What caused this explosive growth? And should I be adding the stock to my portfolio? Let’s take a look.

What does Omega Diagnostics do?

The company operates within the healthcare industry. It provides a wide range of in-vitro diagnostic products used throughout hospitals, clinics, and laboratories. These products are manufactured by the company’s three main divisions.

The first and largest is Food Intolerance. This segment generates around 93% of the firm’s total revenue. And as the name suggests, it focused on developing tests that identify individuals’ food intolerances as well as any health problems related to the gut.

The second division specialises in allergies. It only generates around 4% of revenue but offers an essential service used almost every day in hospitals. The company manufactures allergy assay reagents. Put simply, these reagents try to trigger a mild reaction from the body’s immune system to determine whether someone is allergic to something.

The final and smallest division is Omega’s infectious diseases department. It provides a range of CD4 tests that aid in managing patients with a pre-diagnosed HIV infection. However, recently, the firm has adapted its technology to produce antibody tests for Covid-19.

Why did the Omega Diagnostics share price explode?

From what I can tell, Omega’s initial surging share price stems from its promise of developing five different Covid-19 tests in the early days of the pandemic. This momentum has only continued since the company signed a new contract with the UK government.

Omega Diagnostics will provide approximately two million lateral flow devices per week for rapid Covid-19 testing under the agreement. Needless to say, this is a fantastic opportunity for the business, and its managers have said they expect the deal to make a significant contribution to overall performance in 2021.

Risks to consider

The company is a well-established global provider of diagnostics tests. Yet despite this, it’s still unable to make itself consistently profitable and has become somewhat dependent on external funding. Fortunately, the balance sheet is reasonably debt-free and so debt financing is an option for the future, although this could damage its financial health.

Something else to consider is the healthcare industry in general. Much like pharmaceuticals specifically, it’s one of the most heavily regulated sectors in the world. Therefore, there’s no guarantee that new products will receive regulatory approval or be economically viable even if they do.

Final thoughts on the Omega Diagnostics share price

Omega Diagnostics looks like a sound and healthy business in my eyes, but I think its share price is frankly insane. The firm only generated £9.8m of revenue in 2020. And given that it hasn’t stated the value of its new contract with the UK government, it’s tough to determine the business’s true underlying value this year.

I think the Omega Diagnostics share price is too high based on the currently available information. And so, I won’t be adding it to my portfolio today.

The post The Omega Diagnostics share price is up nearly 1,200% in a year! Should I buy now? appeared first on The Motley Fool UK.

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Zaven Boyrazian does not own shares in Omega Diagnostics. 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.

Omega Gets Hammered 

Omega stock took a dive in early trade today, and it is still down 18% around midday, for an implied market cap of £20m. 

That’s not something you are likely to experience with Shire, which is a much bigger and diversified pharmaceutical business, and whose shares aren’t particularly expensive right now. 

In short, Shire is an investment that deserves attention, while Omega is a speculative bet that I’d rather not consider until its development stage is completed. 

Omega’s Trading Update

The group reported today its financial results for the year ended 31 March, but something else caught investors by surprise. 

Omega said that following its last update on Visitect CD4 that confirmed “completion of the internal investigation phase” it had moved “into the process of verification and validation”.

The validation stage focused on “testing the longer-term stability of in-house manufactured finished devices“, which is a key step to production on a larger scale.

Visitect is a testing kit at a development stage that is expected to be a money-spinner.

Bad News, But Its Financials Are Ok

Unfortunately, Omega has determined that “there is a stability issue with finished product that manifests after a period of five weeks of storage at room temperature“, and this matter requires further investigation.

On 1 June, Omega’s share price rose significantly in the wake of an upbeat trading update for Visitect CD4 and other allergy developments. 

As I pointed out back then, when its shares traded at around 24p, the commercialisation of Visitect CD4 may or may not make it to the market, so Omega stock carries a huge amount of risk today, even at its current level of 18.7p a share. 

That said, it ended the year with cash reserves of £1.97m (2014: £3.12m), and a £1m undrawn credit line from its bank — enough to satisfy its funding needs for some time. 

Consider that, as it said today, it incurred in “£1.5m of capitalised development costs” during the year, “bringing the cumulative spend to date to £3.1m on the Allergy iSYS project and £1.1m on the Visitect CD4 project, neither of which has been amortised so far“.

