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The Avacta share price is soaring. Should I buy?

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The Avacta (LSE: AVCT) share price soared yesterday by almost 5%. Since the beginning of the year, the shares have rallied by nearly 50% and by over 65% in the past 12 months. Most of the gain has come this year, but during the last month, the Avacta share price tumbled by over 20%. For now, I’ve placed the stock on my watch list, but I think the biotech firm has lots of potential.

The test

The AIM-listed firm develops diagnostics and cancer therapies. The current CEO, Alastair Smith is the founder of the company. He has been responsible for the the management, strategic development and fundraising since Avacta listed on the junior market in 2006.

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But what has caught the attention of most investors is its rapid coronavirus test. These type of tests are intended to provide a cost effective and fast way of detecting individuals who have Covid-19. And Avacta has developed one that has so far yielded good results.

Recent news

Just yesterday, the firm announced that its test can detect the Delta variant, the strain which was first identified in India. Of course, the market reacted positively to this news and the shares jumped by almost 5%.

The Delta variant is spreading very quickly across the globe. And it may rapidly become the dominant strain worldwide. But there have been some concerns that Avacta may be late to the market with its Covid-19 test.

I personally think the rapid test remains important, especially now that it can detect this variant. It should also help the world get back to some kind of normality. It could mean that workers can go back to offices and large events can take place.

Bright side

As I mentioned, over the past month, the Avacta share price has fallen. But I think the sell-off is an overreaction. After all, this month the company has made a series of positive announcements.

On 7 June, Avacta confirmed that it had received UK approval for its rapid test. This was followed by the sign-off from the European regulator allowing the company to place its product on the market in 27 countries of the European Union.

Avacta also struck a deal with Calibre Scientific to distribute its tests in the UK and Europe. While Calibre’s headquarters is in Los Angeles, California, it has a global reach extending to over 100 countries. To me, this means that Avacta has the potential to distribute its rapid coronavirus test outside the UK and Europe.

But despite this good news, I think investors are disappointed that this hasn’t resulted in any sales yet. While Avacta is generating some revenue, it’s loss-making. It’s also worth noting here that the biotech firm now has the distribution infrastructure in place. But it has yet to sell its tests. And there’s no guarantee that major companies and other large-scale end users will buy the product.

My view

I reckon there could be a lot of upside with the Avacta share price. But I’d like to see some evidence that it’s selling its rapid coronavirus tests before I dip my toe in. Hence I’ll only be monitoring the stock for now.

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Nadia Yaqub 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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