A British backward trend that needs reversing

COMMENT: 'The 1996 DTI Scoreboard shows that we have gone nowhere since 1991. R&D as a proportion of sales is the same today as it was then and still only half the level of companies in other main developed countries'
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The Independent Online
For the last five years the Department of Trade and Industry has proudly published its annual UK R&D Scoreboard, a league table that ranks companies by what they spend on research and development. In the past the Scoreboard has shown that corporate Britain, while not exactly setting the world on fire, is at least chugging along in the right direction. It now emerges, however, that far from nestling somewhere in the lower reaches of the Premiership we are in fact languishing in the Endsleigh League of invention

The 1996 Scoreboard, published today, shows that we have gone nowhere since 1991. R&D as a proportion of sales is the same today as it was then and still only half the level of companies in other large developed countries. The rise in absolute investment was the lowest last year for five years despite a purple patch for corporate profits in the last two years. And in the one area of the pitch that the UK has traditionally done well - growing its R&D investment at a faster rate than the rest of the world - the trend has gone into reverse.

Oh, dear. Not quite Accrington Stanley but time, perhaps to start thinking about applying for re-election to the league.

The problem, of course, with scoreboards and league tables is that, fascinating though they may be, the crude statistics reveal only half the story. They may tell you the quantity of money spent on R&D but they give no insight into the quality of that R&D nor the amount spent on R as opposed to D. There is a vast difference between invention and innovation. Nor do big R&D budgets automatically equate to commercial success.

The UK's position relative to competitor countries is further skewed by the preponderance of drug companies in the league table. The pharmaceutical sector accounts for one third of total R&D spending by UK companies, which means that just one giant deal like the Glaxo-Wellcome merger can have a huge distorting effect.

Nevertheless, there are some worrying trends. The long-term picture shows clearly that UK plc under-invests in R&D - a disparity that cannot be explained away by the cost of funds or City short-termism - while the tail of companies that pay inadequate attention to R&D is getting longer, not shorter. This ultimately, can only hurt UK competitiveness. Companies wanting to do something about it should use the scoreboard to benchmark their performance against the best in their class.

Costain delivers lorry load of bad news

Costain has been a disaster story for longer than anyone would care to remember. A more spectacular case of lost shareholder value is hard to imagine. Ten years ago, this household name in construction and road building was worth around pounds 1.7bn, or nearly as much as Railtrack. Today the company is valued at just pounds 20m - possibly less depending on the size of the latest lorry load of bad news now being prepared for City consumption.

So much has already been written and said about Costain's fall from grace, that it is probably wise to withhold comment until delivery takes place. One aspect of the latest chapter of woes does bear examination, however - the sudden plunge in the share price and the subsequent suspension of trading. The case for suspension of share dealings has never been a strong one. In so far as there is a justification it is to prevent the prospect of a rumour-driven and disorderly market. But too often the effect is to deprive less well-informed shareholders of the opportunity to sell at a reasonable price. Consider the last two cases of it - Costain, and the day before, Wickes. In both cases, the better informed class of shareholder was able to exit the stock before dealings were halted. It seems highly likely that some of this activity was essentially insider dealing. But most of it would have been City professionals sniffing the wind.

As for most small shareholders, however, they would not even have been aware of the share price plunge until it was too late to deal. It could be argued that share suspension protects these people, since without such a mechanism the shares would continue in free- fall exposing small shareholders to the risk of selling at an unrealistically low price.

But in practice it doesn't often work this way. The news is nearly always worse than the stock market imagined. The suspension, if it is ever lifted at all, thus acts merely as a temporary break in the southward passage of the shares. In any case, it cannot be right to deprive any shareholder of the ability to sell on the grounds that their judgement may be at fault. That is the very antithesis of what free markets are meant to be about.

Those who gain most from share suspensions tend to be market-makers, for while trading persists, they are obliged to buy. But no one should feel too sorry for them. Market- makers already have enough protections and privileges.

Biotech boosted by an act of faith

The market was asking for it, and it duly got it - an opportunistic rights issue from the head boy of the biotech sector, British Biotech. Yesterday's pounds 143m rights issue is a chunky call on shareholders, even for a company valued at pounds 1.4bn. It represents a substantial act of faith by the group's normally hard-nosed City investors, particularly as it represents more than the pounds 124m that British Biotech has raised from the market since its flotation in 1992. Most of what investors have coughed up so far has already been spent, judging by the pounds 110m deficit the group sports in its accumulated profit and loss account. Directors are confident that the new money will bridge the gap between now and the end of the century, when, hopefully, at least one of the company's drugs will actually be earning some money.

Even so, the timing of this issue looks just a little suspect. Despite the recent fall in the share price, the call is deliberately pitched to take advantage of the warm sentiment surrounding recent news on Marimastat, British Biotech's anti-cancer wonder drug. With pounds 66m in the bank, the company could easily have afforded to wait for something a little more concrete by way of product confirmation before tapping shareholders for the next phase of development.

Furthermore, if any of the products live up to their promise, then by waiting the company could raise the money a good deal more cheaply.

The risk for investors is exacerbated in that, with every new demand for cash, commercial risks are being piled on the already evident product risk. Spanking new labs and a substantial sales force are all very well for the likes of an industry giant like Glaxo, but for a management with no saleable product, let alone any experience of running what is becoming a sizeable company, they represent a move into uncharted waters.

And despite Chiroscience's news that it has launched what probably represents the first full biotechnology-developed product to come to market, the real blockbusters still have steep mountains to climb before they can earn real money. British Biotech will probably be allowed to get away with it this time, but there are some nervous investors out there, none the less.

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