The Synairgen (LSE:SNG) share price exploded over the last 12 months, increasing by over 680%. What caused this incredible growth? And should I be adding the stock to my growth portfolio? Let’s take a look.
Why did the Synairgen share price skyrocket?
Synairgen is a pharmaceutical drug development company that focuses on discovering new treatments for respiratory diseases. In 2020, it adapted its knowledge and talent to produce SNG001 – an advanced treatment for Covid-19 patients with severe symptoms.
There are numerous drugs already on the market to ease the impact of the virus. However, what makes SNG001 unique is the fact that it’s inhaled rather than injected. Thus the medicine can be directly absorbed into the lungs.
The primary catalyst behind Synairgen’s soaring share price was the announcement that SNG001 successfully completed its phase II trials. The results of which showed a 79% reduction in the need for ventilation machines amongst patients. Needless to say, the drug shows promise. And it would seem the FDA in the US agrees as it has greenlit the treatment for fast-track approval.
Last month, Synairgen began recruiting for phase II/III trials to gather more data and target patients at home instead of in a hospital environment.
If SNG001 is approved, City analysts have forecast that total revenue for 2021 will be around £150m, some £47m of which will be profit. Comparing that to Synairgen’s current share price places the P/E ratio at 7.4. To me, that looks relatively cheap for a high-growth biotech stock. But, as always, young drug development companies carry a lot of risk.
Discovering new medicines is a high-risk process
The results from the phase II trials are undoubtedly positive. However, they’re far from conclusive. After all, only 101 patients were involved in the study. As this sample size grows into the thousands for phase III, more accurate results will be acquired. And they may not be as positive as the earlier phases indicated.
It’s entirely possible for drugs in phase III to be rejected by regulators or simply become economically unviable after approval. This is particularly problematic for Synairgen as it has no other products in its portfolio.
The company has formed a handful of partnerships over the years and provides some service work. But ultimately, it lacks any form of reliable or recurring income. As such, it is continually having to raise additional funding to keep the lights on.
Suppose SNG001 fails to deliver the desired results? In that case, Synairgen will have to start the typical 10-year drug development cycle basically from scratch. As I don’t think investors are that patient, this will likely lead to a collapse in the Synairgen share price.
The bottom line
Personally, I think buying shares in Synairgen at its current price looks more like speculation than investing. The firm has many challenges ahead, and failing to overcome them could be catastrophic for the entire business.
For now, I’ll be keeping a close eye on it throughout 2021. But I’m not adding it to my portfolio yet.
