Financial woes could deflate Immunosyn

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In the last few weeks shares in Immunosyn have been rising steadily seemingly over nothing. The California-based biotechnology company has not released any significant news or indicated that its lead product SF-1019 has started official clinical trials in humans.

Nonetheless, this silence has not stopped the stock, which first started trading on the OTC market in October 2007, from finishing last week 43% higher after more than doubling over the last month. The rise has left it with a market capitalisation of $1.33bn, despite having only one full-time employee and only one pre-clinical product. While mystery will remain over what has caused the share price surge, worrying statements in the company's annual report published today could cause the stock bubble to burst.

In a "going concern" statement in the annual report the group, which has only $24,000 in the bank and last year racked up expenses of $673,000 said: “As shown in the financial statements, Immunosyn had an accumulated deficit of $828,600 and a working capital deficit of $733,523 as of December 31, 2007 which is considered insufficient to fund operations over the next 12 months.”

The group went on to say that unless additional funds are raised, there is “substantial doubt about Immunosyn’s ability to continue as a going concern”.

Risky bet

It is hard to see who would now be willing to invest in not only such a risky company, but a company with an early stage and therefore equally risky drug. Derived from goat serum SF-1019 is a part of a class of treatments known as Biological Response Modifiers that have to date been more closely evaluated in veterinary medicine. The group had been looking for orphan drug status in chronic inflammatory Demyelinating polyneuropathy and reflex sympathic Dystrophy.

One explanation for the seemingly inexplicable recent rise of Immunosyn is the relative illiquidity of the company's stock. Most of the shares in Immunosyn are owned by Argyll Biotechnologies, the originator of SF-1019 and Immunosyn’s licensing partner.

Argyll, which is responsible for all regulatory approvals and clinical trials in both the US and Europe and their associated costs, owns 54% of the stock. A further 30% is owned by large investors leaving a small free float, meaning that even small amounts of stock bought could cause large share price movements.

Equity research

One such large share price movement was caused back in January when privately-owned Proteus Equity Research Partners put out a statement saying that it believed shares in the company could reach a rather high looking $32. At the time the shares were trading at more lowly $2.70.

Proteus’ reasoning for such a stratospheric valuation call was the broad target markets for SF-1019 and the potential for rapid approval of the drug under both the FDA Orphan Drug Act and European and Canadian Special Access Programmes.

This had a duel reaction of causing the shares to shoot up 26% and for Immunosyn, which has the worldwide rights to market, sell and promote SF-1019, to put out a statement denying that it had in any way authorised or endorsed the rather optimistic looking piece of research.

With the exception of Proteus other analyst coverage of the company appears to be scant with no other brokers listed on their website and none of the major houses appearing to cover the company.

Little coverage

But the OTC market is characterised by little analyst coverage and as such the stocks traded on it are considered to be more risky than those traded on larger exchanges. The infrequent trading also means that the spreads, the difference between the bid and ask prices are large.

More recently, in the absence of wildly hopeful research, excitement about the company appeared to be coming from the bulletin boards, many of which were talking up the stock as the group makes its way towards clinical trials in the US and the UK.

However, even this looks to have been based on wishful thinking. There has been little news on the US trials since the group said in November that it was responding to a request for additional data from the FDA to support its Investigational New Drug Application.

Slightly more progress had been made in the UK where there has been approval to start manufacturing of the drug ahead of formal clinical trials.

Today, following the worrying financial news from the company, that progress and the advancement of Immunosyn’s share price might just have been put on hold.

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