Shares in Omega Diagnostics lost more than a quarter of their value yesterday after the company confirmed that a highly lucrative contract to make hundreds of millions of Covid tests for the UK Government has expired.
Chief executive Colin King said the news was “clearly extremely disappointing” but added there were “plenty of positives” in the company’s core business. He said Omega is also stepping up efforts to secure commercial contracts to use the additional Covid manufacturing capacity created in anticipation of the government orders that haven’t materialised.
Alva-based Omega was one of two UK firms selected in March to manufacture up to 200 million rapid Covid antigen tests for the Department for Health and Social Care (DHSC). The contract could have been worth up to £374 million.
The contract was in two parts, with an initial scale-up phase where the DHSC provided Omega with equipment and working capital to get production capacity in place. The DHSC was then due to select which test it wanted, triggering phase two when orders would be placed.
READ MORE: Omega secures new contract while awaiting overdue UK Covid test decision
However, the decision on which test the DHSC wanted was delayed well beyond initial expectations and has still not been confirmed.
“In advance of today’s results, we took some legal advice and have confirmed that the contract has in effect expired,” Mr King said.
Omega continues to have access to the Government-funded equipment, and has brought Lansdown Strategic Capital on board to help secure contracts to manufacture Covid testing kits on behalf of commercial partners. The first agreement to emerge from this – a deal with flight certification provider DAM Health of Liverpool – was announced earlier this month.
DAM has so far made an initial purchase order for £750,000 worth of Omega’s Visitect Covid tests for use by medical professionals. Meanwhile, the company is awaiting regulatory approval for the kit’s use in the larger self-testing market, which Mr King said should trigger other commercial agreements.
READ MORE: Omega Diagnostics files for European approval of self-testing Covid-19 kits
During the six months to the end of September, sales of Covid test kits drove a 170 per cent increase in revenues within Omega’s global health division. There was also “growing momentum” for the use of the company’s CD4 Advanced test to improve the outcome of patients living with HIV.
Meanwhile, the health and nutrition division – which sells tests to detect food intolerances – has returned to pre-pandemic levels with a 62% increase in revenues.
Overall, turnover during the first half was 81% higher at £5.73m, but losses surged from £280,000 to £2.75m as administrative overheads and direct labour costs increased in anticipation of orders from the DHSC.
Omega said it is reducing the size of its lateral flow manufacturing capacity, which should lead to a lower cost base in the second half of the year. Further improvements in sales performance are also anticipated, and as a result the losses are expected to be lower in the second half.
READ MORE: Omega highlights allergy sales as Covid testing delays continue
Analysts at house broker finnCap said they believe that at current share price levels, Omega’s valuation is underpinned by its core operations.
“The core business remains on track to deliver further growth in the second half, driven by international expansion opportunities for health and nutrition, the building momentum in Visitect CD4 and the prospect of commercial Covid-19 sales,” they said in a note to investors.
Simon Douglas, chairman of Omega Diagnostics, said the company is well-positioned despite the uncertainty over the utilisation of Covid manufacturing capacity.
“Overall, we expect to see an improved sales performance across the group for the full year and to see losses reduced in the second half,” he said.
Shares in Omega closed yesterday’s trading 10.5p lower at 29.5p, a decline of 26%.
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