Should I get invested in this FTSE pharma share?

I last looked at small molecule drug development companies Sareum (LSE:SAR) in June 2021. Back again, this FTSE AIM the members fly with the potential for treatments used to fight Covid-19.

I think that investors are overestimating the chance and magnitude of success related to Covid-19. My hunch is that prices will continue to rise, but will also retreat as breakthroughs fail to occur and interest wanes. I am not interested in investing in it.

Now that Sareum’s share price has fallen again, I think it’s worth reconsidering.

Burn cash

The Covid-19 app appears to be a distraction. All that remains in the plan now passes the reference for potential applications in respiratory diseases. Sareum is returning to its core mission of developing next-generation kinase inhibitors for the treatment of cancer and autoimmune diseases.

However, the Covid-19 episode is not entirely wasted. The company took advantage of the rising stock price. It issued an additional 10.6m shares in the 2020 to 2022 financial year, raising £7.9m in cash, or 74p per share. In the previous six years, £5.9m in cash was raised from the issue of 27.1m shares. That could do just 21p per share.

Sareum needs cash. It has not produced any meaningful profit for ten years. However, it burns an average of £1.12m a 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 received approval to initiate a phase one clinical trial of 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 part of UK regulators. This requires a subsidiary to be set up there, adding additional costs. The level of cash utilization will be higher than the average going forward.

I think that another equity raise will happen in the next year or so. This means more dilution for long-time shareholders. They may say that progress has been made, and that this justifies the dilution.

Sareum is considering options for another drug in development, SRA737, a Chk1 inhibitor. It is licensed to Sierra Oncology, which took over the second phase of the trial for solid tumors. Sierra was purchased by GSK in July 2022 for the rare cancer treatment portfolio. After the purchase, the rights and data collected in SRA737 return to Sareum.

Share price changes of Sareum

For real success, Sareum’s offering must be more effective or equally effective but better tolerated by patients. That should be shown in the third phase of the trial, which has not yet started. Well, with some positive results from the latest phase one trial, Sareum’s share price could be even higher. But looking at the average rate of success in the industry, it is more likely that it will not.

Although the rewards are potentially great, drug development is an expensive and risky business. In the end, I will not invest in Sareum. Risk appetite will not allow. And even if it will, I will choose a basket of stocks like Sareum in a larger portfolio in the hope that one big winner pays for all the other disappointments.