The discovery that points to biotech’s incredible revival…

(This article first appeared in Penny Sleuth on 10 February 2011. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by MoneyWeek Limited)

2010 was the year of the junior miner.

Every week saw some plucky explorer score unbelievable gains. But this year is likely to be different, and I’ve got my eye on a few other sectors that I think could see fantastic successes in 2011.

I’ve talked about food stocks and the remarkable recovery in UK manufacturing. But one sector that is really beginning to look exciting is biotech.

Dormant for years and abandoned by investors as a non-starter, biotech looks to be on the cusp of a thrilling revival. After a string of dramatic announcements in recent months, it seems that investors have discovered a newfound enthusiasm for these stocks.

Just look at what happened this week when drug researcher SAREUM HOLDINGS (SAR) revealed news of another exciting breakthrough…

The discovery that points to Biotech’s extraordinary revival

On Monday Dr Tim Mitchell, Chief Executive of the Cambridge based drug researcher, reported that its Aurora+FLT3 Kinase programme had, in a pre-clinical in-vivo study, appeared to slow the progress of cancer.

Ten leukaemia patients were treated with this compound and their ‘leukaemia regressed to such an extent that no detectable cancer could be found in any of the cases treated’. By contrast for those who did not receive Sareum’s compound their leukaemia ‘increased five to fifteen fold’.

That was enough to send Sareum’s share price multiplying. Having drifted along for months at a price of about 0.25p, the shares took off, hitting 1.65p the following day and 4.79p on Wednesday. It has slipped back a little today. But those lucky enough to have been holding the shares and smart enough to have got out at the top could have multiplied their money nineteen-fold in the space of just three days.

No less impressive was the extraordinary volume of shares that were traded. On Wednesday 1,142,362,883 Sareum shares were traded, representing over 80% of its entire issued capital, and the excitement spread elsewhere.

• Oxford-based PHYSIOMICS (PYC) has developed a simulation platform that can show how a tumour will react to drug exposure. It saw its share price surge from 0.25p to an intra-day high of 0.68p

• The US company NEXTGEN (NGG), which offers a suite of services that can increase the traditionally low success rates associated with biomarker development, flew from 0.11p to a high of 0.53p

• VALIRX (VAL), which focuses on the epigenomic analysis and treatment of cancer (the epigenome consists of chemical compounds that modify, or mark, the genome in a way that tells it what to do) almost doubled to 0.53p

This is an extraordinary revival for a sector that has been languishing for so long that most investors have given it up. But you need to be very careful here…

A sector shot through with risk - and scintillating rewards

A cure for cancer is the equivalent of finding a river of liquid gold. But still, the biotech industry is fraught with danger. It eats up money, and genuine successes are few and far between.

A few years ago high hopes were held for ANTISOMA (ASM), also a company looking for successful cancer drugs. This week it was described as a company ‘that develops drugs that do not work’. That’s a harsh but fair verdict on a company that has seen its share price sink from 36p to 2.2p over the last twelve months.

Those who rushed into Sareum are already being brought face to face with some of the realities of biotech life. Today the company took advantage of the surge of interest to tap shareholders for £500,000, through the sale of 500m new shares at a penny a time.

And a more careful reading of Sareum’s Monday revelation shows that ‘at six weeks following treatment, no detectable cancer could be found in two of the ten examples dosed with the Sareum compound. In the remaining eight treated examples, the average time taken for the leukaemia to increase five-fold was six weeks, compared to two weeks in the untreated cases’. So while Sareum’s treatment seems to have some advantages over others, it appears to limit the spread of cancer, rather than kill it off completely.

How marvellous it would be if Sareum had a cancer cure! But shareholders should prepare for a long and bumpy ride. Biotech research is a laborious process. While successful developments in this area often improve upon existing therapies, few provide a total cure.

In time Sareum will need to find licensing partners, most probably big pharma companies with deep pockets. As big pharma cuts back on its own research spending, it is increasingly looking for small biotechs to do the early work, but the big boys do not move fast.

For example, investors bid the shares of VERONA PHARMA (VRP) up to 18p in 2009 after it said that RPL554 compound was safe and effective for asthma patients. But it is yet to strike the anticipated licensing agreement.

How to decode the jargon and make tremendous rewards

So while there is no shortage of penny share drug discovery companies, this can be frustrating territory. You’ll find obscure medical jargon, long time lines and a record of setbacks that far outweigh the successes. Many of the investors who have just warmed to biotech will make grave errors.

I’ve been following biotech stocks for a long time. And to be honest, it took a great deal of research before I was entirely comfortable with the medical jargon and dangers of investing in this sector. And for all that caution, I think I can still sometimes overestimate the potential of some of the biotechs I invest in.

But do I think all that research has paid off. Having got in ahead of its trial success in Verona Pharma for example, Red Hot Penny Shares booked a tremendous gain in 2010.

And in the Red Hot portfolio today is a small cap drug developer that I think is facing into a transformational year. I have high hopes for this one. And there will probably be a few more biotech stocks in the Red Hot portfolio by the end of the year. It’s dangerous territory, but I love the excitement of this extra-high risk sector.

Good investing,

Tom Bulford Editor, Red Hot Penny Shares

Leo from Kintore, Scotland says… “I took the plunge and subscribed and, to be honest, have not looked back since. I have invested in a number of recommended companies and the result has been to see my portfolio rise 150% thus far (in about 18 months). I would simply say that if you are looking to invest in something a little different, have a little cash you can afford to lose and like to take risks in order to achieve greater returns, then this is for you.”

To see more feedback from our readers click here

(This article first appeared in Penny Sleuth on 10 February 2011. Penny Sleuth is an unregulated free e-letter written by Tom Bulford and published by MoneyWeek Limited)