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The Sareum share price is exploding higher! Should I jump in?

A Dechra Pharmaceuticals scientist uses a microscope
Image: Dechra Pharmaceuticals

Stocks that are listed outside the FTSE 100 can appeal to me even though they are smaller companies. Often, those with a smaller market capitalization have a larger potential for higher growth. Evidence of that can be seen from the performance of the Sareum (LSE:SAR) share price. The stock has risen 735% over the past year, with solid fundamental drivers. Here’s what I need to know.

A boost from Covid-19

Sareum discovers and develops drugs that are mostly designed around cancers and autoimmune diseases. It aims to focus on multiple drug development programmes at any one time in order to have a steady stream of potential revenue. The company makes money by licensing out the drugs (or components) that have been developed to larger businesses. 

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There’s nothing here that’s particularly unusual about an early stage drug development company. As with most of the companies operating in this sector, the costs of research and development can be high. The flipside is that unless something meaningful is developed, revenue is unlikely to be higher.

A quick look at the recent performance of the Sareum share price shows that clearly something meaningful was developed over the past year! This has been with regard to Covid-19. It received a UK Research & Innovation grant of £174,000 for a research project relating to Covid-19. The main thrust of this was whether Sareum’s proprietary TYK2/JAK1 inhibitor could help on cytokine signaling after a someone is infected.

Clearly, a lot of the move higher in the Sareum share price in recent months can be put down to this project. The company has said that results so far are encouraging, which is adding fuel to the fire.

A fair value for the Sareum share price?

The story around Covid-19 and what it could mean for Sareum is good news. Yet as an investor, there are still a lot of unanswered questions. The big one to me is what the financial benefit of successful licensing of the Covid-19 project could be. Is this materially a game changer when the company can license it out or not? 

Without such forecasts, the rest of the picture for Sareum doesn’t look that appealing. In the half-year accounts, revenue was shown as nil, with operating expenses at £594,000, leading to an obvious loss. Simply put, the Sareum share price needs the project to be a success, otherwise the valuation currently is above the fundamental value.

Given my limited in-depth scientific knowledge, I can’t put an accurate figure on the value of the current project. Due to this, I can’t say whether the 735% rally in the share price is fair. It could be that there is more upside, but I’m not able to quantify this. 

Overall, I’m not going to be investing in Sareum at the moment. I simply don’t understand the specifics enough to make an informed decision.

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jonathansmith1 and The Motley Fool UK have 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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