Avacta shares: the epitome of high-risk, high-reward FTSE AIM shares

Avacta (LON: AVCT) shares bear the characteristic volatility of many of the most popular FTSE AIM shares. The biotech company’s share price was caught up in the pandemic-era trading hysteria, skyrocketing to a record 273p in May 2021, buoyed by both investor overexuberance and its association with ground-breaking innovation.

By March 2022, Avacta had crashed to 42p, but has now recovered to start 2023 at a healthy 120p.

Avacta share price: science in brief

Avacta has two key proprietary platforms, Affimer and pre|CISION.

Affimer works as an alternative to antibodies and eliminates many of the negatives of the $100 billion market, such as their poor specificity, reliance on animal immune response, and the cost and complexity of their manufacture. pre|CISION is a targeted chemotherapy platform which only activates within fibroblast activation protein (FAP)-rich tumour tissue, which theoretically reduces the exposure of healthy tissue to chemotherapy side-effects.

Avacta has signed partnerships with several globally significant pharma corporations, including a joint venture with DaeWoong Pharmaceutical, a licence agreement with Point BioPharama, and a $400 million partnership with LG Chem.

The FTSE AIM company has also conditionally agreed to purchase leading IVD distributor Launch Diagnostics for £24 million, with an earn-out capped at £13 million. The acquisition constitutes the first major step in Avacta’s M&A-led strategy to build a wide defensive moat around its growing position within the European immunodiagnostics market.

Launch makes strategic sense: it generated 75% of its 2021 £32.75 million revenue in the UK, with an impressive gross margin ranging from 44% to 50%. Interestingly, the acquisition discounted Launch’s covid-related revenue by 80%, but given the potential pandemic resurgence, this could be an even better deal than previously expected.

Encouragingly, Avacta is taking an issue of a 6.5% £55 million 5-year, unsecured bond (convertible at 118.75p) to Heights Capital, a subsidiary of titan Susquehanna International, to part-finance the takeover. Investors have leapt on this backing as evidence of Avacta’s strength.

Avacta shares: AVA6000 Q1 2023

While the biotech is loss-making, revenue increased to £5.5 million in H1 2022, against an operating loss of £9 million. Losses on drug development are increasingly expensive in this tightening monetary environment, but in Avacta’s case, could be well worth it.

While the company has a long-term strategy, Q1 will be determined by the success (or lack thereof) of its novel AVA6000 pro-doxorubicin (chemotherapy) drug. Phase I trials began as far back August 2021 — a decent reminder of how long biotech investments can take to pay off — and the company has promised investors an update in ‘early January.’

In addition, it has announced a Science Day for mid-February that some speculate could be used to explain in detail the success of the treatment. For context, if AVA6000 works as hoped, it could completely revolutionise chemotherapy. And the effect on Avacta’s share price could be stratospheric.

Indeed, the anthracyclines market (including doxorubicin) is expected to grow to $1.38 billion by 2024. But this would be a severe underestimate if AVA6000 eliminates much of their associated toxicity.

Reassuringly, AVA6000 has been granted Orphan Drug Designation by the US FDA, which provides tax credits for drug developers taking the risk to develop treatments addressing rare diseases. Importantly, if AVA6000 is approved, the company would benefit from seven years of market exclusivity in the US, described by CEO Alastair Smith as a ‘significant commercial advantage.’

As a caveat, biotech enterprises do tend to have a nasty habit of throwing unexpected curveballs at investors — Synairgen’s failed covid-19 SNG001 trial in February 2022 saw the once-lauded company fall by 94% in a single day of trading. And while Avacta is a very different prospect, it is still a volatile FTSE AIM stock.

But the potential could make the company an excellent first 2023 trade for the adventurous investor with a high-risk appetite.