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Why the Oxford Nanopore share price is falling fast

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The Oxford Nanopore (LSE: ONT) share price is falling. At its IPO on 30 September, its shares were valued at 425p. They then rocketed 50% to 615p the next day. However, in the past two weeks, its share price has fallen to 548p. Yes, some early investors will be taking profits. But what else is going on?

The business model

The company has developed a new generation of sensing technology that uses nanopores embedded in high-tech electronics to perform precise molecular analyses”. In plain English, it’s a market leader in DNA and RNA sequencing technology. The company has developed products that analyse DNA by moving DNA samples through tiny holes (nanopores) and measuring how they react to electrical currents. 

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Its flagship product, the MinION, is the only portable real time DNA/RNA sequencer on the market. It has dozens of current applications, including identifying viruses, monitoring Ebola, environmental tracking, antibiotic resistance surveillance, food safety monitoring, cancer analysis, agricultural development, and foetal DNA analysis.

The technology can also be used to monitor air conditioning and check airports for pathogens. And its portable nature makes it valuable for doctors visiting patients at home, as well as for paramedics in ambulances. The future possibilities are endless, and the potential to generate significant revenue is very real. I can understand why the share price initially shot up so high.

Financials

Prior to the IPO, Oxford Nanopore’s revenue rose from £52m in 2019 to £113.9m in 2020. This was largely due to government contracts for coronavirus testing kits to help tackle the pandemic. However, even though the company nearly doubled its revenue, it still hasn’t posted a profit. But as a growth stock, investing income into research and development isn’t unusual. And with the prospect of elevated returns in the future, some investors seem prepared to wait for the company to become profitable. 

However, in this current inflationary environment, interest rate rises are just around the corner. So I think loss-making growth stocks are particularly vulnerable right now. Analysts don’t expect the company to hit profitability until 2026. And even then, there’s no guarantees. In its latest figures, Oxford Nanopore brought in revenue of £59m for the first six months of this year, making another loss of £44.4m.

On the plus side, CEO Gordon Sanghera has control over a special share to veto an unwanted takeover in the next three years. This means that the biotech firm won’t be subject to a hostile takeover during its expansion stage. This does appeal to me as a long-term investor.

My verdict for the Oxford Nanopore share price

The Oxford Nanopore share price is still 30% higher than its IPO two weeks ago. But I think some of this rise is because investors became overly excited about a rare UK biotech listing. And I believe its technology could soon be replicated elsewhere. As profits seem to be years away, I’ll be ignoring the Oxford Nanopore share price. It might be revolutionary, but I worry about the company’s financial prospects as monetary policy tightens.

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Charles Archer 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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