Investors who bought 4D Pharma (LSE: DDDD) shares have had a torrid 12 months. The share price of the biotechnology company has fallen by 30% over the last year. But they were down further until late last week (and this week so far) as the shares have recently leapt. It’s not immediately clear why the share price has risen so rapidly. What’s clear though is that 4D Pharma has a lot of potential and it’s for that reason that I’m tempted to buy the shares now.
Why I’m tempted to buy despite the risks
Given that many investors won’t have heard of 4D Pharma, I’ll start by explaining what it does. It focuses on developing Live Biotherapeutic Products (LBPs), which are drugs derived from the human microbiome. It has developed its research to build MicroRx, which is a discovery platform that’s able to select those bacteria that have a therapeutic effect in specific diseases, including cancer.
The company has 10 main programmes in development. These include two drugs that have reached phase II clinical trials and are progressing relatively well through the drug testing process. It also has a research collaboration with MSD, a trade name of Merck to discover and develop Live Biotherapeutics for vaccines.
This close partnership with a major pharmaceuticals firm could open the door to further collaboration in future, I think, and Merck could even buy the therapies as they progress through the drugs approvals process. I believe this would be a good outcome for shareholders as it would raise cash and move 4D pharma towards being profitable.
For now though, the company remains loss-making. Losses in 2020 were around £26m. Yet 4D Pharma has cash and cash deposits that cover about a year’s worth of research and development costs. In 2021 the biotech firm raised approximately $24.03m (£17.29m) in a private placement. It has also secured a credit facility for up to $30m with Oxford Finance SARL. That’s all good news, but despite this extra money, it could still need to once again call on investors for even more, which would have the effect of diluting any holdings. I feel that raising longer-term debt would usually be preferable from a shareholder perspective.
The bottom line
Given UK investors have no other share like 4D Pharma to buy, I think that if evidence builds around the value of the microbiome in healthcare, 4D Pharma’s shares should do well. Investing in the stock is clearly not about today’s fundamentals. The investment case is all about how 4D Pharma is a world leader in an exciting new area of healthcare innovation and about its future potential.
Of course, it’s possible 4D Pharma shares could be worth nothing. It’s a speculative, high-risk company to invest in. There are no two ways about that to my mind. But most rewards involve calculated risks. So, I would put aside just a small part of my overall cash to add 4D Pharma shares to my portfolio, given their huge potential. If just some of what’s in the pipeline works as expected, it could be transformational. When — or if — the potential of the microbiome in healthcare is proven, the 4D Pharma share price could rise very quickly. It may be a roller coaster ride up to that point though, but it’s one I’m prepared for.
Andy Ross owns no share 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.