British Biotech, the fallen star of the UK biotech industry, is to merge with its rival Vernalis in a move that will see it abandon its historic name and leave its home in Oxford.
Another restructuring will also close down much of what remains of the original drug development work which once promised a "cure for cancer" and took the company to the brink of the FTSE 100.
Peter Fellner, who took over as chairman of British Biotech last December, said the company would adopt the name Vernalis and take that group's base in Winnersh, near Reading, as its headquarters.
He described yesterday's £85m merger as the "end of an era", but said the combined group would have better science, lower costs and - for the first time in British Biotech's history - a product on the market. Vernalis launched its first drug, a migraine treatment called Frovatriptan, last year.
Mr Fellner said the Oxford building from where British Biotech was created in 1986 would be sub-let or even sold for redevelopment.
"It is the end of an era in that sense, and it is true that we are drawing a line under the former British Biotech, but of course for shareholders it is not a line because they get shares in a new company that has, we think, good growth potential," he said.
"The original British Biotech business model, going back years, did not work. In order for shareholders to get leverage from the company's cash resources we have had to abandon a lot of what they had before."
In a delicious irony, Mr Fellner is dismantling the work of his old colleague and rival Keith McCullagh who, along with Brian Richards, set up British Biotech after they were made redundant from GD Searle. Mr McCullagh was head of biology at GD Searle in the mid-Eighties, while Mr Fellner was head of chemistry.
Mr McCullagh was ousted as chief executive in 1998 when a whistleblower alleged that investors had been fed an over-optimistic picture of the clinical progress of the company's cancer drugs. The founder still has a small shareholding, though, and said he will be voting for the Vernalis merger with a heavy heart.
"I would rather have kept the name and I saw the news about Oxford with some sadness. The facilities we built there were first rate, with some of the finest chemistry labs in the country. We created a very proud and successful business. It was an era for UK biotech where the company's lead was particularly helpful to other companies in terms of encouraging a route to the London Stock Exchange and encouraging City institutions to invest in biotech."
But British Biotech - and the ebullient Mr McCullagh personally - are routinely blamed for the bad name the sector has attracted among sections of the investment community. British Biotech shares were chased higher in the mid-Nineties on enthusiasm for its cabinet of revolutionary cancer drugs, including a particularly exciting one called marimastat, but none in fact worked. Class Law, a firm of solicitors, is still threatening a lawsuit on behalf of aggrieved shareholders, although it has so far failed to launch any action.
The sector continues to be afflicted by boom and bust. The most recent boom - prompted by the mapping of the human genome in 2000 - has turned to bust and many UK biotechs have been unable to raise the cash they need to be able to continue their research and development. Clinical programmes and staff have been cut across the sector, and consolidation has been seen by many as the only way of strengthening companies.
Yesterday's merger of British Biotech and Vernalis, though, was not warmly received by the stock market. Both companies' shares fell, British Biotech by 4.5p to 59.5p and Vernalis by 2.5p to 47p. The combined entity will have a cash pile of £48m, very good by the standards of the UK industry, but even if the planned cost cuts are completed will still need refinancing in three years. The combined group will save £6.5m a year by sacking more than 70 of the 204 staff and cutting several drug projects.
The contrast with the US industry - where two profitable, self-sufficient biotech companies, Biogen and Idec, announced a £4bn merger last month - is stark.
Samir Devani, analyst at Altium Capital, described yesterday's deal as a "merger of weakness" which would create a group with no clearly defined areas of therapeutic expertise. He said: "While we applaud the continued consolidation of the biotech sector, the combination of British Biotech and Vernalis is undoubtedly a merger of two relatively weak companies. While the combination lacks therapeutic synergy, it will produce a financially more robust business."
Mr Fellner argues he can turn around this dim initial view and accepts the new Vernalis is still a work in progress. He expects to make another acquisition by early next year and will be looking for a candidate with a portfolio of launched or close-to-launch drugs. He is aiming to create something similar to Celltech, the UK's biggest biotech, where he is still chairman, whose pharmaceuticals sales fund more exciting drug development work.
He will first need to clarify the prospects for Frovatriptan. It is being marketed in the lucrative US market by Elan, but the cash-strapped Irish drug maker has signalled it will sell the product and some fund managers fear that sale process could be disruptive. On the other hand, optimists cite strong trial data on Frovatriptan as a way of preventing migraines associated with pre-menstrual stress and approval for use in these cases would dramatically increase its market.
As reported in The Independent, British Biotech has been circling Vernalis since March, when Robert Mansfield, its long-standing chief executive, quit and the company admitted it needed a rescue fundraising. The talks had stalled over price before resuming last month. Vernalis shareholders will control 53 per cent of the combined group.
There was never likely to be a wrangle over the name, though. In 1986, Mr McCullagh and Sir Brian needed letters of reference to persuade the Department of Trade and Industry to use the word "British", but since 1998 successive management have looked for an excuse to ditch the moniker and bury the company's scandalous past. It may yet be missed.
Mixed fortunes for former key protagonists
Keith McCullagh accepts that he may not be welcomed back to the stock market with open arms after presiding over the débâcle at British Biotech. The company's founder and chief executive is working on his second new project in five years, a business called Pharmacy2U, which links doctors direct to pharmacies and sends out repeat prescriptions through the post. And he hopes it could float as early as next year if the stock market continues to pick up.
"I would like to stay [as]chairman although I will see what our advisors say. Five years has gone by and not a single thing has come to light that casts a shadow over my character or my integrity and honesty at the time. There is nothing of any substance I am ashamed of, but I appreciate that my public perception is as someone who misled the City."
Brian Richards, with whom Mr McCullagh founded the company in 1986, escaped in 1994 with his reputation intact and has since become a grandee of the biotech industry and a peer of the realm. After a string of directorships and positions on numerous Government and international advisory bodies, he has scaled down his interests since turning 70 last September. He remains chairman of Alizyme, a listed biotech group worth £64m and with a portfolio of products in human trials that would be the envy of British Biotech.
Life is a little quieter for Andrew Millar, the whistleblower, but with the large payout he won in his legal clash with British Biotech - estimated at upwards of £500,000 (although he has kept schtum on the terms) - he can afford to relax. He has recently set himself up as a biotech consultant after a stint with privately owned Oxford Gene Technology, which was taken over 18 months ago. He said yesterday that he had been doing "freelance consultancy work".Reuse content