By Nuala Moran
Special To BioWorld Financial Watch
"I'm looking forward to 1999, because it can only be better than 1998."
This rueful comment from Robert Dow, CEO of Scotia Holdings plc, of Stirling, Scotland, would no doubt be echoed by many of his counterparts in the U.K. biotechnology sector, which had more than its share of bad breaks in the year just past.
Every one of the 20 or so quoted U.K. companies took a battering on the London Stock Exchange (LSE) in 1998, as did the five quoted on London's Alternative Investment Market (AIM). Even companies that had nothing but good news during the year, such as Celltech plc, of Slough (LSE:CTP), and Cantab Pharmaceuticals plc, of Cambridge (LSE:CTB), saw their share prices cut.
This loss of value for the entire sector resulted in severe fallout — both from corporate restructurings and the loss of many top executives. Founder CEOs who fell from grace included David Horrobin, who finally parted company with Scotia in April, after relinquishing control to Dow at the end of 1997; Louis Nisbet, who left Xenova Group plc (LSE:XEN), of Slough, in April; Keith McCullagh of Oxford-based British Biotech plc (LSE:BBG), who left in August; and Glen Travers of Cortecs plc (LSE:CCS), located in London, who was ousted in May. As well, seven members of the board of London-based Therapeutic Antibodies plc (LSE:TAB), including founding scientists John Landon and Harry Browne, were gracefully retired in October.
Following the exit of their scientifically oriented founders, all these companies have been subject to a radical restructuring, as their more commercially minded successors sought to harbor resources and improve shareholder value. While it has been a rough ride, and some such as Cortecs started the new year with more weeding yet to be done, the result is a more mature, focused and commercially minded sector.
Shares Suffered . . .
However, this maturity is yet to be translated into shareholder value. After falling 47 percent between January and August, the U.K. Bloomberg Biotech Index of LSE-quoted biotech shares registered an increase of just 1.2 percent in the two months of September and October 1998. In the same two months the Nasdaq Biotech Index — a market-value weighted index composed of 142 biotech stocks with a minimum market cap of $50 million — stopped moving downward and rose by more than 28 percent, from a value of 268.96 on Sept. 4 to a value of 345.08 on Oct. 30.
While a few U.K. stocks — such as Oxford Asymmetry International plc, of Abingdon, Oxfordshire (LSE:OAI), Powderject Pharmaceuticals plc, of Oxford (LSE:PJP), and Phytopharm plc, of Godmanchester, Cambridgeshire (LSE:PYM) — ended the year close to their 52-week highs, none of the biotech companies put on value in 1998. To the contrary, many lost value without doing anything wrong, and others dropped despite positive news flow all year. Cantab Pharmaceuticals is a prime example. The company reported steady progress with TA-HPV for the treatment of cervical cancer, now in Phase II clinical trials; TA-GW for genital warts, being developed in collaboration with SmithKline Beecham plc, of London (NYSE:SBH); and DISC-HSV for genital herpes, being developed with London-based Glaxo Wellcome plc (NYSE:GLX). Cantab also announced it was expanding its pipeline with the acquisition of a cocaine and a nicotine vaccine from ImmuLogic Pharmaceutical Corp. (NASDAQ:IMUL), of Waltham, Mass. Despite all this good news in 1998, the company's share price fell from a 52-week high of £3 to just over £2. Similarly, Cambridge Antibody Technology plc (LSE:CAT), based in Royston, Cambridgeshire, hardly put a foot out of place, but ended the year at just over £2.30 per share, compared to a high of £4.17 in January 1998.
. . . As Did IPOs
As in the U.S., sentiment was running against the sector from the start of 1998. When Quadrant Healthcare plc (LSE:QTH), based in Cambridge, tested the waters for a stock market flotation in January, CEO Iain Ross emphasized that Quadrant was not a biotech company in the usual mold, but a specialist in drug delivery with a strong, proprietary technology platform. At the time, Ross commented that although the market was off for "pure" biotech, there was money around for related companies with a good story to tell. The flotation in February raised £20 million.
Next up was Oxford Asymmetry International. Once again, CEO Edwin Moses was keen to point out that this was a biotechnology services company which already had a significant turnover and a near-term prospect of moving into profit without making further calls on investors. Oxford Asymmetry went public in March (LSE:OAI), raising £20 million.
