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After several lean years, drug developers have managed to ignite interest among investors, with 15 new pharmaceutical companies floating over the past year. Christopher Spink takes the sector's pulse

The current plight of blue chip pharma Astrazeneca has highlighted the risks faced by drug developers. Several of the group's potential blockbuster products have failed late-stage clinical trials and one of the company's existing drugs has suffered from safety concerns. This has conspired to punch billion-dollar holes in the group's expected revenues.

As blue chips no longer seem to offer a low-risk way of gaining exposure to the fast-growing pharmaceutical sector, investors are reassessing their views of smaller drug developers, hoping they can provide drugs for the larger concerns. So in relative terms their risks are decreasing, especially if a spread of the more promising candidates can be selected.

Increasing appetite?

This might explain why the appetite for new small cap drug plays seems to be increasing. Over the past year no less than 15 such companies have floated and a sizeable number of those already listed have managed to raise sizeable sums to continue their drug development programmes.

This trend seems to be continuing. For example, this month Proximagen, which is developing treatments for Parkinson's and other neuro-degenerative diseases, is hoping to join AIM via a £12 million flotation that will value the group at £30 million. The group's major backer is technology commercialisation concern IP2IPO.

Plethora Solutions, previously called Medpharma, has already started trading on AIM, having raised £10 million, giving it a similar starting value of £30 million. Plethora, backed by Sir Christopher Evans' influential venture capital outfit Merlin Bioscience, specialises in finding therapies for urological disorders. The group's main drug candidate is a spray that can prevent premature ejaculation. This is already in Phase II trials.

The buoyant prevailing atmosphere contrasts with that experienced last summer when Vectura joined the market, raising £20 million. The group, headed by the highly-regarded Chris Blackwell, complained of 'challenging market conditions' when drumming up support last June. It has two inhaled products in development, one of which treats male erectile dysfunction and one that treats chronic obstructive pulmonary disease.

'Lifestyle' drugs

Interestingly, the likes of Plethora and Vectura are representative of a growing number of companies on public markets that are trying to find treatments for conditions that are not of themselves critical or life threatening.

Typical amongst them is Xenova, a firm testing compounds that can treat nicotine and cocaine addiction.

Alizyme currently has an anti-obesity drug in Phase II trials. The group, capitalised at £186 million, has other treatments for irritable bowel syndrome and colitis entering Phase III trials.

Alizyme is one of a handful of drug developers worth more than £150 million. Another is NeuTec Pharma, a firm working on therapies to combat hospital-acquired infections, including MRSA.

Most of these concerns have drugs in Phase II or III clinical trials, with a good chance of commercial success. This explains their higher values. For instance, NeuTec's share price has doubled over the past year following encouraging Phase III trials for a drug to treat yeast infections. The group raised £25 million on the back of this at 490p a share.

However, drug developers with products near commercialisation are not immune from the development problems encountered by Astrazeneca and other similar entities.

Take GW Pharmaceuticals, one of the larger AIM representatives. This group, which has a licence from the Government to use cannabis to develop pain-relief prescription medicines, has seen its shares slump after delays to the launch of its first product, originally expected to get the green light last year.

Early-stage opportunities

Although most of the recent newcomers have drugs in Phase II trials, some are at an earlier stage of the research process and therefore have attendant higher risks.

Examples include Synairgen, another IP2IPO spin-out, which is trying to find treatments for asthma and other respiratory problems. Proteome Sciences, uses nanotechnology to identify sub-molecular proteins that indicate the presence of a disease and is at an early stage of development for these diagnostic tools. The group's shares have slumped lately on funding concerns.

Blue chip ties

Some of the more interesting opportunities are those ventures that already have close links with major pharmaceutical companies. Minster Pharmaceuticals recently reversed into shell RII, with two drugs in development that used to be owned by GlaxoSmithKline, for whom the company's executive team used to work.

In a similar vein, Antisoma, which focuses on cancer therapies, has an agreement with Roche to conduct clinical trials on potential candidates that Roche believes are too niche for its own portfolio. The company suffered from the failure of one of its drugs in Phase III trials, but has seven promising drugs in development at present as well as over £32 million of cash. At a market value of £82 million, the shares look reasonable value.