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.

The rise and fall of Avacta shares

The pandemic-driven pharma boom is well documented. But Avacta was a huge winner, thanks to its timely antigen test kits that were effective detection tools. Its shares rose an astronomical 1,125% between March 2020 (when Covid was first declared as a pandemic) and May 2021. 

But the rise of variants meant the efficacy of the results dropped, causing the company to pull its test kits from the market in early 2022. Subsequently, the Avacta share price fell 86% to 42p. 

However, in recent weeks, this pharma stock has made a big comeback. Here’s what happened and my verdict on the stock. 

Big developments

Avacta is still primarily a clinical-stage biopharma firm with a focus on cancer detection and treatment. While it has a few other divisions, its most promising oncology treatments are still under development. 

Right now, oncology is one of the fastest-growing medical sectors. The market for such treatments is growing at a compound annual rate of 9.6%, which will generate $292.8bn by 2028. 

And a recent update from the board showed some significant developments in bringing these cancer treatments to market. While it will still take a decade before Avacta’s new AVA6000 chemotherapy system reaches the market, the prospects are promising. 

The innovative treatment focuses on reducing the toxicity of chemotherapy on healthy cells by strengthening its tumour-targeting properties. This is done with the help of a protein marker that’s present in high amounts in cancerous cells. 

The update shows that the treatment will move to Phase II by the second half of 2023. This was earlier than first expected and shows me that Phase I dose escalation data has been favourable so far. 

At the same time, the company also rolled out updates on several key partnerships. Its ongoing relationships with LG Chem Life Sciences and Daewoong Pharmaceuticals both received positive updates. Results from these partnerships are expected to boost the disease detection product line of Avacta over the coming decade. 

Concerns and verdict

Positive business developments and the UK market rebound have triggered this recent jump in Avacta shares. But I don’t think the current growth rate can be sustained without visible financial results. Even if trials are completed, bringing new cancer treatments to market is no easy task. It could take years to reach profitability. 

And financially, the firm is still loss-making, recording a pre-tax loss of £29m last year. This makes this AIM share a very speculative investment. The market is volatile right now and further economic distress in the UK could cause the FTSE 100 and other indexes to tumble. And while its future looks promising, I’ll wait for Avacta shares to show signs of sustained growth across the rest of 2022 before I consider a small investment in 2023. 

In fact, some scientists have described biotech as the future of medicine. And consequently, analyst forecasts predict the biotech sector alone will grow by an annualised rate of 15.8% until 2028, reaching $2.4trn! That’s more than three times bigger than the current $752m market size.

Needless to say, this presents a massive growth opportunity for those willing to invest in biotech stocks. But this growth doesn’t come without its risks. So, let’s explore exactly how these businesses work and the threats a biotech investor needs to know about.

What are biotech stocks?

Biotech stocks are a small but rapidly expanding segment of the healthcare industry. These businesses operate similarly to pharmaceutical companies. They both research new treatments and medicines for diseases, run clinical trials to prove efficacy and safety, and then eventually bring their product to market after regulatory approval.

However, the key differential in biotechnology is the approach to developing new treatments. Traditional pharmaceuticals use chemicals as the basis for new drugs, whereas biotech uses living organisms such as bacteria and enzymes. As crazy as that sounds, it’s opening many new avenues and solutions for treating genetic diseases and developing highly effective vaccines.

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The development pipeline for biotech stocks

The drug development pipeline for biotech stocks has five steps:

1. Discovery

Scientists identify a potential drug candidate for treating a specific disease. Typically, firms prioritise treatments with ample market opportunities and little competition on the market or in development.

2. Preclinical trials

Once a candidate is selected, non-human lab testing begins. This can be done using in vitro (in test tubes) and/or in vivo (in animals such as mice) testing. 

3. Clinical trials

If preclinical trials show encouraging results, human trials begin with qualifying patients recruited from hospitals and other medical institutions. This is the longest part of the process and where most drugs fail. 

• Phase 1 – Initial small-scale study where, on average, 60 closely-monitored patients receive different doses. The goal is to determine the highest effective dosage that does not cause severe side effects.
  
