Pharma stock Sareum was and is fighting against the odds

I last looked at the small-molecule drug development company Sareum Holdings (LSE: SAR) in June 2021. Back then, this FTSE AIM member was flying high on the potential for its developmental drugs 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. There was no breakthrough. Sareum’s share price has fallen back towards where it was.

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 for the company. 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.

Pipeline

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.

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.

Most drugs never make it to market

If this reads so far as an attack on Sareum, it is not meant to be. Drug development is difficult, long and risky road to travel. Very few candidate drugs make it from the lab bench to market. For the ones that do it can take 10 to 15 years and around $1bn to get them there. So the company was right to have made the most of that stock price surge to 400p.

But, I don’t think investors were acting rationally when they drove the Sareum stock price 2,400% from 16p in March 2020 to hit its all time high a little over a year later. This was extreme optimism. And it was misplaced. It won’t be the first time nor the last.

Super stock forecasting

Sareum’s molecules were always unlikely to be approved for the treatment of COVID-19. I would think that they are unlikely to be approved for the treatment of anything. Again, I am not singling out Sareum. Nor am I singling out those investors that bid its price up. From the inside, swept up in the moment, thinking the situation is special or privileged, it’s easy to attach an extreme probability for success. No newlywed will ever countenance the prospect of getting divorced, their relationship is special. Yet, divorce rates run at 40-50%.

When making forecasts its better to take a step back. The chance of a drug for an infectious disease like COVID-19 getting approved is 10.5%. I didn’t pull that number out of thin air. It is from a paper that looked at 406,038 entries of clinical trial data for over 21,143 compounds from January 2000 to October 2015¹.

Infectious disease drugs fair better than average. Overall, drugs have a 5.7% chance of getting approved. But, still, it was always unlikely that Sareum would get a successful COVID-19 treatment to market. The chances of SDC-1801 getting from phase one to phase two is 39%, from two to three 25.5%, and from three to approval 63.7%. Multiply those together and the overall probability is 6.3%.

These are the probabilities that investors should have considered as a base rate when making the decision to invest. They can be adjusted up or down to account for the specifics of the situation. But, there has to be justification for doing that. This probability can be multiplied together with whatever per share value measure of success an investor has come up with. This will be significantly reduced. This will undoubtedly not have compared well with the Sareum share price siting at or close to 400p.

References:

1. Chi Heem Wong, Kien Wei Siah, Andrew W Lo. “Estimation of clinical trial success rates and related parameters.” Biostatistics 20(2): April 2019, Pages 273-286. Published online: 31 January 2018. DOI: 10.1093/biostatistics/kxx069 (link to article)
2. Duxin Sun, Wei Gao, Hongxiang Hu, Simon Zhou. “Why 90% of clinical drug development fails and how to improve it?” Acta Pharmaceutica Sinica B: Volume 12, Issue 7, 2022, Pages 3049-3062. DOI: 10.1016/j.apsb.2022.02.002.

DISCLAIMER: James J. McCombie does not own any of the shares mentioned. The Storied Investor has no beneficial ownership position in any of the shares mentioned.