MIDAS SHARE TIPS: Biotech group Redx Pharma shares are in doldrums but could soar as new drugs come on stream

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Biotech group Redx Pharma floated on AIM in March 2015 at 85p. Today the stock is trading at 26¾p. Yet the company has done nothing obviously wrong and it is backed by heavyweight investors including Aviva, Legal & General and Jon Moulton, the super-rich private equity veteran.

The company has a large pipeline of potential drugs, several of which are at an exciting stage of development. So, if all goes according to plan, the shares should rise considerably from current levels.

Redx was formed just six years ago and its founders were determined from the start to be different from their peers.

Looking ahead: The company has a large pipeline of potential drugs, several of which are at an exciting stage of development

Most biotech firms focus on one or two products, so the risk of failure is high. Redx is developing around a dozen new products, so if a couple do not make it to market, the company should not suffer unduly. Many drug developers also concentrate on finding entirely new treatments for particular diseases.

Redx looks at what is already out there and works out how to make it better. This significantly reduces the risk of failure because the company concentrates its efforts on improving drugs and products that are either already on the market or are undergoing trials.

One of its compounds, for example, is designed to treat the most common form of adult leukaemia.

Pharmaceutical multinationals Johnson & Johnson and AbbVie have already produced a drug for this cancer, but questions have been raised about its long-term efficacy.

Redx picked up on these concerns when the drug was in clinical trials and has been developing an alternative, which is intended to be more effective for longer. Research is at an advanced stage and Redx's product is expected to move into clinical trials late next year.

The company is also developing a treatment for pancreatic, breast and head and neck cancers by targeting cancer stem cells in these areas of the body. These stem cells are difficult to find but they can lie dormant for years before reactivating a cancer after it has gone into remission. Swiss drug group Novartis is looking at this type of cancer therapy too, but Redx is confident that its treatment will do a better job. The company is making good progress and the drug will move into clinical trials early next year.

Trading trends: If all goes according to plan, the shares should rise considerably from current levels

Across the group, Redx is focused on three areas: cancer treatment, infectious diseases and immunology, working out how best to use the body's own immune system to fight illness and combating autoimmune diseases such as diabetes and Crohn's disease.

Chief executive Neil Murray, a doctor by training, has more than 25 years' experience in the pharmaceutical industry, including a spell in the 1990s as a director of Glaxo Wellcome (before it merged with SmithKline Beecham and became GLAXOSMITHKLINE).

He and his fellow founders, all of whom have extensive records in the drugs sector, formed the company around five principles: the products they develop have to meet a market need; some tests must have been carried out already on the basic compounds; competition has to be limited; the Redx drugs have to be the best on offer; and the drugs need to relate to the areas that the company is focusing on - cancer, infectious diseases and immunology.

The idea behind all these principles is simple: they will help Redx to develop great drugs quickly and therefore make it more commercially successful than many in the biotech sector.

A superficial glance at the share price performance would seem to suggest that the strategy has been greeted with scepticism by the stock market. But within the pharmaceutical industry, the company is extremely well regarded.

Infectious diseases that it is targeting include the hospital superbug MRSA and the food poisoning bug E.coli, which killed a child in Scotland only last week. The NHS was so impressed with Redx's work on MRSA that it is collaborating with the company to discover new drugs that will stave off the threat of bacteria that are resistant to current antibiotics. The joint venture, with the Royal Liverpool Hospital, is one of the first that the NHS has undertaken with the private sector, a notable milestone for a company as young as Redx.

The company is also collaborating with drugs giant AstraZeneca on certain treatments and it is in discussions with several other major pharmaceutical groups about partnership and licensing agreements. The idea of cooperation with larger companies and organisations lies at the heart of Redx's commercial philosophy.

As a junior biotech business, it needs the financial and marketing muscle of bigger partners, as it cannot hope to bring products to market on its own. Some drugs will be licensed before going into clinical trials. Others, such as the pancreatic cancer treatment, will be licensed once trials have begun, at which stage partnership agreements become significantly more lucrative.

Based in a former AstraZeneca plant near Macclesfield, Cheshire, the company has received substantial local funding and won a number of local awards.

Despite regional support and its licensing strategy, Murray may well need to issue more shares to fund growth. In March, the firm raised £10million in an equity placing at 35p and it now has £14million in the bank. But analysts predict that Murray will be back for more.

Midas verdict: Redx is at an early stage in its evolution and the share price performance has been poor. There is also the chance that Murray will come cap in hand to investors over the next year. Long-term, however, this company could prove a rewarding investment and at 26¾p, the shares are a bargain.

Traded on: AIM Ticker: REDX Contact: redxpharma.com or 01625 238972

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