Investors and traders alike always seem to be on the hunt for the next big biotech breakout story. After all, even if governmental pricing regulations come to the top drug companies, there are still dozens of unmet needs and drug classes that could become the next blockbuster drug categories. Even with shares of Avid Bioservices Inc. (NASDAQ: CDMO) surging on Friday, there may still be a lot of implied upside to the story for this developer and maker of monoclonal antibodies for other bio and pharmaceutical companies.

Before blindly jumping into a story, it is important to consider that Avid has a mere $300 million market capitalization rate even after Friday’s big surge. Its revenues are still low when compared to large companies in biotech and pharma, and it has accumulated losses of $560 million over time.

The driving force behind Friday’s gain is its earnings announcement. Avid said that it has converted the losses and negative margins in fiscal 2018 into a sustainable position of financial strength, and its backlog and data from customers is expected to drive sustainable growth ahead. Winning new business from existing customers also is expected to generate better returns and metrics ahead.

Avid’s revenue for the fourth quarter of its fiscal year 2019 was $17.1 million, a gain of 146% from the same quarter last year. While its $53.6 million in revenue for the full fiscal year 2019 met its guidance, that was shown to be flat compared with 2018. The company ended its April period with a revenue backlog of $46 million, and the bulk of that should be recognized over the next year.

Avid also said that its gross margin for the fourth quarter reached 21%, and it was 13% for its full fiscal year 2019. Those compare to margins of −28% during the fourth quarter of fiscal 2018 and −5% for its fiscal year 2018. The company attributed those gains to its product mix, higher capacity utilization and lower direct manufacturing costs.

Where the story gets more interesting is after a research report was issued by Janney Montgomery Scott. The firm’s Paul Knight reiterated a Buy rating and raised the target price to $10 from $5. This was just a $4 stock the prior day, and Friday’s upgrade may be a complete about-face when it comes to the recent research report history seen here.

Janney’s report noted that Avid is a pure-play microcap company involved in the commercial development and manufacturing of monoclonal antibodies. Avid was shown to have exceeded estimates and to have achieved EBITDA profitability, all while growing its backlog with five new contracts. Knight’s commentary said:

Along with the company’s positive comments about the mAb market strength, we see numerous indicators like increasing prescriptions, a great share of mAbs in FDA approvals, and peers like Lonza indicating very strong market demand. Lastly, the interim CEO and Board includes, Rick Hancock and Mark Bamforth, respectively, highly respected veterans of the biological production industry.

Friday’s report from Janney also shows how the market for monoclonal antibodies has improved every month this year. Avid added five new customers, on top of increased orders from existing customers, and additional validation projects are underway to add more customers. Knight expects Avid to see revenue and earnings upside from its potential to win more than four customers per year and to see contributions of more than $4 million per customer annually. He also sees EBITDA margins expanding to above 25.0% over time and believes that Avid can acquire strategic assets. His report said:

These validation projects are necessary per FDA protocols for commercial production. While current projects average around $3-5 million, an approved product can drive tens of millions of revenue. Avid has about $100 million of built capacity and another $100 million of expansionary capacity relative to $64-67 million in guided FY20 revenue.

Janney’s fair value target of $10.00 is based on a 4.4-times multiple of the firm’s fiscal year 2022 estimate of $130 million and also reflects a P/E multiple of 16.1 times its fiscal 2022 estimate $0.50 per share (minus net cash of $1.90 per share).

Avid Bioservices was last seen trading up 32% at $5.28 on Friday before the noon hour, and its 52-week trading range is $3.37 to $8.44. Avid’s midday trading volume of 4.6 million shares was more than 20 times a normal trading day, and the shares were last seen with a 1.51 million share count in its short interest, with about nine days to cover, according to Nasdaq data.

Unfortunately, Avid is only followed by three analysts, making earnings and revenue projections for the years ahead. To make matters even more complicated, Janney had downgraded Avid from Buy to Neutral and trimmed its target to $5 from $10 less than two months earlier.

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