Diversifying into pharma

It’s not often that I’ll buy a share that’s up over 400% from where it was just 6 months ago. It’s even rarer that I’ll speculate in pharmaceutical companies, so notorious for having success or failure contingent on a lone trial. On first glance, I would be sorely against spending hard-earned money on such a company, let alone an AIM-listed one.

But if even the best of us can eat our words, who am I to not U-turn every so often?

As part of my move into smaller companies with more asymmetric risk-reward ratios, I’ve been searching for undervalued businesses that could grow into the type of company lauded as an AIM success story. On this quest I’ve taken a deeper look into 4d Pharma (LON: DDDD), a company that, while certainly on the up, has not yet hit the stratosphere like I hope for. Let me be clear: a look at the financials alone does nothing to back up my statement. For a company with an almost £200m market cap, paltry revenues of £0.21m in the financial year to 31 December 2019 do not give my theory much credence. Let me show you what does.

DDDD (what a mouthful!)’s USP is that it specialises in the use of non-engineered single strains of bacteria, originally isolated from the gut microbiome of healthy human donors. Strains of bacteria are then chosen to treat particular diseases, ranging from cancer to COVID-19. The benefits of this “Live Biotherapeutics” approach are perhaps best explained by the CEO himself:

“Live Biotherapeutics as a new class of drug have a number of advantages over traditional therapies. As living bacteria, LBPs produce multiple products, proteins and metabolites, and as a result have ‘poly-pharmacy’ effects, able to hit more than one target simultaneously.  For this reason, Live Biotherapeutics may be able to address multi-component diseases where previous approaches have failed. This includes Parkinson’s disease, cancer and immune-mediated diseases.

The perfect drug is both safe and effective; Live Biotherapeutics, by definition, are expected to meet the safety criteria, and we are currently demonstrating efficacy through our clinical trials. This safety profile significantly accelerates the development pathway, allowing us to go from discovery to clinical proof of concept in as little as four years, much faster than traditional drug types.”

It reminds me somewhat of stem cell treatment, which can be modified to treat a wide variety of ailments. From this, 4D appears the Swiss Army Knife of pharmaceuticals. Although, who would invest based on the words of a small-cap CEO? (without substantial proof of concept backing them!) Of course, we as even vaguely prudent investors need more than that.

I now direct you to their prospective treatments, of which there are no less than 16. If any one of these pass any of the regulatory hoops all the way to Phase 3, the current £187m market cap is a mere fraction of fair value. Take the Irritable Bowel Syndrome (IBS) treatment, currently in a Phase II trial. With the market for IBS treatment set to reach $1.5 billion by 2023, and with no treatment as of now tackling the problem’s source, we can easily see the potential. Combined with their so-called largest intellectual property estate in the microbiome sector, with granted patents in the US, across Europe and globally, with over 400 patents, this could be a future source of recurring cash flow for 4D.

What’s more, investors are circling, just not so much in the UK. 4D competitor Seres Therapeutics currently boasts a $2.48 billion market capitalisation, a potential sign of what to come if even one of the 16 therapeutics listed above receives regulatory approval.

Finally, from a balance sheet perspective, the fact that a July equity placing raised just over £7m to strengthen the company’s liquidity position mitigates the risk of further placings in the near term. If a fund raise does occur in the future, in my opinion it likely will be accompanied by a potentially transformative piece of news that can send the market capitalisation into the billions (if it isn’t there already! With risk diversified across treatments in an innovative new sector, I find the investment to be a potential multi-bagger (even if I wish I got in a little earlier). Let’s see if my entry price of around 125p a share looks downright cheap in the future!

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I currently hold shares in 4d Pharma (LON: DDDD).