Cambridge has the right long-term prescription

Scipher sends growth message; Treatt's smell not quite good enough
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The Independent Online

The sinking of Ark Therapeutics' planned flotation, called off last week, suggests investor current appetite for jam today weighs against even the best companies in the biotech sector. Few investors seem willing to back a loss-making company developing the drugs of tomorrow. With little investor demand, and little sense of how meaningfully to value biotech companies, Cambridge Antibody Technology has seen its shares drift down and down.

The sinking of Ark Therapeutics' planned flotation, called off last week, suggests investor current appetite for jam today weighs against even the best companies in the biotech sector. Few investors seem willing to back a loss-making company developing the drugs of tomorrow. With little investor demand, and little sense of how meaningfully to value biotech companies, Cambridge Antibody Technology has seen its shares drift down and down.

They were down again yesterday – by 9p to 1,057p – when the company said it would take a slightly larger chunk out of its cash pile this year than it had previously suggested, perhaps as much as £36m. To put that in perspective, CAT was sitting on £147m at the end of March.

Part of the extra spending is down to its failed bid for Drug Royalty of Canada, one of its early-stage investors who was going to take a big cut of CAT's future revenues. Although CAT lost out to a rival bidder, it has bought itself out of the revenue sharing deal, so the £1.2m cost looks worth it.

The group is also putting more resources into trials of a product it calls CAT-152, a treatment for post-operative scarring in the eyes. The data so far has been positive, and has attracted the interest of some big drug companies wanting to market the product. The potential is such that CAT is considering building up a salesforce to market the product itself.

These are the sorts of medium-term decisions that Peter Chambré will be taking now he has his feet under the chief executive's desk. CAT has technology that can manufacture human antibodies in test tubes much faster than rival methods. It has been proved on several occasions now, and the most advanced drug is awaiting approval from regulatory authorities in the US and Europe. It was proved again yesterday when HGSI, a Nasdaq-listed partner, said it was developing a third drug based on CAT technology. Mr Chambré's task is to use that technology to develop more drugs for CAT, rather than simply to hire it out to other drug firms.

The collaborations keep on coming, and clinical trial data has been better than hoped. With seven drugs in the clinic, CAT has one of the best pipelines available. All this should outweigh the risk of failures in the clinic or in the courtroom, where CAT is defending its intellectual property. Ark's failed flotation suggests that investors need not hurry to buy, but CAT looks like one of the sector's long-term winners.

Scipher sends growth message

Scipher has given investors more cause for concern than celebration over recent months and its shares have more than halved in a year.

While yesterday's financials were nothing special, the promise of an improvement in its operating performance this year suggests there is light at the end of the tunnel.

Scipher licenses other people's patents and works on ways to exploit their technology. It made a pre-tax loss of £12.7m in the year to 31 March compared with a £10.1m loss a year earlier. Sales were £21m, slightly beneath the expectations of its house broker but up from around £16m a year before.

Encouragingly, revenues from "new business" – projects begun since it was spun out of EMI in 1996 – were £16.5m, up from £11.6m.

Scipher predicts it will at last sign off its £8m property sale and leaseback deal to shore up its finances. It signed a new £7m banking facility last week. After slashing costs it will be cash positive around the turn of the year. It predicts profitability from the middle of 2003. The company is still in its infancy despite managing patents for a number of blue chips including BT and the continental telecoms firms KPN and Deutsche Telekom. While technologies including computer displays and fingerprint identification kits seem set to continue to earn a tidy income, they are unlikely to transform the business into a giant overnight.

The problem remains one of how to value a loss-making company with no real peers on the market. Analysts predict the company, worth around £79m, will make sales of about £30m this year, so the shares – up 7.5p to 88p – don't look particularly cheap on a rough and ready multiple of sales. But more sophisticated valuation measures, which take account of predicted cashflows from the business, produce much higher valuations.

With Scipher's sale and leaseback firmly in sight and with profits around the corner, the stock could well gain momentum.

Treatt's smell not quite good enough

Run out of Frankincense? Short on Myrrh? Then you're probably looking for Treatt, a latter-day essential oils merchant that combs the high seas for rare and exotic ingredients to flavour and fragrance a range of products from soft drinks to shampoo.

The family-run company, founded in 1886, has a nose for smells. From eucalyptus to lavender, patchouli to ylang ylang, Treatt's buyers can source about 2,000 so-called aroma chemicals.

The best sellers are citrus oils, which are manufactured on location in Florida. Normally these contribute 12 per cent of sales but a recent spike in the orange oil price from $1 to $3.50 a kilo pushed this up to about 33 per cent in the six months to 31 March.

This partly compensated for a poor start to the financial year, which Treatt blames on tough trading in the wake of 11 September. Pre-tax profit fell 4 per cent to £1.25m. Turnover was up 7 per cent to £14.45m.

While the future may not smell of roses, Hugo Bovill, Treatt's managing director, is pretty confident. The end market for the company's smells and tastes is potentially limitless and orders have picked up compared with a year ago.

The stock, down 16p yesterday to 202p, has had a great run of late, climbing to 245p earlier in the year. It is very tightly held with Mr Bovill and his brother, another long-term member of the Treatt team, own 60 per cent. At 10 times, its price-earnings ratio is undemanding but earnings are forecast to be flat for the next two years. Hold.

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