British Biotech's Domino Effect
But it was at this point in the year that the leader in the sector, British Biotech, began to come apart. A stream of bad publicity has continued to flow from the company since the head of clinical research, Andrew Millar, was suspended in March on a charge of divulging confidential information. Those biotech companies trying to raise money say the situation has colored investors' attitudes toward the sector as a whole.
Among the twists and turns of the plot, British Biotech had to issue a lengthy statement rebutting Millar's claims of badly managed clinical trials, insider share dealing and inappropriate release of information. The company was also forced to admit that Millar had unblinded two of its clinical trials, casting doubt on whether the data will be accepted by regulatory authorities. (This doubt will not be removed until the data are presented to the regulators, who agreed with the company that there are no safety implications of the unblinding. Still, they will wait until they see the data to determine whether the trial has been compromised.)
There followed the undignified spectacle of Keith McCullagh being summoned to appear before the parliamentary group the Science and Technology Select Committee to explain events at the company, followed by his resignation at the annual general meeting in August. British Biotech's new management, which took over at the meeting, instigated a review of the clinical trials, dropping some and expanding others, but it still has not reached a final settlement with Millar.
Since the Millar soap opera began its run there has been only one IPO: Oxford GlycoSciences plc, of Abingdon, Oxfordshire, came public on the London Stock Exchange (LSE:OGS). Against the trend, OGS put its hand up and admitted it was a biotechnology company — but one with strong platform technology in proteomics, several deals in the bag and an income stream from services. The flotation in April raised £30 million.
Thus, the IPO window has remained closed since the spring, putting a damper on the ambitions of firms such as gene therapy companies Cobra Therapeutics Ltd., of Keele, Staffordshire, and Oxford Biomedica plc, of Oxford (AIM:OXB), to seek a main market listing.
Instead, there was the spectacle of discounted rights issues. As an indication of how weak the market had become, even PPL Therapeutics plc (LSE:PTH), of Edinburgh, the company that became world famous for cloning Dolly the sheep, was forced into a heavily discounted rights issue. In November, the company raised £20 million at 80 pence per share, a discount from the trading price of more than 30 percent. Another firm facing the same predicament was Therapeutic Antibodies, which raised £7.5 million at a 52 percent discount, also in November. Only the botanicals specialist Phytopharm managed to come close to its share price of £1.50, raising £2.3 million at £1.45 per share at the end of November.
So, while technology stocks — e.g., telecommunications and computing — were the best performing shares on the London market for the year as a whole, biotechnology stocks languished. Cortecs, which fell steadily all year, ended 1998 down 95 percent at a price of 9.5 pence. It was the worst performing of any stock on the market. In the winners and losers stakes, Phytopharm once again deserves mention: With a gain of 258 percent over its 1997 closing price, it closed out 1998 at £1.715 and was London's seventh-strongest performing stock. To highlight the reversal of feelings toward the sector, it is worth noting that in 1997 the top performing stock on the market was a biotech company, Shield Diagnostics, of Dundee, Scotland (LSE:SDG), with a 410 percent gain year-end to year-end.
Despite the dry IPO market, 1998 saw a steady stream of investments in start-up biotech companies (see the chart on p. 3). In fact, most of those young firms reported that there was venture capital available for companies with a good story. And, in the absence of new issues, in August investors had a timely reminder that an IPO is not the only exit route, when mouse genomics company Hexagen plc, of Oxford, was sold to Palo Alto, Calif.-based Incyte Pharmaceuticals Inc. (NASDAQ:INCY) for US$38 million.
At the end of 1998 there was a glimmer of hope for companies aiming for an IPO in 1999: Antisoma plc, of London, floated on the Pan-European market Easdaq in December, raising £10 million. CEO Glyn Edwards commented that the company had been intending to raise a further round of money privately, but was convinced that with its lead compound, Theragyn, in Phase III clinical trials for treating ovarian cancer, it was time to go public.
This signals a more subtle, realistic sense of where the value lies in biotechnology companies. Investors no longer regard biotechs as speculative, blue-sky stocks which might just produce a blockbuster drug. Instead, the market is beginning to understand that there can be value in a company that has no products — that indeed, a biotech company could move into profit without having sold a single drug, if it has a technology platform that can be licensed, or information to sell, or if it can get drugs to an advanced stage of clinical trials and then strike a deal.
