If there has been a defining trend on AIM these past few years it has been the growth in the size of the companies listed. When Growth Company Investor conducted its annual Spotlight on AIM research earlier this year, we discovered three ventures valued at over £1 billion, 24 valued at more than £500 million and no fewer than 234 valued at over £100 million. The average company is now worth more than £50 million.

While all of this is to be welcomed – above all else it underlines AIM’s growing maturity – one unintended negative side effect has been to shift investor’s attention away from the many pioneering and inventive minnows. In a bid to redress the balance, Growth Company Investor has trawled the lower echelons of the market in search of those that are unloved and/or undiscovered, but that may also be on the cusp of making a big splash in their respective sectors.

Can 1.3 billion people be wrong?

Only three drug developers around the world have a product for the bowel disorder post-operative ileus (POI) and Phynova is one. It is also one of only a few to be developing a product to relieve symptoms of chronic hepatitis-C (HCV) as well as dengue fever (a potentially fatal tropical disease that affects 40 million people each year). If that doesn’t excite, you might wish to contemplate the products in development that treat obesity, diabetes, respiratory infections, MRSA and cancer. By the end of this year, three of these products will be in clinical development. This is quite a pipeline of products for a company capitalised at £10.6 million.

Its HCV drug candidate is undergoing Phase IIa trials in five centres in the US. Putting a drug into Phase II is a significant step that has not been reflected in the company’s share price. What may well be holding back the company’s rating is that its products are botanical and are associated with traditional Chinese medicine. Phynova’s strategy is in fact to use the time-honoured natural remedies as a jumping-off point into accepted clinical trials for the essential compounds contained within. Once the drugs’ capabilities have been proved in early clinical trials, it then aims to license out these candidates to other pharmaceutical companies, including those in emerging markets. A big break came indirectly in November when the US FDA approved the first ever botanic drug in the USA.

Phynova’s most advanced candidate, for HCV, may apparently be introduced to emerging markets before it is accepted in the US and talks are being held in Brazil and Russia already. If events pan out as management hopes, 2008 could see it emerge onto the market and 2009 could see the POI suppository available in China. The company bought a 45 per cent stake in a Chinese plant-based drug development company that is pumping ever more new products into the pipeline. These drugs have been working in some form in China for hundreds of years and if any of them take off in the West, Phynova’s current valuation could soar. As with any drug developer there are a lot of investment ifs and buts, and potential buyers of the stock have to weigh up the simple fact that the shares are now at 54p, having been as high as 132p last year. A classic high-risk, high-reward situation is in play here.

Oliver Haill

Growth Company Investor

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