LONDON The CEO of Vanguard Medica plc, Robert Mansfield, has written to the company¿s shareholders in an effort to cheer them up after a disenchanting 1998, during which the stock price slid from a high of #6.52 (US$10.80) to #1.57.

Mansfield acknowledged that there was a background of ¿disappointing events in the biotech sector and in our own portfolio.¿ As a result, he said, some of the more positive aspects of Vanguard¿s performance were overshadowed.

For Vanguard, of Guildford, Surrey, the major disappointment of the year occurred in May, when London-based SmithKline Beecham plc declined to take up its rights to the migraine treatment frovatriptan. This, the lead compound in the Vanguard portfolio, was licensed in from SmithKline. Although SmithKline said its decision was not a reflection of the product, Vanguard¿s price fell 25 percent in a day.

Vanguard¿s strategy of licensing in compounds for development and licensing them out for commercialization appealed to investors as a low-risk, low-cost strategy. But they were unprepared for the reversal of a partner that decided not to take up marketing rights. The stock has not recovered from the shock, despite the fact that in October the company announced an alternative deal with Dublin-based Elan Corp. for North America. This included an equity investment of US$10 million and milestone payments of up to US$50 million. Mansfield notes that the first milestone of US$7.5 million was paid in December 1998.

¿The deal with Elan has significantly advanced the potential cash flows to Vanguard for frovatriptan compared to the previous profit-sharing arrangement, with [SmithKline],¿ Mansfield said. ¿The proposed milestone payments alone from this deal will recover almost all of our development costs for frovatriptan.¿

Investors also reacted to news in the second half of 1998 that Vanguard was stopping development of three compounds. When the company disclosed in December that it was dropping VML 252 for the treatment of elevated blood phosphate levels in hemodialysis patients suffering from chronic renal failure, the share price fell by 19 percent. This was despite the fact that the company simultaneously announced an agreement with 3M Pharmaceuticals to develop VML 600, an oral immune-response modifier for the treatment of hepatitis C.

Mansfield claimed Vanguard¿s attrition rates are similar to the industry norm. ¿We would, of course, prefer to be better than the norm, but we take the view that inevitably some compounds fail to meet the clinical and competitive profile that we and our partners have defined for them,¿ he said.

Vanguard¿s development programs contain a series of go/no-go decision points.

¿Given that some compound failures are inevitable, we feel strongly that it is better to discontinue development at an early stage,¿ Mansfield said. n