Novacyt SA – Increased demand for diagnostics and investment in the Health Care industry

Novacyt SA (LON: NCYT) is a France-based Clinical Diagnostics Company. It deals in diversified diagnostic products used in oncology, haematology, microbiology, LBC, and serology testing.

Rationale for Valuation – Speculative Buy at GBX 800.15

• For Novacyt, the first half of 2020 has been transformational and delivered sales growth of over 900%.
• The Board believes the strong demand for COVID-19 diagnostic testing will continue through the next few months and well into next year.
• The Company has decent fundamental metrics as it has maintained a Net margin and ROE above the industry median in H1 FY20. In H1 FY20, the net margin was 55.5%, and ROE was 109.6%.
• On leverage front, the debt-equity ratio was 0.04x, which was lower as compared to the industry median of 0.17x, reflecting that the company is less leveraged as compared to the industry.
• From the technical standpoint, shares were trading well above the short-term support level of 200-day (253.88) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• The pace of development in the healthcare industry and competitive pressure may impact business operations.
• The Group faces an inherent risk of product liability and associated adverse publicity.
• Brexit, customer credit risk and foreign exchange fluctuations can also hamper the business.

Recent News

On 2 October 2020, the Company announced the liquidity agreement monthly update. The agreement is governed under French law. As per liquidity agreement for September, Invest Securities bought 12,516 shares at €5.88 maximum price and €3.30 minimum price and sold 15,066 shares at €6.17 maximum price and €3.33 minimum price.

On 29 September 2020, the Company stated that it had launched a new COVID-19 antibody (a CE-Mark approved serology) test. While simultaneously, the Company had signed a new supply contract for testing kits with the UK DHSC (Department of Health and Social Care.

Financial Highlights (for the six months ended 30 June 2020, as on 17 September 2020)

(Source: Company Website)

• In H1 FY20, the Company has delivered a sales growth of more than 900%, driven by the strong growth from Primerdesign.
• Gross profit witnessed a continued positive momentum, with a strong gross margin of 85%.
• Led by the growth in sales in molecular products business, the operating profit stood at €48.3 million, higher than the loss of €0.7 million in H1 FY19.
• For the UK COVID-19 testing, the Company has collaborated with AstraZeneca, GSK and University of Cambridge.
• It has also signed several new and significant strategic partnerships, including a distribution agreement in the US.
• The Company’s cash increased to €19.7 million against the previous period (31 December 2020: €1.8 million). This large increase in cash was driven by the significant upturn in trading.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Conclusion

The Company has launched the respiratory test panel (Winterplex™) and two-gene target test for COVID-19. In the near-term, Novacyt would give a strong organic revenue growth in the core business. For FY20, the revenues are expected to exceed €150 million and EBITDA profitability to exceed €100 million. In the short-term period, the group is likely to perform well by selling the COVID-19 test kit. The Company expects additional sale with the launch of several new products. Overall, it seems to be well-positioned to deliver on the vision of becoming a market leader in respiratory and transplant clinical diagnostics. The stock made a 52-week low and high of GBX 6.03 and GBX 974.15, respectively.

Based on the decent growth prospects, we have given a “Speculative Buy” stance on Novacyt SA at the current market price of GBX 800.15 (as on 12 October 2020, before the market close at 10:06 AM GMT+1).

PureTech Health Plc - Expects to initiate first-in-human clinical studies by the end of 2021

PureTech Health Plc (LON: PRTC) is an Advanced Biopharmaceutical Company. It is dedicated to developing, discovering, and commercializing highly differentiated medicines for devastating and immunological diseases.

Rationale for Valuation – Speculative Buy at GBX 237.50

• The debt/equity ratio recorded by the Company in the past three years was considerably below the industry median. In H1 FY20, the debt/equity ratio was 0.05x.
• In the last two years, the Company has delivered a positive return of ~56.72%, which is higher as compared to the FTSE 250 Index.
• From the technical standpoint, 14-day RSI stood at 33.38, which is supporting the upside movement.

Key Risks

• The failure of the Company’s products to obtain required regulatory approval could cause a significant decrease in the company’s value.
• The failure of the company to obtain patent protection and maintain the secrecy of crucial information could affect the income of the company.
• Also, the adverse US federal income tax regimes and fluctuating exchange rates can affect the financial condition further.

Recent News

On 1 October 2020, the Company announced the appointment of biotech entrepreneur Kiran Mazumdar-Shaw to PureTech board of directors.

On 23 September 2020, the Company has submitted a Draft Registration Statement to the United States SEC (Securities and Exchange Commission). This is for the potential listing of American Depository Shares on the Nasdaq Stock Market.

Financial Highlights (for the six months ended 30 June 2020, as on 27 August 2020)

(Source: Company Website)

• PureTech Level Cash Reserves increased by US$189.9 million against the previous period (31 December 2019: US$120.6 million).
• The Company witnessed a strong balance sheet, with a US$136.5 million of equity investments and non-dilutive funding.
• Founded Entities have raised more than US$890 million, of which US$823.4 was from third parties.
• For the six months ended 30 June 2020, the losses from operations decreased by 24.9% year-on-year, due to a decline in operating expenses.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative) 

Conclusion

The first half of 2020 has been an exceptional period, with the achievement of multiple notable regulatory milestones. During the first half of 2020, the Company has demonstrated a robust commitment to value realisation through the monetisation of Founded Entity equity. In H1 FY20, it generated more than US$245 million from the sales of minority shares in certain Founded Entities, which will help the future growth of PureTech.

Further, it has also generated an additional around US$101 million of cash in August 2020, which is from a subsequent sale of Founded Entity equity. In light of the Company's strong cash position, PureTech expects that the ADSs would trade on the Nasdaq Global Market. Overall, the Company’s prospects look good, and it could be an attractive opportunity to invest in the long term. The stock made a 52-week low and high of GBX 191.20 and GBX 339.36, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Speculative Buy” stance on PureTech Health at the current market price of GBX 237.50 (as on 12 October 2020, before the market close at 12:35 PM GMT+1), with lower double-digit upside potential based on 47.00x EV/NTM Sales (approx.) on FY20E sales (approx.). 

*All forecasted figures and Peer/Industry information have been taken from Refinitiv, Thomson Reuters.

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