Drug discovery and development

As a quick reminder, Sareum is a drug discovery and development business. It focuses specifically on cancer and autoimmune diseases. Once the drugs are developed, it then licences them to pharma and biotech companies to manufacture on a larger scale and sell.

So what’s happening with the Sareum Holdings share price? As I write, the shares are trading for 175p. At this time last year, the shares were trading for 345p, which is a 49% drop over a 12-month period.

The bear case

Drug development and discovery is a very lengthy and risky process. Aside from the time invested into the venture, there is every chance that the drug in question may not be fit for purpose and lots of time and cash could be wasted. This is a risk for all drug development businesses, and not just Sareum Holdings, however.

Despite the fact Sareum has many approved patents and agreements with licensed pharmaceutical companies, it looks to me like its growth and future pipeline is still very much in the discovery phase. This uncertainty does not sit well with me.

The bull case and my verdict

Looking at more recent events, I noticed that the Sareum Holdings share price did spike in April. I believe this was directly linked to pharma giant GSK purchasing a business that Sareum collaborated with, called Sierra Oncology. Together, Sareum and Sierra created a cancer drug known as SRA737. Some people think that GSK’s takeover could mean significant investment behind the project and that Sareum would benefit financially because of its agreement with Sierra. There is no concrete evidence of this yet, however, and I will keep a close eye on developments.

One thing I did note about Sareum is that, based on its business models and agreements, it doesn’t actually front much cash in drug development projects. Its partners do in most cases. It has also recently been granted patents for some of its other projects such as its SDC-1802 TYK2/JAK1 inhibitor programme. This is linked to protecting any drugs developed to treat acute lymphoblastic leukaemia.

Considering all the pros, cons, and recent events, I would not buy Sareum Holdings shares for my portfolio. Despite some positive events recently, my knowledge of the drug discovery market is limited. In addition to this, the other major factor putting me off is the fact that much of Sareum’s outlook ahead is in the discovery phase and a pipeline in the drug discovery market is not guaranteed.

Sareum is one stock I will put on my watch list and will continue to monitor developments and perhaps revisit in the future.

Sareum is a young, UK-based drug developer specialising in cancer and autoimmune diseases. The biotech‘s share price has fallen considerably over the year, but spiked in April as investors speculated about GSK’s buyout of Sierra, and what it meant for Sareum.

So, what’s been going on the Sareum share price, and is it a buy for my portfolio?

Share price volatility

Sareum’s share price jumped 130% in April.

This was related to GSK’s purchase of Sierra Oncology for $1.9bn (£1.5bn).

Sierra — a late-stage biopharmaceutical company focused on targeted therapies for the treatment of rare forms of cancer — and collaborated with Sareum in the development of SRA737, a novel cancer treatment. SRA737 is one of only two assets in Sierra’s pipeline.

Investors believed that GSK’s takeover could put money behind the SRA737 project and accelerate its development. 

According to an existing agreement, Sareum is set to receive $550k (£418.5k) when the first patient dosing for any new clinical trial occurs.

Sareum also says that it is eligible to receive a 27.5% share of any future milestone payments.

However, GSK’s primary interest in Sierra Oncology was for momelotinib, a drug meant to treat myelofibrosis.

Prospects

The GSK move appears to be positive for Sareum, but it’s important to not get carried away.

Firstly, there are no guarantees that GSK will allocate resources to develop SRA737. Secondly, drug development is a very long road, and it’s a risky business.

The UK biotech operates a collaborative and outsourced business model with all lab-based research carried out in the laboratories of collaborators or third-party providers. This enables the company to reduce projects costs. But Sareum’s portfolio is primarily early stage.

Earlier this year, the European Patent Office granted Sareum’s patent application for its SDC-1802 TYK2/JAK1 inhibitor programme. The patent protects the SDC-1802 discovered molecule and any drugs developed based on the molecule. 

The molecule is to be used in treating T-cell acute lymphoblastic leukaemia.

This is also good news but it’s still early days. The drug was due to start Phase 1 clinical trials in the first half 2022. The average success rate at this stage of development is only 7.9%! 

Would I buy Sareum stock?

Would I add this stock to my portfolio? Probably not. Sareum’s pipeline looks risk-heavy to me and in all honesty, I don’t know enough about early-stage drug development. Having said that, I’d suggest that Sareum looks better value for money than several US-listed biotech stocks I’ve been watching recently.

As an investor, I’ve also been concerned about the sizeable spread between the buying and selling price. I can currently buy Sareum shares for 190p, but the selling price in 180p. This means the stock would need to gain nearly 6% before I could make my money back.

