Is the Avacta share price dip a buying opportunity?

I would buy Avacta at its current share price if I was comfortable with the risk inherent in its developmental drug pipeline. So, am I?

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At 130p, the Avacta (LSE: AVCT) share price is well below its May 2021 price of 269p. Avacta had rallied strongly from a low of 16p, reached during the March 2020 coronavirus market crash. Looking further back and the Avacta share price history looks exactly as I would expect from a chronically early-stage biotechnology company: some ups but mainly downs.

Ultimately, the success or failure of Avacta’s developmental pipeline will determine where its share price goes in the future. And it is that pipeline that will determine whether or not I should buy Avacta at its current share price.

No news is good news

There has not been any recent news about the pipeline. But the company did reveal that it had no banking relationship with either Silicon Valley Bank (SVB) or its UK subsidiary on Monday. It had no cash on deposit, nor was it reliant on SVB for funding. That is good news. Looking further back and Avacta raised some equity in February and January. It also released some positive news from the phase one clinical trial of one of its drugs.

Getting a drug from the lab bench to market is usually transformational for a pharmaceutical and biotechnology company like Avacta. Right now the company has one therapy, AVA6000, in phase one clinical trials. It is AVA6000 that investors will be looking at closely.

Moving from phases one to two, and two to three, will gain their interest. Completing phase three will get their attention. So how likely is it that AVA6000 — a modified form of the generic chemotherapy doxorubicin — moves through the phases?

I like to start with a base rate for success. According to one report, only 5.4% of developmental oncology drugs made the jump from phase one all the way to approval. Now, AVA6000 was granted Orphan Drug Designation from the US FDA in September 2022. That means it has been identified as a potential treatment for rare diseases. The success rate for drugs for rare diseases is higher at 17%.

Avacta share price

Until it can command meaningful revenue, Avacta will continue to turn to investors and creditors for cash. Even if AVA6000 makes it through to approval, that takes 10.5 years on average. If the drug ends up licenced for the treatment of a rare disease, then revenues might be disappointing. Of course, Avacta has other drugs in its pipeline, but the same calculus has to be applied if they move to phase one trials.

Drug development companies are risky. More often than not the development fails. Successes take time and a lot of funding, and sometimes do not make attractive returns. I don’t think Avacta, at its current share price, is a buying opportunity for me. Here is why.

I would not invest in a single developmental pharmaceutical company. Because the chances of individual success are low, a basket of them makes more sense. Even then that would be as part of a larger diversified stock portfolio. The hope would be that at least one succeeds to make up for the failures of the others. But I have learnt through experience that I am not comfortable with the risk inherent in stocks like Avacta. That’s true even if I held a bunch of them.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James McCombie 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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