2021 has been an incredible year for the Sareum (LSE:SAR) share price. Over the last 12 months, the penny stock has exploded by over 620%. And just last week, this upward momentum continued with a double-digit leap. So what’s behind this explosive growth? And should I be considering this business for my portfolio?
The exploding share price
As a quick reminder, Sareum is a young drug development company. It specialises in discovering treatments for cancer and autoimmune diseases. Last year it utilised its knowledge to help in the battle against Covid-19. Its drug, SDC-1801, which is used to combat severe symptoms of the virus, proved to be far superior to existing anti-inflammatory steroids during lab tests.
The excitement behind the growth opportunities this new treatment provides, even in a post-pandemic world, seems to be the primary catalyst behind the rise of the SAR share price. The stock’s momentum also appears to have been accelerated further by the progress made in its Chk1 venture with Sierra Oncology. Chk1 is currently in phase-two trials investigating its ability to treat solid tumours in various types of cancer.
However, the growth seen last week is related to another cancer drug called SDC-1802 in pre-clinical development. The company has now secured a US patent for the treatment, which adds “another layer of protection around this promising candidate in key territories“.
With trial data continuing to be positive and Sareum hitting key milestones, I’m not surprised to see the share price achieve such explosive performance.
A penny stock with plenty of risks
As encouraging as this progress is, Sareum still has a long road ahead of it. Currently, none of its products have made it to the market or received regulatory approval. As such, the business has no revenue stream. That makes it entirely dependent on external financing to keep the lights on.
Management has raised several million pounds over the past year, which undoubtedly provides a good amount of liquidity to keep operations going. However, what concerns me is that the money was generated by selling new company shares to only a handful of high net-worth individuals. And its most recent £1m capital raise in August was entirely sourced from a single investor.
Being reliant on only a few sources of capital can be a recipe for disaster. Even more so if future trial data stops looking as promising as it is today. Needless to say, if this individual decides to reduce support in the future, and Sareum is unable to attract new creditors, the SAR share price could be in for quite a tumble.
The bottom line
Researching, designing, and developing a new drug is a very time-consuming and expensive process. Even with candidates in phase-two trials, it could be several years before any revenue starts flowing.
With that in mind, it’s pretty clear that Sareum’s current £230m market capitalisation is supported by substantial future growth expectations from investors. And these expectations may never be fulfilled. Personally, I’m not interested in adding such risk to my portfolio. Therefore, I’ll be keeping this penny stock on my watchlist for now.
