There has been a huge (83%) drop in the share price of Phytopharm (LON:PYM) this morning, as their Research Update looks extremely negative, in that their lead product in development, for treatment of Parkinson's Disease, called "Cogane", has failed to produce any efficacy in Phase II (i.e. tested in real life, on people) trials.

Phytopharm is reviewing whether to continue with Cogane (which seems unlikely given that it doesn't work), and reviewing its strategic options. They had £5.5m in net cash at 31 Jan 2013, and unless there are other promising products in the pipeline (which it seems there are not, otherwise the statement today would have switched the emphasis to them), then PYM looks dead in the water, and should probably be valued below net cash (to take into account closure costs), as opposed to the market cap before today of £34.7m.

This is a good example of why I never invest in drug discovery companies - the timescales are very long, they require multiple fund-raisings, hence diluting existing holders, and the vast majority of drug trials fail. Yet they often command premium valuations because it's easy for a good salesman to get investors excited over the potential if the drug were to be successful.

Moreover, a large pharma will swoop and buy them out once a worthwhile drug is developed. So risk/reward in this sector is all wrong, unless you are a scientist who is knowledgeable in the field, and find a particular company which is likely to succeeed. I don't see how an average investor can possibly assess risk/reward on this type of share, so it's really just gambling.

Also note that there's no downside protection, other than net cash. So when a drug discovery company with one lead product fails, then the outcome really is binary. So one needs major multi-bagger potential to justify risking almost 100% of your investment. It's not for me, but occasionally people get lucky and happen to be holding something that explodes on the upside. Also from time to time such shares become fashionable and command high ratings, so astute traders can make money on the uplifts in sentiment.


It's going to be a quiet day today, with very little company results or news this morning, and with US markets closed for President's Day., where most of us get our…

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