Sareum Holdings (LSE:SAR) is what I’d call a classic small-cap clinical drug development company. The Sareum share price is volatile, based on news updates from the company regarding the state and progress of projects in the pipeline. It has caught my eye as it’s seen a sharp 40% drop in the past month. Over a one-year period the stock is now down 55%. Is this a buying opportunity for me?
Tumbling price
Over the course of the past month we’ve had both a trading update on a clinical-stage oral inhibitor (SRA737) and the full-year results. Neither of these two releases were particularly positive, in my opinion, and helped drive the share price lower.
The update on SRA737 was a blow as Sareum was partnering on the development of the drug with Sierra Oncology. However, a press release confirmed that Sierra intends to return the rights for SRA737 to another business, the CRT Pioneer Fund.
The full-year results were also a real mixed bag. As we’re coming out of the Covid-19 pandemic, the focus for much of 2022 has changed. The company noted that it’s now focusing on drugs for “autoimmune disease and particularly psoriasis, an area of high unmet need and one with significant commercial potential.”
Even though this could boost long-term profits, it meant that for the year, research and development costs increased. In fact, the increase in expenses meant that the full-year loss was £2.2m. This was higher than the £1.5m loss from the year before.
I feel that both of these factors contributed to the disappointing share price returns in the recent past.
Mulling over the share price
Fundamentally, the success of any investment I might make depends on Sareum being able to commercialise any drug development. As the company says: “Our approach is to discover and develop programmes to late preclinical or early clinical stages before licensing or partnering.”
Therefore, the share price will always be fluctuating based on which programmes are doing well (or badly). Yet until the final stage of partnering happens, revenue and profit is going to be something of a dream.
This doesn’t mean that the stock can’t rally from the current dip. Speculative buyers can send the share price flying higher very easily. This is compounded by the fact that the market capitalisation is under £100m. As a result, only a relatively small amount of buying volume can cause a disproportionate move higher.
Ultimately, I prefer to invest in companies that can generate revenue at earlier stages of the goods/services timeline. For example, a manufacturer that can produce and sell something in a matter of weeks. I don’t really like the uncertainty of waiting to see if a clinical trial will be successful in 2023.
I don’t discount the fact that now does appear to be a good time to buy Sareum shares for the long term. But based on the business model, it doesn’t appeal to me.
