Fun fact: a £1,000 investment back in May is now worth £2,150 today. But is this just the beginning of another round of volatility? Or is it the start of another quadruple-digit explosion like the one we saw in 2020?

Encouraging clinical progress

As a quick crash course, Avacta’s focused on developing innovative cancer therapies using its proprietary pre|CISION platform. This novel approach allows drugs to be targeted directly at tumours, reducing overall toxicity and nasty side effects for patients.

Over the last six months, management’s been publishing and presenting some pretty encouraging results from its ongoing clinical trials, particularly when it comes to its flagship AVA6000 targeted cancer drug.

The early data from ongoing Phase 1 trials have started showing evidence that AVA6000 is successfully reducing tumour sizes while also causing far fewer side effects compared to existing cancer therapies. As such, the company successfully raised additional funding from investors, extending its financial runway beyond the first quarter of 2026.

Given the multi-billion-dollar size of the cancer therapy market, Avacta’s looking increasingly more like a biotech disruptor. And if the firm continues making promising progress, the long-term growth potential of this currently £320m market-cap company could be enormous.

So should investors start thinking about investing at this early stage to maximise their potential returns?

Risk versus reward

As exciting as Avacta’s progress has been, it’s important not to get carried away. Phase 1 clinical trials are still ongoing. And even once they’ve been completed, there’s Phase 2 and Phase 3 to follow.

Put simply, AVA6000 is still at the start of its journey. And it could be up to a decade before it enters commercial production, assuming it doesn’t fail somewhere along the journey. Don’t forget that around 70% of drug candidates fail in Phase 2 trials either due to safety concerns or a simple lack of effectiveness.

With no meaningful revenue stream, Avacta’s entirely dependent on financial support from investors. And if the slightest hiccup emerges during clinical trials, that essential pool of capital could dry up very quickly.

Even if it doesn’t, by continually raising money through equity, shareholders will continue getting diluted. And the number of shares outstanding has already increased by 55% since 2020.

Equity dilution may prove irrelevant if Avacta’s flagship drug candidate is successful. But that’s a very big ‘if’ at this stage. Put simply, this company is a classic case of high-risk, high-potential reward.

Personally, buying the shares today feels more like speculation than an investment. It’s definitely a story to watch carefully, especially if more clinical trial results point towards strong progress. But for now, I’m hunting other, more established opportunities in the biotech space.

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It’s an investment management company. And faced with high interest rates and shaky economies, investors have been favouring savings accounts, gold, and safer things rather than stocks and funds.

With just £10.4bn in assets under management, this is a sector tiddler. And that has to raise the risk.

But the stock was boosted by first-half results. Profit before tax reached £5.4m, and the company held £31.2m cash with no debt. Also by 22 May, 71% of funds were outperforming their sectors.

There’s a forecast 9% dividend yield, which could be at risk as economic pressures continue. This isn’t the safest penny stock out there. But I’d say the recovery potential makes it worth considering.

Biotech rebound?

Avacta Group‘s (LSE: AVCT) a biotech company specialising in diagnostics and therapeutics. The share price had a couple of good Covid years as the company developed test kits. But that’s long since faded and we’ve seen a five-year fall of more than 75%.

At around 34p, at the time of writing, it’s a penny share on that score. And I don’t think the market-cap’s too far out at £135m. The main problem’s a lack of profit.

With full-year results delivered on 6 June, CEO Christina Coughlin said the company’s oncology technology “has the potential to treat up to 90% of solid tumors by repurposing a range of effective oncology drugs to significantly reduce toxicity and side effects.” But it’s only just moving towards the Phase 1 trial stage.

Results showed a loss from continuing operations of £29m, with cash and equivalents of £12.9m on the books at 31 December 2024.

The likelihood of needing more cash seems high. So it’s a very risky one. But the rewards could be significant. Worth a closer look, I’d say.

Property future

I like housebuilders, but AIM-listed Springfield Properties (LSE: SPR) had escaped my eye. We’re looking at a market-cap of £112m, with the share price a few pennies below the magic pound threshold. It was up over 170p in mid-2021. The forecast price-to-earnings (P/E) ratio’s only 7.5.

Revenue fell 13% in the first half, though some blame was directed at Scottish government delays in affordable housing contracts. Scotland? Oh yes, that’s were this builder lays its bricks.

