Clinical trials firm hVIVO (LSE: HVO) delivered a trading update today (29 January). This is a stock that I own, having built up a position over the past couple of years. However, while I still view it as one of the more promising small-cap shares to consider buying, it’s proving far more volatile than I anticipated.

To give a flavour, the share price today has dropped 5% to 19p, as I write. However, in the two weeks prior, it had surged nearly 30%. Over five years, it’s up 252%, but down 36% since mid-November. Did I mention that it’s volatile?!

Looking through the update though, I think there are a couple of concerns as well as long-term potential.

What happened?

For those unfamiliar, hVIVO is a contract research organisation (CRO) that specialises in human challenge trials (HCTs). These involve recruiting healthy volunteers — signed up through its own FluCamp recruitment platform — and exposing some of them to pathogens to test vaccines and therapeutics.

Today, the company actually delivered two announcements. First, there was the trading update for 2024, which showed 12% year-on-year revenue growth (£62.7m) and a strong EBITDA margin of approximately 26% (up from 23.3% in 2023). It ended the year with £44.2m in cash, up from £37m the year before.

Operationally, hVIVO made solid progress, opening the world’s largest commercial HCT unit. This 50-bedroom facility has also enabled the firm to diversify its offerings to include laboratory services for external clients. Earlier this month, it inked its largest standalone lab contract signed to date (£2.7m).

The second announcement offered guidance and related to the acquisition of a pair of clinical research units from a CRO in Germany. The company said this deal “further diversifies hVIVO’s services to include in-patient Phase I and Phase II trials across a broader range of therapeutic areas“.

The acquisition cost €10m, funded entirely from hVIVO’s existing cash resources. However, while the units recorded unaudited revenue of nearly €20m last year, they also reported an adjusted EBITDA loss of €1.8m.

Why is the stock down?

So, the firm is using cash to buy loss-making businesses abroad. Moreover, it plans to spend another €2.5m on integration costs in 2025. Consequently, management has warned that this will impact EBITDA margins in the short term, guiding for mid-to-high teens (significantly less than last year’s 26%).

However, it also expects the acquisition to contribute positively to earnings by 2026. And it gives hVIVO a “significant footprint” in Europe while offering “considerable cross-selling opportunities” due to a broader client base.

Looking forward, it expects revenue of £73m this year, including this deal. If we assume similar revenue at the acquired business (around £16m), then this suggests core revenue will be flat or declining, hinting at weak organic growth. That’s not ideal.

Then again, the firm has previously stated that it expects acquisitions like this to help get it to £100m in revenue by 2028.

My view

Stepping back, I think the market reaction today is understandable. However, the stock at 19p may still be worth considering for patient investors.

Given this is a business with a modest £129m market cap though, I’m keeping my holding small relative to my overall portfolio. That way, I can benefit if it goes up while minimising damage if it doesn’t.