• Phase 2 – Assuming Phase 1 is successful, Phase 2 expands the study to around 120 patients. The goal is to uncover evidence of the drug candidate actually working while simultaneously isolating the optimal dose.
  
• Phase 3 – This is the longest part of the clinical trial process and can take years to complete. The goal is to prove the effectiveness of the treatment compared to existing drugs. Studies are expanded to include an average of 600 patients. However, patient numbers can venture into the thousands depending on the drug. Phase 3 trials are most commonly run as randomised, double-blind studies. Some patients receive an existing drug and/or a placebo, while other patients receive the new treatment being tested. 

4. Regulatory approval

If Phase 3 trials reveal strong evidence of high efficacy and safety, biotech stocks then file for approval from drug regulators such as the MHRA in the UK and FDA in the US. This process can take anywhere between 6 and 10 months and may require the company to perform further clinical trials if insufficient evidence is provided. If the regulator grants approval, the firm can offer its product on the open market and begin Phase 4 trials.

• Phase 4 – Drugs with regulatory approval still need to be monitored when offered to patients. The goal is to determine whether any long-term health impact occurs that would not have been detected during Phase 3 trials.

5. Commercialisation

After regulatory approval is granted, biotech groups still need to convince doctors and health insurance companies to offer the new drug to patients. This is where sales representatives come into the picture. And dethroning an existing treatment even if it’s not as effective can be a challenge.

This product pipeline can span decades. And statistically speaking, over 90% of drug candidates never make it to market. That’s why most biotech shares develop multiple drugs at the same time. Like prudent investors, these companies are diversifying their investments.

But running multiple trials at the same time is a highly capital-intensive process. Consequently, most young biotech businesses have to continuously issue new shares to raise the necessary funds. This causes significant equity dilution. It’s also common to see larger players acquiring younger companies when a drug candidate shows a lot of promise.

Top biotech shares in the UK

Here are the top biotech stocks on the London Stock Exchange in order of market capitalisation:

AstraZeneca

AstraZeneca is one of the largest pharmaceutical companies and healthcare stocks in the world. Given its access to vast resources, the group develops new treatments for a wide range of diseases. The list includes cancer, cardiovascular, renal, respiratory, immunology and other rarer conditions. 

The company already has a diverse portfolio of products on the market and its vaccine against Covid-19 made it a household name. Looking at the current project pipeline, AstraZeneca is researching 183 drug candidates, with 16 in late-stage development and two under regulatory review.

Key Metrics:

• Market Cap: £156.3bn
• Average Daily Volume: 2.33m
• HQ: Cambridge, UK
• Cash/Debt: $6,398m/$30,781m
  

GlaxoSmithKline

GlaxoSmithKline is a global leader in vaccines and pharmaceutical treatments targeting cancer, HIV, immuno-inflammatory, and respiratory diseases. The company has established research teams and manufacturing facilities worldwide, providing a global distribution network, particularly across the US, Europe, and Asia.

With over 1,500 active partnerships with external pharmaceutical organisations and governments, GlaxoSmithKline stands out among the crowd of healthcare stocks. It’s worth noting that the group also has a consumer healthcare division for over-the-counter products. However, Glaxo is in the process of spinning this off into a standalone entity, enabling the group to become entirely focused on developing new treatments. 

Key Metrics:

• Market cap: £88.5bn
• Average daily volume: 9.02m
• HQ: Brentford, UK
• Cash/debt: £4,335m/£24,173m
  

PureTech Health

PureTech Health is a mid-stage biotech business with a focus on creating new therapies for diseases with limited or no existing treatment options. The firm specialises in medicines related to the brain, gut, and immune system. It has two drugs with US and European regulatory approval, along with a further 16 in clinical trials and 27 candidates being investigated.

Beyond researching and developing its own treatments, management has built up a significant equity interest in other biotech groups. In total, it has a stake in eight different companies, three of which have commercial products and a further three in the final round of clinical trials.

