Shares in e-Therapeutics (LSE: ETX) have climbed 65% in 2021. And, over the past two years, we’re looking at a gain of over 1,200%. Before that, e-Therapeutics really was a penny share, trading at around 2p. Even today, at 29p, I’d say it still fits the description.
The company released full-year results Thursday. But before I examine them, what does it do? Well, e-Therapeutics is developing AI-based software aimed at speeding up the drug delivery business. The technology is being used to investigate diabetes, Alzheimer’s, Parkinson’s, and other ailments. But what about Covid-19, which has clearly driven the penny share price gains?
The results speak of e-Therapeutics’ new Covid project. It’s using its technology “to identify approved and known drugs, both alone and as synergistic combinations, that could rapidly be repositioned for the treatment of Covid-19.”
That illustrates a key thing I like about the e-Therapeutics drug discovery platform. It’s based on artificial intelligence, analysing existing data to find novel applications for drugs that have already been through the lengthy approvals process. It appears flexible and can be adapted to new ailments relatively quickly. So that’s a definite positive for me. But is it enough for me to buy a penny share?
Show me the balance sheet
No. Technological promise alone will not get me to invest. I’ll only buy if I think a firm’s financial situation stacks up too. I’m also very wary of going for a penny share because I’m painfully aware that most of them got that way by previously commanding higher prices and then collapsing. And that did, in fact, happen at e-Therapeutics. On flotation day back in 2007, the shares were placed at 67p apiece.
The company reported an operating loss of £4.5m for the year to 31 January, after a R&D spend of £2.7m. That’s on rather modest revenue of £0.3m. So, still very much in the cash-burn phase. The year, in financial terms, was very much a fundraising one, in which “the company strengthened its financial position raising total gross funds of £13.2m.”
The biggest equity issue, of £11.6m, happened in July 2020. With the pandemic in full swing, it was clearly a good time to tap the markets for cash. It’s led to a healthy balance sheet, with cash of £13m on the books at 31 January. The huge share price rise, however, has pushed its market capitalisation to £117m. With no profits yet, that implies investors see the future value of that £13m cash rising ninefold.
Will I buy a penny share?
So, will I put my penny share aversion to one side and buy e-Therapeutics shares? In short, no. Not now. I do think I’m seeing some exciting potential in the company’s technology. And the urgency that the current pandemic has forced on the drug discovery and development process can only highlight the value of this technological approach.
I just think the current share price puts too high a value on that potential and leaves little or no safety room to allow for the risks. The main risk I see is that it will take longer then expected to reach sustainable profits, which could result in a share price reversal. If that happens though, I’ll be rethinking it.
