Celltech looks a real tonic

INVESTORS attracted by the potential in the biotechnology industry but worried about the risks should look at Celltech. The group has excellent management and a broadly based pipeline of potential new drugs which could yield blockbuster returns. It is not over-dependent on any single project. At the same time it has plenty of cash in the balance sheet, a profitable and dramatically expanding manufacturing business, and alliances with established industry giants which ensure that it is at no risk of running out of money for the foreseeable future.

Rivals are increasingly taking note of Celltech as a model of how a biotechnology company should be managed in the 1990s. In the United States, by contrast, many smaller biotech companies have funding problems. This changing perception has been reflected in a share price up from 219p, when I wrote about the group last year, to 286p currently, against a flotation price of 250p in December 1993.

Investors should not be put off by the rise that has already taken place. Despite the cautious approach, Celltech is playing for high stakes and the bull market in the shares may have only just begun. Fair-value models for 1997, making the admittedly considerable assumption that there are no great disappointments in clinical trials between now and then, could see the shares worth more than £l0, even though the group is unlikely to be seriously profitable much before the end of the decade.

One factor in the transformation of Celltech's prospects is a new management team. Dr Peter Fellner and Dr David Bloxham, respectively group chief executive and chief executive of Celltech Therapeutics (the drug development arm), both ex-Roche, were brought in to give the group focus. They have transformed it. But the real pay-off will come as we approach the 10- year anniversary of their arrival, when we will know if any of the trial drugs is a winner.

The next couple of years could be crucial. The group has two particularly promising compounds: CDP 571 for the treatment of rheumatoid arthritis, inflammatory bowel disease and septic shock; and CDP 840 for the treatment of asthma. Some idea of how seriously these compounds are taken in the industry comes from the partnerships Celltech has formed to develop them. Bayer is committed to make payments (known as milestone payments) to the group of £29m to fund the development of CDP 571. Milestone payments of up to £31.5m, payable over a five-year period, have been committed by Merck on CDP 840. The group has alliances with four large companies with milestone payments of £62m in total, of which £l3.6m has been paid so far. The deal is that Celltech does the initial research. The huge cost of further development and marketing is then handled by the companies. Yet Celltech can still expect a share of between 25 and 45 per cent of the profits on its products.

A common element in all Celltech's compounds is their relation to human monoclonal antibodies and the immune response. In effect, the group, with a research staff of 185 based in Slough, has become a world-recognised centre of excellence. This has other benefits. First, the group is a leading manufacturer of antibodies for its own and other companies' use. Last year this division made profits of £2m on £l4.2m of sales, despite considerable disruption at the factory. Profits are also understated by up to £2m because much of the production is supplied at cost within the group. Expansion is under way in both this country and New Hampshire in the US. Profits from this division could be £5m to £l0m by the end of the decade.

A worldwide surge of interest in the therapeutic use of antibodies could also generate royalties for the group, because many companies will be using Celltech's technology. First fruits are being seen with a new drug launched by Eli Lilly, which could generate royalties for the group of more than $5m (£3m) in a few years if sales reach $250m. An educated guess is that as other human antibody-based compounds come on stream, sales could reach $lbn, generating perhaps $20m of annual profit for Celltech.

Celltech's current market capitalisation of £203m could be justified by its human antibody manufacturing and licensing income, even if none of its third- party-funded drug development programmes is successful. Yet prospects look good or the big drug companies would not be providing such chunky payments. If just one of these drugs is a winner the rewards could be spectacular. The shares look an attractive speculative play with far less downside than is usual with biotechnology investments.

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