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Why the Avacta share price is due another strong run in May

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The Avacta (LSE: AVCT) share price is currently a little off its year high, but is still well up on where it was 12 months ago. Back then, the shares were 100p. At the time of writing, it’s 256p. Despite this strong rise, could the shares be due another one?

What could boost the Avacta share price?

The biotech company has revealed data from its clinical validation that confirmed hopes for its AffiDX lateral flow test. Avacta has said that demand is strong from distributors, licensing partners and large-scale end users and it has “the potential to generate substantial revenues”.

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It adds to another successful smaller clinical trial of the company’s lateral flow test from February this year. The test is designed to provide a fast, low-cost means of identifying individuals with a high viral load and who are considered more likely to infect others with Covid-19. 

Avacta is also making progress in its therapeutics division. That part of the business is developing commercial opportunities for its Affimer technology. Affimers are alternatives to antibodies taken from a small human protein. They are helping to solve a critical gap in current cancer treatments, so this could be a big market.

In May, the Avacta share price could be boosted by the possibility that it will obtain a CE mark for professional use. This could really help drive sales higher, especially in Europe where it could begin to roll out and be sold in May.

The risks with this share

Of course, there’s always the possibility that Avacta’s trials in future have negative outcomes. In biotechnology this is always a risk, which can hit the share price.

Another pitfall of the industry is research and development (R&D) costs. This means Avacta has to invest heavily for future growth, which in turn can mean it needs to ask shareholders for more money, possibly diluting existing holdings. 

The ambitious biotech firm’s final results from just this month showed that Avacta had £47.9m available at the end of 2020. But it saw an operating loss of £21.3m, due in part to increased R&D spending and to the growth of the business that saw it needing to invest in staff and other areas. These numbers might not look good on the face of it. But, if the company can hit its milestones, by next year the financial picture could look much better.

I think on balance, the shares could be due another strong run in May on the back of news flow. Of course, if that news is bad, the opposite could be true. Yet there has been a lot of operational progress, which I think underpins its growth potential. And its therapeutics division means it’s not reliant only on Covid testing for future revenue and potential profit. It has more strings to its bow than that.

That said, while Avacta has made a lot of progress, I’ll do more research before deciding whether to add the shares to my own portfolio. After all, biotech can be a very hit or miss industry, with volatile share prices. The Avacta share price is no exception. 

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Andy Ross owns no share 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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