A Primer On Covid-19 Testing In The UK (Part 2)

12th Nov '20 by Keelan Cooper

21 comments 6714 reads

The promising vaccine news from Pfizer earlier this week has been welcomed by global financial markets, but has inevitably also impacted certain segments of the market, notably Covid-19 testing stocks. Whilst the vaccine has proven that there is indeed light at the end of the tunnel, there are still a few hurdles we need to overcome before we can return to previous levels of normality.

Below is an image of how the Pfizer & BioNTech Covid-19 vaccine stacks up against traditional vaccines. As we can see, the 90% effectiveness is remarkable, given this is an entirely new vaccine design, using RNA for the very first time.

However, the vaccine will need to be stored at -80C, which complicates the logistical process of getting the doses to reach billions of people. Pfizer has also stated that it will only be able to produce 1.3 billion doses by the end of 2021, which would mean 650 million people will be vaccinated. If other vaccines are not proven to be effective, it may take several years before the global population of 7.8 billion people is vaccinated.

The full Phase 3 results data from Pfizer are also yet to be published, so we are currently unaware of how long immunity will last for, or how effective the vaccine is across different age groups. There is also the risk that the virus mutates and makes the vaccine redundant altogether, although this is unlikely.

Despite the encouraging signs emerging from Covid-19 therapeutics and vaccine developments, it may take some time for the world population to experience these benefits. Mask wearing, social distancing and mass testing is likely to remain at the forefront in our battle against Covid-19 for the foreseeable future.

In this article, we will assess some of the UK listed Covid-19 testing stocks, which include: Novacyt, Avacta, Omega Diagnostics and Genedrive. It is important to note that whilst some of these companies stand to benefit from the influx of government spending, others might ultimately fall short. As always it is essential to DYOR and tread carefully, the markets are particularly volatile in the current climate, especially Covid-19 stocks!

Novacyt (LON:NCYT, EPA.ALNOV)

Share Price: 871p

Market cap: £619m

StockRank: 83

Test type: PCR, RT-PCR, ELISA Antibody…

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Macro

12th Nov '20

Keelan,

I am interested in your view on therapeutics. A few weeks ago a Virologist turned fund manager, Mike Taylor (https://twitter.com/biotequity... ) , recommended a Swiss therapeutics company called Molecular Partners. They seem to have the basis for a monoclonar antibody treatment that is capable of small volume injection.

https://www.molecularpartners....

I watched live on 15th October when the share price was 15 SFR. Didn't buy the next morning on the European open and then sat and watched the price surge on the USA market open. Of course it has gone onto 21 SFR on partnering announcements!

Essentially, what do you think of Mike Taylor's ascertion that the vaccines may not be that profitable whereas therapeutics providers will have more freedom over pricing and hence enjoy larger profit streams?

Also, what do you make of their approach technically?

Hydro31

What a difference a few days makes. When the vaccine news came I was set to sell all my NCYT on fear that Covid testing had had its day, but I missed the opportunity. So ended nervously buying more at £7. And then the director buys £500,000 worth at £8.17!! He obviously know what’s to come. That’s a years salary he has just reinvested.

There is a bigger picture here developing, antibody testing and pcr testing are going to be a big part of any vaccine roll out and beyond. So testing will be around beyond 2021 albeit in smaller quantities from 2022

We are also creating a diagnostic infrastructure that can deal with future pandemics as well as provide fast and reliable testing of a whole host of diseases. Imagine how better we could have dealt with the pandemic if we had already had the diagnostic equipment in place in every GP’s surgery/ care home and could have been mass testing from day 1. imagine if that equipment could be used to test for a whole host of ailments.... perhaps reduce some burden on the hospitals

An evolution in diagnostics ?

JohnEustace

Excellent article Keelan, much appreciated.

Wilbraham

Another interesting article - thanks!

