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Can the Avacta share price keep climbing?

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2020 was a challenging year for many businesses. But for some, like Avacta Group (LSE:AVCT), the pandemic has been a breeding ground for growth opportunities. The Avacta share price since March last year is up by over 1,000%! And in 2021, it has continued its upward trajectory. What’s causing this enormous growth? And is it too late to add this business to my portfolio?

The surging Avacta share price

I’ve previously explored Avacta’s business. But as a quick reminder, it is a young biotech company. The firm focuses primarily on the development and production of diagnostics medicines for cancer immunotherapies. But in 2020, the management team began to leverage its expertise to develop a rapid Covid-19 testing kit. And with a high level of demand, as well as anticipation for such a test during the height of the pandemic, the Avacta share price took off.

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And it seems investor expectations continue to be met. After preliminary results in January last year showed a 96.7% accuracy level, the company just announced that it has received approval from the Medicines & Healthcare products Regulatory Agency (MHRA). Under this approval, the firm can now begin distributing and selling its antigen lateral flow tests within the UK for professional use. This actually makes it the first CE-marked product developed using the company’s Affimer platform that has been brought to market. What’s more, Avacta is also expecting approval from the European Medical Agency within the near future. Thus allowing for commercial distribution in Europe in addition to the UK.

It’s unclear as to how much revenue this newly approved test will generate throughout 2021. But given the continuing demand for rapid Covid-19 tests here in the UK and abroad, this is undoubtedly an encouraging milestone achieved by management. So, I’m not surprised to see the Avacta share price climbing. And if the business can continue to deliver these promising achievements, then I think it’s likely that the stock will continue its upward trajectory.

The risks that lie ahead

Despite the possibility for continued growth in the Avacta share price, there also exists the potential for a rapid decline. The overall valuation of the business is high. In 2020, the firm only generated total revenue of £3.64m. Meanwhile, losses increased to £18.89m. And yet, based on the stock price today, the company is trading at a market capitalisation of around £650m. Even using the most optimistic city analyst revenue forecast of £4.5m for this year, that places the price-to-sales ratio at over 140.

Given this valuation, I think it’s fair to say that the Avacta share price is almost entirely being inflated by shareholder expectations. So far, the management team has been able to deliver. But there is no guarantee that it will be able to continue to do so. Therefore, I wouldn’t be surprised to see some massive levels of price volatility if any problems begin to arise. And given that Avacta operates within the medical industry, the risk is relatively higher than in other sectors.

The Avacta share price has its risks

The bottom line

To me, the business continues to make excellent progress in developing new products and launching them on the market. But, while I do find the company to be an exciting growth opportunity, the Avacta share price is simply too high, in my opinion. Personally, I think there are plenty of other growth opportunities available today at much better prices. Therefore this business is staying on my watch list for now.

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Zaven Boyrazian does not own shares in Avacta Group. 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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