Caution needed over wonder-drug company


Is British Biotech the next Glaxo or just another speculative bubble? The City is excitedly talking about it in the revered tones as the former. The success of clinical trials on its BB-2516 cancer drug sent the shares soaring to pounds 21 yesterday before falling back again. The finance director, Jim Noble, tried vainly to dampen the hysteria by warning that the drug had many obstacles to overcome before it becomes commercially available, possibly in three years, but he failed. Everyone likes a stock market wonder company and in British Biotech we seem to have one.

Mr Noble's caution is understandable as well as reponsible. It prevents millions of cancer sufferers being offered false hope. It also allows the company to continue its development without being saddled with the wonder-drug tag. But the City is not easily side-tracked from the sniff of wealth beyond the dreams of avarice and the talk is of huge potential for the drug and huge share price potential for the company.

While extremely encouraging, the cancer data is very preliminary. However, British Biotech is more than a one-drug company. What really impresses analysts is the range of drugs the company has under development, all with enormous potential. This weekend British Biotech will release progress reports on another drug, BB-10010, which protects the immune system of patients undergoing chemotherapy. Its arthritis drug, BB 2983, goes into clinical trials next year, with Glaxo Wellcome itself picking up the bill. Glaxo Wellcome is also paying for phase-two clinical trials for British Biotech's asthma drug. While health regulators need to be 100 per cent sure of a drug to give it approval, the stock market is not so demanding. If there is an even chance of British Biotech getting at least some of its products to market it will be enough to drive the share price, say analysts.

Gone are the days when the big pharmaceutical companies threw expensive combinations of drugs at mice and men. British Biotech, with its intellectual base in Oxford University, sells itself as a company trying to provide solutions to the root causes of complaints which either affect millions or are very expensive to treat. Cancer has always been the great Holy Grail of modern medicine and the potential market is enormous if the drugs are good enough. With royalty agreements already in place Glaxo Wellcome is already hovering on the sidelines. For the time being UK institutions are so convinced of the potential that anything less than a silly price would fail to tempt them. The upside for this stock still looks huge.

A first step towards reining in Murdoch

Could it be that the year-long campaign by cable operators to rein in Rupert Murdoch's BSkyB has finally borne fruit? On the face of it, yesterday's announcement that the Office of Fair Trading is to investigate the terms of Sky's supply of programming to cable operators is a sign that the Government (the DTI and OFT at any rate) is finally taking Mr Murdoch's dominant position seriously.

There is much at risk for BSkyB, which has acquired a powerful position in the UK television market by offering film and sport unavailable elsewhere. Cable operators, following efforts to develop their own sources of Hollywood product and top-level sport, gave in, and accepted that they would have to buy wholesale from Sky.

The problem from the cable operators' point of view was that BSkyB could set the price and the terms of supply. It could bundle channels together, obliging them to take both movie channels, for example, if they wanted to offer their subscribers Disney. A number of "informal undertakings" between the OFT and BSkyB failed to offer much remedy. Even after Sky's channels were ostensibly meant to be offered a la carte, cable operators found that they still had to take at least one movie channel if they wanted to get Disney.Typically for a company run along Mr Murdoch's preferred lines, every concession by BSkyB seemed to hide yet another condition. For every one issue on which the company apparently gave way, another two would emerge - vintage Murdoch.

This has become more than just a commercial battle. Reining in Mr Murdoch has become an issue of public policy in the light of the advent of digital technology. BSkyB cannot be allowed to leverage its analogue dominance to take over the digital world as well. The OFT inquiry is a first step: wholesale programming must be available on transparent, unbundled terms. Next, the anti-competitive clauses of some of Sky's contracts (with Nynex, Telewest and the Premier League, for a start) must be quashed. Down the road, Sky's dominance of conditional access must be whittled down.

Finally, with the likely full-scale commercialisation of the BBC, the consolidation of the ITV sector and the advent of digital, it may even be time to bring BSkyB under more direct regulatory control. Why should Sky, unlike all the monopoly ITV companies, be able to avoid full and frank regulation? Clearly these are not matters for the OFT but at least it has realised that someone has to make a start.

Granada moves closer to its goal

Less than two weeks into the Forte takeover battle and the Granada share price is already beginning to creep back from the drubbing it received in the immediate aftermath of the company's pounds 3.2bn bid. Gerry Robinson, chief executive, still has a task to perform in convincing the City of the merits of this takeover, but he is beginning to get there. In the meantime Forte looks as vulnerable as ever. There is enormous disillusion among institutional shareholders with this company. If Mr Robinson's task is still a hard one, Forte's is doubly so.

Forte's first formal defence document is out next week but unless there is something unexpected to pull out of the hat it is hard to see how it can further the arguement very much. The track record is poor. While it might be possible to put some fancy sum-of-the-parts valuation on the company, such exercises are only meaningful if management is prepared to put the valuation with a wholesale breakup. Does Sir Rocco Forte really want to do that? He seems prepared to go further than Granada on this front but not the whole hog.

The other traditional strategy in a bid defence is to attack the bidder. Here again Forte is going to find it hard going. Unless there is an achilles' heel we do not know about, Forte is not going to be able to fault Granada on financial performance. In accounting terms, too, the company looks squeaky-clean.

The commercial logic of the deal is easier ground but again the core Forte businesses of roadside catering and inexpensive overnight accommodation fit neatly into the Granada group. Sir Rocco may yet surprise us but at this stage it looks bad for him. A little bit more on the offer price and Granada is home and dry.


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