If you want a smoother ride do consider $ABT - share price barely batted an eyelid on Monday (I panic sold then but may re-enter). Partly because diagnostics is only c. 30% of Abbott's business, and covid testing only part of this. But they do have most bases covered and, crucially, global reach and reputation. Roche and Thermo-Fisher I believe are other 800lb gorillas though I haven't investigated.

The list of UK contracts awarded is updated weekly I think

https://bidstats.uk/tenders/me... I sense the DHSC's latest focus is on rapid testing, perhaps with positive cases then confirmed (or not) with a pcr test. The table suggest £496m contract was awarded to Innova Medical. This follows a large award to Oxford Nanopore for their quicker LAMP tests. It's a mistake to think that UK quoted companies will necessarily be the main beneficiaries of the huge testing spend.

Myself, I'm wary of Avacta (LON:AVCT) and now put it in the crap-shoot bucket. They announced their 15-min test back in May, but there seems little real news subsequently on certification/ validation and there's perhaps a worry that they're missing the boat as they appear not to be part of any of the large scale rapid test pilots in Liverpool etc. I believe they claim to have large manufacturing capacity though.

PS petty comment - the article uses the word Affirmer in many places; I believe Affimer is the term Avacta use

PPS just heard on the 7.00 pm news a northern UK firm, Croda (?) talking about preparing to transport the Pfizer vaccine from mid-December. In fact, I do wonder if $BNTX might be a better way of diversifying exposure as the world transitions from testing to vaccinating? BioNTech SP is now only 10% above its Friday level and equal to the highs of July. I do feel the US markets in this area are far more stable than the 'wild west' AIM market. I read that Pfizer/BioNTech is a profit-making enterprise (unlike the 'humanitarian' ethos that is common in the vaccine field) as they funded their $2bn research effort in-house. Obviously they may be vulnerable to a better/cheaper/more user-friendly vaccine competitor but it sounds like they'll have a strong order flow initially as govts' priority will be speed. Sorry for veering off on a tangent!

nicobos

13th Nov '20

I’ve taken the opportunity to get some Novacyt SA (LON:NCYT) at what I believe to be a decent discount.

Firstly, it’s the only one of the stocks generating real and large cash flow. They were one of the first to market and trust is everything when it comes to medical products. When this is all over, if testing has ‘had its day’ they will likely have >£200m cash in the bank. Every PI seems to be an expert virologist / immunologist these days. I am not, therefore I’m putting trust in the numbers rather than what some of these companies may speculatively deliver over next 12-18 months.

Secondly, a number of funds have bought in at these levels. They only make ‘long term’ decisions and would have factored in a vaccine into their models. II support provides a stable investor base for the future.

Thirdly, I believe it is an attractive takeover opportunity for big pharma given product already to market and strong earnings. Would not be surprised to see it snapped up over next 12 months and this gives some protection on the downside.

Finally, there are some near term catalysts as we wait for the approval of their winter Covid flu product (of course this is binary and can go both ways).

Alex Meals

Hi. What will happens if some new Vaccine news will be announced? How deep Novacyt will fall then?

timarr

Who can tell?

What we can say, with quite a lot of assurance, is that positive announcements about vaccines were expected in the last two months of the year. There was a small risk they would all fail, but it wasn't very high. So the big stock gyrations this week were on news that really ought to have been baked in to prices already - basically there was a lot of hot money in the market, there were a lot of undervalued companies out there and a few overvalued ones, of which Novacyt Sa (LON:NCYT) was probably one at its highest points.

We also knew, before the Pfizer announcement, what the likely trajectory would be for rolling a vaccine out and, roughly, the impact on testing. We'd expect the vaccine to be given to key workers and the most vulnerable over the first six months of the year, and then to the rest of the population beyond that. So we know that the big peak in CV-19 testing will be over the next six to eight months and it will decline thereafter.

However, we don't know how much it will decline. We don't know how effective the vaccines will really be, whether vaccinated people are still infectous and how long they'll need before they need a booster. We don't know what the uptake will be. All of these things will impact future demand for testing.

