Analysis: A bitter pill to swallow

It will take some strong medicine to restore British Biotech to health. Will its recovery be aided now that it has a doctor at the helm? In Sickness And In Health

THIS IS a story about hubris on a grand scale. It is also the story of those left behind to sort out the mess. At its peak, British Biotech, once the great white hope of the UK life sciences industry, had a stock market value of more than Railtrack. Armed with a portfolio of chemical compounds which management hinted might have blockbuster potential in the treatment of cancer and pancreatitis, the company was able to raise hundreds of millions of pounds from investors to fund ambitious expansion plans into a fully fledged international pharmaceuticals company.

The remnants of this grandiose strategy are still there to be seen in the shape of Biotech's spanking new, modernistic, glass fronted headquarters on the outskirts of Oxford. In other respects, however, British Biotech is but a pale shadow of its former self, its share price shot to bits, its founders and driving spirits sacked or gone, and its products of questionable if any value.

What went wrong and what hope now for this one time wonder stock?

British Biotech started in the late Eighties in an old warehouse as a loss-making drug research company. By the mid 1990s, it had outgrown these small beginnings to become the flagship of the burgeoning biotech sector. Its chief executive, Keith McCullagh, in a fit of grandeur he later came to regret, said his company would be the "new Glaxo" - an all- encompassing pharmaceutical giant able to discover, produce and sell its own drugs. Disaster struck shortly afterwards.

Last year, the company sacked its head of research, Andrew Millar, after he broke the secrecy of some clinical trials and voiced his concerns over British Biotech's drugs to shareholders. The public row set off legal action against Dr Millar, an inquiry by the London and New York stock exchanges, and even a probe by the House of Commons.

"Millargate" also caused a collapse in the company's share price, and plunged the sector into a crisis from which it has still to recover.

A boardroom clear out was inevitable. Biotech's "success", it appeared, had been largely fantasy. Its foundations were of sand - little more than the overblown hopes of investors, and more particularly, British Biotech's management. The chairman, John Raisman, retired and the chairman of the building material group RMC, Christopher Hampson, took his place. Dr McCullagh was replaced seven months ago by Elliot Goldstein, from the pharmaceutical group SmithKline Beecham.

The 48-year-old Canadian has the unenviable task of resurrecting a company now on its knees.

Dr Goldstein was forced to scrap one of British Biotech's star drugs, the anti-pancreatitis treatment Zacutex, after a series of inconclusive trials. He also had to oversee a disappointing set of results for Marimastat, the anti-cancer drug which represents British Biotech's remaining hope of becoming profitable in the medium-term.

Dr Goldstein is not daunted by the enormity of the task. "When I joined, I was really impressed by the science, but I felt that the company needed a vision and a road map," he said. "The vision which existed before got lost because of all the events, the external problems and the Millar affair. When I arrived, it had evaporated."

He plans to replace the lost vision with a radical and painful return to basics. His mantra, repeated almost obsessively, is "focus". Gone is the ill-fated dream of the "new Glaxo". Dr Goldstein believes British Biotech must become a "new British Biotech": a small, but sound drug development company.

The first step is to get the clinical house in order. Dr Goldstein believes that the idea of producing drugs from the cradle of research to the grave of market launch is not viable for a company of British Biotech's size.

He will seek agreements with partners to help fund the development of its compounds.The world's top 20 pharmaceutical companies and the eight top biotechnology groups have been contacted with a view to co-funding.

The strategy is a radical departure from Dr McCullagh's grandiose ideas, but it is widely used by other biotechnology groups. Its biggest benefit is that it allows companies to cut the substantial costs of testing their compounds.

Under the present regime, drugs must undergo three sets of rigorous clinical trials before being submitted for regulatory approval. The trials last for years and can be expensive in the extreme. More importantly, only a small percentage of drugs make it to the market, leaving companies with losing compounds large costs and no rewards.

The drawback of Dr Goldstein's strategy is that if the British Biotech drugs do work, then its partner will claim a large chunk of sales revenue. But Dr Goldstein feels the new policy will help British Biotech to be more efficient and better to "focus" its resources. "Among biotechnology companies, there is a strong push, which you have to resist, to move too quickly from Phase II [of clinical trials] to the [final] Phase III. A lot of companies will take risks to get to Phase III." Working with a partner will help British Biotech to cut losses and scrap projects which are proving unpromising.

Dr Goldstein's second task is to restore the morale of the company's 300 employees. "There was a lot of worry. People were justifiably upset and concerned because they were reading a lot of things about their company. The company was portrayed as a kind of villain."