What exactly is going on? Can this momentum continue? And should I be considering this business for my portfolio today? Let’s dive in.

The skyrocketing Sareum share price

As a reminder, Sareum is a young drug developer specialising in cancer and autoimmune diseases. Therefore, securing patents to protect its products from generic manufacturers is essential.

And the bulk of gains investors have seen can be attributed to two exciting announcements made in the last 72 hours. First off, the European Patent Office notified management that its application for the group’s proprietary cancer drug, SDC-1802, has been approved and will come into effect as of 4 May.

This is undoubtedly a massive win for the pre-clinical treatment and brings it one step closer to potential commercialisation. Even more so, given early data indicates promising levels of efficacy.

Meanwhile most recently, one of the company’s key partners, Sierra Oncology, was acquired by GlaxoSmithKline. The pharmaceutical giant is currently switching strategies to expand its medical portfolio, and seeing it target a late-stage biotech business is not too surprising. But what does this have to do with Sareum?

Sareum and Sierra collaborated in the latter’s development of SRA737, a novel cancer treatment. While the drug is still in development, Glaxo’s latest move could put serious money behind the project, accelerating its timeline. And with an existing agreement in place, as soon as the first patient dosing for any new clinical trial occurs, Sareum is set to receive $550k (£418.5k).

Needless to say, this is all rather positive news. So I’m not surprised to see the Sareum share price surge as a result. But should I be thinking about buying shares today?

Taking a step back

As encouraging as these latest developments are, there remains a long road of uncertainty ahead. Drug development is notoriously challenging. And even the most promising late-stage treatments can fail in the final rounds of clinical trials. This barrier to success is actually why larger pharmaceutical firms tend to prefer acquiring promising mid-to-late-stage biotechs rather than researching new drugs from scratch in-house.

In the case of Sareum, the odds are not in its favour. As I said earlier, SDC-1802, while returning positive early data, has yet to enter Phase 1 trials. And though it sounds like that may not be far off, the average success rate at this stage of development is only 7.9%!

Furthermore, given it doesn’t have any drugs on the market, its revenue stream is non-existent. Therefore, the Sareum share price seems to be primarily driven by expectations of success, which are by no means guaranteed.

Suppose the company continues to hit milestones and the positive data still rolls in. In that case, I’d expect this stock to continue surging. But if the slightest hiccup were to occur, I think it’s likely to see intense volatility in Sareum’s share price.

Personally, given the risks, I’m keeping this business on my watchlist for now.

What’s behind Wednesday’s jump?

Shares in Sareum actually surged again on Wednesday. The share price is up over 130% in the last four days of trading (and 168% in a year). The ongoing rise has partly been driven by the approval of its patent application by the European Patent Office.

On Monday, the European Patent Office granted the firm’s patent application for its SDC-1802 TYK2/JAK1 inhibitor programme. This announcement sent the share price soaring at the time. The patent protects the SDC-1802 molecule and any drugs developed based on the molecule. The discovered molecule is to be used in treating T-cell acute lymphoblastic leukaemia – a type of cancer specific to white blood cells known as T lymphocytes.

But GlaxoSmithKline‘s purchase of Sierra Oncology or $1.9bn (£1.5bn) on Wednesday may have also influenced Sareum’s gains. Sierra Oncology is California-based, late-stage biopharmaceutical company focused on targeted therapies for the treatment of rare forms of cancer. The purchase of Sierra is seen as part of GSK’s transition to focus on its core pharmaceutical business – the Brentford-based firm has also announced the shedding of its consumer health unit.

Sierra has licensed a drug candidate, SRA737, which was discovered and developed by Sareum. It is one of only two assets in Sierra’s pipeline. SRA737 is a novel checkpoint kinase 1 (CHK1) inhibitor. How the takeover will impact the development of it is unknown at this stage.

Earlier in April, shares in the company also rose 18.2% in a single day. No reason was identified for the jump.

Should I buy?

So there is clearly plenty of interest in the stock. But would it make a good buy for me? Sareum made pre-tax losses in each of the last four years. So seemingly its market cap/valuation of £219m at the close of business yesterday is based on future earnings and the value of the products it has discovered and developed. For me, that already sounds a bit risky and I’d need to have a full understanding of the value of those products to justify an investment here.

As I write, the share price is trading at 325p. Last Thursday the stock was trading at under 150p. Those are some considerable gains from a company that hasn’t indicated an increase in profitability. There’s also no concrete evidence that another business might be looking to acquire the company.

