Key Points

• Shares of Avacta exploded in 2021 thanks to its protein-based diagnostic solutions to help fight Covid-19.
• Avacta’s flagship cancer treatment, AVA6000, is in Phase 1 trials with encouraging initial results.
• The firm could become an acquisition target if it continues to deliver solid results.

Avacta (LSE:AVCT) shares have had quite a bit of downward momentum lately. After reaching its highest point in over a decade last year, the stock has lost almost all of its gains. And in the past 12 months, Avacta shares are down nearly 80%. But is there a valid reason behind this decline? Or is this actually a buying opportunity for my portfolio? Let’s explore.

The bull case for Avacta shares

As a reminder, Avacta is a young biotech business that focuses primarily on researching cancer therapeutics as well as novel diagnostic solutions. 

The latter is receiving particular attention from the medical community. Why? Because Avacta has created a proprietary platform called Affimer. This platform provides diagnosticians with a vast portfolio of reagent proteins that can be used to detect infections within samples. This technology allowed the company to create lateral flow tests for detecting Covid-19.

Traditionally, this process is completed with monoclonal antibodies. However, these are both expensive and challenging to manufacture, giving Affimer a clear advantage. That’s obviously a solid catalyst for long-term growth for Avacta shares.

On the therapeutics side of the business lies Avacta’s pre|CISION platform. This is still relatively in its infancy. But it’s already being used to develop the group’s new cancer treatment. AVA6000 is a highly targeted chemotherapy drug currently in Phase 1 clinical trials. 

Once again, there are existing chemotherapy treatments out there. But this biotech stock is taking things one step further by designing a drug that will only affect cells with a high concentration of a specific protein that’s typically only present in solid tumours. 

As a result, fewer healthy cells get caught in the crossfire, resulting in far milder side effects for patients. Needless to say, that could be an enormous win in the fight against cancer, and for Avacta shares as well.

Taking a step back

As revolutionary and exciting as Avacta shares might be, there are some considerable risks to consider. Affimer may have been proven as a viable alternative to anti-body based diagnostics, but convincing customers to switch could take quite a bit of convincing. And with no cancer drugs on the market, the revenue stream remains quite restricted while the costs continue to skyrocket. 

After all, running clinical trials is not cheap. And to make matters worse, the likelihood of success is pretty low. In fact, on average, less than 10% of drugs in Phase 1 ever make it to the market. So far, AVA6000 is showing promise. And the group recently announced its plans to increase the dosage after initial data showed no safety concerns.

But should the next set of results be less promising, the entire project could end up being scrapped. And that would mean sending enormous amounts of capital down the drain, sending Avacta shares down the drain.

Should I buy Avacta shares?

This early-stage biotech group has a fascinating collection of products in the pipeline. At least, that’s what I think. And it’s possible Avacta could become the target of an acquisition by a larger pharmaceutical group.

However, as promising as it seems, I think it’s too early for me to add Avacta shares to my portfolio. For now, I’m going to keep a close eye on the progress of its ongoing clinical trials. And if encouraging results continue to roll in, I may have to reassess my opinion about Avacta shares.

Zaven Boyrazian does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.