In the last five months, Avacta (LSE:AVCT) shares have jumped nearly 173%. But this doesn’t tell the full story of this pharma stock. Despite the recent surge, this FTSE AIM share is still down 8.5% over the last 12 months and 3.9% in 2022. This price action points to a volatile asset that rises and falls rapidly with the market. So what’s the reason behind this new spike in interest and should I invest in this medical research stock? Let’s find out. 

The rise and fall of Avacta shares

The pandemic-driven pharma boom is well documented. But Avacta was a huge winner, thanks to its timely antigen test kits that were effective detection tools. Its shares rose an astronomical 1,125% between March 2020 (when Covid was first declared as a pandemic) and May 2021. 

But the rise of variants meant the efficacy of the results dropped, causing the company to pull its test kits from the market in early 2022. Subsequently, the Avacta share price fell 86% to 42p. 

However, in recent weeks, this pharma stock has made a big comeback. Here’s what happened and my verdict on the stock. 

Big developments

Avacta is still primarily a clinical-stage biopharma firm with a focus on cancer detection and treatment. While it has a few other divisions, its most promising oncology treatments are still under development. 

Right now, oncology is one of the fastest-growing medical sectors. The market for such treatments is growing at a compound annual rate of 9.6%, which will generate $292.8bn by 2028. 

And a recent update from the board showed some significant developments in bringing these cancer treatments to market. While it will still take a decade before Avacta’s new AVA6000 chemotherapy system reaches the market, the prospects are promising. 

The innovative treatment focuses on reducing the toxicity of chemotherapy on healthy cells by strengthening its tumour-targeting properties. This is done with the help of a protein marker that’s present in high amounts in cancerous cells. 

The update shows that the treatment will move to Phase II by the second half of 2023. This was earlier than first expected and shows me that Phase I dose escalation data has been favourable so far. 

At the same time, the company also rolled out updates on several key partnerships. Its ongoing relationships with LG Chem Life Sciences and Daewoong Pharmaceuticals both received positive updates. Results from these partnerships are expected to boost the disease detection product line of Avacta over the coming decade. 

Concerns and verdict

Positive business developments and the UK market rebound have triggered this recent jump in Avacta shares. But I don’t think the current growth rate can be sustained without visible financial results. Even if trials are completed, bringing new cancer treatments to market is no easy task. It could take years to reach profitability. 

And financially, the firm is still loss-making, recording a pre-tax loss of £29m last year. This makes this AIM share a very speculative investment. The market is volatile right now and further economic distress in the UK could cause the FTSE 100 and other indexes to tumble. And while its future looks promising, I’ll wait for Avacta shares to show signs of sustained growth across the rest of 2022 before I consider a small investment in 2023. 

The post Up 173%, can Avacta shares continue this incredible run?   appeared first on The Twelfth Magpie.

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Suraj Radhakrishnan has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

What does this news mean for Hikma and Shire? Should you ditch these stocks right now or is this a good opportunity to buy?

Uncertainty

A story by Bloomberg, sourced from “people familiar with the matter”, said that the Justice Department’s antitrust investigation, which began two years ago, “now spans more than a dozen companies and about two dozen drugs”.

Hikma was not among the 12 companies named by Bloomberg, which included industry giants Mylan and Teva Pharmaceutical Industries, but the Footsie firm is the number six generics company in the US. Furthermore, it is a manufacturer of two drugs referred to in the Bloomberg story — doxycycline and digoxin — although, according to the Financial Times: “Analysts said the two medicines are now relatively unimportant to Hikma’s US generics division”.

Hikma may or may not be drawn into the investigation, but in any case antitrust inquiries are fairly common and when fines are levied they represent a one-off hit and rarely lead to any lasting damage to a company.

Long-term value

I’m more interested in Hikma’s long-term prospects and current valuation after a 6.8% fall in its shares on Friday. In fact, at 1,620p, the shares — now down 40% since August when the company downgraded current-year earnings guidance — are at a two-year low.

As far as prospects are concerned, I believe Hikma has a bright future. The group generates 60% of its revenue from the US, while 34% comes from the Middle East and North Africa, which is an attractive region for high, long-term growth. The business is also nicely diversified across generics (30%), branded (30%) and injectables (40%).

As far as valuation is concerned, 2016’s depressed earnings represent a bit of short-term indigestion as a result of a major acquisition. Looking ahead to 2017, and cautiously taking earnings forecasts from the lower end of analyst expectations (110p versus a consensus of 125p), we get a price-to-earnings (P/E) ratio of 14.7 and earnings growth of 25%, giving a highly attractive P/E-to-earnings growth (PEG) ratio of 0.6.

This wide margin of safety persuades me that Hikma offers excellent long-term value at the present time and I rate the shares a ‘buy’.

Another very buyable stock

Shares of Shire were not hit as hard as Hikma’s on Friday, falling 2.4%. They’ve recovered a bit today, but at 4,500p are nevertheless about 15% down from their peak last month.

Shire was not mentioned in the Bloomberg article and, indeed, doesn’t have the level of exposure to the generics market as Hikma. For example, it supplies an authorised generic version of its attention deficit hyperactivity disorder drug Adderall XR on which it receives royalties.

Like Hikma, Shire has made a large acquisition this year, and in Shire’s case the integration of the new business is progressing smoothly. As the leading global biotechnology company focused on rare diseases, this is another company whose growth prospects I like. And the shares look very buyable to me at a consensus 2017 P/E of 10.9 and PEG of 0.6.

The post Should you ditch these Footsie pharma stocks right now! appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended Hikma Pharmaceuticals. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.