Key Metrics:

• Market cap: £492.9m
• Average daily volume: 267.4k
• HQ: Boston, US
• Cash/debt: £468m/£52m
  

Oxford BioMedica

Oxford Biomedica is a rising gene and cell therapy business specialising in viral vectors. In oversimplified terms, the company re-engineers existing viruses to deliver improved genetic material into patients’ cells.

Management is using this technology to develop its own treatments. However, management also outsources its capabilities to other drug developers via its LentiVector platform. 

This drastically reduces the cost of developing gene and cell therapies. So, it’s not surprising that pharmaceutical titans like Bristol Myers Squibb, AstraZeneca, and Novartis are all active customers. These customers pay ongoing milestone fees throughout development, as well as a royalty on sales for any drug that makes it to market. However, it’s worth noting that most of the current drug pipeline using LentiVector remains relatively early stage.

Key Metrics:

• Market cap: £466.9m
• Average daily volume: 223.76k
• HQ: Oxford, UK
• Cash/debt: £109m/£9.34m
  

Avacta Group

Avacta is an early-stage biotech firm specialising in the fields of diagnostics and therapeutics. Its diagnostics division created a proprietary platform called Affimer. This is a portfolio of reagent proteins that can be used to detect specific infections within a given sample. Traditionally, this process uses antibodies. However, manufacturing antibodies is a complex, time-consuming process that Affimer reagents don’t have to go through. 

On the therapeutics side of the business, the company is currently testing its flagship AVA6000 chemotherapy drug in clinical trials. This treatment is being developed with the group’s second chemical platform called pre|CISION. Unlike existing chemotherapy treatments, AVA6000 is highly targeted. As a result, fewer healthy cells are caught in the crossfire, which reduces the severity of side effects.

Key Metrics:

• Market cap: £311.4m
• Average daily volume: 1.46m 
• HQ: Wetherby, UK
• Cash/debt: £26m/£1.7m

Investing in the US biotech industry

As with pharmaceutical and healthcare companies, investing in American biotech stocks comes with the same degree of regulatory risk. All treatments need to approval from the Food & Drugs Administration (FDA) for commercialisation in the US.

The list of US biotech stocks is significantly longer than here in the UK, as the American healthcare market size is enormous by comparison. With that said, here are some of the largest biotech shares available across the pond in order of market capitalisation.

1. Regeneron Pharmaceuticals (NASDAQ:REGN)
2. Vertex Pharmaceuticals (NASDAQ:VRTX)
3. Exelixis Inc (NASDAQ:EXEL)
4. Novavax Inc (NASDAQ:NVAX)
5. Twist Bioscience Corp (NASDAQ:TWST)

Are biotech stocks right for you?

Investing in a biotech company is a high-risk move. Drug development is notoriously challenging and expensive, with most drug candidates failing to get past regulators. In fact, a failure in a clinical trial can often be a death sentence. After all, most pre-commercialisation biotech stocks rely on external financing, which isn’t easy to raise when promoting a failing product.

But, this sector has a lot to offer investors despite its high-risk nature. And an easy solution to reducing risk exposure is to only invest in the firms that already have a product on the market with a sizeable revenue stream that can help fund future developments. 

Having said that, even the largest biotech shares can still be volatile, especially when bad results emerge from ongoing clinical trials. Therefore, the biotech sector is not suitable for everyone. And taking a diversified approach is, as always, a prudent strategy when investing in biotech stocks.

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Unfortunately, finding such opportunities is pretty rare. And there are plenty of occasions where one seems to have appeared but later turns out to be a dud.

With that in mind, let’s explore two penny shares I’m personally not going near.

Phase 1 cancer trials

Avacta (LSE:AVCT) received a lot of attention in 2020 for the young biotech’s participation in the fight against Covid-19. Using its proprietary Affimer proteins, lateral flow tests were rolled out to help detect and reduce the spread of the virus. But cancer research is actually at the core of this firm’s agenda. And its new AVA6000 chemotherapy treatment is driving a lot of excitement.

Unlike existing chemotherapy treatments on the market today, AVA6000 is highly targeted, only affecting tumour cells with a specific protein concentration. That means less collateral damage to healthy cells, reducing the horrible side effects for patients.

This certainly sounds promising as penny shares go. So what’s wrong with it?