The chief executive embarked immediately on a round of breakfast meetings with employees of every rank in an effort to understand their gripes and allay their fears. He told them the company's scientific expertise was "world class, up there with the best" and tried to reassure them the bad times were over.

By all accounts, Dr Goldstein is an excellent communicator, with a genial character, and his words probably prevented an exodus of scientific expertise. But not even he could disguise the brutal news delivered to staff in March. The company decided to shrink its US operations and its Oxford- based administrative staff, shedding 60 jobs. At the time, the group said the redundancies were another step towards a leaner British Biotech, but some of the remaining staff were alarmed by the cost-cutting drive.

But even if the drugs deliver and the scientists remain on board, the new British Biotech will be nothing without the support of investors. During its tribulations, the company committed a cardinal sin in any fund manager's eyes: it appeared to mislead investors.

When Dr Millar told a couple of shareholders that some of the stock exchange announcements on Zacutex and Marimastat were in danger of not being borne out by the tests, he broke the magic link between the company and the City that had propelled British Biotech shares to over 300p from the 42.5p of the 1992 flotation. The company vigorously rebuffed the allegations, claiming Dr Millar's assertions were unfounded sour grapes after being passed over for promotion.

However, British Biotech's protestations of innocence did little to stop the rot. The share price went into freefall and the company, which was once on the threshold of the FTSE-100, was plunged into crisis. Today, the stock is worth a mere 18.5p, a 93 per cent fall from its peak in April 1996.

To add insult to injury, British Biotech is still living on the funds raised during its love affair with the stock market. The group netted almost pounds 240m in three fund-raising rounds between 1994 and 1996. A large chunk of the funds is still there in the shape of a pounds 105m cash pile, helping British Biotech to continue operating even if it does not make a penny for another three years.

The two on-going investigations by the London and New York stock market regulators over the allegedly misleading statements are continuing severely to damage the company's standing and Dr Goldstein is keenly aware that he has a mountain to climb in re-establishing credibility.

On one thing Dr Goldstein is adamant. He will never fuel the market's optimistic expectations. He has already said the company is capable of getting one new compound into development per year on average for the next three or four years, but he will not be drawn on the details. "We have to get to the point where people think that what we say is fair, balanced and accurate," he said.

This will be an awesome task. Many experts believe the credibility gap between the company and the market is now so wide that the share price will remain depressed until British Biotech produces some successful drug trial results.

Nick Woolf, senior analyst at BancBoston Robertson Stephens, the US bank, says: "They have to produce the data or sign a major pharmaceutical company as a partner."

The moment of truth could be around the corner. The results of several key clinical trials are to be published over the next 18 months. After the demise of Zacutex, the company is concentrating on Marimastat, an interesting, but as yet unproven, compound. The drug is part of a new class of agents, called metalloproteinase inhibitors (MMPIs) which differ from existing therapies because they attack the cancer-causing agents rather than targeting the tumour.

British Biotech's expertise in MMPIs gives it a clear edge over its rivals, and there are rumours that SmithKline Beecham is interested in partnering Marimastat. But the drug's results have been disappointing so far, and SKB, or any other partner, is unlikely to come on board unless there is solid evidence that it works. Over the next 18 months, British Biotech expects to publish the outcome of further tests, which will determine the future of the drug, and perhaps of the company. Some industry experts believe that scrapping Marimastat could spell the end of British Biotech, but Dr Goldstein's scientists are more upbeat. They say two other compounds at an earlier development stage could sustain the group even if Marimastat failed. The two drugs could be followed by three other compounds.

The other crucial element to regaining investor confidence is a resolution of the Millar affair. The two sides have traded writs and are due to appear in court in autumn.

A long public trial revisiting the details of a case punctuated by personal rivalries, mistakes and sheer incompetence, will hardly help Biotech's case, and the company is trying to reach an out-of-court settlement. Dr Goldstein believes that an end to the legal wrangling is important - but not too important, and he claims the company should focus on only one thing: "Results. At the end of the day, investors want results."

Founded: in 1986 in an old carpet warehouse in Cowley, near Oxford, by Keith McCullagh and Sir Brian Richards, two former executives of the US drug company GD Searle.

Turnover in 1998: pounds 450,000

Pre-tax loss in 1998: pounds 42.7m

Employees: 290

Major Product: Marimastat, an anti-cancer compound currently in the third and final phase of clinical trials. Results expected over the next few months.