What’s going on with the Avacta share price?

This Fool explains why he thinks the Avacta share price has been underperforming, and the catalyst that could cause a re-rating.

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The Avacta (LSE: AVCT) share price has been languishing for the past couple of months. Since the beginning of August, the stock has declined by around 13%. Over the past year, shares in the testing and diagnostics group have increased by just 1.6%. 

The stock has underperformed even though its published a robust set of results for the period ending 30 June at the end of September. The company reported an increase in revenues to £2.3m and a cash balance at the end of the period of £37m. 

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The firm has also announced that its antigen lateral flow test has performed strongly when testing to identify SARS-CoV-2. 

First sales 

The first sales of its flagship AffiDX SARS-CoV-2 antigen lateral flow test occurred after Avacta’s first-half results were published. As such, it looks as if investors will have to wait and see what sort of an impact these deals will have on the group’s top and bottom lines. It will also be interesting to see how much of an impact these sales will have on cash flow. 

Running out of cash is usually the main reason why small businesses fail. Even though Avacta is not a small business by conventional standards, with a market capitalisation of £283m, the group is still tiny compared to its international testing and diagnostic peers. Some of these companies have multi-billion-pound market capitalisations. 

Avacta has enough cash to sustain its losses for around a year, so there is no immediate pressure on the balance sheet. Still, I am sure the company’s shareholders would rather see profits than losses. 

I think this is one of the main reasons why the Avacta share price has struggled over the past couple of months. It seems to me as if the market is waiting for the company to report on the sales of its flagship testing product. This testing product could produce a significant revenue stream for the group, which has been losing money consistently for years. 

Without a turnaround, the corporation may continue to report losses and, sooner or later, it will have to raise new funds. Some investors may not be willing to back the company with additional fundraising. They may be staying away from the business until there is more clarity. 

Avacta share price catalyst 

However, Avacta is far more than just a testing business. It recently began the first stage of testing for its AVA6000 drug. This is part of the company’s preCISION chemotherapies and Affimer immunotherapies slate of treatments, which have the potential to transform cancer therapy. 

These treatments may have potential, but it could be years before they reach commercialisation. In the meantime, the company will have to find funding from somewhere. Its testing division could provide this capital. 

So overall, it looks to me as if the market is waiting for further news from the business before buying into the stock. I would use the same approach. I am not willing to buy the shares today but might reconsider my position if and when the company is starting to produce cash flow. 

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Rupert Hargreaves 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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