AVA6000 is still in Phase 1 clinical trials. It could be up to a decade before the treatment makes it to market, assuming the trials are successful. But, on average, less than 10% of Phase 1 drugs make it past the regulators. And that doesn’t include the problems with financial viability even if approval is given.

These aren’t exactly welcoming odds. And if AVA6000 fails, the stock price could quickly plummet. Hence why I’m not tempted to start adding some shares of this penny stock to my portfolio today.

Mining Bitcoin with penny shares

With the spiking prices of cryptocurrencies last year, shares of the penny stock Argo Blockchain (LSE:ARB) skyrocketed. But since then, both crypto and Argo have seen their prices plummet. The future of digital currencies remains uncertain. And while there are several practical uses for the technology, many individuals like myself remain unconvinced.

Regardless, I can’t deny this business has made remarkable progress over the last 12 months. Excluding the recent dip in Bitcoin production due to weather conditions. Profit margins stand at an impressive 80%+! Meanwhile, the construction of its new mining facility in Texas is proceeding on schedule. Overall, things seem to be moving in the right direction.

Having said that, like many penny shares, there is an ocean of uncertainty surrounding the long-term viability of this business. With regulators starting to clamp down on cryptocurrencies, prices could be in for quite a tumble. With the fate of this business seemingly beyond the management team’s control, it doesn’t sound like an enticing proposition for my portfolio.

A future leader in the fight against cancer?

I’ve explored this business before. But as a quick reminder, Avacta is a medical diagnostics business primarily focused on developing cancer therapies.

In 2020, Avacta’s share price exploded as management leveraged its knowledge and expertise to develop rapid testing kits in the fight against Covid-19. This initial level of excitement from shareholders has since waned. And this is undoubtedly a contributing factor to the stock’s recent downward trajectory.

But in the meantime, some significant milestones have been hit. In mid-2021, Phase 1 clinical trials for its targeted chemotherapy treatment began. And last month, the company reported positive initial results with no safety concerns. As such, the drug dosage is being increased, moving Avacta closer to the next stage of clinical trials.

But what makes this drug so special? Without going too scientific, chemotherapy is effectively a poison that kills cancer cells. The problem is that it also has a habit of killing healthy cells. That’s why the treatment can have such unpleasant side effects.

Avacta’s drug has been designed to only attack cells that contain a specific concentration of a protein found only in solid tumours. In other words, if it works, the risk of collateral damage to healthy cells is almost entirely eliminated.

Given that the generic chemotherapy market is expected to reach $1.38bn by 2024, that presents an enormous opportunity for the Avacta share price.

The risks surrounding the Avacta share price

As exciting as a new and improved chemotherapy treatment is, there remains a long road ahead. On average, only 9% of Phase 1 drugs ever reach the market. Even if Avacta can beat the overwhelming odds, there still remains the issue of funding.

Running clinical trials is not cheap. And as it stands, the group only has around £37m of cash on its balance sheet. That may seem like a lot until considering the average cost of drug development is about £760m. In other words, the firm will have to raise capital to see this project to the end.

Typically, young biotechs get a sponsorship from a larger pharmaceutical giant after proving their drug has potential. Usually, this takes place around Phase 2 trials. And I wouldn’t be surprised if that’s what happens with this business.

But in the meantime, the company has to raise capital by itself. And with the Avacta share price dropping so rapidly, its equity-raising capabilities are pretty limited compared to a few months ago.

Time to buy?

Avacta is by no means a one-trick pony. But a lot of resources are being poured into its chemotherapy treatment, which could turn out to be a dud. Consequently, the future of the Avacta share price seems uncertain. Personally, I’m not interested in adding this level of risk to my portfolio. So I’ll be keeping this stock on my watchlist for now.

• The firm has two exciting treatments that seek to better tackle cancer
• It contributed to the Covid-19 testing roll out
• Interim losses widened from £6.9m to £10.1m year on year 

Pharmaceuticals and diagnostics company Avacta Group (LSE: AVCT) specialises in cancer treatments. The FTSE AIM firm focuses on clinical stage development and currently has two major proprietary treatments. It also provides Covid-19 testing kits in the UK. Its share price has had some volatile movements over the past year, and I want to know more. Should I buy this company for my long-term portfolio, or avoid it? Let’s take a closer look.  

