2021 hasn’t been a particularly great year for the Avacta (LSE:AVCT) share price. Despite reaching a high of 291.8p in May, the stock has since been on a downward trajectory. In fact, over the last five months, it’s down more than 50%. Although looking at a 12-month period, the fall is closer to 25%. Last week, management released its interim report providing an update on the progress being made. So, is this firm about to make a comeback? Or is more decline on the horizon? Let’s take a look.
A year of progress
I’ve previously explored this business. But as a quick reminder, Avacta is a biotech firm that has been actively involved in fighting the pandemic since early 2020. The company’s diagnostics division is currently developing a new generation of lateral flow tests that can detect the Delta variant of Covid-19. Given early data shows higher accuracy than existing tests already on the market, this endeavour could prove lucrative.
Meanwhile, on the therapeutics side of the business, progress for its new chemotherapy drug AVA6000 continues to move forward. In the last six months, the firm received regulatory approval to commence phase one trials. At the same time, its pre|CISION technology, which is being used to develop AVA6000, has been licensed to Point Biopharma. The license is to help create tumour-activated radiopharmaceutical drugs, for which Avacta has received an upfront fee. And it’s on track to continue receiving additional development milestone payments, totalling $9.5m, not including any subsequence royalties if any drug makes it to market.
These achievements are certainly commendable in my eyes. And providing the firm can continue progressing at its current speed, its top line could be set to surge – sparking a potential comeback. So why aren’t investors more bullish about this latest report?
The lacklustre share price performance
The latest developments at Avacta have enabled it to expand its revenue stream slightly, with total sales coming in at £2.3m versus £1.8m in 2020. However, like all young biotech companies, it has a lot of expenses to contend with. And it seems, investors were less than pleased to see losses grow bigger.
Research & development costs grew 53%, causing operating losses to jump from £8.1m to £11.3m. Meanwhile, its cash reserves have started depleting. While the firm still has £37m at its disposal, that’s down from £54.5m in 2020.
Drug development is expensive, so this is hardly surprising news. But if the cash burn continues at its current rate, I think it’s likely Avacta will have to raise additional capital either through equity or debt to keep itself afloat. Both of which could have a significant short-term impact on the AVCT share price.
The bottom line
As encouraging as the progress has been, my opinion on this business remains unchanged. There are still a lot of unknowns surrounding this company. And yet it’s boasting a market capitalisation of £310m even with the recent fall in the AVCT share price. That’s nearly 100 times its revenue stream!
In my opinion, the valuation is simply too rich for my tastes. So, Avacta is staying on my watchlist for now.