From a Novacyt Sa (LON:NCYT) perspective we can say two things - one, this was all entirely predictable and, two, given that it was predictable (so that future test demand was bound to decline) the vaccine announcement is good news. Why? Because potential competitors are now going to find it harder to raise funds by pointing to hockey stick models of future demand - which is an advantage for scale players who are already deployed. Keelan's excellent post brings this out, I think.

Hence - if you're rational about this, positive vaccine news is good news for Novacyt. Obviously, if all you're concerned about is scalping profits then it's a problem.

The big gyrations in Novacyt this week were because the price had got ahead of itself, because there was a lot of short term money in the stock that fled when the price tanked and, you'd have to suspect, because a lot of private investors had made life changing amounts of money by backing it from very low levels and were desperate to get out as they saw that dwindling before their eyes.

From a long term perspective I could make a case for Novacyt's price at half its current level or four times it. Those are odds I like. A lot of cash is already guaranteed in the coming year and CV-19 has catapaulted the company across the funding chasm that many good but cash poor firms suffer from. CV-19 testing will probably decline over the next year or so but will likely end up as an attractive long term annuity revenue. In the meantime there's a chance of more big contracts.

More positive vaccine news is now virtually guaranteed. The Pfizer announcement shows the virus can be blocked - if one can do it, so can others, hopefully including some of the free to market ones with less deployment problems. This is universally good news for humanity and a triumph of science that wouldn't have been imaginable even half a generation ago.

Most likely, I imagine, further positive news will have further negative impacts on "Covid-secure" stocks. Good. The market eventually rewards rational agents over irrational ones. The opportunity for Novacyt now is in the hands of its management - it has the funding and it has the scale to become a world leader in diagnostics. And it's far from being a CV-19 only stock.

It may fail, of course. But in a lifetime in investing I know that opportunities like this don't come along very often. I'm very happy to have hitched a lift on the ride and if it ends up crashing and burning then so be it. But I think the odds are in my favour, which is the best you can ask for when it comes to investing.

Hi Alex,

In my opinion we always knew there would be vaccine news and in fact it was estimated by Numis to be due In November. So there shouldn’t really have been any surprises for the market. There will be more vaccine news Too And its a good thing for humanity but its also a good thing for the testing market too. We will roll a vaccine out and testing will be a regular part of that roll out. You need to know you dont have it before you take the vaccine. So that requires a test. 7 Billion people on the planet. Secondly it takes time to create all those vaccines and roll them out so we probably have 2-3 years whereby we cant achieve herd immunity.

We also need to know how long the vaccine works for (we dont know that yet). So testing will be ongoing. Every time someone gets the flu, we are going to need to test. Then finally with all this investment perhaps see continued innovation. The Q16 & Q32 diagnostics equipment that NCYT are putting into the field are capable of a lot more, legionella , clostridium, norovirus who knows perhaps we could try and eradicate flu because we will have the equipment in the field and diagnosis can be quicker before these diseases get passed about.

MH1

Thanks Keelan,

I watched £SBI on Investor Meets Company last night. I assume the recording will be up.

It's clear they are not just a testing company but have seen an opportunity which they think they can monetise. Their margin on testing is currently 40% gross. They expect the business to peak in 2021 but didn't view the vaccine news as negative but something to drive testing shorter term .Its clear they are going to look at bolt on acquisitions to bolster their other business areas. It also seems to be the game of some of these other players to use the cash flows elsewhere.

They did have some other interesting businesses including storage which is clearly very high quality returns and very relevant post the Pfizer announcement. They spoke about 80% gross margins and 90% recurring revenues which caught my attention!

Interesting free-to-read article on rapid tests and their accuracy

https://www.economist.com/scie...

Passive Income

Great write up, Thank you. Could you also have a look at CTEA for part 3? They have the COV-ID app and a link up with BHA to provide the healgen test which is on the governments short list of lateral flow tests.

dmcarver

Did I miss something? I thought GSK was one of the leading players in this game?

