One unloved small-cap biotech to watch

Developing successful new drugs generates good headlines, but there's more to the pharmaceutical industry than that. Here, Tom Bulford looks at one small biotech company working at the unglamorous - but undervalued - end of the sector.

In the huge pharmaceutical industry most of the headlines are made by new drug formulations. But there's another hugely important strand of the business on which billions of dollars are spent. That is the creation of improved delivery mechanisms.

The first step of any drug delivery system is to get the drug into the body. But the challenge does not end there.

To determine whether a drug 'works' and is saleable, its essential to know what happens once it is inside the body. For how long does its deliver its therapeutic benefit? How accurately is this delivered? And how much collateral damage is caused in the process?

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One promising penny share company that is working on ways to radically improve drug delivery is Lipoxen (LSE: LPX).

When I dropped in to his office last week, chief executive Scott Maguire was adamant that Lipoxen's technology is living up to its high promise. But he was also frustrated about UK investors.

It seems these investors are worried about the risks involved in his company's business. What they didn't seem to realise, Maguire said, was that, compared with other biotechs, the risks associated with Lipoxen are low.

This is because it is simply reformulating existing drugs and vaccines with natural delivery technologies. And on top of that, all clinical trials to date have been very successful. If only investors could see this.

Why biotech shares are often hugely undervalued

Frustration with the investment community is a common complaint of leaders of the UK's biotech sector.

In part, this is due to lack of expertise in the City. But a second factor one that certainly applies to Lipoxen is that biotechs are often prevented from publicising their successes because their major pharmaceutical partners would rather keep them quiet.

Other small-cap newsIn last Thursday's Penny Sleuth I said business at Empresaria (ticker: EMR) "has been on an upswing in recent months - something that could be confirmed at next Thursday's AGM. Watch this space!"Today (3 June) shares in the AIM-listed international recruitment agency jumped 15% as its AGM statement confirmed the strong trading I described last week.The company says full-year profits are set to be "materially ahead of market expectations".

So today Lipoxen is valued at just £10m even though a single licensing deal for one of its drug delivery platforms could be worth a multiple of this. The question is how long investors will have to wait for that to happen. As chairman Brian Richards points out, this is "the stage that real shareholder value is generated".

The answer to this question, as Lipoxen knows all too well, is not entirely in its own hands. In order to offset the huge costs involved, Lipoxen licenses its know-how out to others who can conduct clinical trials.

Last year was a tale of delays to several of the projects that should prove the worth of its drug delivery platforms.

One trial, conducted by Russian partner FDS, was delayed due to a lack of finance. A second for the UK's Technology Strategy Board was upset when lead manager Cambridge Biostability Ltd went into liquidation. A third was rescheduled when project leader the Serum Institute of India (SIIL) had a change of plan...

The 'breakthrough' trial that could send Lipoxen shares soaring

Ironically though, this last setback may create the breakthrough for Lipoxen, because the change to SIIL's plan was to expand the trial. While this has delayed the results which are now expected in the third quarter of this year they will be all the more significant when they do appear.

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The trial that SIIL is running uses over 30 patients suffering from anaemia (a consequence of kidney failure). They have all been given the standard drug, erythropoietin (EPO), for this condition. But it has been delivered into the body using Lipoxen's unique PolyXen technology.

Typically, long-lasting therapeutic agents such as proteins and peptides are carried into the body in combination with polyethylene glycol, an artificial chemical polymer that is widely used in industry and is an ingredient of vehicle anti-freeze.

Instead of using artificial polymers, Lipoxen's approach is to use natural, biodegradable polymers. It believes these should allow the drugs to act for longer and with fewer unwanted side effects.

In the case of PolyXen, proteins are combined with polysialic acid, a type of sugar naturally occurring in the human body. Because it doesn't trigger an immune response, polysialic acid has been called 'nature's ultimate stealth technology' the ideal carrier of therapeutic proteins.

I understand that the Indian trial of PolyXen-delivered EPO is going well. But this is far from the only string to Lipoxen's bow.

Lipoxen shareholder Baxter International has been evaluating PolyXen as a delivery mechanism for a series of drugs, including the blood-clotting agent Factor VIII. We could hear news of this industry giant's plans in the next few weeks.

Meanwhile in the area of vaccinations, Lipoxen has a platform technology called ImuXen. This could have a number of benefits.

First, it could allow multiple vaccines to be delivered in the same dose. Second, it could multiply their effectiveness. And third, it could also permit vaccines to be stored in ambient rather than refrigerated conditions. This is especially important in many developing countries.

Clearly these innovations could make a big difference to healthcare and could save a good deal of money as well. Even so, the UK stock market seems unwilling to take anything on trust.

This is frustrating for Scott Maguire. But for penny share investors it means that the announcement of any licensing deal is sure to be greeted with a dramatic hike in the share price. This is one to watch.

This article is taken from Tom Bulford's free twice-weekly email The Penny Sleuth

Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund. Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.