Is the Starpharma share price a buy?

The Starpharma Holdings Limited (ASX: SPL) share price has gained 50% since the end of December 2018. Is it a buy?

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I have recently spent some time reviewing the annual reports and announcements from S&P/ASX 200 (INDEXASX: XJO) index-listed company, Starpharma Holdings Limited (ASX: SPL) to assess the merit of buying SPL shares. Starpharma shares last closed at $1.36 per share, which is a gain of more than 50% since the end of December.

Starpharma shares have been described by Bell Potter as a potential winner for FY20. They were listed as a speculative buy along with fellow healthcare and biotech shares, Pharmaxis Limited (ASX: PXS) and Mesoblast Limited (ASX: MSB).

The past financial performance of Starpharma

A look at the financial history of Starpharma is not pretty, with the company losing money 9 out of the past 10 years. Total revenue and income for Starpharma in 2018 was $5 million, while expenditure exceeded $15 million. This has been a consistent trend leading to accumulated losses for the company of more than $150 million. At the end of 2018, Starpharma had a cash balance of just over $50 million.

Although the described financial performance is undesirable, it is not necessarily unexpected, given what the company is trying to achieve. Starpharma is trying to develop and commercialise world leading drugs, using its dendrimer technology. This type of process can often require considerable upfront investment and is done with the hope of significant payoff in the future.

The future outlook for Starpharma 

Starpharma's VivaGel products have recently been released in Australia, Europe, and Japan. This has been done in partnership with already established brands and puts Starpharma in line for revenue share, royalty and milestone payments into the future. The VivaGel BV product has also been licensed for more than 160 countries but has not yet been successfully approved for the United States (US) market.

Starpharma continues to work to develop and enhance drugs for what it estimates are multibillion-dollar markets. There is also the belief that its technology could potentially enhance a large percentage of existing pharmaceuticals. These elements appear to give Starpharma a large window of opportunity and the potential for massive return on investment. However, we are still waiting to see if a product using Starpharma technology will be commercially successful. 

Foolish takeaway

Investing in Starpharma shares is very tempting given the described potential of their patented technology and the value of the markets involved. However, I would prefer to see how successful its newly launched products are and the level of compensation Starpharma receives before investing. Although this may mean missing out on the potential upside of this company, it will also mean protecting investment capital in the event these products do not penetrate the market as effectively as hoped.

Mitchell Perry has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Pharmaxis Ltd. and Starpharma Holdings Limited. The Motley Fool Australia has recommended Starpharma Holdings Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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