The report showed higher profits, with a gross margin rising to 17.7% from 14.7%. The company said it has a “large, high quality land bank“. And it added that the “long-term fundamentals of the Scottish housing market remain strong“. Net bank debt fell 33%.

I’d say the smaller focus means more risk than nationwide builders. But if we’re seeing the signs of a new bull run, as I suspect, it could be another cheap stock to consider now.

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Back then in the pandemic, the business developed products used for Covid-19 testing. It even managed to sell some of them. That created speculative buying for the stock.

However, even the firm’s Covid test kits weren’t enough to create overall profits for the enterprise.

Getting out of diagnostics

In September, the firm said it’s looking for a buyer for its diagnostics division. If successful, it could gain some much-needed capital. But at the same time it will kill off the revenue stream from that division.

Meanwhile, the share price chart mirrors the changing fortunes of the company. With the stock in the ballpark of 45p, it’s down around 65% this year.

The main ongoing focus of Avacta’s efforts is the development of cancer therapies. The company describes its pre|CISION technology as a “proprietary warhead delivery system”.

Operational progress

Given the large number of cancer sufferers, a war on the disease seems like an attractive proposition. Avacta’s trying to develop treatments to target the tumours themselves, while sparing harmful effects on normal tissues. Perhaps that area of operations can produce a future top-selling product and relaunch the share price.

The company delivered an update on progress with September’s interim results report. Chairman Shaun Chilton said the firm’s prioritising further investments in therapeutics, including the “acceleration” of its AVA6000 clinical trial enrolment.

AVA6000 showed a “highly encouraging” tolerability profile with “robust” initial efficacy signals in both dose-escalation arms of its Phase 1a trial.

The directors are “encouraged” by the potential of the “innovative” medicines in the Avacta pipeline. The firm’s AVA6000, AVA6103, and AVA7100 programmes are “highly differentiated pipeline assets, addressing large markets”. 

Big costs, small revenues

Nevertheless, early-stage development’s an expensive and cash-consuming game. Loss-making companies like this tend to keep operations going by issuing more shares and raising extra money from shareholders. For example, Avacta did a fundraise in March to raise just over £31m.

Every issue of new shares dilutes existing holders. So if a drug development phase lasts too long, there can sometimes be little benefit left for the longest and most patient investors. That’s even if the business does eventually start earning decent money.

On top of that, treatments can fail even in the later stages of development. So those uncertainties are the biggest risks for Avacta shareholders today.

Nevertheless, the company’s been progressing its stable of potential new treatments and every passing week may take it closer to commercial success. So Avacta shares could recover at some point. But there’s a lot of risk for shareholders to carry in the meantime.

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So far, Avacta (LSE:AVCT) shareholders have enjoyed and endured both sides. Those who invested in this biotech business in 2019 are probably celebrating, given the 250% return. Yet those who hopped on the train in mid-2021 are likely questioning everything, given shares are down almost 75%.

It’s a similar story for those who became shareholders at the start of 2024 since shares have tumbled almost 40%. So what’s going on? And is now the time to start buying?

Volatility of biotech

As a quick reminder, Avacta’s an upcoming diagnostics and cancer therapy specialist. It gained a lot of attention during the pandemic thanks to its lateral flow test kits for Covid-19. But, since the demand for this product has waned significantly following the rollout of vaccines, sales growth has slowed and profitability’s evaporated.

Consequently, investor patience is seemingly running thin. Even more so given the troubles management encountered in receiving regulatory approval for other testing kits in 2023.

This pattern isn’t uncommon for young biotech businesses. Valuations are often driven by expectations. And failing to meet targets can be devastating, especially for small-cap and penny stocks. But is there hope?

Focusing on the long run

As previously mentioned, diagnostics is only one half of this enterprise. The other is cancer therapy. And on that front Avacta’s making encouraging progress.

Following a recent update, Phase 1 clinical trials for its AVA6000 drug have sucessfully completed the second cohort, with the third now underway. That puts the company on track to hit its clinical trial objectives for 2024. And given Phase 1’s where most treatments fail, these positive results are a very encouraging sign.

To help speed things along, the company’s appointed a new scientific advisory board of cancer experts across the US and UK. And with around £35m of cash on the balance sheet, Avacta should have enough capital to complete Phase 1 trials.

