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The Novacyt share price is up over 10,000% but I still think it’s a buy

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The Novacyt (LSE:NCYT) share price has risen from under 7p a year ago to 780p at yesterday’s close. That is an extraordinary 11,043% rise. Some equally impressive financial results underlie Novacyt’s stock price surge. In the first half of 2019, Novacyt made €5.86m in revenue. Half-year revenue for 2020 was up 1,129% year-on-year to €72m. Novacyt made an operating loss of €0.89m for the first six months of 2019 but turned an operating profit of €48.65m for the same period in 2020.

Novacyt’s trailing 12-month net income up to 30 June 2020, was €35.44. That is a stellar improvement in the bottom line of a company that traditionally reported full-year losses. Clearly, something significant has happened at this maker of diagnostic tests for cancer and infectious diseases, and that something is the coronavirus crisis.

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Novacyt share price rise

In early January, Novacyt started work on a coronavirus test. Later that month its global regulators made it the first test approved for use. At the same time, Novacyt scaled up its manufacturing capacity to deal with the anticipated surge in demand. Novacyt’s share price started to climb in January as the markets took note of its efforts.

In April, Novacyt won a contract from the UK Department of Health and Social Care (DHSC) to supply coronavirus testing kits. This drove its share price higher. After a bit of a slump, September brought a stunning half-year report, a new contract from the DHSC, and a new type of test. Novacyt’s share price rallied again, hitting a high of 880p in October.

The September DHSC contract is worth at least €160m. This will rise to around €260 if, as expected, the DHSC takes the option to extend the supply period from 14 to 24 weeks. Novacyt has become a trusted partner of the DHSC because it offers tests for active and past coronavirus infections. Also, it has near-patient testing kits on offer, alongside equipment for use in dedicated larger-scale testing units. This range of options is just what governments require to carry out mass testing.

Testing times

Novacyt’s full-year 2020 revenues could be north of €332m – that is year-on-year revenue growth of an astonishing 5,566%. Revenues from coronavirus testing are expected to continue to be high well into 2021. But, what of the years beyond the coronavirus crisis? How will Novacyt and its share price do then?

Novacyt plans to leverage the reputation, market intelligence, and relationships developed during the Covid-19 response to commercialise new products and expand its presence in respiratory and transplant clinical diagnostics. Novacyt now has plenty of cash (and no debt) to make acquisitions and invest in R&D to achieve these goals.

Novacyt’s management looks more than competent. They acted quickly and decisively when alerted to the coronavirus, beating many to the punch. Then they continued to innovate as the crisis developed. I have confidence they will achieve their goals. The trend to diversify supply chains in the wake of the coronavirus also works in Novacyt’s favour as it will allow market share to be gained with increased ease. Also, decentralised testing is a new theme and requires outfitting more locations with testing capabilities, which is to Novacyt’s benefit.

Novacyt is still a small company, and its plans carry significant execution risk. But I think the Novacyt share price has room to run for an investor willing to accept the risks.

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James J. 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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