Test tube babies that weigh in too heavily: Biotechnology companies may be pricing their shares out of the market

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The Independent Online
GREED and unchecked optimism are threatening to snuff out investor interest in biotech nology before the first product makes it out of the test tube and onto the market. On Friday Chiroscience Group was the latest biotech company to enter public life. Like many others it arrived with more of a whimper and less of a bang than its army of promoters promised. The shares, placed at 150p, struggled to a penny premium.

A growing number of investors in biotechnology feel they have drawn the short straw. Other, so-called blue-sky investments, where the likelihood of the company earning profits are some way off, have fared much better. Shares in Division and Virtuality, two companies involved in virtual reality, are well above their issue prices. The same can be said of speculative computer stocks such as Phonelink, up 26 per cent against the market over a year, and Tadpole Technology, one of the stock market's best performing shares in recent years.

Many professional investors believe that biotech's big problem is not that profits are often years away, or that the technology is difficult to comprehend - the problem lies in the foolishly high prices being demanded by the brokers taking these companies public.

David Cohen of Societe Generale Strauss Turnbull, who was responsible for floating a number of hi-tech companies in the 1980s as a senior partner with Chase Securities (formerly Simon & Coates), said: 'Some of the valuations being put on these companies are absolutely staggering. They just don't stack up.'

Many point to the fact that leading biotech shares such as British Bio-Tech and Celltech, together with Anagen and Cantab, have floundered since going public. Now the fear is that the sector's dismal showing could wreck any chance quoted biotech companies may have of raising the additional finance needed to bring innovative products to market.

Peter Smith, an analyst with James Capel, said: 'On average it takes about pounds 170m to bring a drug to market, so it is reasonable to assume that most quoted biotech companies involved in drug research will have to come back for more funds.' Which is why fear stalks many biotech labs up and down the country. Some executives in biotech companies are terrified that new companies coming to the stock market on what they regard as cynically high valuations will inevitably lead to an investor backlash.

Jeremy Curnock Cook of Rothschild, who is an adviser to Biotechnology Investments, one of the world's longest established funds specialising in this area, said: 'A high value on a newly floated biotech company creates a substantial bill that has to be paid at a later date. Some of these companies are taking a rod to their own back by raising too much when they float. They might raise enough money to make it once round the block, but you often need to go three times round to launch a new drug.'

One executive of a quoted biotechnology company said: 'In the early 1980s, Parton International gave the whole sector a bad name by raising a lot of money and then failing to deliver on promises. I fear that could happen again, due to some of the recent companies that have floated.'

Over the last couple of weeks the cracks in the biotech nology sector have really started to widen. Shares in Proteus, one of the sector's few high- flyers, have fallen from a peak of 500p to 349p in recent weeks, following the resignation of one of its brokers, UBS. Its second broker, Allied Provincial, took the company public and is resolutely supporting the shares. The firm's Birmingham office has emerged as one of the leading sponsors of biotechnology shares, often beating first division rivals in London.

Besides Proteus, Allied Provincial is broker to Haemocell, Shield Diagnostics and Tepnel Diagnostics, and later this year will sponsor new companies called Pharmakoprus and Peptide Therapeutics. The suggested market capitalisation for the last of these is about pounds 100m, despite the fact it was only founded last year.

Also guaranteed to raise eyebrows is the fact that Prelude, a venture capitalist firm that bought 28 per cent of the company last autumn for just pounds 500,000, could be about to make some 50 times its investment in well under a year.

Dominic Wilson, biotech nology analyst at Allied Provincial, said: 'Putting a value on a biotech company is a very inexact science. You could say, 'How long is a piece of string' - as most of them are a long way from making a profit.'

He added: 'I hear some people say that the price of a company like Proteus is too high - but that view could change if the company were to have good news on the product front. This is a very sentiment-driven sector.'

As well as the collapse of Proteus shares, and the dispute it had with UBS over prospects, the float on Friday of Chiroscience Group has polarised feelings. A number of top City brokers believe the shares have been cynically priced. Critics point to the fact that the company was founded two years ago in a management buy-out that valued it at about pounds 1m, yet its broker, Panmure Gordon, has valued the business at pounds 102m.

'Are you seriously telling me the managers have added pounds 100m of value to Chiroscience in two years?' asked an analyst with one of the City's top pharmaceutical research teams.

Frazer Hall, an analyst with BZA, which is the broker to another biotech company, Cantab, said: 'Chiroscience Group is significantly overvalued when you compare it to the American standards.'

This view is backed up by the James Capel analysts and Ian Smith of Lehman Brothers, who believes a more sensible price-tag would have been closer to pounds 85m.

In its defence, Robin Gilbert of Panmure Gordon said: 'Chiroscience Group will be making losses for the next few years, so you have to accept that any valuation is subjective. We have a view of what profits and sales could be by the turn of the century, and we price the stock accordingly.'

But many institutional investors are coming to the view that biotech stocks in London need to reflect the average 28 per cent fall in prices experienced by the sector in America.

Brian Ashford-Russell of the investment institution Henderson Administration, who follows UK and US technology companies, said: 'Some of the prices being asked for biotech nology companies in Britain are out of line with what is on offer in America. Perhaps investors here are being legged over in some cases, as stock has been shoved out on silly prices.'

If more top fund managers take Ashford-Russell's line, several quoted biotechnology companies that are expected to ask for further funding this year will be seriously disappointed.

(Photograph omitted)

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