

Amidst the visible challenges, could the Avacta share price still explode?

Warren Buffett said, “if a business does well, its share price will follow”. With that in mind, Avacta’s ability to utilise its platforms, and develop new marketable products, could further propel buying interest in the company’s stock.

Looking at the progress made over the years with its platforms, I think it’s fair to say the group is heading in the right direction. Personally, I remain cautiously optimistic about the firm’s future prospects. Providing its clinical trials continue to return encouraging results, I wouldn’t be surprised to see a larger player make an acquisition offer. After all, that’s quite common practice in this stock market sector.

Of course, the opposite is also true. And any unexpected failures will undoubtedly translate into further decline for the Avacta share price.

Final thoughts

Avacta’s product pipeline seems fascinating to me. With the perfect drive from charismatic management, the company’s growth could be exponential. However, a lot of challenges still lie ahead, and it remains early days for this business.

Therefore, while I’m impressed by Avacta’s growth potential, I’m keeping it on my watchlist for now.

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Prosper Ambaka does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.