Yet, as exciting as this news is, there remains a long journey ahead. There are still two more clinical trial phases to go before reaching the market, each significantly more expensive than the last. And £35m isn’t going to cut it. As such, I wouldn’t be surprised to see large volumes of shareholder dilution moving forward.

But even if it can raise all the necessary funds, that doesn’t guarantee future trials will be a success. Don’t forget over 90% of clinical trials fail.

A risky buying opportunity?

It goes without saying that Avacta’s an incredibly risky investment. Even though its market-cap currently sits outside of penny stock territory at £260m, it seems to be held up almost entirely by expectations of clinical success. After all, shares are currently trading near a price-to-sales ratio of 10.

In other words, even with shares taking a big tumble, they’re still quite expensive. However, should AVA6000 be a success, today’s price may be worth paying. Nevertheless, given that it’s going to be years before AVA6000 will be contributing to sales, assuming it’s successful, this stock seems to me like a massive gamble compared to other opportunities right now. I’m not buying.

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What went wrong?

Many of us will know the company from the development of Covid-19 lateral flow tests. However, since then, the share price has been incredibly volatile. Since the peak in 2020, when shares hit £2.74 and the market cap was £340m, the value of the company has sunk to £154m.

Several factors seem to be at play here. Many are commonplace in the biotech sector, but I still have a few major concerns.

Avacta, like many other pre-revenue companies in the biotech sector, has yet to turn a profit. The company’s earnings per share are forecasted to decline in the coming years, which has dampened investor confidence.

The firm boasts impressive revenue growth of 34% over the past five years. However, it seems this growth might be falling short of lofty investor expectations. With enormous rallies in previous years this disappointment has naturally led to a sell-off, driving the share price down.

Business has also been hampered by difficulties in obtaining regulatory approvals for new diagnostics and therapies. Delays in securing the rights for a new antigen testing kit in May 2023 further eroded investor confidence.

The biggest red flag for me is the dilution of shares in the company, with 31% more shares outstanding than a year ago. In February 2024, the business raised funds through a share sale at a significantly discounted price. To me, this sounds like an action the company wouldn’t do unless it really had to, sending very worrying signals.

Is there hope?

While the recent performance has been undeniably bleak, there are some positive signs for Avacta. The company finally received the ISO 13485 certification last year, allowing its tests to be used in Europe. This could lead to increased sales and potentially a turnaround in fortunes.

When compared to others in the sector, the price-to-sales (P/S) ratio of 6.6 times is well below the average of 10.2 times. There is clearly a future in the technology being used here. So if a company can grow sustainably, and build a market share large enough, it could well be a winner in the long term.

Overall

The share price decline is a complex issue, requiring a decent amount of technical knowledge of the sector. The short-term outlook might seem uncertain, but the company’s progress in regulatory approvals and its potential for future growth could represent a good opportunity for patient investors. However, I think there are less complex and more lucrative investments out there, so I’ll be staying well clear for now.

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But how much would I have today if I’d invested £1,000 in this biotech stock in 2018? Well, five years ago, Avacta shares were approximately 26p each. Now, they’re trading for 115p, which translates into a 342% rise.

Therefore, my £1,000 would now be worth around £4,420, a more than quadrupling of my original investment. Nice.

What does Avacta do precisely?

The life sciences company has two parts to its business. There’s a diagnostics unit that develops and supplies a range of in-vitro diagnostic products. Then there’s the therapeutics division, which is built upon two proprietary platforms. One of these develops novel cancer therapies, and it’s this that has generated a lot of investor interest.

Avacta’s lead programme, AVA6000, is a tumour-targeted form of the established chemotherapy treatment doxorubicin. It works to slow or stop the growth of cancer cells by blocking an enzyme.

Unlike doxorubicin, however, AVA6000 is a ‘prodrug’, which means it remains inactive until it reaches the site of the tumour. Because of this, it may be useful for treating cancer with fewer side effects (including nausea and hair loss) than doxorubicin.

Very promising progress

In June, Avacta announced that the fifth dose escalation cohort in AVA6000’s phase 1 clinical trial had been completed successfully. The trial is evaluating the safety and tolerability of this potential drug.

The good news is that despite the high dose level, which was approximately 2.25 times a typical dose of doxorubicin, AVA6000 has continued to be well tolerated by patients. Indeed, there was a marked reduction in the incidence and severity of all chemotherapy side effects.

