Avacta share price slips – is this Covid-19 stock a good long-term investment?

The FTSE AIM All Share (INDEXFTSE: AXX) stock Avacta Group’s share price is dropping after a sensational run. Is this a good time to buy the dip?

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Covid-19-testing stock Avacta Group (LSE: AVCT) is seeing its share price pull back after an exciting year of gains. Is this biotech stock a viable long-term investment or a FTSE AIM share to avoid?

Avacta’s good news boosts its share price

Until mid-March, Avacta had been enjoying another share price spike as it rolled out a stream of good news. Earlier this month Avacta confirmed its rapid antigen lateral flow test showed promising results. The cancer therapy and diagnostics developer said the test can detect dominant new Covid-19 variants including the B117 (Kent) and D614G, as well as the original coronavirus strain.

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In addition to this exciting news, Avacta signed a royalty-bearing agreement with Werfen subsidiary Biokit. No financial details were disclosed, but the licence agreement has the potential to bring in recurring revenue. Essentially, Biokit wants to incorporate Avacta’s Affimer reagents, which are a class of non-antibody binding proteins, into its in-vitro diagnostic products.

Being a cancer fighting company with chemotherapy drugs in its pipeline, this gives the company considerable scope for future growth and clinical breakthroughs.

Avacta financials

Avacta has a £666m market cap. Investors have seen a whopping 1,200% one-year return and 116% year-to-date. The company achieved £3.9m in sales in FY20 and sales for FY21 are projected to reach £6.25m. The Avacta share price is currently down 17% from its high of £2.85 earlier this month.

Risks to investing in Avacta shares

The risks to any biotech, and particularly an AIM-listed share, are numerous. Avacta runs clinical trials, and if these fail, then its share price is likely to take a considerable hit. The preliminary results of its rapid antigen lateral flow test clinical trial were exciting, but the sample size was tiny. It showed a clinical sensitivity of 96.7% but only 30 participants took part. Therefore, a much higher number of participants may not show comparable results.

In addition, R&D costs are endless, so the company churns through a lot of cash and is no stranger to share dilution.

On 15 March, one employee exercised their right to cash in 10,000 share options for 10p a share. A further 128,400 shares were issued at 10p each the next day. This led to further diluting the Avacta share price this week.

AIM shares tend to suffer from lack of liquidity and extreme volatility. So if you need to get your cash out in a hurry, it can mean taking a lower share price than you’d like.

Even if the company achieves all it hopes, I’m not convinced the current valuation is reasonable. I think it’s an expensive stock and the Avacta share price is experiencing extreme volatility. Unfortunately, the risks outweight the rewards for me and I’m not sure that it’s a good long-term investment. Therefore, I won’t be adding Avacta shares to my Stocks and Shares ISA. As far as healthcare stocks go, I prefer AstraZeneca as a long-term addition to my portfolio.

Fortunately I'm aware of another growth stock that looks a better bargain and with further growth potential...

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Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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