As such, Sareum’s valuation is based on the value of its products more than is the case with many other companies. Of course, that brings further risks. For example, it’s entirely possible that another company will discover or develop a more effective way of treating its target disease.

Personally, I think there’s too much risk for me to invest in this one and I won’t be adding it to my portfolio any time soon. That’s not to say the stock won’t continue to soar, it is just not for me.

This UK share has developed proprietary advanced thermal conversion technology (called distributed modular generation, or DMG for short) that turns waste like plastics and rubber tyres into hydrogen. Powerhouse claims that its system is lower cost, can create less waste, and can be used in a broader range of uses than other ‘energy from waste’ technologies.

Powerhouse is setting itself up to exploit a potentially explosive market. Statista thinks the waste to energy industry will grow by almost a quarter between now and 2027 to be worth $50.1bn. But I need to remember that development of its flagship Protos plant remains at the early stages. Any issues in the construction of the site could have significant implications for future profits and sink Powerhouse’s share price.

Another penny stock for the green revolution

The escalating climate crisis also means that demand for Kingspan Group’s (LSE: KGP) construction products is booming. The business sources the majority of its revenues through the manufacture of insulation panels and boards, helping its customers improve their energy efficiency. Its other technologies also help save water and boost the amount of natural daylight coming into buildings.

Kingspan’s operations span Europe, North America, and Australasia, giving it excellent geographic diversity. Sales volumes rocketed 30% in the six months to June, while revenues leapt 36% excluding currency movements and contributions from acquisitions thanks to price inflation.

Turnover could take a hit if economic conditions worsen and the construction sector begins to struggle. But thinking about buying the stock and holding it in my portfolio for the long term, I think Kingspan is a highly attractive ESG stock. Analysts at Researchandmarkets.com think the global foam insulation market will grow at a compound annual growth rate of 4% during the next five years.

An exciting healthcare share

Investing in pharmaceutical stocks can be risky business. Drugs development is packed with hazards. Even if a treatment passes the R&D stage without costly setbacks and delays it may fail to get regulatory approval. But sometimes an attractive healthcare stock comes along that really grabs your attention. Sareum Holdings (LSE: SAR) is one that I’m consdering buying today.

This penny stock produces drugs for the treatment of cancer and autoimmune disorders. These areas alone provide plenty of growth opportunity for Sareum. Indeed, positive patent and testing news on its oncology-related products have helped drive the share price to record highs recently. The company’s decision to make drugs that battle Covid-19 symptoms has also boosted its profits outlook. Its SDC-1801 treatment has proved to be more effective in combating symptoms of coronavirus than other anti-inflammatory steroids.

Sareum is a company that seems to have the wind in its sails right now. Though its products are still yet to hit the shelves, this is a share I think could explode in value during the next decade.

The exploding share price

As a quick reminder, Sareum is a young drug development company. It specialises in discovering treatments for cancer and autoimmune diseases. Last year it utilised its knowledge to help in the battle against Covid-19. Its drug, SDC-1801, which is used to combat severe symptoms of the virus, proved to be far superior to existing anti-inflammatory steroids during lab tests.

The excitement behind the growth opportunities this new treatment provides, even in a post-pandemic world, seems to be the primary catalyst behind the rise of the SAR share price. The stock’s momentum also appears to have been accelerated further by the progress made in its Chk1 venture with Sierra Oncology. Chk1 is currently in phase-two trials investigating its ability to treat solid tumours in various types of cancer.

However, the growth seen last week is related to another cancer drug called SDC-1802 in pre-clinical development. The company has now secured a US patent for the treatment, which adds “another layer of protection around this promising candidate in key territories“.

With trial data continuing to be positive and Sareum hitting key milestones, I’m not surprised to see the share price achieve such explosive performance.

A penny stock with plenty of risks

As encouraging as this progress is, Sareum still has a long road ahead of it. Currently, none of its products have made it to the market or received regulatory approval. As such, the business has no revenue stream. That makes it entirely dependent on external financing to keep the lights on.

Management has raised several million pounds over the past year, which undoubtedly provides a good amount of liquidity to keep operations going. However, what concerns me is that the money was generated by selling new company shares to only a handful of high net-worth individuals. And its most recent £1m capital raise in August was entirely sourced from a single investor.

Being reliant on only a few sources of capital can be a recipe for disaster. Even more so if future trial data stops looking as promising as it is today. Needless to say, if this individual decides to reduce support in the future, and Sareum is unable to attract new creditors, the SAR share price could be in for quite a tumble.

