The Novacyt (LSE:NCYT) share price plummeted 12% in early trading on Tuesday. The fall followed an update from the company that noted the UK Department of Health and Social Care (DHSC) had issued a claim against it. Novacyt is an Anglo-French biotechnology group and an international specialist in clinical diagnostics.
What’s in Tuesday’s update?
Novacyt issued an update on its dispute with the DHSC regarding a supply contract. On April 9 2021, it announced it was in dispute with the DHSC over a contract for Covid-19 diagnostic kits and other products. The contract had been announced in September 2020.
The firm said that on April 25 2022, it was notified that the DHSC has now issued a claim against Primerdesign Ltd and Novacyt for £134.6m. Novacyt added the claim figure is broadly in line with the disputed Q4 2020 revenue.
It said it believes it has strong grounds to defend the claim and assert its contractual rights. The company also contends that it’s in a strong position to recover outstanding sums due from the DHSC.
The firm added that it’s unable to provide further comment at this time due to the ongoing nature of this claim. Further updates would be provided when appropriate.
Is Novacyt a good buy?
Full-year results are due on 28 April, but 2021 performance is expected to be some distance below 2020’s. In a full-year update, the company suggested 2021 underlying revenue would be £95.8m. This figure excludes £40.8m in revenue from a contract cancelled by the DHSC.
Novacyt’s growth has been almost exclusively a result of the pandemic. In 2019, the firm recorded only £11.5m in revenue. In 2020, that figure jumped to £277m. So on that front, 2021 data doesn’t look like it’s going to be particularly good news. EBITDA is expected to come in around £36m. That’s in line with expectations but way down on the £176m recorded in 2020.
A key concern for me is that Novacyt is hugely dependent on one product area, and that’s Covid-19 testing kits. Covid products accounted for 95% of revenue in 2020 and 86% of revenue in 2021. That’s particularly concerning especially when the future of the virus is less than predictable. It might be the case that Covid-19 is here for the long run and that testing will remain an integral part of our daily lives. Equally, it could be the very opposite. After all, we don’t have daily or home testing for other viruses — well most of us don’t.
For me, buying Novacyt is too risky. I’m just not sure about long-term demand for Covid-19 testing. And the DHSC claim doesn’t make the stock look more attractive. I’ll keep an eye on this one but I won’t be buying any time soon.
