Thread by @TaylorQuant

Novacyt has over 550+ tests.

So why haven't they been doing billions in revenue like their peers, and why are we expecting them to go mid cap like other diagnostics companies, now.

What's changed and why have investors been backing sustainable mid cap revenues?

#NCYT #ALNOV

When Novacyt acquired PrimerDesign in 2016, it was for their portfolio of tests and the talent within that team.

However those tests were research use only (RUO), and PrimerDesign themselves were not structured as a business that could sell into the clinical use market.

You have seen how much PCR tests cost. But you have also seen the accuracy needed and competition in that market. That competition exists for good reason - it's worth billions and has a 17.5% CAGR from 2020 to 2027.

Clinical use tests are used to diagnose disease.

Hence the need for higher standards than research use tests. When companies move to enter a new market, they often begin with a research use test, then upgrade it to clinical to make money from it.

In 2016, as Novacyt acquired PrimerDesign, they knew they were sitting on a gold mine.

But it would take time and investment to transform those RUO tests to high margin clinical use tests (current clinical use Novacyt margins are around 80% for example).

In 2017 Novacyt began the process of evaluating which tests they would CE mark first, and they also began changing PrimerDesign's internal structure to expedite their move into clinical use diagnostics.

This is costly and requires investment.

Here's a research note from Edison who covered Novacyt in 2017 as they were deciding which initial 6 tests to upgrade to high margin clinical use.

When Novacyt saw the potential of PrimerDesign's RUO portfolio, they knew this is where the future of the business lay ahead and a couple of years later, after work had been done internally upgrading PrimerDesign's structure for regulator approvals, they sold Lab21 and NOVAprep.

At this time, Novacyt had also worked alongside a PCR device manufacturer IT-IS on harmonising PrimerDesign's ecosystem with a new release, the Q32.

It could run multiplex and had a higher throughput. IT-IS made Roche's Lightcyclers. That's their level it's worth noting.

Now Novacyt was leaner, and had two decentralised devices and a huge market leading portfolio of high margin tests waiting to enter the diagnostics world with a bang.

They sought investment from lenders, and some weren't happy with the dual listing complications.

Others didn't see diagnostics as being en-vogue. Drugs were much hotter for lenders pre-2020.

And then the pandemic struck.

Novacyt were ready because they had just finished years of M&A, and structural changes at PrimerDesign.

And that's why they were able to move fast on Covid-19 and continue to do so - nearly a dozen tests there alone in around 12 months.

Breakneck R&D speed.

Now they don't need to convince lenders of the worth of a huge diagnostics portfolio going clinical use.

All lenders are scrambling to get in the door in diagnostics. M&A is nutty for decentralised diagnostics companies. A massive focus now is on disease prevention.

And that affords @NovacytGroup a position of strength.

It may even appear aloof from investors' perspectives when we experience market side volatility and the CEO doesn't respond to us.

From their POV - the opportunity is obvious and they only require more patience.

As of December 2020 that had over £100 million in cash to CE mark a greater range of PrimerDesign's tests.

And likely much more cash to date. They have more capital than they need and more cash comes in daily, being re-invested in R&D, direct sales teams, talent, services etc

(Note their existing distributor network isn't great in my estimation and their push into direct sales will change things very quickly for them going ahead)

Yes the pandemic was a windfall. Still is a windfall.

But if you're investing in Novacyt, it's about the portfolio going clinical use.

That's the mid cap. It's not about these cash deals from covid now, we've done enough to make it happen fast.

It's clear the market needs more information and communication. At this stage I think it needs to be something major. Great suggestions like investor presentations etc will really help near term...

But I think a complete internal restructuring and 5 year + growth plan is likely underway. It will detail which portfolio tests to move to clinical use first to generate to greatest high margin revenues (like covid) and which new assets to acquire or R&D.

That is a significant body of work.

And personally, I would also prefer that presented to the market as a prospectus. A prospectus used as an application to the main London Stock Exchange.

AIM is no place for a talented team like this.

In the near term - definitely trying to ignore the market side noise. It's heartbreaking seeing this extreme volatility and the effects on investors who truly believe in Novacyt are galling.

That disappointment must be taken seriously and put under review.

And action taken to prevent it from happening again.

Whether that's a communications strategy or something else, we will see. I doubt very much investors are being ignored, especially as the board themselves have been buying shares around 8 euros.

For once they can actually feel our pain - no-one likes seeing their investment tank.

But this is all temporary and a footnote in the company's future. Think ahead.

It's all in place, they now miss no pieces to go mid cap. None. The tests are all there and the cash is there.

We do want some trendy pathogen tests though.

I think a cannabis pathogen test would be hype. Quite trendy getting, would get the market's attention!

But transplant, IFD & oncology especially is where the need and money is. 🙏