That companies could become profitable without having a product was exemplified by Celltech, which saw the royalty income from its Boss patents on antibody manufacture rise steeply as drugs that relied on the technology, such as Remicade and Rituxan, hit the market. Celltech's royalty income from these patents rose from £4.3 million in the fiscal year ended September 1997 to £11.7 million in the year ended September 1998. The company expects to move into sustained profit in the year ending September 2000, at which point it may have one product approved — the monoclonal antibody CMA 676 for the treatment of acute myeloid leukemia — although it will have seen little in sales revenues.
The realization that it's possible to turn a profit without selling a drug is also leading companies to reconsider their original business strategies. Rather than spend the money to go the whole hog in commercializing products alone, companies are now under pressure to find partners with a marketing structure already in place.
Although British Biotech's fallout with investors was not sparked by its expensive ambitions to market its own drugs, its plans to do so were swiftly reversed once investors began to question how their money was being spent. Having already acknowledged that it needed a marketing partner in North America, British Biotech's new management announced similar plans for Europe in August — even though the former management team had already begun the process of setting up European marketing operations.
Similarly, investors became disgruntled at the slow pace of commercialization at Cortecs, and this was cited as one of the main reasons for Glen Travers being forced from the company. As it turned out, Cortecs' lead product, macritonin, for the treatment of postmenopausal osteoporosis, was not as close to the market as the company had indicated, and in December Cortecs was forced to retrench even further.
Celltech too, decided to hand European marketing rights for CMA 676 over to partner American Home Products Corp., of Madison, N.J., in return for an improved worldwide royalty rate.
Bad News/Good News
Investors also had to learn that having a deal with a pharmaceutical partner does not guarantee success, even with positive Phase III data. Vanguard Medica Ltd. (LSE:VGD), of Guildford, Surrey, began the year with a share price of £4.24 and what looked like a low-cost, low-risk strategy of licensing in compounds for development and then licensing them back out for commercialization. The company was knocked sideways in May, when SmithKline Beecham declined to take up its option on the migraine treatment frovatriptan, which Vanguard had licensed in from SmithKline in 1994. Luckily, Vanguard was able to turn around and license the drug to Irish firm Elan Corp. plc (AMEX:ELN) in October, but the damage to Vanguard's share price was not reversed.
Then, in December, Vanguard experienced a classic case of bad news hitting the share price while good news has no impact. It announced simultaneously that it was dropping VML 252 for the treatment of elevated blood phosphate levels in dialysis patients, but that it had signed a collaboration worth a potential US$25 million with 3M Pharmaceuticals, a subsidiary of 3M Corp., located in St. Paul, Minn. The net effect: Vanguard's share price fell by 20 percent to £1.57.
In another example of the bad news/good news conundrum, PeptideTherapeutics Group plc, of Cambridge (LSE:PTE), was heavily clobbered when it decided with partner Medeva plc, of London, to drop an intranasal flu vaccine following results of a Phase I trial. Although analysts viewed the project as representing around 5 percent of the company's value, the share price fell by 50 percent. Peptide Therapeutics has since issued a stream of good news in the form of deals with pharmaceutical companies and positive clinical data, but its stock ended the year at just over 80 pence, a big drop from its 52-week high of £3.10.
In fact, investors are so off biotech that even achieving the Holy Grail of getting a drug registered failed to move them, as Chiroscience Group plc, of Cambridge (LSE:CRO), discovered when it announced in December that it had received marketing approval for Chirocaine in Sweden. Although this is not a biotech drug, but a chiral version of an existing local anesthetic, bupivacaine, it is the first significant drug from a U.K. biotechnology company to receive approval. The news sent Chiroscience's share price up a mere 0.5 pence because of worries whether the licensee, Zeneca plc, of London (NYSE:ZEN), would remain interested after its merger with Astra AB, of Stockholm, Sweden.
From this mire of deals, reversals and setbacks a new view is now emerging in the U.K. of the model biotechnology company. Today's ideal company is one that has a revenue stream from selling services or licensing out technology; discovery and/or development deals with pharmaceutical companies providing up-front payments, milestones and royalties; and the spice of an in-house portfolio that might just produce a blockbuster drug.
This is the model that Paul Kelly, CEO of genomics company Gemini Holdings plc, of Cambridge, is working toward. He aims to float the company within the next 18 months, and says his main task at the moment is trying to educate the market to the fact that "biotech is not small pharma." He noted, "Investors still have a tendency to ask 'Where is the product?' But they are also favoring a business model which has the promise of short-term revenue, as well as blue-sky value." *