Small cap biotech Phytopharm (PYM) has crashed by 84% to 1.62p after announcing that its Parkinson's disease treatment, Cogane, has failed in a clinical trial. The disappointing news has reduced its market value from £34.7 million to £5.5 million, thereby valuing the business purely on its cash position.


The shocking share price performance highlights the danger of investing in early stage biotech or pharmaceutical companies. Investors are betting on a drug working, usually before any data has been calculated, and if the results are negative then investors can wave goodbye to their cash.


'UK pre-revenue drug development companies remain a lottery,' analysts at Peel Hunt stated in a research note following the news.


Data from Phytopharm's Phase II clinical trial of the treatment for early-stage suffers concluded that it had no effect on the condition. This stage was the first test of the treatment’s effect on the disease after Phase I proved it has no harmful side-effects. Phase II involved more than 400 suffers randomly allocated various doses of Cogane or a placebo every day for a month.


Cogane is Phytopharm’s main asset and management has halted all research and development while they conduct a strategic review. Unless another use for the treatment is found, the company is likely to become a cash shell such as Renovo (RNVO:AIM) and Antisoma (ASM:AIM) effectively did when their main drugs failed.


Cogane’s pre-clinical models were encouraging but the treatment’s failure has led Peel Hunt to question the relevance of such models used to justify the expense and size of the clinical trials. 'Ultimately this outcome should have been reached at a lesser loss for shareholders.'


Shares in Phytopharm doubled in price between August and September 2012 to a peak of 12.75p after investors reacted to a reassuring trading update. Peel Hunt said in November 2012 that the 'day of reckoning approaches'. At the time it commented: 'Positive results will drive significant valuation upside, although if the trial were to fail, the cash and early stage pipeline holds little value.' We now know which way the pendulum has swung.

Issue Date: 18 Feb 2013