Small is still beautiful for biotech companies coming to market
Celltech's recent setback has not cured firms' enthusiasm for public listings, reports Sameena Ahmad
Wednesday 28 May 1997
The crash in Celltech's shares will undoubtedly affect investor sentiment, which is vital for stock market debutants. Patrick Rousseau, CEO of Thallia, a French health food company hoping for a $100m (pounds 61m) float says: "I have heard of six IPOs [initial public offerings] due this summer now delaying until the autumn after Celltech."
But behind these delays, a huge queue of hopefuls is building up. Michael Ward, editor of biotechnology newsletter BioBusiness, estimates there are 700 European bioscience companies looking to raise public money over the next decade. Of the UK companies seeking to float in London, three - Powderject, Ethical Holdings and Galen - announced valuation details before Celltech's bombshell.
Waiting in the wings are Oxford Glycosciences, which recently appointed James Noble, former finance director of British Biotech, to its board, chemical designer Oxford Asymmetry, Cambridge-based Cenes, gene-therapy group Therexsys and cancer specialist, Antisoma.
Even more are eyeing up the UK from the Continent. Jeremy Curnock Cook, head of Rothschild's biotechnology investment fund, sees enormous growth in biotechnology in Europe. "These companies are 10 years behind the US in commercialising their research, but are now ready to raise serious money." France dominates this list which includes Biocom, a computer software group; IDM, a gene-therapy company; Cerep, a chemical screening specialist; gene-delivery company, Transgene, and drug delivery group, Biovector Therapeutics. Coming from Germany are Morphosys, which has developed a peptide antibody library and IDEA, which hopes to list on AIM. Brussels is offering IBT, Spain, PharmaMar, which makes drugs from marine plants and from Australia the agricultural genetic engineer, ForBio, is looking for a secondary listing this year. Pharming, the Dutch company which was planning a London summer listing, may now delay until the autumn, say sources.
Mr Ward of BioBusiness also notes a new trend for US-listed biotechs to seek a secondary quotation on the less crowded European markets. "Some of these US companies don't get much exposure at home where there are 300 plus biotechs. The UK has just 20 or so. Also many have subsidiaries on the Continent and so it is natural to seek more investors there." Sugen, which has a German base and is 20 per cent owned by Zeneca, plans to float in London late summer while US compatriot, Verigen, which has a Danish subsidiary, will list on AIM.
How many of these hopefuls will actually make it? Though Celltech was a sharp reminder of the volatility of biotechnology shares, most believe prospects for the right sort of newcomer remain good long term.
One reason is a growing understanding that failures are meant to happen in drug research. David Horrobin, chief executive of Scotia, one of the UK's largest listed biotechs, says: "Most small molecules fail. For every 10,000 evaluated, only one makes it to market." John Padfield, chief executive of Chiroscience, points out that biotechnology companies are particularly exposed to good and bad news: "Biotechs walk around naked - everything we say or do is scrutinised. Drugs die all the time within the big pharmaceutical companies, but investors never know about it."
The complexity of biotechnology companies is partly to blame for the collective panic in share prices after bad news from one company. Robert Alington Maguire of Baring Brothers says: "It is precisely because pharmaceutical companies are very complex and very different that people tend to judge them as the same." The small size of the UK biotech market is also critical. Dr Horrobin says: "There is still a lack of qualified analysts and journalists here. If people don't understand the technology it is easy for them to become wildly enthusiastic or overly negative."
However, that is changing. As Mr Curnock Cook notes: "A bigger market attracts more money, institutions have to take a position and more analysts start to follow the sector seriously." This results in a keener ability to differentiate companies on quality. Louis Nisbet, chief executive of Xenova, the recently floated UK group, says: "Institutions are becoming very clued up and are starting to recruit medically qualified fund managers." The realisation that biotechs are worth a serious look is also being driven by the growing number of alliances with big pharma groups eager to find innovative new products.
In addition, as Mark Brewer, analyst at Hoare Govett, points out, not all biotechs carry equal risk: "Not every company develops drugs from scratch. There is plenty in this sector for investors with a lower appetite for risk." Of the imminent floats, Galen is a mini-pharma company profitable for 30 years. Powderject doesn't make drugs at all but develops devices to deliver them. None has plans to scale back their flotation valuations post Celltech.
Nor should investors forget the potential for biotechs to rise from the dead. Cantab's shares, which crashed to little over 100p in 1995 after a lead drug failed, now trade at 917.5p. British Biotech, which lost its first cancer drug batimastat, is now capitalised at almost pounds 1.7bn. As Dr Horrobin points out: "Anyone who invested in biotechs at flotation have done much better than if they'd put the money in big drug company shares. We are all pretty successful investments."
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