As I write, Covid-19 testing specialist Novacyt (LSE: NCYT) is Friday’s top riser on the London Stock Exchange. Novacyt’s share price is up by 17%, lifting the stock back above 400p. Investors seem to be buying back in to this popular stock, after a positive update on new Covid-19 testing products.
Today’s gains have helped to reverse the 40% slump seen two weeks ago, when Novacyt lost a key contract with the NHS. The stock is now broadly flat on one year ago. Is this an opportunity for me to buy this former winner at a bargain price? I’ve been taking a look.
Targeting new variants
The company’s new testing products seem to be designed to meet two needs. Firstly, there are new Lateral Flow Tests (LFT) to detect SARS-CoV-2 IgG antibodies. I assume these fast-acting tests are targeted at individuals and organisations who want to be able to test for immunity and get instant results. I’d expect this to be a growing market, at least for the next 12 months.
Novacyt’s scientists have also been developing new versions of its core PCR testing product, which detects Covid-19 infections. These tests still require lab processing for a result but are considered to be the most accurate type of test.
Among the new tests are products designed to detect new variants, such as the one originally identified in India.
All of these products sound promising to me, although I suspect they will all be quite short-lived — will we still be testing intensively for Covid-19 in 12 months’ time? Nobody knows.
Novacyt share price: not for me
Novacyt’s new products may have promise, but the firm has not revealed any new contracts to replace the lost NHS deal.
What worries me about this situation is that we’re four months into 2021, but Novacyt has just begun a legal dispute with its largest customer (the NHS) over revenue during the final three months of 2020. If this dispute goes against Novacyt, some of this money might never be received.
NHS sales generated 50% of its revenue during the first quarter of this year. But the company has failed to renew this contract and management does not expect the NHS to need any more PROmate PCR testing kits to meet demand in 2021.
Sales and profits are now expected to fall sharply this year. This makes me wonder how safe Novacyt’s cash pile will be. The company reported a cash balance of €101m on 31 December. But with sales falling short of expectations, I wonder if this cash will be needed to support product development costs.
Unfortunately, it may be some time until we find out more. Novacyt had planned to publish its 2020 results in April, but these have now been delayed to 29 June.
For me, there are just too many uncertainties here. I don’t have the information to work out whether Novacyt’s share price is really cheap. For this reason, I won’t be investing.