This treatment opens up the possibility of more frequent dosing, which could be revolutionary for patients (and the stock).

Meanwhile, the company continues to progress the diagnostics side of the business through acquisitions. Last year, it announced a £62m fundraise to help finance the purchase of Kent-based Launch Diagnostics for up £37m. This is a distributor of in vitro diagnostics tools within the UK.

Then in June, it bought Belgium-based Coris BioConcept for £7.4m. This firm manufactures and markets a variety of lateral flow tests.

Still a risky biotech

While all this is encouraging, it’s still early days for its promising therapeutics division. Many drugs move on from phase 1 to phase 2 trials, but the success rates decline as the process continues. Up to 70% of phase 2 trials and around 50% of phase 3 trials fail for various reasons. 

So, even if it gets through the trials, we are still years away from this potential blockbuster drug generating any revenue. Meanwhile, the group’s diagnostics business only brought in revenue of £4.1m last year, on top of £5.5m from achieved therapeutics milestones. At the group level, it lost £39m, with more losses expected in the years ahead.

Therefore, it seems certain the company will need to keep selling shares along the way to fund its later stage trials. Couple this dilution with today’s sizeable market cap of £323m, and the stock seems too risky for my liking. So I’ll be investing my money elsewhere.

The post If I’d invested £1,000 in Avacta shares 5 years ago, here’s how much I’d have now appeared first on The Motley Fool UK.

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.

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Ultimately, the success or failure of Avacta’s developmental pipeline will determine where its share price goes in the future. And it is that pipeline that will determine whether or not I should buy Avacta at its current share price.

No news is good news

There has not been any recent news about the pipeline. But the company did reveal that it had no banking relationship with either Silicon Valley Bank (SVB) or its UK subsidiary on Monday. It had no cash on deposit, nor was it reliant on SVB for funding. That is good news. Looking further back and Avacta raised some equity in February and January. It also released some positive news from the phase one clinical trial of one of its drugs.

Getting a drug from the lab bench to market is usually transformational for a pharmaceutical and biotechnology company like Avacta. Right now the company has one therapy, AVA6000, in phase one clinical trials. It is AVA6000 that investors will be looking at closely.

Moving from phases one to two, and two to three, will gain their interest. Completing phase three will get their attention. So how likely is it that AVA6000 — a modified form of the generic chemotherapy doxorubicin — moves through the phases?

I like to start with a base rate for success. According to one report, only 5.4% of developmental oncology drugs made the jump from phase one all the way to approval. Now, AVA6000 was granted Orphan Drug Designation from the US FDA in September 2022. That means it has been identified as a potential treatment for rare diseases. The success rate for drugs for rare diseases is higher at 17%.

Avacta share price

Until it can command meaningful revenue, Avacta will continue to turn to investors and creditors for cash. Even if AVA6000 makes it through to approval, that takes 10.5 years on average. If the drug ends up licenced for the treatment of a rare disease, then revenues might be disappointing. Of course, Avacta has other drugs in its pipeline, but the same calculus has to be applied if they move to phase one trials.

Drug development companies are risky. More often than not the development fails. Successes take time and a lot of funding, and sometimes do not make attractive returns. I don’t think Avacta, at its current share price, is a buying opportunity for me. Here is why.

I would not invest in a single developmental pharmaceutical company. Because the chances of individual success are low, a basket of them makes more sense. Even then that would be as part of a larger diversified stock portfolio. The hope would be that at least one succeeds to make up for the failures of the others. But I have learnt through experience that I am not comfortable with the risk inherent in stocks like Avacta. That’s true even if I held a bunch of them.

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What’s caused this rise? And should I snap up some shares today?

An exciting technology

Avacta is a clinical-stage developer of cancer therapies and is listed on the Alternative Investment Market (AIM). The stock took off during the pandemic after the firm used its antigen technology to develop a testing kit to detect the coronavirus. Starting in 2020, the shares rose 1,500% in just one year. The share price then crashed 84% over the next 12 months after it discontinued its test kits.

The reason for the recent rise is due to growing excitement around Avacta’s core technology. The company’s pre|CISION platform is developing drugs that could reduce the toxicity of chemotherapy.

The most promising and advanced potential treatment is AVA6000. This is designed to boost chemotherapy efficacy and minimise off-target toxicity. The hope is that this treatment can alleviate many of the unpleasant side-effects of chemo, including nausea and hair loss.