Exciting medical advancements and the Avacta share price

The firm developed two revolutionary cancer therapies and diagnostics procedures. The first, Affirmer®, is a proprietary therapeutic platform. This treatment, the company says, seeks “to address the lack of a durable response to current cancer immunotherapies”.

Using naturally occurring human protein, Affirmer provides an “alternative to antibodies derived from small human protein”. Indeed, while tackling an important issue, this could be lucrative for the firm and positive for the Avacta share price. The antibody market is potentially worth over $100bn.

The company’s second medical advancement is named pre|CISION. This is targeted chemotherapy that seeks to lessen the side-effects for patients. The AVA6000 trial moved to the clinical stage in summer 2021. On 3 February 2022, the Phase 1 trial advanced after a “positive review”. The Avacta share price rose 3% on this news. It is currently trading at 47p. This is down 74% over the past year.

Furthermore, much of the excitement about the business arose because it manufactures Covid-19 testing kits in the UK. These gained approval in June 2021. While the rapid antigen test was fit for use in the UK, the government paused its roll out when the Omicron variant struck. It resumed in December 2021.

Lukewarm results

The company is clearly active within the cancer treatments and diagnostics field. While this is important in creating new technologies, it may also positively impact the Avacta share price in the near future.

As is the case with many early-stage pharmaceutical firms, however, the company results show widening losses. This may be due to efforts to finance new technologies. Indeed, the interim results for the six months to 30 June 2021 show that research costs had nearly doubled year on year, to £6.2m.

For the same time period, revenue increased from £1.8m, in the first half of 2020, to £2.3m. Despite this, losses widened from £6.9m to £10.1m. This doesn’t exactly fill me with confidence as a potential investor. 

The company is developing some amazing cancer treatments. However, the recent results are not strong enough to encourage me to buy the shares. While I won’t rule out a purchase in the future, I will be standing aside in the near term.

The stock has underperformed even though its published a robust set of results for the period ending 30 June at the end of September. The company reported an increase in revenues to £2.3m and a cash balance at the end of the period of £37m. 

The firm has also announced that its antigen lateral flow test has performed strongly when testing to identify SARS-CoV-2. 

First sales 

The first sales of its flagship AffiDX SARS-CoV-2 antigen lateral flow test occurred after Avacta’s first-half results were published. As such, it looks as if investors will have to wait and see what sort of an impact these deals will have on the group’s top and bottom lines. It will also be interesting to see how much of an impact these sales will have on cash flow. 

Running out of cash is usually the main reason why small businesses fail. Even though Avacta is not a small business by conventional standards, with a market capitalisation of £283m, the group is still tiny compared to its international testing and diagnostic peers. Some of these companies have multi-billion-pound market capitalisations. 

Avacta has enough cash to sustain its losses for around a year, so there is no immediate pressure on the balance sheet. Still, I am sure the company’s shareholders would rather see profits than losses. 

I think this is one of the main reasons why the Avacta share price has struggled over the past couple of months. It seems to me as if the market is waiting for the company to report on the sales of its flagship testing product. This testing product could produce a significant revenue stream for the group, which has been losing money consistently for years. 

Without a turnaround, the corporation may continue to report losses and, sooner or later, it will have to raise new funds. Some investors may not be willing to back the company with additional fundraising. They may be staying away from the business until there is more clarity. 

Avacta share price catalyst 

However, Avacta is far more than just a testing business. It recently began the first stage of testing for its AVA6000 drug. This is part of the company’s preCISION chemotherapies and Affimer immunotherapies slate of treatments, which have the potential to transform cancer therapy. 

These treatments may have potential, but it could be years before they reach commercialisation. In the meantime, the company will have to find funding from somewhere. Its testing division could provide this capital. 

So overall, it looks to me as if the market is waiting for further news from the business before buying into the stock. I would use the same approach. I am not willing to buy the shares today but might reconsider my position if and when the company is starting to produce cash flow. 

