The Synairgen (LSE:SNG) share price took quite a hit last week following its latest earnings report. The stock is down around 21% since last Thursday. And this recent decline has pushed its 12-month performance to a disappointing -17% return. Is this business in trouble? Or is this volatility an opportunity to grab some shares at a discount? Let’s take a closer look.
The progress continues
Despite what the SNG share price would suggest, Synairgen has actually achieved some promising milestones. Its flagship drug SNG001 is currently undergoing phase three trials. And the last patient is on track to be enrolled by the end of November.
As a reminder, SNG001 is an inhaled interferon beta formulation to treat severe respiratory diseases. That’s a fancy way of saying, patients aren’t injected but rather breathe the drug directly into their lungs. The company is currently running trials to verify its effectiveness against severe cases of Covid-19.
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Early lab results released back in May showed the treatment successfully eliminated the virus to undetectable levels. And if a similar outcome can be replicated in the upcoming phase three trials, Synairgen might soon shed its pre-revenue status. The next set of results for SNG001 are expected to arrive within the next few months. In the meantime, the firm has already begun exploring its effectiveness on other Covid-19 variants. And recruitment for its phase two trial of home treatment has just finished recruiting.
Needless to say, this is quite an encouraging amount of progress over the last six months. So why did the share price fall on the news?
The crashing share price
Drug development is a very expensive endeavour, with no guarantee of results. Now that SNG001 is entering phase three trials, the costs are ramping up. Consequently, research & development expenses have exploded over the last six months from £4.5m in 2020 to £36.9m in 2021. And with more staff on the payroll, administrative costs have more than doubled.
In my experience, seeing a high ramp-up of costs when entering phase three trials is not uncommon. The study is estimated to have a total of 610 patients in 99 different hospitals around the world. And hospital fees for running clinical trials are high.
Consequently, ignoring the effects of taxes, the firm reported a loss of £38.9m. That’s more than 600% larger than a year ago. So I can see why some investors were spooked, triggering the fall of the SNG share price.
The bottom line
The spike in costs ultimately doesn’t concern me as much as it does the market. After all, Synairgen still has £46.2m of cash on its balance sheet, which is a decent liquidity level. However, given the amount of capital being sunk into this single product, it does mean the SNG share price is exposed to a single-asset risk.
Suppose these trials don’t produce positive results? In that case, the SNG share price could be on the verge of collapsing even further. Personally, this binary outcome doesn’t tempt me. Therefore, I’m still keeping Synairgen on my watchlist for now.
