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Will the Avacta share price keep climbing?

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The Avacta (LSE: AVCT) share price has been one of the market’s best-performing investments over the past 12 months. The stock has risen a staggering 970% since the end of March last year.

While past performance should never be used as a guide to future potential, I’ve wondered if it’s too late to invest in the stock following this performance. It’s clear the company has potential, but I’m worried I might have missed the boat. 

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The Avacta share price outlook 

Last year, Avacta became one of the many small healthcare and diagnostic businesses that tried to use their knowledge to design a rapid Covid-19 test. 

The company partnered with Cytiva to develop the test and, by August, the business had a product ready for clinical trials. According to preliminary trial results released in January, the test had an accuracy rating of 96.7% in identifying Covid-19 infections.

Based on these results, the organisation is now pursuing full clinical approval to launch its test in Europe.

If the company receives approval, the opportunity could be tremendous. The UK alone is carrying out over one million coronavirus test every day. This suggests the demand for tests is running at around 365m a year, but that’s only the UK. Throw in Europe as well, and the number could be over a billion. 

This market potential seems to be behind the recent performance of the Avacta share price. If the group can grab just a sliver of this market, the rewards could be substantial.

Risks and challenges

Unfortunately, as the group’s test is yet to be approved, it’s almost impossible to tell what the future holds for the business. We don’t know how enormous the market potential could ultimately be, and there’s no guarantee the test will ever hit the market.

What’s more, Avacta is just one fish in a big pond. It will have to compete with the likes of Swiss pharmaceutical giant Roche for market share in the testing market. 

Considering these risks and challenges, I’m not in any rush to add the Avacta share price to my portfolio. I think the business could have potential. But, until we have more idea of how the company’s ambitions will translate into cold, hard cash, it’s difficult to argue that the stock is worth its current valuation.

Indeed, at the time of writing, the company has a market capitalisation of just over £600m. That’s a lot of money for a business with virtually no revenue and reported operating losses of £8.1m for 2020, up from £6.6m in 2019. 

That said, the business could prove me wrong. I think the Avacta share price is far too expensive at current levels, but all it could take is a significant contract award, or agreement with a country’s health service, and its outlook would change entirely. 

In this scenario, the Avacta share price could keep climbing. However, without further operational progress, it may struggle to move higher.

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Rupert Hargreaves 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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