The share price of E-Therapeutics (LSE:ETX) was on fire throughout all of 2020 and has continued to rise since. The penny stock was priced at 3.75p back in January last year. But today is much closer to 23p. What caused this 510% surge? And should I be adding the business to my portfolio? Let’s take a look.
A tech solution to drug development
E-Therapeutics is involved in the drug discovery sector of the pharmaceutical industry. Discovering and creating new medicines is a long and expensive process that carries a lot of risks. However, this software company is trying to help change that.
It has developed a proprietary platform that incorporates big data and a suite of powerful tools driven by artificial intelligence to accelerate the drug discovery process. And while the technology only recently launched, it is already being used to investigate type-2 diabetes as well as neurodegeneration diseases such as Alzheimer’s and Parkinson’s.
Why is the penny stock on the rise?
The E-Therapeutics share price started to climb in early 2020, following the release of its results for 2019. It had been a pre-revenue business for many years, and so finally, seeing some form of revenue was exciting. What’s more, overall losses for the year were cut in half, from £5.1m in 2018 to £2.9m in 2019. Combined, this appears to be the primary catalyst for the rising share price. However, I’m far more interested in another announcement made later in the year.
In May, E-Therapeutics announced it had expanded its platform’s capabilities to support RNA interference (RNAi). Without going too deeply into gene science, RNAi enables the manipulation of protein behaviour within the body. RNAi-based therapies can treat a wide range of diseases such as cancer and antibiotic-resistant bacterial infections.
Today the RNAi drug market is worth approximately $39bn. But current forecasts indicate it will grow by an average of 27.2% annually, reaching a market size of $131bn by 2025. Needless to say, that represents an enormous growth opportunity for this penny stock.
Risks to consider
As promising as the technology may be, there are some significant risks to consider. The first being the lack of substantial revenue. In 2020, the firm only generated £0.5m, which doesn’t come close to covering the cost of operations. As such, the business is still dependent on outside funding to keep the lights on.
What’s more, the company is exposed to some significant cyber-security threats. If a breach were to occur that exposed sensitive client data, E-Therapeutics’ reputation could be severely damaged, leading to a potentially significant reduction in future revenue.
The bottom line: a penny stock to buy?
The company’s technology is rather impressive in my eyes, especially given the growth opportunities that lie before it. However, even with its recent progress, I believe it’s too soon to invest, especially at its current share price. The market capitalisation of the stock is almost £100m, despite it only generating a tiny amount of revenue. Therefore I’m not adding E-Therapeutics to my portfolio today.