The Synairgen (LSE: SNG) share price has surged in value in the past two months. During the last two weeks of July, shares in the micro-cap jumped more than 440%.
That meteoric rise came after management announced positive results from the company’s Phase II drug trial for SNG001, which is, according to the business, effective in preventing coronavirus patients from requiring ventilation.
Investor sentiment towards the company continued to improve throughout August. The Synairgen share price hit a high of 250p on 20 August as investors became increasingly excited about the firm’s prospects.
However, over the past two weeks, shares in the drug discovery company have fallen back below 200p. Unfortunately, I think there’s a high chance the stock could fall further before it returns to its previous all-time high. Today I’m going to explain why.
Synairgen share price outlook
Synairgen’s SNG001 drug could have huge potential, but I think the market has gotten ahead of itself here. It’s still in its early stages of development. The company needs to complete a Phase III trial before it can take the treatment to market. This could take some time to complete, and there’s no guarantee SNG001 will meet its trial’s goals.
The number of drugs that successfully make it from the drawing board to the market is tiny. It’s less than 10% of all treatments. SNG001 has made it this far, but there’s no guarantee it will make it over the final hurdle.
What’s more, the market for coronavirus drugs is highly competitive. Estimates suggest there are over 1,000 different treatments and medications in the pipeline. In Europe alone, over 130 other products are being trialled and tested. So, even if SNG001 does pass its last test, Synairgen may have its work cut out to promote the treatment in a crowded field.
Delays could weigh on the Synairgen share price.
Unfavourable odds
All of the above suggests Synairgen is going to face an uphill struggle to get its product to market. It seems as if the odds are stacked against the business.
As such, it seems likely the share price could fall further in the near term. It could be many months before there’s any more positive news to report on SNG001. During that time, other companies with blockbuster treatments may draw investor attention away from the Synairgen share price.
That said, while there’s no guarantee SNG001 will succeed, there’s no guarantee it won’t fail either. If the drug makes it to market, the company’s could see considerable revenue growth, which would be extremely positive news for the micro-cap.
Therefore, I believe investors need to take a long-term outlook with the business and own it as part of a diversified portfolio. The stock could fall back to 100p in the near term as SNG001 is put through its paces. If it fails the last test, the company may run out of money. However, if the treatment is successful, the stock could be an attractive long-term investment.
Owning the Synairgen share price as part of a diversified portfolio would allow investors to profit from any upside while limiting downside risk.
