The Investment Column: Biotechs can spring back to life

Laing knows how to play the PFI game
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The Independent Online

Prostrakan, the Scottish drug development company assembled through a year of merger activity, has appointed Morgan Stanley to float the company in the next few months. InterCell, an Austrian vaccines business, is about to choose where to list this year. There is even talk of reheating some of 2004's failed flotations, including Cyclacel. Plenty of bankers, investors and fund managers expect 2005 to be the year biotech springs back to life.

Prostrakan, the Scottish drug development company assembled through a year of merger activity, has appointed Morgan Stanley to float the company in the next few months. InterCell, an Austrian vaccines business, is about to choose where to list this year. There is even talk of reheating some of 2004's failed flotations, including Cyclacel. Plenty of bankers, investors and fund managers expect 2005 to be the year biotech springs back to life.

It looks a good bet. Last year was pretty positive for the members of the FTSE techMARK Mediscience index which covers life sciences companies, but the biggest gains were in medical device company shares rather than those of the perennially loss-making drug developers. The only such biotechs to outperform the index had specific pieces of good news: Cambridge Antibody Technology won a court battle over royalties on a blockbuster drug developed with its technology; XTL Biopharmaceuticals conducted a strategic shake-up after investor pressure; and Vernalis switched its one launched product, a migraine treatment, to a better US marketing partner.

This year, after four years in the doldrums, it could be biotech's turn to capture the imagination of the speculative investor - especially if it takes the advice of the respected team of analysts at Nomura to stop whingeing. Although Nomura put it slightly less intemperately, the broker's analysis showed that the amount of cash available to fund Europe's biotech sector is broadly speaking the same as was available in the early days of the more mature US industry, about $180m (£96m) per company from inception to the launch of its first drug. The cash, the science and the management is all in place.

News from the sector in the early months of this year ought to be good. For the more speculative investor, the bid approach for Oxford Biomedica has put the focus on biotech for the first time in a while (although in that case, the risk of a disappointing merger or of the talks failing suggests shareholders should take any profits they have now).

For the specialist investor, there should be progress updates from some of the sector's most recognisable names. Alizyme is due to license out its obesity and/or colon cancer drugs; Antisoma has some early-stage data due from its cancer products; CeNeS Pharmaceuticals is edging closer to launching its morphine-based painkiller. This is a hugely risky sector, and results from human trials of drugs will very often contradict earlier positive data. Many projects will have to be canned because the drugs don't work, or because companies have to concentrate their scarce resources on other more promising projects.

But with large pharmaceuticals companies becoming increasingly reliant on buying in drugs from outside developers, and with an ageing population needing more medicines, the biotech industry needs to exist, can prosper, and ought to generate positive headlines this year. Of Nomura's list of movers and shakers for 2005, stocks which we would advise gamblers to investigate include Antisoma, for the prospect of a bid; Vectura, which is developing drugs for lung disease and impotence and which has licensing deals due; and Allergy Therapeutics, which is doing interesting work in allergy vaccines.

Laing knows how to play the PFI game

John Laing is "the purest way to play the growing PFI market", according to a broker's sales pitch for the shares yesterday. And it is.

Unlike most of the quoted companies bidding for lucrative government contracts to build schools, hospitals, roads, courts, whatever, under the Private Finance Initiative, Laing doesn't do any of the building or later-maintenance work itself. It organises the bid, manages the work, then sits back and reaps the long-term income from the Government. Or, in the future, it could sell its stake in the whole project.

It is these future sales that are key to Laing's value, and the reason the shares look undervalued at their current price of 268.5p, up from 229.5p when we last tipped them in June.

We are still only learning how to value PFI investments. The most respected analysts suggest Laing should be valued at about 1.7 times the equity investment it has made or is about to make in its 42 existing projects, 24 of which are fully operational already. The market for PFI stakes is nascent, but those that have changed hands have done so, in fact, at much higher valuations. Jarvis's stake in Tubelines sold for 2.3 times.

The main risk is that Laing will mismanage a building project and have to shoulder the pain of cost overruns. In its old days as a builder, it was particularly appalling at such risk management, and although it is much more respected in its current field, it is a difficult balancing act. There is also a longer-term political risk: if it is seen to make too much money from PFI sales, the Government could seek to claw it back.

For now, though, with PFI-style techniques being adopted in Europe, and the pipeline of new projects in the UK also still strong, the shares are a buy.

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