Firmer look to biotech fledglings gets

The Investment Column

The fledgling biotechnology sector of the stock market has had a storming rise this year, outperforming the already healthy increase of major drugs groups. But for most of the two to three years since the majority of the companies came to market, investment in the sector has been seen as something of a casino by investors - and with good reason.

British Biotech is a case in point. Seen as one of the more serious players, with a market capitalisation now well over pounds 400m, it saw its share price plunge from 590p to 428p in February after it revealed problems with clinical trials of its then most promising drug, the anti-cancer compound batimastat. Since then the shares have soared close to 900p.

This roller-coaster ride is typical of the sector, but there are signs that it is moving onto a somewhat firmer footing, with institutions showing more serious interest in investing and the product portfolio edging towards commercial exploitation.

Last Friday's news that Chiroscience had become the first of the new biotech companies to win regulatory approval - for its painkiller dexketoprofen - was something of a milestone in this respect. The decision does not necessarily mean that other companies' products will be similarly blessed by the authorities, but it does show that the industry has the potential to move from the unquantifiable "blue sky" research stage to the creation of products that have the capacity to generate sales.

British Biotech's recovery from the February debacle is also testimony to its diversification strategy. Far from proving fatal, had it been the group's only product, batimastat's starring role has now been taken by a new oral anti-cancer drug, BB-2516. Indeed, the end of this month should see the release of data on trials of BB-2516, which could have a big effect on the share price.

Given the current level of the shares, British Bio's immediate financing needs should be assured by warrants exercisable at 525p over the turn of the year, which will raise pounds 47.5m.

Celltech, another of the better-regarded members of the sector, has also been steadily building a decent development portfolio, ranging from asthma to inflammatory bowel disorders. It has also been one of the most successful at cutting the risks associated with the sector by cultivating link-ups with big groups like Zeneca and Roche.

Even Scotia, the largest of the pack and a producer of evening primrose oil, has fought off its fringe image, with the market now getting excited about its anti-cancer compounds.

But investors should remember that profits from most of these companies are unlikely to emerge much before the next century. It would be strange if, before then, some of them did not fall by the wayside.

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