Investors in allergy specialist Circassia (CIR) have learned a hard lesson in the risks associated with backing a development-phase drug company.

The third and final clinical trial phase proved that its severe cat allergy candidate, Cat-SPIRE, does not work, sending shares 62% lower to 104.1p as investors rush to dump the stock.

Circassia investor Imperial Innovations (IVO:AIM) falls 6.6% to 406.3p on the news. Woodford Patient Capital Trust (WPCT) escapes the sell-off, down only 0.3% to 89.75p despite Circassia being its fourth biggest holding.

The Oxford-based company has several treatments under development and the knock-on effect of today's news is that management have terminated the phase III grass allergy study and halted work on its ragweed study while it reviews Cat-SPIRE’s data.

The failure happened despite the treatment passing two previous clinical trial phases. Investors need to remember that while the risk of a treatment getting to market falls as a candidate passes early stage clinical trials, there is no guarantee that it will ultimately reach the market.

Third phase clinical trials typically involve tests on hundreds if not thousands of suffers, compared to a handful of patients in the second phase, while the first trials test for side-effects on a few healthy volunteers.

Cantor Fitzgerald has put its recommendations under review believing today's result calls into question the entire immunotherapy approach that has been followed by Circassia.

The broker’s analysts note the company’s £139 million cash position is a positive point. ‘Fortunately, Circassia is well capitalised and the company has diversified its respiratory interests taking the company into asthma diagnosis and respiratory generics.’

This is not Circassia’s first set-back. The Oxford-based company had to produce additional phase II data for its ragweed allergy candidate in 2015.

Web - Circassia - 20 June 2016

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Issue Date: 20 Jun 2016