Alistair Smith, Avacta’s founder and CEO, thinks AVA6000 could one day mean “chemotherapy without side effects“.

Positive results

Phase I trials for this drug candidate began in 2021. In January, the company released results that showed AVA6000 was well tolerated. And that an analysis on tumour biopsies from six patients suggested “doxorubicin is being released within the tumour tissue confirming the tumour targeting potential of the pre|CISION technology”. That indicates a degree of efficacy, though much further evidence is obviously needed.

The trial also saw a “marked reduction” in the “typical toxicities associated with the standard doxorubicin chemotherapy administration“. That suggests it could indeed reduce the side effects from chemotherapy.

This is obviously exciting news for Avacta and potentially great news for cancer patients too. However, this is still only early days and the stock remains risky. It will be many years (if ever) before this cancer treatment is approved by regulators for use.

Meanwhile, the company remains loss-making. It recorded a pre-tax loss of £29m last year, and a similar loss is expected this year. Later phase trials are more expensive, so I’d expect losses to mount from here.

The company does operate another platform called Affimer, developing alternative treatments to antibody therapies. However, these programmes are still in the research phase.

My move

Nearly all biotechs end up going one of two ways. Their drug candidates fail in trials and they disappear. Or their technology shows enough promise that a larger pharma company acquires them. Avacta’s platforms are showing enough potential that I think this AIM biotech could be an acquisition target at some point.

The share price could rocket if that happens. Alternatively, more positive drug development news could spark a rally in the shares. However, I don’t invest on the basis that a firm could be acquired. And while its technology looks promising, we’re still many years away from any treatments getting approved.

Overall, this biotech is too speculative for my tastes. So I won’t be buying shares as things stand.

The post Is the Avacta share price about to rocket in 2023? appeared first on The Motley Fool UK.

The clinical stage biopharmaceutical business was a true Covid share. In 2020, it started developing rapid tests for the coronavirus infection. And the company proved to be good at releasing exciting-sounding updates via the Regulatory News Service (RNS).

A speculative frenzy

The news stream through 2020 details every step in the company’s operational progress. I think the stock probably became caught up in a speculative frenzy powered by locked-down investors and speculators with time and money on their hands.

Alas, in April 2021 Avacta released its full-year results report for 2020. And the financial figures proved to be less euphoric. Revenue for the year came in at a mere £2.1m or so, and the business generated an operating loss of just under £19m. However, the company did manage to use all the investor interest to raise much-needed capital of just under £54m.

Within a few weeks, the stock began to slide and kept on falling. Indeed, a fair bit of the speculative froth dropped away from the price until it bottomed in March 2022 near 41p. But the full-year results for 2021 didn’t offer reassuring figures for sharholders. Revenue for the year was a little over just £2.9m, while operating losses had ballooned to around £29m.

I might have assumed that the end of the story would be predictable. Perhaps it would have run along the lines of an ever-falling share price. And that would likely have been accompanied by escalating losses and an ongoing series of fund-raising events of decreasing size. Certainly that template has been well-established by prior loss-making outfits.

A resurgent share price

However, by April this year, the share price had shot back up to above 140p. Perhaps the move had been driven by chief executive Dr Alastair Smith’s positive comments in the full-year report. He said he’s “confident and excited” about the immediate and long-term prospects of the business.

For example, he pointed to the potential of clinical trial progress for the firm’s AVA6000 project. And he also emphasised the firm’s pipeline of in-vitro diagnostics (IVD) products and a redeveloped SARS-CoV-2 antigen test “offering immediate and long-term opportunities”.

Most recently, the company has been raising money to buy Launch Diagnostics, a distributor in the UK IVD market. The company reckons the acquisition will accelerate Avacta’s diagnostics strategy. It’s “the first step” in a drive towards building an integrated and differentiated IVD business “with global reach” the directors said.

More losses ahead

That sounds promising. But the financial reality of the move is yet more dilution for existing shareholders. It’s all jam-tomorrow stuff again. And City analysts don’t look as optimistic, to me. They’ve pencilled in a net loss of just over £30m for 2023.

With the share price near 102p, as I write, it’s down around 14% over the past year after a roller-coaster ride. It’s possible the business could realise its ambitions profitably in the years ahead. But I see the stock as highly speculative. And I don’t think it can make me rich. So I’m avoiding it.

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