2020 was a game-changing year for Novacyt (LSE:NCYT) that saw its share price explode from 14p to over 850p. That’s a return of nearly 6,000% in the space of a year! But since the start of 2021, more than half of this gain has been wiped out. And last week, this downward trajectory continued. What’s causing this extreme volatility?
The rise and fall of the Novacyt share price
Novacyt is a medical diagnostics business. And before Covid-19 came into the picture, it was a relatively small company that developed and sold pathogen testing kits for the medical, life science, and food industries. The pandemic has caused chaos for many sectors. But for Novacyt, it presented an incredible opportunity.
Using its knowledge, the company developed and launched the first Covid-19 rapid testing kits months ahead of its competitors. With demand surging and the supply practically non-existent, Novacyt found itself in a mini-monopoly that triggered a 900% rise in revenue. Needless to say, this level of growth is extraordinary. So seeing the Novacyt share price surge by millionaire-making percentages in the space of a year is not that surprising. Alas, this explosive growth would not last.
Some 50% of the newly-found revenue stream came from a single contract signed with the UK Department of Health and Social Care (DHSC). Despite Novacyt delivering on all promised supply milestones, the DHSC decided not to extend the contract in early April this year. In other words, 50% of Novacyts expected revenue for 2021 just disappeared.
The management team is pursuing legal action against the DHSC to enforce its contract. But there is no guarantee that this will yield a different result. And so, the Novacyt share price has plummeted.
Moving Forward
Seeing a massive portion of its income disappear is a painful sight, especially when there haven’t been any announcements regarding how this lost revenue will be replaced. However, it was undoubtedly going to happen eventually. After all, once the pandemic is over, the need for these rapid testing kits will likely decline.
Developing and launching new medical products is an expensive endeavour. But thanks to its stellar performance last year, the firm’s cash balance now sits at £91.8m. Beyond providing a high level of liquidity, it can fund this necessary research and fuel any potential acquisitions. Providing these ventures bear fruit, the Novacyt share price could begin climbing again over the long term.
Closing thoughts
In my experience, investing in a company embroiled in a lawsuit is not a particularly sound strategy. But should Novacyt emerge victorious, the return of its lost revenue will undoubtedly send its share price surging once more.
Personally, I’m not interested in taking this risk. Court battles can be long, expensive and distracting for the management team who should be focused on running the business. It could be many months or even years before this matter is resolved. And by then, the need for rapid Covid-19 testing kits may no longer exist. Therefore I won’t be adding the shares to my portfolio today.
