Should you buy Neil Woodford’s favourite small caps Purplebricks Group plc, 4d Pharma plc and Imperial Innovations Group plc?

What does the future hold for Purplebricks Group plc (LON: PURP), 4D Pharma plc (LON: DDDD) and Imperial Innovations Group plc (LON: IVO)?

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Hybrid online estate agent Purplebricks (LSE: PURP) is an estate agency disruptor and certainly ranks highly in the eyes of Neil Woodford as his funds own more than 25% of the company’s outstanding shares. And judging by Purplebricks’ latest annual results, this wasn’t a bad move at all as annual revenue jumped a whopping 448% and website visits more than tripled due to major investments in marketing and sales campaigns.

Of course, beefed-up marketing campaigns haven’t come cheap and are the reason pre-tax losses doubled to £10.5m. However, as seen with the jump in revenue, increased awareness has filtered through to higher sales and management expects to turn its first profit in fiscal year 2017. This would be a huge step for a company that is barely two years old and still has massive disruptive potential for the stodgy traditional estate agent model.

Purplebricks, rather than taking a commission on each property sale of up to 2.5%, offers simple flat-fee packages that are payable whether or not the sale goes through. The low fixed fees combined with the benefit of working with a self-employed local estate agent is what sets Purplebricks apart from both traditional agents and other online-only competitors. If the company can keep up the pace of breakneck growth, maintain 60%-plus market share among online competitors, and doesn’t rush its planned expansion into Australia, Purplebricks definitely has a place on my watch list.

Biotherapeutics

Neil Woodford’s interest in disruptive companies is also apparent with his 24% stake in biotherapeutics firm 4D Pharma (LSE: DDDD). Biotherapeutics is a burgeoning field that seeks to harness the benefits of live organisms such as gut bacteria to treat a variety of illnesses that have thus far defeated traditional pharmacology.

4D’s initial focus has been on gut bacteria and diseases in the related area, such as Crohn’s, colitis and irritable bowel syndrome. Progress has been picking up lately and the company now has several of its 15 treatments progressing through clinical trials.

Despite currently having no revenue, 4D is well placed to continue investing in its pipeline due to £85.4m in cash against total annual pre-tax losses last year of only £10.1m. But while the company’s financial position is appealing and biotherapeutics have massive upside, investing in a small pharma company that currently has no approved products or revenue is just too risky a proposition for me.

Trust in Woodford?

It’s a similar story for another of Neil Woodford’s most concentrated holdings, his 21% stake in Imperial Innovations (LSE: IVO). It has ties with universities and researchers across the UK and invests in start-ups in industries as varied as novel oncology treatments to remote sensors for oil & gas facilities.

With stakes in 38 companies, many of them early stage private ventures, investing in Imperial Innovations requires placing high amounts of trust in the fund managers to choose their investments well. Without the expertise necessary to judge the prospects of starts-ups focused on everything from the treatment of viral infections after bone marrow transplants to next generation lithium ion batteries, Imperial Innovations isn’t at the top of my buy list despite Neil Woodford’s bullishness.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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