I think big pharmaceutical companies such as AstraZeneca have attractive defensive qualities, but I also have room in my portfolio for upcoming research and development (R&D) outfits like Oxford Biodynamics (LSE: OBD).
As the name suggests, the company was started by Oxford University, as long ago as 2007, but it arrived on the stock market at the end of 2016. OBD has yet to make any money or to generate revenues large enough to cover its trading costs.
However, many investors hold shares in a firm such as OBD in the hope it will one day develop a blockbusting drug or medical treatment that can be commercialised either by direct sales or by selling the intellectual property to a bigger firm, perhaps AstraZeneca. Sometimes, licensing deals in such situations can transform a business such as Oxford Biodynamics.
OBD says on its website it’s a biotechnology company with “a proprietary epigenetic discovery platform.” The idea is to develop treatments based on the latest advances in regulatory genome architecture and “its links to clinical outcomes and patient stratification.” The company reckons its EpiSwitch biomarkers, based on chromosomal conformation signatures, “are a critical cog in personalised medicine.”
Profitless R&D firms like this almost always face a race against time to discover something that can be commercialised before the money runs out. From that point of view, I’m a little discouraged that the firm has been around for 12 years without making any profits.
What often happens with this kind of set-up is that shareholders gradually become more and more diluted as the company returns repeatedly to the market for more funds. When and if a financial breakthrough finally arrives, it can be too late to save an early shareholder’s ‘investment’.
Sound balance sheet
But the balance sheet in today’s half-year results report reveals the company has cash and equivalents of around £7.9m and fixed-term deposits of £9m. Meanwhile, the company reports an operating loss in the period of £1.7m. However, the net cash figure used in operations was ‘only’ £804k.
Assuming OBD doesn’t crank up its rate of cash burn, it could survive for around five years without raising more funds even if it fails to ramp up revenues. But the clock is ticking.
Chief executive Christian Hoyer Millar explained in today’s report the firm made “strong” operational and commercial progress in the first half of the trading year with its EpiSwitch technology platform being adopted for “prestigious” clinical trials in the US and UK. The company also entered into “promising” new collaboration agreements.
There’s not much forward-looking visibility to be had from a company like this. Maybe one day the firm could deliver spectacular shareholder returns but, in the meantime, I think patience could be required.
However, there’s always that danger that the money could run out before revenues gain traction. That’s why I’d only put a small amount of my capital in a speculative share like OBD and balance my holding with stalwarts such as AstraZeneca.