The Investment column: Celltech lesson

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The Independent Online
The Investment column: Celltech lesson

Chief executives who admit their companies are overvalued are rare, and biotech group Celltech's Peter Fellner is not usually among them. But yesterday he admitted that the biotech sector had been overvalued before the British Biotech scandal prompted its dramatic re-rating. As Celltech yesterday said it had leapt another hurdle on the way to US Federal Drug Administration approval for a pioneering treatment for leukaemia, Dr Fellner is anxious to avoid the perception that Celltech is sitting on a wonder drug.

The last time Celltech was on the cusp of such greatness was in early 1997 when its shares hit 683p on expectations for a drug developed by Bayer to which it had royalty rights. The shares halved when Bayer reported negative test results, despite Celltech's belief that the drug represented only a third of the share price.

Celltech's CMA676 - a treatment for acute myeloid leukaemia developed in conjunction with American Home Products - has performed well in phase two trials. It is to take the FDA fast-track to market approval, expected in March or April 2000. The market barely reacted to the news, the shares gaining 1p to 456p.

Prescriptions would follow within weeks of approval, and analysts expect annual earnings of at least $150m (pounds 93m), of which Celltech would take a "high teens" royalty amounting to around $30m annually. Although the direct market is limited around 15,000 patients, the drug has the potential to generate spin-offs for 130,000.

Should earnings come through, Celltech will enter profitability in the second half of next year and should break even in the next full year. The effect of securing a substantial income stream would mark a qualitative and quantitative change in the value of Celltech, with a corresponding hike in the share price.

Celltech's lesson from 1997 was to diversify. There are several less advanced projects in the test tube - each with their own risks - and none as pioneering as CMA676. The company is seeking a partner to offset the costs here and also has a modest, but growing, income from antibody royalties. Positive news flow from these activities in forthcoming months may tip Celltech a little higher.

Should CMA676 fall at the last hurdle, the damage to sentiment would far exceed the 55p analysts estimate it to be worth. At 456p, and with earnings some way off and dividends further, Celltech looks fully valued.