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Despite a decline in infections, testing is likely to become routine to keep everyone safe and maintain freedoms
Thursday 20 May 2021 Author: Martin Gamble

The successful development of vaccines was a triumph for the world and was for the most part great news for equities too, however it negatively impacted sentiment for one particularly sub-set of the market.

The initial excitement surrounding biotechnology companies involved in developing Covid-19 testing kits and treatments for sufferers of coronavirus rapidly evaporated as the focus moved from testing and treatment to the protection offered by jabs.

The massive subsequent falls seen in share prices has probably gone too far in some cases, considering the likely demand for mass testing hasn’t disappeared entirely.

However, we should point out the small cap names in the sector are far more volatile than average and only suitable for investors with a reasonable tolerance for risk.

The waning enthusiasm for testing plays is not a huge surprise given the fast deployment of vaccination programmes in the UK, US and Israel. Infection rates have fallen rapidly across the UK, notwithstanding the risk of emerging new strains such as the latest Indian variant which has been classified a ‘variant of concern’ due to its faster transmission rates.


However, dismissing the need for Covid-linked diagnostics and medicines is an oversimplified take on the current situation with many countries now leaning towards weekly or bi-weekly mass testing programmes to fully open their economies.

In the UK the entertainment industries have adopted a rigorous testing protocol in a controlled way to allow events to happen in front of live audiences.

For example, the recent final two days of the world snooker championships in Sheffield was the first indoor event to be held in the UK with a near capacity crowd in over a year.

This was allowed on the basis that people entering the arena had proof of a negative test. Pharmaceutical analyst at Finncap, Mark Brewer argues that demand for high sensitivity tests will exist for many years despite the vaccine roll-out.

Brewer highlights the US government has spent $1.2 billion purchasing Abbot Laboratories’ lateral flow tests while the UK government has spent over one billion pounds on buying hundreds of millions of Innova Medical tests.

A report from Grandview Research estimates that the global Covid-19 testing market was worth around $84.4 billion in 2020 and is expected to grow at a compound annual growth rate of 3.1% from 2021 to 2027.


As the table shows, on average, the share prices of our selected group of companies have halved relative to their 12-month highs, which were largely achieved in the early parts of 2020.

For example, shares in molecular diagnostics company Genedrive (GDR:AIM) peaked on 5 May 2020 at a price of 220p from which it has subsequently fallen by two thirds.

The company was recently successful in its tender for the Public Health England’s microbiology framework agreement which allows it to supply all the company’s Covid-19 testing equipment.

However, being part of the framework doesn’t guarantee orders.

Its test kit was also approved by the Indian regulator after showing 100% sensitivity and specificity in a performance evaluation conducted by the Indian Council of Medical Research.

Sensitivity measures the accuracy of positive tests while specificity is a measure of the accuracy of correctly identifying negative test results.

At the other end of the performance spectrum is cancer therapies and diagnostics company Avacta (AVCT:AIM) with the shares only around 6% off the recent highs.

That’s because the business has generated a lot of positive momentum in recent weeks. This month it began the commercial roll-out of its sensitive rapid lateral flow test after it gained CE marking, allowing it to be marketed across the EU.

The company’s test is intended to provide a fast, low-cost means of identifying individuals with high viral loads, who are considered more likely to infect others.

In clinical studies, the test achieved sensitivity of 98% and specificity of 99% which is considered high for a lateral flow test.

Lateral flow tests had been seen as a poor relation to the ‘gold standard’ polymerase chain reaction or PCR tests which are designed to test genetic material in a virus.

In contrast, lateral flow tests are designed to detect the spike protein produced by the body in response to the presence of a virus.


Shares highlighted Avacta as a great way to get exposure to the Covid-19 testing market back in April 2020, on the basis that its rapid lateral flow test could be a ‘game changer’. It has since been one of the best performing shares in the diagnostics space gaining 296%.

Avacta recently confirmed it has manufacturing capacity, subject to access of equipment funded by the UK government, to produce five million-to-30 million tests per month. We think the shares are still attractive.

One of the darlings of the sector last year was diagnostics firm Novacyt (NCYT:AIM) which was one of the first companies to develop an effective PCR test to identify the virus, which it launched at the end of January 2020.

At that time the shares were trading at 20p and they eventually rocketed to £11.94 in October, registering a 5,870% gain in a few months.

However, a profit warning on 9 April relating to the failure to extend a Covid-19 testing kit supply contract for the Department of Health and Social care, saw the shares slump 39% and they have drifted lower since.

The failure to extend the contract and souring relationship with the DHSC undermined the investment case. The contrasting fortunes of Avacta and Novacyt underlines the heightened volatility and risks associated with the sector.


Vaccinating the global population will likely take years, given the reluctance of some nations to share their stockpiles and the politics and logistics involved.

Health care analyst Adam Barker at Shore Capital argues that recent calls to waive intellectual property rights wouldn’t necessarily achieve the hoped-for benefits of increased supply to developing nations.

‘For many developing countries, knowing how to make the vaccines would be one thing, but actually being able to do it, store and transport them is a completely different issue.’

Barker points out that vaccines are incredibly hard to manufacture, with onerous safety checks being one reason why there aren’t any generic vaccines.

The threshold for herd immunity is the point at which most of a population is immune to an infectious disease, either through having had the virus or through immunisation.

Some estimates put the threshold at around 70% but there isn’t widespread agreement on the matter.

According to the World Health Organisation and data compiled by Our World Data, around 1.37 billion doses had been administered as at 13 May 2021 and 333 million people have been fully vaccinated, representing 4.3% of the global population, emphasizing the enormity of the task of reaching herd immunity.

While the virus is still at large and mutating somewhere on the planet, the risk of more deadly strains is ever present. This reinforces the logic of continued mass testing programmes.

The risks of investing in the sector are higher than average but likewise, the potential rewards could be significant. One such share with huge potential and whose shares have fallen 59% from the recent highs is respiratory and drug discovery firm Synairgen (SNG:AIM).

Synairgen (SNG:AIM

Price: 100p – Market Cap: £200.1 million

The company has been developing its SNG001 drug for the treatment of respiratory virus infections for over a decade.

The inhaled drug can be used in the home setting, was given fast track status from the US Federal Drug Agency in December 2020.

In a UK at-home study, SNG001 was 100% effective at preventing hospitalisations with the strongest effect seen on patients suffering marked and/or severe breathlessness.

As we have discussed the increasing number of variants pose a risk to the effectiveness of vaccination programmes.

For example, Numis noted that The Seychelles, despite being the most vaccinated country in the world, recently reintroduced widespread restrictions.

This means that Synairgen could play a crucial role in providing a solution for treating high risk patients affected by new resistant strains as well as parts of the world with high infection rates such as India.

After raising fresh equity last year, the company has £75 million of cash on the balance sheet.

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