Still, I’d look for value elsewhere. 

What Do I Like About Shire? 

Firstly, it has the backing of financial analysts, which is a good thing. The average price target from brokers stands at 5,800p, for an implied upside of 11.5% from its current level. Consensus estimates have risen 30% since July 2014. 

Secondly, its management team has delivered on its promises in recent quarters, and Shire’s projected growth rate for earnings and dividends — both at about 10% annually — are truly appealing based on forward multiples of 24x and 20x earnings in 2015 and 2016, respectively.

By comparison, Omega isn’t much cheaper. 

Finally, in the light of a market cap and an enterprise value of $48bn, Shire’s balance sheet could carry more leverage to support a more aggressive acquisition strategy or to undertake shareholder-friendly activity. 

The post Should I Sell Shire plc & Buy Omega Diagnostics Group plc Right Now? appeared first on The Motley Fool UK.

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• Might it make sense to ‘go away’ from the stock market in May?
• Up 1,000% in 5 years, but the UK government could send Rolls-Royce shares even higher

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Similarly, Roxi Petroleum (LSE: RXP) is roaring back in early trade, with its shares gaining almost 20% of value. Of the two, I’d probably choose the Kazakhstan-based oil and gas explorer if I were to add a high-risk, high-reward stock to my portfolio. Here’s why. 

Omega Diagnostics 

Omega announced today that it had tested its devices “on a large number of patient samples with the aim of optimising performance and deciding on suitable in-house manufacturing processes,” adding that it has now made three pilot batches of devices, “all of which have yielded comparable results and which demonstrate that Visitect CD4 is capable of meeting the company’s performance design goals in comparison to flow cytometry when tested on HIV positive patients.”

Although Omega remains “very confident of the prospective commercial success of Visitect CD4,” what this means is that it remains unclear whether Visitect CD4 will ever generate any revenues.

In October last year, management warned that annual results would disappoint investors due to manufacturing problems with its benchmark HIV test kit, news of which pushed the stock down to 16p from about 19p in a single trading session. Now the shares trade at about 24p, but key to value creation is the commercialisation of Visitect CD4, which may or may not make it to the market this year or next. 

While Omega said that its “internal investigation phase is now complete as planned,” its stock remains highly illiquid, and value investors may need more concrete news to budge. Its market cap is only £24m, which implies net earnings multiples of 27x and 24x for 2015 and 2016, respectively. Also based on trading multiples for forward sales, the stock is not incredibly expensive, true — but a strong sterling could hurt profits over the next 24 months.

Roxi

Today’s operational update is important for two reasons. 

Firstly, it shows that Roxi has options, as it fetches more cash than it had hoped from the sale of the Galaz contract area in Kazakhstan. The acquirer is a consortium led by Xinjiang Zhundong Petroleum Technology, which will pay up following an increase in the price of brent crude — “the aggregate consideration will be $100m and Roxi’s effective consideration has increased to $23m,” from $20m, which is not small change for a company with negative operating cash flow and normalised capex above $10m annually. The funds from the Galaz disposal will be used to fund the development of its flagship BNG assets. 

Secondly, “in April 2015, Roxi announced the agreement to issue new shares at an effective price of 18p per shares to BOCO (…) to raise $20m,” but in light of “the imminent completion of the sale of Galaz and difficulties in receiving timely payment, Roxi has informed BOCO it is not continuing  with this subscription and has terminated discussions with them.”

Good news on this front, too. With a market cap of £122m, Roxi trades around 16.3p a share, some 36 % below its 52-week high of 25.5p as of 1 September 2014. It’s a bet worth taking, I’d argue. 

The post As Omega Diagnostics Group plc & Roxi Petroleum plc Rally, Should You Sell Or Buy? appeared first on The Motley Fool UK.

More reading

• A £20,000 ISA invested in red-hot BP and Shell shares 1 year ago is now worth…
• 3 FTSE 100 shares I think look undervalued heading into May
• As the Lloyds share price falls while profits rise, is it time to dump?
• Might it make sense to ‘go away’ from the stock market in May?
• Up 1,000% in 5 years, but the UK government could send Rolls-Royce shares even higher

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.