Biotech Investing

Volatile though they may be, small pharma stocks offer opportunities that can’t be ignored.

Dr. Linda Summerton knows the pharmaceutical sector inside and out. A 25 year industry veteran, she’s worked at drug-making giants like AstraZeneca (NYSE:AZN) and Merck (NYSE:MRK). These days, however, Dr. Summerton serves as chief exec at the UK-based Immodulon Therapeutics—a smaller, private biopharmaceutical company that specializes in immunotherapy.
Clearly, Dr. Summerton sees opportunity in smaller pharmaceutical companies. But plenty of investors remain intimidated by nano, micro or small cap pharmaceutical stocks because of the risk involved with buying in. More restricted pipelines and less capital means that small pharma can not weather clinical failures as well as the larger drug makers, often making their stock more volatile.
Still, small pharma stocks offer opportunities that can’t be ignored. We touched base with Dr. Summerton to hear her thoughts on the small pharma sector—including the lure it might hold for investors—and where she sees the industry headed in 2017.

Life Science Investing News: What are the benefits of investing in smaller pharmaceutical companies as opposed to the major drug manufacturers?
Dr. Summerton: Investing in smaller pharmaceutical companies presents several opportunities for investors. For me, a key benefit is the chance to be involved in the very early stages of a company’s development—from initial R&D to the first clinical trials.
This early involvement means that investors better understand the company’s values, priorities and products and it allows the investor to build strong relationships with the key decision makers from the beginning.
Investment in small companies whose products are in later stages of development is also beneficial. This is because there are more results available, so the investment risk is reduced.
On a macro level, smaller companies tend to be nimbler and make faster decisions than their larger counterparts. This creates a more entrepreneurial and innovative environment.
Life Science Investing News: Why are smaller pharmaceutical companies so critical to driving innovation in this sector?
Dr. Summerton: The life sciences sector is a major contributor to the UK economy and smaller companies play a vital role in this. For example, SMEs with fewer than 250 employees make up 78 percent of biopharmaceutical companies (including the service and supply chain) and 94 percent have less than £5 million turnover.
While innovation occurs in the research departments of large pharma companies, lots of innovation takes place in academia and small companies. This is driven by both the sheer volume of research work in academia and small companies—some of whom start from academic discoveries—and also the fact that such research is likely to be more wide ranging and esoteric.
Large pharma know this and are now spending huge efforts in collaborating on and fostering this research. But it needs more than large pharma’s support to be truly successful and to ensure diversity and choice for the healthcare providers and patients as well as to create a vibrant economy.
Life Science Investing News: What major hurdles did the pharmaceutical industry face in 2016?
Dr. Summerton: The pharmaceutical industry continues to face numerous challenges. These include:
  • Finding new and important targets to treat disease and the increasing technical risks associated with innovative targets.
  • The ever-increasing costs of drug development and regulation, and overcoming the further hurdles of reimbursement and adoption of new drugs.
  • Small pharma companies face the additional challenge of raising investment. While investment into smaller pharmaceuticals carrying out early stage research and development has seen significant growth, achieving the next level of success from clinical ‘proof of concept’ to product registration and launch is most often achieved through a deal with large pharma. To address this, the UK Government should be looking at how to encourage private investment into the healthcare system. For example, and as suggested by the BIA [UK BioIndustry Association], a Citizens’ Innovation Fund which provides the opportunity for patients or families to contribute directly to clinical development of new drugs and ultimately the state of clinical care within the UK would be a brilliant way of doing this.
  • The whole healthcare sector would benefit from a greater diversity of options to bring new and important drugs to market. Brexit gives us a good excuse to revisit initiatives and ensure they are fit for purpose, as well as to propose new ideas to support small companies at this crucial point.

Life Science Investing News: What do you expect from the pharmaceutical industry in 2017? Any general trends that investors might anticipate seeing?
Dr. Summerton: This is an exciting time for the industry, and there are huge opportunities in the wake of the Brexit vote. However, there is uncertainty about what the ‘final’ Brexit will look like for the pharmaceutical industry, which is impacting businesses’ decisions.
With a weakened pound, confusion around the future of EU funding and movement of labour regulations, one might expect to see pharmaceutical companies delaying M&A activity, investment, expansion plans and R&D projects until the implications of Brexit are clearer.
Such lack of action could have long term implications on the industry’s progress and negate the progress we have achieved over the last ten years.
I also think companies with manufacturing facilities within the EU bloc might begin looking at relocating their UK functions to alternative sites in the EU to minimize the risk of additional tariffs and delays.
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Securities Disclosure: I, Chelsea Pratt, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: Interviews conducted by the Investing News Network are edited for clarity. The Investing News Network does not guarantee the accuracy or thoroughness of the information reported. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.



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