Should I invest in penny stock Sareum (LSE:SAR)?

Sareum Holdings is a penny stock generating interest as its drug development work makes waves in the Covid-19 space. Is it a good investment?

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Drug development company Sareum Holdings (LSE:SAR) specialises in developing therapeutics for cancer and autoimmune diseases such as arthritis and irritable bowel disease (IBD). Last year, heightened interest in biopharma stocks led the Sareum share price to rocket over 572%. And this year, its ascent has continued, with its share price hitting a high of 9.5p in June. This momentum has brought the penny stock to the attention of many UK growth investors.

What does Sareum do?

Sareum is a small molecule drug company developing targeted therapeutics. However, it doesn’t do the initial research. Instead, the team learns from others in the game using a low-cost research outsource model.

The team looks for drug candidates they believe will go all the way through clinical trials. Sareum then further designs the chosen molecules in-house and commissions lab work to proceed.

For instance, some existing autoimmune treatments treat the disease but have terrible side effects like thrombosis or severe infection. The Sareum Holdings team believes the TYK2/JAK1 inhibitors within these treatments can be enhanced to generate quality drugs that work with the immune system, devoid of the terrible side effects.

It’s already taking these through preclinical trials to test for the optimum dose and evaluate toxicology levels.

The company does not plan to commercialise drugs. Instead, it progresses to early clinical trials (phase 1 or 2) but will then licence to a partner.

For instance, Sareum licensed its CHK1 inhibitor SRA737 cancer treatment to Sierra Oncology. And its association with Sierra has lent considerable credibility to Sareum stock.

Furthermore, it has also been running a Covid-19 research programme. This is to see if its candidate molecule SDC-1801 can treat a cytokine storm in Covid-19 patients, along with protection against bacterial pneumonia. Meanwhile, SDC-1801 is being researched to treat psoriasis and rheumatoid arthritis.

Penny stocks can be a money pit

Today, Sareum is a penny stock with a £209m market cap. Its share price is up 1,160% from its 52-week low and down 34% from its 52-week high.

Sareum may well have further to climb. But penny stocks are notoriously risky investments.

In mid-June, the company raised £1.4m from the distribution of 30m additional shares. One high-net-worth individual bought the shares after already buying £900k worth of shares on 1 June.

This money is to be used to progress its TYK2/JAK1 programmes into clinical development. But it will also be used as working capital. The buyer also received a five-year warrant, which can be sold when the share price is above 7p for five consecutive days. That’s only 11% higher than it is today.

Furthermore, the company will need to raise additional funds in the coming weeks to undertake clinical trials for its autoimmune indications and a potential Covid-19 application.

Will this top biotech slide or soar?

Based in the UK, Sareum became the third-best-performing European biotech small-cap company last year. I think much of the success of the Sareum share price is due to the Covid-19-related hyping of biotech stocks.

Unfortunately, penny stocks are volatile, and I think this share price could just as easily slide as soar. I think Sareum does have some enticing reasons to be bullish, but it’s too risky for me. When investing in pharma stocks I prefer an established company like AstraZeneca.

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 assessed. Consider taking independent financial advice.

Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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