Pennyledges

Excellent concise article......await next episode as hold a couple of these ...have held NCYT in the past and just topped up with a few SYNG as the treatment aspect is also vitally important from an ill covid positive patient point of view and the phase 2 trial results have been published and are good.

Andy P

I saw this morning on CNBC from an epidemiologist that the vaccine wouldn't be effective if 30% of the population where not to take it. Just do a survey of your friends to see who would be first in line to get the vaccine. From my inquiries I am beginning to wonder if people are being a little too optimistic. I would love to here feedback from others

MichaelFBS

Thank you for a interesting summary.

I hold both Avacta (LON:AVCT), Novacyt Sa (LON:NCYT) and Synairgen (LON:SNG) (the latter is my smallest holding by some way and Novacyt Sa (LON:NCYT) nearly my largest.

I agree with the general sentiment here that a vaccine is very positive for Novacyt and makes them even more of a bid target (for Pfizer?) than they were before.

Couple of points

I understand, but I have not yet confirmed it, that the Pfizer vaccine has to be transported at -80c but can stored (say in the GP’s fridge) for 5 days and not deteriorate.
Avacta did say way back in the early days of Covid (around March/April time) that their Affimer had been found to block the SARS-Cov-2 spike protein (so effectively a vaccine/cure) though I have heard nothing on this since.

I did not top on Novacyt earlier this week as even with the fall, which has been painful, it is still a 10% holding.

Regards

Michael

Thx Tim great post.

pka

The CEO of Novacyt and a consultant to the board have acquired about £500k and £90k worth of its shares respectively over the last two days:

https://www.stockopedia.com/share-prices/novacyt-sa-LON:NCYT/news/novacyt-sa-directorpdmr-shareholding-urn:newsml:reuters.com:20201112:nRSL0564Fa/

https://www.stockopedia.com/share-prices/novacyt-sa-LON:NCYT/news/novacyt-sa-directorpdmr-shareholding-urn:newsml:reuters.com:20201113:nRSM3414Fa/

Those very significant purchases make me feel much more confident in continuing to hold my Novacyt shares, despite their 33% drop in price on Monday followed by a partial recovery later this week.

I agree. I was close to dumping my holding prior to that news. The other UK covid plays look risky in comparison, particularly those with no product yet approved.

Are we expecting a juicy special dividend next year from Novacyt Sa (LON:NCYT) - despite the tax angle, some might prefer that to spending the entire cash pile on possibly less profitable business generation/acquisitions?

Another tangential idea for a covid play - Palantir. From today's TechMarketView email ''Demand for Palantir's software has increased as a result of economic and geopolitical uncertainty, and more recently it has benefited from the COVID-19 pandemic.........In the UK, Palantir has made headlines due to its role in supporting the Government's response to COVID-19. Its Foundry platform has been connected to NHS England and NHS Improvement data to provide a consistent operating picture—“single source of truth"—for managing the pandemic. It is also being use to manage the supply and demand of critical NHS resources including PPE, ventilation and oxygen equipment, and ICU consumables. It secured a £20m call-off contract as part of the Home Office's Border Flow Service (see Palantir secures £20m deal to help monitor the UK border) and, according to recent media reports, is in discussions with the Government to support NHS Test and Trace.'' They lPO'd only in Sept, but with $26bn market cap these UK NHS contracts seem small beer.

Bullsnbears

14th Nov '20

Has anyone seen Dr. Reiner Fullmich's video outlining his intention to bring a class action against PCR testing?

This appears to be going after certain individuals but I wonder whether there could be any risk for PCR manufacturers such as Novacyt?

16th Nov '20

Novacyt had an RNS today with an R&D update:

https://www.stockopedia.com/share-prices/novacyt-sa-LON:NCYT/news/novacyt-sa-rampd-update-urn:newsml:reuters.com:20201116:nRSP3501Fa/

I hold.

A Primer on Covid-19 testing in the UK (Part 2)

Novacyt (LON:NCYT, EPA.ALNOV)

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Keelan Cooper

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