Shares in the coronavirus test maker Novacyt (LSE:NCYT) dropped more than 30% in Wednesday trading after early investors exercised warrants in the booming company.
The Anglo-French biotech group has seen its shares soar 887% in the last month. The trigger for its ascension was the news on 31 January 2020 that its molecular diagnostics division Primerdesign had launched a new test to detect novel coronavirus, dubbed Covid-19 by the World Health Organisation.
Since the outbreak in Wuhan, central China, more than 75,000 people have been infected with coronavirus with upwards of 2,000 dying. Meanwhile, more than 1,000 cases have been recorded outside the Chinese mainland, with infections reported in 25 countries. Six coronavirus deaths have so far been reported outside China.
According to Al-Jazeera around 14,000 people have recovered from Covid-19.
Medical experts suggest that coronavirus is highly transmissible and can relatively easily be passed from person to person. This puts testing kits in extremely high demand.
In the weeks after the launch of the test, Novacyt’s chief executive Graham Mullis said ten countries had shown “significant interest” in the product and that it had been developed as a direct response to the outbreak.
A study published on Monday of 72,000 confirmed and suspected coronavirus cases by China’s own Centre for Disease Control and Prevention suggests that Covid-19 is more contagious than the SARS outbreak of 2002-2003, but is not as fatal on a case-by-case basis.
Early investors cash out
Regulatory news out on Wednesday 19 February describes how early investors have exercised warrants at well below the current share price.
That means two things. Firstly, heavy dilution for existing shareholders. Secondly, the strong likelihood that those new shares are being dumped onto the market.
Novacyt said in an RNS to the market on Wednesday morning that YA II CD Ltd was exercising warrants for 300,000 shares at a price of €0.946 per share for a total subscription of €283,800.
According to Morningstar, YA II CD Ltd has invested in other early stage biotechnology companies, including AIM-listed novel cancer treatment developer Valirx (LSE:VAL).
The previous day, Tuesday 18 February, Novacyt issued a regulatory news update to say that Amsterdam-based private banker and market maker Accent Grave BV had exercised warrants for 1,000,000 shares at a price of €1.16 per share.
The notice said: “These warrants were transferred to Accent Grave BV from the vendors of Primerdesign Limited who were issued with the warrants as part of the consideration for the sale of Primerdesign to Novacyt in May 2016.”
Momentum trade in Novacyt
The announcement of a potentially transformative product to help deal with the world’s best-known threat in coronavirus means liquidity in the Novacyt share price has soared.
This has happened extremely quickly and is likely based purely on a massive amount of new and unforeseen volume.
As a momentum trade, the shares have made a lot of sense: when an incredible amount of new volume comes through, new investors will buy in based on the price action and volume alone.
This quickly snowballs and the rising share price becomes a self-fulfilling prophecy.
I would suggest the current share price — at 125p at time of writing — is a great opportunity for current holders to top slice and take profits. Volatility is extremely high and traders will have to be quick to get out at the price they want.
Knowing what we know about momentum trades, there will be a break off point. Exactly where that will come is not certain, but what goes up must come down. And the fall is usually just as hard or harder than the rise.