Less than two months after implementing changes to make iteasier for biotechnology companies to gain a listing, the LondonStock Exchange has set up a committee to review the newregulations. The stock exchange is now concerned that othertechnology-based companies, mostly in the medical sector, arecreeping in under the wire at far too early a stage in theirdevelopment.

The stock exchange has set up a working group chaired byBrian Richards, chairman of British Bio-technology Group plc, tolook at the operation of the new rules. The group also includesleading representatives from listed companies, marketpractitioners and venture capital firms involved in this sector.Biotech representatives include Paul Haycock, chief executiveofficer of Cantab Pharmaceuticals plc and an official from theBio-Industry Association.

The committee, which is not expected to report before March,will review several of the new regulations. Specifically, it willexamine the requirement that companies must provideindependent reports assessing the merit of their products andan analysis of their business plan before seeking a flotation.Currently, reports must include a schedule to commercialexploitation and any projections of the market potential for thecompany's products.

The committee will also examine the provision that directors,senior employees and promoters "agree not to dispose of theirshares, other than amongst themselves, for a period of twoyears from the date on which dealings commence." Perhapsmost important of all, the committee will also review the stageof development that a company should reach before it isconsidered suitable for listing.

The Stock Exchange modified its rules last December so thatscientific companies without a substantial trading record couldbe listed. Before this change, a company needed at least threeyears of profitable trading before it could raise money on theLondon Stock Exchange; five years was the requirement for afull listing. Companies that have listed under the new rulesinclude Amgen Inc., British Bio-technology Group, CantabPharmaceuticals plc, Celltech Group plc, Celsis International andScotia Holdings Ltd.

It was the plight of British Bio-technology Group that led to lastyear's changes. The company persuaded the stock exchange towaive its usual conditions, allowing British Bio-technology toraise 30 million pounds (U.S.$45 million) in a flotation in June1992. The exchange

later modified its rules to allow other companies to seek alisting if they met the same conditions as British Bio-technology: having two or more compounds in clinical trials.Companies were also expected to provide independentassessments of their technologies and recruit directors withexperience in the pharmaceuticals sector.

James Noble, British Bio-technology's finance director, believesthat many of the companies now trying to exploit the newregulations are very different from the biotech startups thatthe rules were designed to assist. Many have neitherpharmaceutical compounds in development nor are theyinvolved in clinical trials.

Noble pointed out that it was the nature of the biotech businessthat led to the changes. With a 10-year time table and a $100million bill for bringing a new compound to market, thesecompanies could not hope to raise their capital from venturecapital funds or other sources.

This does not apply to companies developing diagnostictechnology or medical instrumentation, Noble said. But thestock exchange seems to find it difficult to differentiate thetechnologies.

In particular, Noble pointed to the case of companiesdeveloping medical instrumentation. With lower costs and farshorter

development times, these companies have very differentcapital requirements from companies in the pharmaceuticalsbusiness. Nor do instrument makers have to conduct clinicaltrials in all of their major markets, he added.

After years of complaints from biotech companies that it wasfar easier for them to raise money in the U.S. than the UnitedKingdom, the pendulum has swung in the opposite direction,said Nobel. He believes American investors "would have heartattacks at the valuations placed on companies in the U.K." Noblethinks investors are more sophisticated in the U.S. when itcomes to placing a value on new companies. They also expectcompanies "to get further along the line" before seeking alisting, he said.

Keith Binding of Arthur Andersen & Co. supports Noble'sassessment of the issue. He has just completed a survey ofsenior managers of biotechnology companies. The belief is that"the rules are not working very sensibly at the moment," saidBinding. Some companies, particularly those in the diagnosticssector, are seeking a listing at "far too early a stage."

While the review may tighten up the listing requirements, bothNoble and Binding feel that there may be room for a furtherrelaxation of the rules for genuine biotech companies. Inparticular, both point to the artificial requirement that twocompounds be in clinical trials. They highlight the case ofXenova, which has just one product in trials.

With alliances with companies like Suntory Ltd., Roche HoldingLtd., Genentech Inc., Genzyme Corp. and Warner-Lambert Co.,Xenova has excellent credentials. It has raised some $60 millionsince its formation in 1987, much of it in the U.S.

-- Michael Kenward Special to BioWorld

(c) 1997 American Health Consultants. All rights reserved.