Biotech stocks have been at the centre of the Covid-19 vaccine development effort. So it’s no surprise that their share prices have generally been on fire lately. There are lots of AIM shares operating in this industry. But one, in particular, has caught my attention. Could this biotech stock be my next investment? Let’s take a look.
Using biotech to diagnose Covid-19
Abcam (LSE:ABC) manufactures pharmaceutical reagents and provides research tools to companies engaged in diagnostics and drug development. Over the years, the firm has built up a vast portfolio of over 450 antibodies that are commonly used in blood tests (including those used to diagnose Covid-19) as well as the development of new medicines.
I discovered an impressive figure from 2019. Almost half of the scientific papers published related to drug development cited one of Abcam’s products as critical to the research. Needless to say, the firm’s products are well known and widely used. And they have even led to 20 new treatments that are either FDA approved or in clinical trials today.
The business generates revenue from several sources. The bulk comes from the direct selling of reagents to customers worldwide. The other — currently much smaller — sources include service fees, licenses of its technology, and royalties from approved treatments.
The latter component is what I find most fascinating as Abcam continues to receive a portion of each sale of a treatment that was developed using its reagents. Due to the typical 10-year drug development cycle, the number of FDA approved medicines using Abcam’s products is currently quite low. But over the long term, I expect this revenue source to become far more substantial.
The biotech stock is not risk-free
Beyond its shares being AIM-listed, Abcam is exposed to multiple risks. Its international operations did help make it a globally recognised brand within the biotech industry. But as a result, most of the revenue now originates from outside the UK, primarily coming from North America. This exposes the firm to fluctuating currency rates that may have a notable impact on the bottom line.
This global presence also introduces some additional complications regarding regulatory compliance. As I’ve previously discussed, the pharmaceutical industry has some of the world’s strictest regulations. Different countries have different regulatory standards. And while most are similar to FDA, there are some differences that Abcam needs to comply with.
If the business fails to do so, its products would no longer be allowed to be used in certain countries. And it would likely have a significant impact on the business from both a legal and reputational standpoint.
The bottom line: should I buy shares in this AIM Stock
Despite the impressive and vital technology that Abcam provides, it’s not a stock I’ll be adding to my portfolio. At least not at the current price.
The firm’s net income has recently been dropping as it has begun increasing spending to expand faster. Sacrificing profits in the name of growth is a perfectly acceptable strategy, in my opinion. However, this promise of growth has elevated the share price to a level that seems unsustainable to me.
With a P/E ratio of nearly 280, Abcam just looks too expensive. But I’ll be keeping a close eye on it for any potential buying opportunities throughout 2021.
