Novacyt sees good sales growth amid working capital challenges

Clinical diagnostics company Novacyt updated the market on its trading for the six months ended 30 June on Tuesday, reporting that its unaudited revenues in the first half were €7.2m.

The AIM-traded firm said that compared well to the restated revenues for 2018 of €6.4m, with strong growth seen from its molecular diagnostics business ‘Primerdesign’.

Continuing group revenue excluding ‘NOVAprep’ increased by 12%, or 11% at constant exchange rates, with peak sales of €1.4m for the month of June at a group level.

NOVAprep revenues were excluded to reflect the strategic decision to sell the division, as the company announced on 11 December, which remained an ongoing process.

Group revenue included the revenues of the clinical lab for the first half of the year, which had subsequently been sold, as it announced on 18 July.

Primerdesign revenues increased by 7% to €3.3m compared to the first half of 2018, as a result of a 22% growth in business-to-business sales and continued growth of 10% in international markets.

Direct sales in the UK were down by 6% due to the short-term impact of reorganising the sales management structure, with sales growth anticipated to resume towards the end of the year.

Sales in the Middle East and United States markets were the fastest growing regions for molecular products at 114% and 33%, compared to the first half of 2018.

In its Lab21 division, revenue was €4.0m which represented growth of 17%, or 16% at constant exchange rates, driven by the acquisition of the infectious disease assets from Omega Diagnostics, which completed in June last year.

The second quarter of 2019 saw sales restricted by a lack of working capital, as the firm reported on 30 April, which mainly impacted the Lab21 business unit.

Despite that, the new sales team increased UK sales of ‘Microgen’ branded products by 29% compared to the first half of 2018.

The order book remained “strong” for the second half of the year, the board said, with continued growth expected depending on how quickly the supply chain could be restored.

Looking at its new products, Novacyt said the molecular research and development pipeline of CE-marked assays focussed on transplant diagnostics continued to make “good progress”, with the two new CE-marked products ‘EBV’ and ‘BKV’ set to launch in the second half of the year as planned.

The global transplant diagnostics market size was valued at $579m in 2018, and was forecast to expand at a compound annual growth rate of 7.6% over the next five years.

Increasing organ transplants were a “major factor” driving demand for diagnostics use before clinical procedures, the board explained.

It complemented the rapid diagnostic ‘BKV’ assay already launched by Novacyt under the ‘PathFlow’ brand last June, it added.

During the second half of 2019, Novacyt planned to add other key products to the rapid diagnostic ‘PathFlow’ range, including clostridium difficile, helicobacter pylori, norovirus, flu A/B and rotavirus/adenovirus.

Further ‘PathFlow’ products would also be announced later in the year, which would complement the Novacyt portfolio of rapid clinical diagnostics for infectious diseases.

On the subject of its restructure, Novacyt had reported on 18 July that it successfully sold its clinical lab operations based in Cambridge in an all-cash deal worth £0.4m.

It explained that, while the financial benefit of the sale was “relatively modest”, it would enable the group to focus on driving growth and profitability from its core reagent manufacturing business.

The company said it was continuing to look for a buyer of its ‘NOVAprep’ business unit, and had seen interest from China.

As the sale process was continuing, the firm said it was taking further steps to reduce the costs and cash burn of the unit.

There could be no certainty in a successful sale of the ‘NOVAprep’ business, the board said, and in the event a sale did not occur, the operation would be closed by the year-end.

The company said it was also considering how to maximise value from its remaining non-core asset of animal health products, which represented 5% of group revenues.

Novacyt said the options could include a sale of the business, as it was focused on human and food diagnostics and did not intend to invest in another sales channel such as animal health diagnostics.

Looking ahead, the board said the performance of the Primerdesign and Lab21 businesses remained “strong” entering the second half of the year.

Both companies had “significant” sales pipelines and expected sales to be higher than in the first half.

Novacyt said it expected to show increased adjusted EBITDA profitability for the full year, compared to 2018.

“The first half of 2019 has seen good operational performance with solid growth from Primerdesign and Lab21 products,” said chief executive officer Graham Mullis.

“I am pleased with the successful sale of the clinical lab, as it allows us to further streamline and focus our operations.

“Whilst we acknowledge shareholders will be unhappy with the short-term share price performance, the board remains excited and committed to growing and developing our core diagnostic reagent business where we see many opportunities.”

Mullins said that during the first half of 2019, despite the working capital challenges, the firm produced a “record” sales growth period and repaid more than €1m of its principal debt balance.

“Novacyt remains committed to its core strengths of in vitro diagnostics product development, commercialisation and contract manufacturing, and will continue to focus on driving value across the group.”