The Omega Diagnostics (LSE:ODX) share price exploded in 2020. In early March last year, it was trading at 7.5p. Today it’s around 97p. That’s an extraordinary 1,190% increase in the space of only a year.
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.