I last looked at the small-molecule drug development company Sareum (LSE:SAR) in June 2021. Back then, this FTSE AIM member was flying high on the potential for its treatments to be used in the fight against Covid-19.
I thought that investors were overestimating the chance and the magnitude of any Covid-19-related success. My hunch was that the price would continue to rise, but would also likely fall back as breakthroughs failed to happen and interest waned. I was not interested in investing in it.
Now that Sareum’s share price has fallen back, I thought it was worth taking another look.
Cash burn
The Covid-19 applications look to have been a distraction. All that is left of that plan now are passing references to potential applications in respiratory illnesses. Sareum is back to its core mission of developing next-generation kinase inhibitors for the treatment of cancer and autoimmune diseases.
But, the Covid-19 episode was not entirely wasteful. The company did take advantage of its inflated stock price. It issued an additional 10.6m shares in the financial years 2020 to 2022, raising £7.9m of cash, or 74p per share. In the previous six years, £5.9m of cash was raised from the issue of 27.1m shares. That works out at just 21p per share.
Sareum needs cash. It has not generated any meaningful revenue in a decade. Yet, it burns through £1.12m of cash on average each year. The £2.9m of cash listed on the balance sheet at the end of 2022 will not last long.
Clinical trial progress
The company has managed to get approval to start phase one clinical trials on its SDC-1801 TYK2/JAK1 inhibitor for the treatment of autoimmune diseases. But this is happening in Australia, after what sounds like timeliness and responsiveness issues on the side of the UK regulator. This will require a subsidiary to be set up there, adding additional costs. The rate of cash use will be higher than average going forward.
I think it is likely that another equity raise happens within the next year or so. That would mean further dilution for long-standing shareholders. They might say that progress is being made, and that justifies the dilution.
Sareum is weighing options for its other developmental drug, SRA737, a Chk1 inhibitor. This was licensed to Sierra Oncology, which took it through phase two trials for solid tumours. Sierra was bought by GSK in July 2022 for its rare cancer treatment portfolio. After the purchase, the rights and data assembled on SRA737 were returned to Sareum.
Sareum share price
For real success, Sareum’s offerings have to be more effective or similarly effective but better tolerated by patients. That has to be shown in phase three trials, which have not begun. Yes, with some positive results from the latest phase one trial, the Sareum share price might move higher. But looking at average rates of success across the industry, it’s more likely that it will not.
Although the rewards are potentially enormous, drug development is an expensive and risky business. Ultimately, I would not invest in Sareum. My risk appetite will not allow it. And even if it would, I would choose a basket of stocks like Sareum within a larger portfolio in the hope that one big winner pays for all the other disappointments.
