4D Pharma (LSE: DDDD) is a speculative UK penny stock that I’d like to add to my portfolio, because I think its share price could double in just two years. I’ll get why I think that, but first let’s just outline what this biotech company does.
4D Pharma is developing live biotherapeutic products (LBPs), a novel class of drug derived from the human microbiome. The microbiome is essentially microbes that live within the human body. Of particular interest for future healthcare are those in the gut. 4D Pharma has a number of drugs in phase II trials across different medical fields including immune-oncology (cancer) and gastro-intestinal (such as treatments for IBS).
Why could this penny stock double?
Here’s the interesting part – why could the shares do phenomenally well in the coming 24 months? I expect the move into phase III trials will increase the profile of 4D Pharma with investors, both biotechnology investors and beyond.
I think the company’s US listing, on the NASDAQ exchange, will add significant liquidity and provide money for the company to keep progressing its trials. It has raised £30m and has cash on the balance sheet so future shareholders hopefully shouldn’t get diluted.
Overall though what most makes me think the share price can potentially double in two years is that by 2022, revenue is forecast to be £16.2m, from negligible revenue currently. Analyst forecasts have the shares on a price target of 405p, versus around 84p at the time of writing.
There are massive risks, however. First, there is the risk that drug trials fail, or that progress is slower than investors hope. Another concern is that there could be greater competition as the microbiome is becoming increasingly understood. Although 4D Pharma has raised money from shareholders, if trials do go on longer than expected, the company may ask backers for more money. That would dilute any holding and make it harder to make a profit.
On the balance of risk and reward, though I think 4D Pharma is a penny stock I’d likely add to my portfolio. However, it would be a small position! If things go well and it moves to making revenue, I think the share price could at least double within two years.
Another option?
I think Quarto is another penny stock with huge potential. It’s a very different company. Quarto is an illustrated book publishing and distribution company. The shares trade on a forward price-to-earnings of only seven, indicating the shares could be cheap. The group has aggressively cut debt and been adding cash to the balance sheet in recent years. That could set it up for future growth.
On the other hand, margins are quite small and revenues have been falling in consecutive years since 2017. The group also doesn’t pay a dividend, a potential red flag that management believes the group faces challenges. It could be a high-risk/high-reward penny stock that I’ll research further before deciding whether to add to my portfolio.