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Novacyt shares pull back on possible revenue hit

Shareholders in the Anglo-French diagnostic group are sweating on a new approvals process
November 2, 2021

Shares in Novacyt S.A. (NCYT) and Avacta (AVCT) lost ground on news that both diagnostics companies had suspended further sales of their Covid-19 testing kits in line with the UK Health Security Agency's programme on Coronavirus Test Device Approvals (CTDA).

Avacta has pulled its AffiDX SARS-CoV-2 Lateral Flow Rapid Antigen Test while the agency carries out its assessment which, if successful, would result in the test being placed on the CTDA register for approved products.

Novacyt submitted 11 products for review to meet the CTDA submission deadline of 1 September. To date, only the company’s PROmate® Covid-19 test has been named on a temporary protocol, meaning that it can remain on the market while validation is being processed with an extended deadline of 28 February 2022.

If no other products are added to the CTDA register, Novacyt will take an estimated £3m hit to full-year revenues for 2021, although Avacta said the suspension will not have a material impact on the anticipated financial outturn for the year.

The virus has certainly raised the corporate profile of companies engaged in diagnostic science. Macabrely, the share price trajectories of both companies have mirrored mortality rates to an extent, but this segment of the healthcare market, though intertwined with recent events, has been growing in prominence in line with gene therapies and increased digitisation in the healthcare space.

Investors have been quick to grasp the commercial implications. Analysis from BCC Research put the global market value for Covid-19 diagnostics at $60.3bn (£44bn) for 2020. It is anticipated that the market should grow from $84.4bn this year to $195bn by 2027, at a compound annual growth rate of 15 per cent though 2021-27. Numerous assumptions are built into modelling on this basis, so the figures are only indicative, although impossible to ignore. Nevertheless, the number of antigen and antibody tests multiplied rapidly from April 2020 onwards. At that point, the UK recorded a seven-day average of 27,744 tests, but by the following March that figure had risen to 933,234.

That was the high water mark, but it’s significant that testing remains at elevated levels, perhaps suggesting that the process has become routine. Certainly this is backed up by anecdotal evidence, as you would be hard-pressed to find anyone in your social circle, or among your work colleagues, who hasn’t been tested on several occasions. The explosive growth in testing rates was always going to moderate, yet the commercial benefits should endure even if we learn to live with the virus, in the same way we do with seasonal influenza.

Shares in Novacyt were worth 17p at the start of 2020. By the last week in October those same shares were changing hands at 1,318p apiece. Average daily trading volumes increased dramatically from the end of January through to the third week of April, and again in October 2020. The price/volume dynamic for the company held true from the perspective that when volumes are on the rise, pricing typically (though not always) moves in the same direction. However, there were periods when the company’s share price ticked up on the back of faltering volumes, possibly indicating a lack of conviction among investors.

Admittedly, the two main volume spikes occurred in response to revelations that the company’s Covid-19 testing kits had been listed as eligible for World Health Organization (WHO) procurement, and a later update detailing a new supply contract with the UK Department of Health and Social Care. It’s easy to see why these events triggered a surge in volumes, although you’re left wondering about the herd’s mentality rather than its immunity. At any rate, there will be plenty of investors who booked gains of the same magnitude often purported by crypto tub-thumpers (where volumes really are open to question).

Those engaged in the study of behavioural finance must be looking closely at how a black swan event such as Covid-19 has effected the collective psyche. It is hard to believe that there aren’t lessons we could take from the crisis, but the danger exists that we could overlook everyday risk factors as we search for deeper understanding of market dynamics.

Perhaps the main takeway from the pandemic is that we can prosper in spite of ourselves if we hold true to a bucolic view on investing. The initial tumult following the lockdowns was seen by many as an opportunity – and in some respects it was. If anything, however, the crisis has simply reaffirmed the wisdom of the traditional buy-and-hold dictum.