Only mergers can work miracles for biotechnology share prices

Back when biotechnology stocks were what everybody wanted, Oxford Glycosciences (OGS) was one of Britain's most desirable companies. Within a few short weeks of January 2000, the shares leapt from 500p to a staggering 3,245p as investors slavered over the prospect of block-busting miracle drugs unlocked by the mapping of the human genome.

Exactly three years later and OGS's shares are a much sorrier sight, languishing below the 200p mark and supported only by the recent news that the company has become an acquisition target for its old rival Cambridge Antibody Technologies (CAT).

For long-term investors in OGS, the structure of the deal is even more galling. CAT's all-share offer, announced on 23 January, struck at a time when OGS's market value was lower than the amount of money it had in the bank. Several analysts suggested that, despite all the talk of complementary technology, the deal was little more than a disguised rights issue for CAT that would give it £130m in cash.

Share prices across the sector show the market has run out of patience waiting for biotech to come up with its promised miracles. But even if the City has lost interest in the likes of OGS, the industry itself has not. As ING analyst Sally Bennett says: "OGS has filed patents on around 4,000 proteins in its history and has undertaken considerable work to sort and validate these as potential drugs targets. While their true potential remains unclear, I find it unbelievable to expect that in the medium to long term nothing of interest will emerge."

Last week it did emerge that Celltech – the biotech group that recently slid out of the FTSE 100 – is also eyeing a possible counter-offer for OGS, and could be prepared to use cash to buy it. There was also speculation that other companies, including the UK's Xenova and Switzerland's Actelion, might be interested in a bid. Suddenly, say the analysts, the biotech sector should be viewed in a new light.

The main revelation in this potential new bidding war is that the proposed CAT/OGS tie-up is critical from a scientific point of view. Biotech share prices are in trouble because the business models, with their high cash-burn and longer-than-expected conversion of theory to practice, now appear flawed. CAT or Celltech may be about to prove that what the industry needs is a round of mergers. These, so the argument goes, would mop up the small players that each hold one piece of the puzzle, and leave Britain and Europe with a handful of biotech powerhouses with all the science in one place.

As Salomon Smith Barney biotech analyst Jeremy Green says: "The announcement of a merger between CAT and OGS could turn out to be a major event for the European biotechnology industry. A union of two of the stronger companies could create a tem- plate for some of the weaker businesses that are set to run out of cash in the near future."

This is a process that has suddenly lurched into life across the Atlantic. Following the CAT/OGS announcement, an unprecedented flood of six biotech deals were struck in the US over the space of one week. These comprised a big pharma company tie-up with a listed biotech, two public-to-public mergers, two public-to-private mergers and one private-to-private deal.

In the case of CAT and OGS, the technology match is also a compelling feature of the deal. Put simply, one company finds the problem, while the other works out which antibody might provide a cure.

Because, as Morgan Stanley analyst Daniel Mahony suggests, the deal does little for CAT's goal of achieving profitability within five years. He joins other analysts in fully expecting the company to announce further deals over the next 12 months.

The phrase now being applied to speculation over the biotechnology sector is "critical mass". Biotech companies do not have huge workforces that can be slashed after a merger, so a consolidation spree would have to be based on something more fundamental. In the wake of the announcement in January, Emma Palmer of WestLB Panmure wrote: "The planned merger of CAT and OGS kick-starts the consolidation and drive towards critical mass that we have long said the sector needs."

The concept of critical mass would answer a question that the industry has been trying to solve for nearly a dec- ade. Selling technology licen- ces to big pharmaceutical companies is not bringing in enough revenues, and biotech players are struggling to persuade anyone that, on their own, they can really be thought of as independent research engines for the overall drugs industry.

The possibility of a battle for OGS is proof, for the analysts at least, that the biotech industry is still young enough that its managers have not yet arrived at the perfect formula for organising the science. Like many other industries before it, biotech may shortly reach the conclusion that bigger is better.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Software Development Manager

£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

Ashdown Group: Product Manager - (Product Marketing, Financial Services)

£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

Recruitment Genius: Compliance Assistant

£13000 per annum: Recruitment Genius: This Pension Specialist was established ...

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Day In a Page

Isis hostage crisis: The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power

Isis hostage crisis

The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power, says Robert Fisk
Missing salvage expert who found $50m of sunken treasure before disappearing, tracked down at last

The runaway buccaneers and the ship full of gold

Salvage expert Tommy Thompson found sunken treasure worth millions. Then he vanished... until now
Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Maverick artist Grayson Perry backs our campaign
Assisted Dying Bill: I want to be able to decide about my own death - I want to have control of my life

Assisted Dying Bill: 'I want control of my life'

This week the Assisted Dying Bill is debated in the Lords. Virginia Ironside, who has already made plans for her own self-deliverance, argues that it's time we allowed people a humane, compassionate death
Move over, kale - cabbage is the new rising star

Cabbage is king again

Sophie Morris banishes thoughts of soggy school dinners and turns over a new leaf
11 best winter skin treats

Give your moisturiser a helping hand: 11 best winter skin treats

Get an extra boost of nourishment from one of these hard-working products
Paul Scholes column: The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him

Paul Scholes column

The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him
Frank Warren column: No cigar, but pots of money: here come the Cubans

Frank Warren's Ringside

No cigar, but pots of money: here come the Cubans
Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

Isis stands strong as its numerous enemies fail to find a common plan to defeat it

The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

Virtual reality: Seeing is believing

Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
Homeless Veterans appeal: MP says Coalition ‘not doing enough’

Homeless Veterans appeal

MP says Coalition ‘not doing enough’ to help
Larry David, Steve Coogan and other comedians share stories of depression in new documentary

Comedians share stories of depression

The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
Has The Archers lost the plot with it's spicy storylines?

Has The Archers lost the plot?

A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
English Heritage adds 14 post-war office buildings to its protected lists

14 office buildings added to protected lists

Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Scientists unearthed the cranial fragments from Manot Cave in West Galilee