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.

The AVCT share price jumps on progress

I’ve previously explored why the Avacta share price has been on a downward trajectory this year. Long story short, its exceptionally lofty valuation came crashing down after the firm missed some key milestones. More specifically, management didn’t secure a CE mark for its antigen Covid-19 testing kit in May as initially anticipated.

This matter has since been resolved, allowing the AVCT share price to stabilise. But it doesn’t appear to be what’s behind the recent upward trend. Last month, the company announced that the first patient in its Phase 1 trial for AVA6000 Pro-Doxorubicin has been dosed. In other words, the trial is now under way.

The drug is a generic chemotherapy treatment used to combat various forms of cancer. While plenty of alternatives are already available, the potential market size is estimated to reach $1.38bn by 2024. That certainly seems like an excellent opportunity to pursue, especially since Avacta’s drug reduces the systemic exposure of healthy tissues to the treatment. So, it’s safer and reduces the intensity of the side effects of traditional chemotherapy. If the drug can make it to market, then the AVCT share price could see some explosive growth over the long term.

Taking a step back

As exciting as the prospect for a superior chemotherapy treatment may be, there’s a long road ahead. On average, it can take up to 10 years before a drug makes it to the market from phase-one trials. And that’s if it’s able to pass regulatory efficacy and safety requirements. Historically, around 90% of drugs fail at this stage. And the same outcome may occur for Avacta’s latest treatment.

The first stage of the phase-one trials is expected to finish by the second quarter of 2022 and the overall trial by Q2 2023. The purpose of these milestones is to determine the correct dosage to be used for phase-two trials and further evaluate safety and tolerability. If the firm manages to complete these milestones on schedule and uncovers positive results, then I wouldn’t be surprised to see the AVCT share price surge. But that’s a big ‘if’.

The bottom line

All things considered, Avacta continues to look like a promising company. And seeing it diversify away from Covid-related products is an encouraging sign for long-term growth. But with so many unknowns moving forward, the AVCT share price (even after this year’s decline) still looks too rich for my tastes. Therefore, I’m keeping this business on my watchlist.

Progress seen

Despite what the Avacta share price might suggest, the underlying business seems to be making good progress. The latest results from clinical trials show that Avacta’s lateral flow antigen tests can successfully detect the Delta variant of Covid-19. This is particularly exciting as competing tests seems to have a low detection rate for this strain of the virus.

Combining this milestone with the newly signed distribution agreement with Calibre Scientific, it seems Avacta’s revenue growth should be able to continue meeting expectations. Needless to say, that’s fantastic news for this biotech business. So why did the share price crash?

The fall of the Avacta share price

I’ve previously looked at this company and highlighted that the stock was carrying an exceptionally lofty valuation. Shareholder expectations were unreasonably high, in my opinion. And unsurprisingly, at the first sign of trouble, many jumped ship.

Despite efforts to achieve a CE Mark for its antigen testing kit, Avacta could not secure it in May as initially planned. Without this regulatory approval, its products cannot be used throughout Europe. And signing a distribution agreement for a product that can’t be distributed didn’t exactly entice investors. What followed was just over two months of decline for the Avacta share price.

What’s next?

In mid-July, the firm finally received an ISO 13485 certification to use its Affimer reagents in its lateral flow tests. As a result, a CE Mark was transferred to the company allowing its tests to be used by professionals throughout the UK and Europe. That’s one of the main reasons why the share price has started to stabilise. After all, with alternative lateral flow tests being far less effective, the company now has an enormous growth opportunity before it.

That might be an indicator of a buying opportunity for this growth stock. However, upon closer inspection, I’m still not tempted. Why? Because despite the recent crash, the Avacta share price still looks too expensive. Today, the company has a market capitalisation of just over £320m. And yet total revenue for the year is expected to be only around £4.3m with profits nowhere in sight. That places the price-to-sales ratio at an enormous value of 74!

Therefore I’m keeping Avacta on my watchlist for now. As promising as this business and its future potential may be, I believe there are far cheaper growth opportunities to be found elsewhere.