The Investment Column: SR Pharma

DOCTORS, not institutions, dominate the share register of SR Pharma, the biotech company whose value crashed from pounds 126m to pounds 12m two years ago.

These wealthy private investors - many are less rich now - are not all Harley Street practitioners. They are well-informed medical professionals who believed that SR Pharma, then called Stanford Rock, had proprietary technology which could cure tuberculosis. In the event, the drug failed in late-stage trials.

SR Pharma stands in the same position as it did before the crash. It is applying the same technology - it creates a compound by killing bacteria through heat - to cancer. Interim findings in the same late-phase trials suggest the compound, in combination with other treatments, can extend the lifespan of lung-cancer patients from 7 to at least 13 months.

The shares hit a new 12-month high yesterday of 317.5p before closing at 315p. That's still well below their 1997 high of 635p. Sentiment still dogs the stock, and the institutional investor base, though greater than it was, remains thin.

There are several reasons why the shares are undervalued. While the findings are only preliminary, the results from the cancer studies are, say independent scientists involved in the trials, exceptional. Regulatory approval is less tricky because lung cancer tends to be diagnosed late. SR's fortunes do not depend solely on this application of the compound, so the shares are less vulnerable to decimation. It is also being applied to asthma, with good results. SR expects to announce later this year a deal with a pharmaceutical major to fund trials. SR, meanwhile, has a partnership arrangement whereby a US firm funds development of a vaccine based on the compound.

Analysts recognise that failure in one application does not preclude success in another. Cancer and asthma drugs have more certain, First World, markets than tuberculosis drugs, and clinical efficacy is easier to prove. If SR delivers a marketable drug, revenues will still be several years away. But the company, although AIM-listed, is attracting the support of the City as well as Harley Street. Investors should not be deterred from buying by SR's history.