Biotech minnows merge in attempt to stave off collapse

Two of the UK's most financially precarious biotech companies are to merge, in a move that heralds another wave of consolidation across the sector.

Xenova, whose furthest advanced drug failed in clinical trials earlier this year, is buying KS Biomedix, a ten year old cancer specialist which was close to running out of money.

David Oxlade, chief executive of Xenova, immediately said this would be the first of several acquisitions as the company attempts to bulk up its pipeline of drugs, making it a less risky investment proposition.

His declaration pits him against Peter Fellner, biotech's premier deal-doer, who is using the old British Biotech as a consolidation vehicle and has already made two acquisitions since becoming chairman at the end of last year.

Yesterday's all-share deal values KSB at £8.5m, a discount to its market value when the agreement was announced. However, KSB investors will share an extra £6.5m if the company's most advanced drug - TransMID, a treatment for a rare form of brain cancer - is ever launched.

The deal was not taken well by the stock market, which sent KSB shares down 2.5p to 13p and Xenova shares down 0.25p to 12p.

Richard Parkes, analyst at ING Financial Markets, said: "KSB has long been trying to raise funds, and it has failed. The best deal they could get for their shareholders was at a discount to the current share price. On paper, TransMID is an interesting compound, two or three years away from launch. Someone could have snapped it up, but they haven't, and in the end the only one they could sell to was a company which is itself in dire straits."

Xenova is confident that it can raise £9m from its shareholders in the autumn to fund the next stage of TransMID's trials.

Mr Oxlade said the combined entity will have a pipeline of 12 drugs in clinical trials, and enough cash to last over a year, even if it does not license any of its products to bigger pharmaceuticals companies.