The Investment Column: Scotia scrabbles for a success

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The Independent Online
Scotia's recent licensing deal for Foscan, its cancer laser treatment, looks good, but that should not blinker investors to the fact that, after eight years at the bench, the biotechnology group has still not proved the worth of its controversial oil-based technology. The agreement struck with Boerhinger Ingelheim of Germany and the Japanese group Kyowa Hakko is welcome. It boosts the group's fast-depleting cash pile and gives Scotia a generous 25 per cent royalties on future sales.

Though the deal breathed new life into Scotia's shares, which picked up a further 18.5p to 436p on yesterday's interim results, the price has still not recovered from the news in March that Tarabetic, Scotia's lead drug for diabetic nerve damage, which has been under development since 1991, failed to win UK approval. That announcement lopped almost a quarter off the group's value in a day.

Scotia must prove that it can turn evening primrose oil into real prescription drugs, not just food supplements and treatments for ailments such as eczema. Most other drug groups have already dismissed oil-based technology in favour of proteins. The question is whether Scotia knows something that the others do not.

The company believes that Tarabetic will eventually get approval. It is equally confident about its treatment for cancer, codenamed EF13, and EF5 for arthritis. However recent news that EF5 does not work in one group of trial patients is hardly reassuring.

The technology needs to work if Scotia is to justify the money it is ploughing into research and marketing. Increases in these costs in the half-year to June meant operating losses deepened by almost three-quarters to pounds 13m. Even its pounds 60m of available cash is only enough to last two years. That Scotia is already scrabbling for new ways to raise funds - like a Nasdaq listing or spinning off its fast-growing nutrients business - sits uncomfortably with the view of David Horrobin, chief executive, that Scotia will be cash-positive by 2000. Until Scotia scores a drug success, the shares are high enough.