The Avita Medical Inc (ASX: AVH) share price is pushing higher again on Friday, extending its strong short-term rebound.
In afternoon trade, the Avita share price has shot up 8.33% to $1.30, taking its 1 week gain to almost 20%.
That surge is standing out against a weaker backdrop, with the S&P/ASX All Ordinaries Index (ASX: XAO) down 0.3% to 9,138 points. This comes as investors react to the latest developments in the Middle East between the US, Israel and Iran.
Fortunately for Avita, the rebound has been building for several sessions this week. The stock rose 6.31% on Wednesday and added another 1.69% on Thursday, despite widespread selling across the ASX.
Let’s take a look at what’s driving the shares higher.
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Major US government deal supports sentiment
Avita’s update this week appears to be the key catalyst, centred on a 10-year agreement with the US Biomedical Advanced Research and Development Authority (BARDA).
Worth up to US$25.5 million, the deal is aimed at strengthening US emergency preparedness for large-scale burn casualty events.
BARDA will have access to 3,000 units of Avita’s RECELL treatment platform at any point during the contract period. Avita will also manage inventory, logistics support, and deployment readiness.
The full contract value includes procurement options that may not all be exercised. Avita said about US$3.97 million is expected to flow through as revenue over the 10-year term via annual access and readiness support fees.
The market is repricing execution risk
Friday’s rally is also notable because it comes after a prolonged period of heavy selling in the stock.
Even with this week’s rebound, Avita shares remain down more than 50% over the past 12 months. This shows how aggressively the market had already marked down execution risk and earnings uncertainty.
Foolish takeaway
Avita’s sharp rebound this week shows how quickly sentiment can turn when a beaten-down small-cap healthcare stock lands a credible long-term government contract.
The BARDA update clearly improves revenue visibility and gives the market a stronger reason to revisit the recovery outlook.
That said, it is still a small-cap healthcare stock with elevated execution risk, and this week’s rally does not change the fact that the shares remain down over the past year.
Personally, this is not the type of stock I would be chasing after a sharp short-term move. I would rather put my money into larger, more established businesses with steadier earnings and less share price volatility.