Omega Diagnostics Group (LON ODX) shares have bounced 15% this morning on the news that their covid test now has a CE Mark. This is the essential precondition for being able to market the tests across Europe. So, that’s good news for Omega Diagnostics, a major product that can now be marketed.
The big question though is how long is this boost to the Omega share price likely to last? It’s possible, as it largely has been at Genedrive, that this is the start of a major rerating. It’s also possible, as a very similar announcement about a CE Mark was at Avacta, something whose effect fades off. Or even, as happened at Abingdon, something that’s very much a flash in the pan given disbelief in company prospects given earlier mistakes.
It’s also true that the fourth – and this is just of the ones we note ourselves – company, as Omega Diagnostics is, announcing a CE Mark for a covid test is likely to attract less excitement than the earlier ones did.
However, there are a couple of wrinkles here – there are always wrinkles in investing, unfortunately. One is that the UK isn’t the only place with companies making covid tests. And it’s not a huge political surprise that the ministers and bureaucrats in other countries like buying tests from their homegrown companies. Well, OK, so the UK govt is going to buy UK tests, right? Except no, the UK is about the only place in Europe that doesn’t accept a CE Mark as being sufficient proof for the government to start buying the tests. There’s another level of testing (sorry) that has to be done at Porton Down. For some reason, the UK govt is insisting upon proof that the tests actually work before buying them.
So, given this political preference for domestic supply it’s not obvious that being able to sell across Europe offers all that much. We might well be pleasantly surprised of course.
Then there’s the other major issue. To some extent, covid is now over. Countries are starting to drop restrictions, testing requirements are falling. It’ll no longer be necessary to have a test to enter Denmark, for example, or soon enough the UK. Whatever we think about the lockdowns and testing requirements that we have had, it’s obvious that they are retreating – to the detriment of the market for covid tests themselves.
We’re already seeing this in the case of testing centres, rather than test makers. Hundreds of sites were set up and gained heavy business. Now a goodly portion of them look like wastelands with tumbleweed blowing through. At some point the test-making market is going to revert, the big question becomes when?
The problem with our valuation of Omega Diagnostics shares is therefore well, yes, a CE Mark, we can see that’s good. But how good is it and how long is that effect going to last? It’s the answers to those questions which determine a trading strategy.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.