I think the Synairgen share price has one major problem

The Synairgen PLC (LSE: SYN) share price is having a great month. After exploding 420% in one day in July, it’s since grown another 32% to 250p, and appears to be still climbing.

Indeed, one analyst has a price target of 360p per share for the small-cap biotech firm. This target is based on the optimistic view that Synairgen will have an order book of £2b to £3b, and a market capitalisation of £0.5b, by the year-end.

Could this be the growth stock of the year for your portfolio?

I don’t think so. 

The major problem with the Synairgen share price

The broker’s optimism for Synairgen’s stock is based on the positive results from the firm’s Phase II drug trial for SNG001. The therapy is shown to be effective in treating a relatively small number of hospitalised COVID-19 patients. Hence, the July stock surge.

Moreover, the target price is assessed on SNGoo1 being available to purchase before the winter 2020 flu season, and a possible second wave of Covid-19.

But, there’s a long way to go yet before selling it is viable.

Phase III trials will involve testing up to several thousand patients with Covid-19, and trials often last more than a year. In addition, and to the best of my knowledge, Synairgen has never taken a drug therapy to market.

Pharmaceutical giants, like AstraZeneca, have established routes to market and innovative drug pipelines. Synairgen, in contrast, is a specialist drug research and development company. It’s highly unlikely to have created this capability. Consequently, it will need a larger partner to assist.

Routes to market are a stable of big pharma. But, assistance to smaller firms at this time will depend on the quality of other competition for its resources.

The current Synairgen share price is based on short-term optimism that all this falls into place pretty quickly. I don’t think it’s realistic. 

Pie in the sky valuation

Moreover, valuing Synairgen’s Covid-19 opportunity is almost impossible. Recent broker valuations have used the price points of other potential Covid-19 therapies, such as Gilead‘s Remdesivir, as substitutes. But delivering therapeutics is part of Gilead’s business model.

Demand for drugs to treat Covid-19 is one thing. Supplying it on the scale required is quite another. And scaling SNG001 for production, even if Phase III trials are successful, will depend on other firms acting as partners. Much will depend on the value Synairgen’s product potentially provides to their respective business models.  

Notably, Synairgen hasn’t yet produced a reliable revenue stream. Its funding is entirely reliant on investors. Although this is not unusual for a small biotech firm with a long product development cycle, it could reduce its leverage in negotiations for assistance with big pharma.

The last few weeks of Synairgen share price movements may have given investors the return they were hoping for. However, I don’t share the optimism of a 360p price target, and I won’t be surprised if investors are disappointed later this year. At the current price, there are better growth opportunities out there.