The Avacta Group (LSE:AVCT) share price has exploded over the past 12 months, increasing from 14p in March last year to over 260p today. That’s a surge of over 1,750%!
What caused this immense growth? And Should I be adding the stock to my portfolio? Let’s take a look.
Why did the Avacta share price explode last year?
Avacta is a small biotech company that focuses on the development and production of drugs and diagnostic medicines. While its expertise lies within cancer immunotherapeutics, in 2020, the firm began leveraging its knowledge to start designing a rapid Covid-19 test.
The company partnered with Cytiva to develop it back in April last year. And this project appears to be the primary catalyst behind Avacta’s surging share price. The upward momentum only continued as the company released a continuous stream of positive results and new partnerships to accelerate its test development.
In August, it was ready for clinical trials. In September, the manufacturing capacity was expanded. Later that month, a research kit became available for other pharmaceutical companies. More recently, in January this year, the preliminary results from early-stage trials showed a 96.7% accuracy in identifying Covid-19 infections within patients.
The company is now pursuing full clinical approval to launch its test within Europe before the end of Q1 2021. 100’s of millions of rapid Covid-19 tests will likely be needed throughout this year and beyond. Combining that with the additional royalties from treatments developed with its research kit, there is an enormous growth opportunity for Avacta and its share price.
Let’s take a step back
As promising as this company seems, the valuation is borderline insane. At least, I think so. Even if Avacta’s rapid Covid-19 test is approved and distributed throughout Europe, current forecasts indicate total revenue for 2021 of around £8m. And that’s including the income from its other product developments and collaborations unrelated to the pandemic.
Comparing that to the current market capitalisation of £689m places the price-to-sales ratio at 86. Needless to say, investor expectations may be a bit too high. And Avacta’s share price could come crashing right back down should its Covid-19 test fail to receive regulatory approval for use.
It’s true the preliminary results showed a 96.7% accuracy. But this was on a sample size of 30. A much larger number of patients needs to be tested before any approval can occur. And these new results could be vastly different.
The bottom line
There is no denying that Avacta’s rapid Covid-19 test is an incredible opportunity for the business. If successful, the increased cash flow could lead to further development of its other offerings, generating even more growth over the long term.
However, business valuation matters. And personally, even if the most optimistic outcome were to occur, I believe Avacta’s share price is far too high. Therefore, I’m not adding the stock to my portfolio today.
Zaven Boyrazian does not own shares in Avacta Group. 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.