If I had bought into Avacta (LSE: AVCT) five years ago, the value of my investment would have quadrupled. That is the sort of return many investors dream of. Have I missed the boat, or should I add some Avacta shares to my portfolio now?
Improving outlook
This week the company published its prelim results, and there were definitely some positive elements.
Revenue more than tripled. It is still fairly low at £9.6m, given that Avacta has a market capitalisation north of £300m. But the big jump reflected Avacta reaching certain milestones in its collaborative work with a couple of partners, resulting in cash payments. That suggests that the business is moving forward. Some of the revenue increase also resulted from the acquisition of a diagnostics company.
I see such developments as part of the foundation for longer-term revenue growth.
The company also reduced its adjusted loss before interest, tax, depreciation and amortisation (before non-cash and non-recurring items) by 30%.
But it is still substantial, at £15.1m. I also think that metric is so loaded with exclusions that it is not a useful measurement tool for an investor like me. The statutory loss from continuing operations moved up sharply, to almost £40m.
The company thinks that a “significant near-term value driver” will be clinical trials on the efficacy of a programme to reduce the systemic toxicities of some chemotherapy treatments. It announced yesterday that the first patient has been dosed in a US Phase One clinical study for that treatment.
Lots to prove
However, a lot rides on the ultimate outcome of those clinical trials. If they provide positive results of the treatment’s efficacy, I think Avacta shares could soar even from where they are today.
The reverse is also true, though. Failure in the costly trials could see the shares crash down to earth after their strong performance in recent years.
Meanwhile, cash burn is a concern for me. It ended last year with cash and cash equivalents of £42m. But cash has been going out the door fast. Last year, the business had operating cash outflows of £16m. Acquisition costs pushed investing net cash outflows to £25m.
The company has been able to raise cash. Selling more shares and bonds last year raised £61m, for example. But there is a risk of further shareholder dilution in future due to the company’s ongoing cash burn.
Are Avacta shares for me?
Given all this, it does not take me long to consider my own position as a potential investor.
I like the company’s prospects and, if clinical trial results are positive, reckon Avacta shares could keep soaring in coming years.
But the risks are simply too high for my tolerance, even if they are common when investing in biotech shares.
The company is heavily lossmaking. For now, a lot rides on a single product, concentrating the risk. There is no proven profitable model here yet, so I would be investing based on my hopes for the company’s drug pipeline, not its current performance.
That seems too risky for me. I shall not be purchasing any Avacta shares.
