It’s exciting seeing governments directing money towards medical science. This will be an area where small cap investors should be able to get rich pickings in the years ahead.
Other Small cap news...
Another small cap highflyer in Kazakhstan
Today, I want to look at the research process that goes into getting a new drug to market. These days research is increasingly based on biological rather than chemical compounds. Already biopharmaceuticals account for over one third of all drugs in development. Another small cap highflyer in Kazakhstan
- Baltic Oil Terminals (ticker: BTC) shares rocketed 59% today as investors cheered a new deal to export oil from Kazakhstan.
- Baltic Oil reported an improvement in conditions in its market and believes that it will be able to take full advantage of the upturn.
- BTC's 2008 results, due out on 29 May, are "broadly" in line with expectations, despite a challenging fourth quarter and start to the new year.
The challenge of turning any compound, whether biological or chemical, into an approved medical treatment is, though, enormous. At every step of the way, there are hurdles that must be overcome – and failure at any one of them can negate the entire project. Clearly the earlier that any likely pitfalls can be spotted, the more money will be saved in the long run.
That’s why the tests that are run at the very first stage, on the novel compounds themselves, are especially important. But a particular issue with biological molecules is that they are especially complex and fragile. This means that they cost a lot to make, and the more that is required the more expensive the exercise becomes.
AIM-listed company, Avacta (ticker: AVCT), last week unveiled its Optim desk-top machine that could provide at least a part of the answer to this problem. It can analyse minute samples of biological material and could save pharmaceutical researchers huge sums of money.
Making analysis more efficient
This is due to its advanced optical properties which, according to chief executive Professor Alastair Smith, give Avacta a meaningful competitive advantage. Optim can operate with samples two hundred times less than a conventional machine. Translated into money, this means that it can analyse a sample that cost just $50 to produce, against the larger, $10,000 samples that are required by other machines.
The second considerable advantage of the Optim is that it combines into one unit a number of functions that today must be provided by separate machines, such as fluorescence spectrometers, protein analysers, multimodal plate readers and light scattering devices. These do not come cheap, ranging from $30,000 to $300,000 and large research organisations may have several of these on multiple sites.
Despite combining several of these functions, the Optim will cost $75,000 - $150,000 depending upon specifications, so it should be a compelling proposition. The question now is how many Optims Avacta may be able to sell, and here Dr Smith is cautious. ‘A few in the first year,’ is his view, and ‘a few tens in the second year.’ Further out, though, the expectation is that the Optim should generate annual sales for Avacta in the £15m-£20m range with gross margins of at least 65%.
Avacta has done well to produce such an advanced machine in just two years. And there is no doubt that Dr Smith and his colleagues have a keen commercial instinct not always found in companies that arose from work done in university laboratories.
Three key areas for future growth
Avacta is by no means a one trick pony. In the last year it has extended its reach into diagnostics and personalised medicines through the acquisition of three quoted companies, Oxford Medical Diagnostics, which specialises in breath diagnostics, Theragenetics and Curidium Medica. It has also bought YorkTest Veterinary Services and later this year will launch another £3,000 product called MIDAS, that will enable vets to give instant health assessments for pets without having to send samples off to the laboratory.
So there is plenty going on here, and Avacta is targeting three fast growing areas, biopharmaceutical research, diagnostics and personalised medicine. This presents a challenge but if the Optim really takes off then the share price should follow. This is another Penny Share on my Watch List in an area that is returning to stock market favour.
Good investing,
Tom Bulford
For The Penny Sleuth
P.S. I have already recommended specific ways to play the investment trend in medical science. You can be one of the first readers to get in on my next hot penny share play. Get access to my entire small-cap portfolio right now...
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