The bottom line

Researching, designing, and developing a new drug is a very time-consuming and expensive process. Even with candidates in phase-two trials, it could be several years before any revenue starts flowing.

With that in mind, it’s pretty clear that Sareum’s current £230m market capitalisation is supported by substantial future growth expectations from investors. And these expectations may never be fulfilled. Personally, I’m not interested in adding such risk to my portfolio. Therefore, I’ll be keeping this penny stock on my watchlist for now.

The explosive Sareum share price

I’ve explored this business before. But as a quick reminder, Sareum is a young drug developer specialising in discovering treatments for cancer and autoimmune diseases. Like many young biotech firms, the company doesn’t have sufficient funding to develop its products single-handedly. Instead, it sells royalty licenses for its drug candidates to larger, more established pharmaceutical corporations. This provides much-needed capital, and a recurring revenue stream should a drug make it to market.

Recently, Sareum posted some encouraging progress for several of its treatments. SDC-1801, a treatment for severe Covid-19 symptoms, completed its in-vitro studies and provided strong evidence of being significantly more effective than existing anti-inflammatory steroids. As a result, phase one trials are scheduled to commence in early 2022.

Meanwhile, other treatments in its portfolio for autoimmune disease are moving into phase one trials next year as well. And additional patents for its cancer immunotherapy drugs are in the process of being secured. All of this is to say that the firm is achieving several significant product milestones. So, I’m not surprised to see the Sareum share price on the rise.

Taking a step back

The transition out of pre-clinical trials is an achievement many young biotech companies never reach. And with the management team securing additional financing, the firm looks like it’s on track for a prosperous 2022. But as exciting as this is, investors may be getting ahead of themselves.

As it stands, this is a pre-revenue business, excluding the one-time £47,000 generated in 2020. But the rapidly rising Sareum share price has pushed the market capitalisation beyond £230m. While its product pipeline does consist of promising assets, there is no guarantee that they will make it to market. After all, 90% of phase one drugs fail, even with solid pre-clinical results.

With that in mind, it seems to me that this stock’s valuation is being driven by speculation rather than fundamentals. So, I wouldn’t be surprised to see the Sareum share price come crashing down at the first sign of trouble.

Final thoughts

I can’t deny that Sareum and its share price have made impressive progress over the last couple of months. But ultimately my opinion of the company remains unchanged. Without any revenue to support operations, it remains dependent on external financing that may not be available in the future. So, for now, it’s staying on my watchlist.

Freight giant is booming

A steady improvement in the global economy bodes well for Xpediator (LSE: XPD). Why? Well this penny stock provides freight management services which get goods moving across the breadth of Europe, whether by air, sea or road.

It also offers warehouse and logistics services to customers and has operations in the fast-growing e-commerce services segment too.

Xpediator shares go for 69p a pop, below the penny stock limit of £1. And the strength of trading following the Covid-19 crisis has even taken the company itself aback.

The freight giant once again lifted its profits forecasts for the full year back in June. It’s worth remembering that its strong performances could hit the buffers if the Delta mutation continues to send coronavirus infection rates higher.

But, over the long term, I think this penny stock could still prove a wise UK share to buy, helped by its exposure to Eastern European emerging markets.

Follow the Van

Van Elle Holdings (LSE: VANL) — which trades at 45p per share — is the largest ground engineering contractor on these shores. In my opinion this puts it in a terrific position to ride the strong rebound in the British construction sector.

Indeed, latest financials this month showed its order book rose to £34.7m as of 9 August. This was up from £26.4m at the same point in 2020.

The company’s core markets were operating near capacity towards the end of the last financial year (to April). And, pleasingly, the bidding pipeline for its Rail division has improved in recent months.

Though, like any UK share, this penny stock isn’t without risk. A shortage of building materials and labour in the construction market could potentially choke off Van Elle’s recent recovery.

A penny stock for the pharma arena

I also think Sareum Holdings (LSE: SAR) could be a top penny stock to buy today and to hold for years. This UK healthcare firm specialises in producing drugs for the treatment of cancer and autoimmune disorders. And the company is making huge strides in these therapy areas, as recent testing updates show.

Of course there’s no guarantee Sareum (which trades at 6.8p per share) can keep its recent strong momentum at the lab bench going.

Drugs development is a notoriously challenging endeavour, and costs can soar and revenues can suffer if a product is delayed (or, in extreme cases, even binned).

However, I’m encouraged by the recent news flow coming out of Sareum on the R&D front.

