The Novacyt (LSE:NCYT) share price continues to have a rough year. Despite increasing by more than an extraordinary 52,000% in 2020, almost half of this gain has evaporated since the start of 2021. What’s going on? And is this a buying opportunity for my portfolio?
The crashing Novacyt (NCYT) share price
I’ve previously explored Novacyt. But as a quick reminder, it is a medical diagnostics company that develops pathogen testing kits. It was actually the first in creating and receiving approval for a Covid-19 rapid testing kit. Given the huge demand and lack of supply, this was indeed a “transformational” deal for the company, leading to revenues increasing by 900%. So why has the share price since crashed?
Around 50% of the surge in sales was driven entirely by a single contract between Novacyt and the NHS. The agreement was set to be extended earlier this month. But unfortunately, the NHS has decided not to continue its relationship with the firm.
It’s unclear why this decision was made. But if I were to speculate, I would assume it’s due to the vast number of alternative rapid tests now available from other companies at a potentially lower price.
Unfortunately, with this contract no longer in play, the firm’s explosive revenue growth is likely to reverse in 2021. The NCYT share price plummeted by around 40% on the announcement.
Reasons to be optimistic
The loss of the NHS contract is undoubtedly bad news. However, the company is far from doomed. The NCYT share price has seen a recent uptick following the announcement of several new rapid testing kits for Covid-19 variants set to launch later this year.
And while future revenue from the NHS contract is no longer on the table, the company still raised considerable capital for the period in which it was. As a result, the business now has around £91.8m of cash on its balance sheet to fund future development and potential acquisitions.
There haven’t been any further announcements of new contracts to replace the lost revenue. However, if the company can continue to expand its client base in the private sector, the NCYT could make a comeback.
The bottom line
The last time I looked at Novacyt, I concluded that there were simply too many unknowns about the future of its revenue stream. Looking back, that was a fairly prudent decision. But, even after this latest development, there are still a lot of unknowns. The demand for Covid-19 rapid testing kits is falling in correlation with the number of vaccinations. This is particularly troublesome for Novacyt’s revenue stream as it still primarily relies on the sale of its Covid-19 testing kits.
The management team has announced its intention to widen its portfolio of diagnostic products unrelated to the pandemic. However, there is limited information regarding the progress made. And the company has delayed the publication of its 2020 full-year results until June. That means it could be some time before I find out.
For now, I don’t know what the future holds for the NCYT share price. And so I still won’t be adding this business to my portfolio.
