Xenova fund raising delivers fresh boost to biotech sector

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There were fresh signs of life among the UK's battered biotechnology companies yesterday when Xenova launched the sector's second equity fund raising in as many days.

The cash-strapped cancer research company, which bought rival KS Biomedix in September, is raising £21.1m to fund human trials of its most advanced drug.

The size of the placing and open offer was more than the City had expected. It gives the group additional cash to spread among other drugs.

David Oxlade, the chief executive, said it would need £11m to pay for a 350-patient study of TransMid, the brain cancer drug it acquired with KSB. Xenova would also be able to make quicker progress with anti-addiction vaccines for cocaine users and smokers.

KSB was put up for sale after failing to raise the money to fund TransMid trials. But Mr Oxlade remains confident he can attract a bigger pharmaceutical partner to bankroll final-stage trials in 2005. "We have been very impressed with the quality and consistency of the data," he said. TransMid may prolong the life of a patients from six months to nine months on average, with many people living much longer, he added.

The fund raising was unusual because two-fifths of the money was raised through a simultaneous offer of new shares in the US, where Xenova is quoted on Nasdaq.

Mr Oxlade said US investors appeared keen to exploit the gap that has opened between biotech valuations there and in the UK.

Xenova shares fell 1.25p to 11.25p. The new stock is being placed at the equivalent of a 10 per cent discount to Tuesday's closing price, but investors will also get warrants exercisable at a premium to the current price. The warrants could bring in a further £7m over the next five years, but analysts predict Xenova will need to raise new money by the middle of 2005.

Xenova's move comes a day after Antisoma unexpectedly raised £15.2m before costs. The US participation in Xenova's fund raising encouraged some investors to argue that sentiment in the sector is improving, following a rally in the US that has prompted many new American companies to float. Received wisdom is that the UK market is about six months behind the US.

Mr Oxlade is hoping to use Xenova to consolidate the UK's fragmented sector, in an attempt to create a company with the size to attract new investors and with a portfolio of new drugs wide enough to withstand the inevitable failures in trials.