It’s been a rough 12 months for the Avacta (LSE:AVCT) share price. Despite the diagnostics business making solid progress, the stock has dropped by almost 80%! Often these situations can present excellent buying opportunities for my portfolio. But is this a trap? Let’s explore what might happen next to Avacta and its share price
A future leader in the fight against cancer?
I’ve explored this business before. But as a quick reminder, Avacta is a medical diagnostics business primarily focused on developing cancer therapies.
In 2020, Avacta’s share price exploded as management leveraged its knowledge and expertise to develop rapid testing kits in the fight against Covid-19. This initial level of excitement from shareholders has since waned. And this is undoubtedly a contributing factor to the stock’s recent downward trajectory.
But in the meantime, some significant milestones have been hit. In mid-2021, Phase 1 clinical trials for its targeted chemotherapy treatment began. And last month, the company reported positive initial results with no safety concerns. As such, the drug dosage is being increased, moving Avacta closer to the next stage of clinical trials.
But what makes this drug so special? Without going too scientific, chemotherapy is effectively a poison that kills cancer cells. The problem is that it also has a habit of killing healthy cells. That’s why the treatment can have such unpleasant side effects.
Avacta’s drug has been designed to only attack cells that contain a specific concentration of a protein found only in solid tumours. In other words, if it works, the risk of collateral damage to healthy cells is almost entirely eliminated.
Given that the generic chemotherapy market is expected to reach $1.38bn by 2024, that presents an enormous opportunity for the Avacta share price.
The risks surrounding the Avacta share price
As exciting as a new and improved chemotherapy treatment is, there remains a long road ahead. On average, only 9% of Phase 1 drugs ever reach the market. Even if Avacta can beat the overwhelming odds, there still remains the issue of funding.
Running clinical trials is not cheap. And as it stands, the group only has around £37m of cash on its balance sheet. That may seem like a lot until considering the average cost of drug development is about £760m. In other words, the firm will have to raise capital to see this project to the end.
Typically, young biotechs get a sponsorship from a larger pharmaceutical giant after proving their drug has potential. Usually, this takes place around Phase 2 trials. And I wouldn’t be surprised if that’s what happens with this business.
But in the meantime, the company has to raise capital by itself. And with the Avacta share price dropping so rapidly, its equity-raising capabilities are pretty limited compared to a few months ago.
Time to buy?
Avacta is by no means a one-trick pony. But a lot of resources are being poured into its chemotherapy treatment, which could turn out to be a dud. Consequently, the future of the Avacta share price seems uncertain. Personally, I’m not interested in adding this level of risk to my portfolio. So I’ll be keeping this stock on my watchlist for now.