And following recent fundraising it has a decent cash pile with which to continue its research, something which may alleviate the need to tap shareholders for cash again too soon.

A boost from Covid-19

Sareum discovers and develops drugs that are mostly designed around cancers and autoimmune diseases. It aims to focus on multiple drug development programmes at any one time in order to have a steady stream of potential revenue. The company makes money by licensing out the drugs (or components) that have been developed to larger businesses. 

There’s nothing here that’s particularly unusual about an early stage drug development company. As with most of the companies operating in this sector, the costs of research and development can be high. The flipside is that unless something meaningful is developed, revenue is unlikely to be higher.

A quick look at the recent performance of the Sareum share price shows that clearly something meaningful was developed over the past year! This has been with regard to Covid-19. It received a UK Research & Innovation grant of £174,000 for a research project relating to Covid-19. The main thrust of this was whether Sareum’s proprietary TYK2/JAK1 inhibitor could help on cytokine signaling after a someone is infected.

Clearly, a lot of the move higher in the Sareum share price in recent months can be put down to this project. The company has said that results so far are encouraging, which is adding fuel to the fire.

A fair value for the Sareum share price?

The story around Covid-19 and what it could mean for Sareum is good news. Yet as an investor, there are still a lot of unanswered questions. The big one to me is what the financial benefit of successful licensing of the Covid-19 project could be. Is this materially a game changer when the company can license it out or not? 

Without such forecasts, the rest of the picture for Sareum doesn’t look that appealing. In the half-year accounts, revenue was shown as nil, with operating expenses at £594,000, leading to an obvious loss. Simply put, the Sareum share price needs the project to be a success, otherwise the valuation currently is above the fundamental value.

Given my limited in-depth scientific knowledge, I can’t put an accurate figure on the value of the current project. Due to this, I can’t say whether the 735% rally in the share price is fair. It could be that there is more upside, but I’m not able to quantify this. 

Overall, I’m not going to be investing in Sareum at the moment. I simply don’t understand the specifics enough to make an informed decision.

Sareum develops specialist drugs which are used to treat cancer and autoimmune diseases. And it said today it had recorded “encouraging results” from the testing of SDC-1801 on coronavirus-related inflammation. Shares of the company have subsequently leapt 9% today to 6.3p per share.

SDC-1801 “reduced the levels of cytokines associated with Acute Respiratory Distress Syndrome (ARDS) in human lung cells” following infection with Covid-19, results showed. The inhibitor “[also] demonstrated a profile that was superior to the anti-inflammatory steroid dexamethasone and similar to baricitinib, a JAK1/JAK2 inhibitor,” Sareum said.

Subsequent in-vivo studies supported these results and showed that SDC-1801 cut the number of Type 1 interferons that can cause an over-active inflammatory response. The UK healthcare share added that viral loads didn’t increase following the inhibitor’s use. This can be a concern when anti-inflammatory agents are used to reduce an over-active immune response.

Next steps

Sareum’s chief strategy officer John Reader commented that “we are keen to progress this project to the next stage and will now explore our options to find the best way to fund these next steps.”

This could include taking part in the UK government’s AGILE clinical development platform, Reader said. The programme is designed to fund Phase 1 trials and fast-track the production of Covid-19 treatments. The AIM-quoted company is looking to kick off Phase 1 testing in early 2022.

A falling UK share

The Biome Technologies (LSE: BIO) share price hasn’t fared nearly as well as Sareum’s. The UK engineering share has, in fact, plummeted 23% on Thursday to 370p, following a profit warning.

Biome manufactures naturally-produced plastics that are biodegradable and compostable. And it’s slumped today after announcing that factory problems at a key customer would have a “significant impact” on profits growth in the near term.

The AIM business inked a contract with a US customer to accelerate the commercialisation of its proprietary compostable coffee-pod filtration material back in March. Biome said it expected the deal “would support a significant portion of the group’s expected revenue growth in 2021 and beyond.”

However, the client has experienced problems in deploying equipment Biome supplied on a significant portion of its production capacity. And while an engineering solution has been discovered, “it will now take some months for the customer to design and install the necessary modifications.”

In other news, Biome said it has also been affected by delays and cancellations caused by the impact of Covid-19 on the global shipping industry. It said “there is no sign that the current severe level of disruption with shipping and ports will be resolved soon.”

These problems, along with the adverse effect of exchange rate movements, mean Biome is now predicting that revenues “will be materially below current market expectations.”

It also reckons that losses before interest, tax, depreciation, amortisation and share option charges will exceed market predictions in 2021, and that the business will record losses next year too.