Wonder drugs, or a new South Sea bubble?
Today a British company will announce the results of tests on a DNA-based drug that could cure cancer. If the news is good, its shares will soar. But the frenzied hopes of investors in this and other biotech firms may be misplaced
Paul Vallely is Associate Editor of The Independent where he writes on social, ethical, political and cultural issues. He writes leaders, features and has a weekly column in the Independent on Sunday. He was co-author of the report of the Commission for Africa and has chaired several development charities.
Tuesday 21 May 1996
The stakes in what must be the greatest wave of speculation since those 18th-century investments in the South Sea could be raised in a dramatic way today when a firm called British Biotech announces the results of the second phase of clinical trials of a drug called Marimastat.
What we are talking about - or, at least, the investors hope - is a cure for cancer. And that is not the only holy grail that the brat pack of bright new biotechnology enterprises is holding out so enticingly. Treatments for Aids, for migraine, for arthritis, even for fatness are all resolving themselves, like tantalising mirages on some thirst-parched desert horizon, into vague but delightful possibilities for the willing investor.
The technology comes from the new techniques for manipulating the strings of genetic code in DNA. Through biotechnology it is now possible to transfer a gene, often human, into the DNA of another organism, usually a single- celled species such as yeast, though it can be transplanted into large mammals such as sheep. The new gene prompts its host to manufacture a particular desirable protein, which can then be harvested.
The new medicines which result could be worth billions of pounds. Based on this slender prospect the share price of UK biotechnology companies has rocketed in the past six months. Since July last year, the Nomura Research International index of UK biotech companies has risen almost three times as fast as the index for all small companies. The stakes have been raised still further by the fact that Britain has so few companies in which to invest: there are only 12 quoted biotechnology companies in the main UK market compared with 275 in the United States, which leads the biotech field. A year ago these British companies were worth a total of pounds 1bn; today their value has more than quadrupled to pounds 4.4bn.
What is most remarkable about all this is that not one of these companies has ever made a profit. Most have never even made a product. None of the conventional business tools - price-earning ratios, yield and cash flows - can be brought to bear. Rather, the profitability of these companies rests entirely in some twinkle-in-the-eye factor. Share prices fluctuate solely on the latest reports of how research is going. For science, it's all rather inexact.
Today's results of tests with British Biotech's Marimastat - which is designed to block the action of enzymes that allow cancers of various types to grow - are only phase II trials: phase I trials, usually conducted on medical students, test for side-effects; phase II, on real patients, determine dose and quantify benefits. The real hurdle is the phase III clinical trials which are far more widespread and are intended to gather enough statistics to persuade the regulators that the results are valid.
With ordinary drug trials, City speculators reckon that a drug that makes it to phase I has a 20 per cent chance of ever being marketed. By phase III they gamble that its chances have increased to 80 per cent. If Marimastat makes it into that crucial third stage today, British Biotech's shares, which have climbed from under pounds 5 to pounds 28, could rise to pounds 35 or more, valuing the business at more than pounds 2bn and taking it into the FT index of Britain's top 100 companies.
The news is likely to be promising: had the drug been harmful, doctors would have ended the trials early; had it been useless the company would have cut its own losses. So phase III and the lure of 80 per cent probability beckons.
Yet biotech is not the same as ordinary pharmaceuticals. Not enough products have gone on sale so far to indicate whether the analysts' usual predictive formulae hold good. And sometimes things do go wrong, indicating that a prudent punter should sometimes temper greed with fear.
The United States offers a cautionary tale here. It is true that the biggest biotech fortunes yet made have been from projects there; the American biotech firm Amgen made profits of $588m last year, and now has a market value of $10.4bn. But in 1992 and 1993 America's biotech sector, which consists of about 1,000 quoted and private companies, lost more than 50 per cent of its value when the market took fright after disappointing results. If biotech companies were such a good deal, some analysts began to argue, why were the giant pharmaceutical companies not buying them up in huge numbers as had been earlier predicted?
The problem has not gone away. Earlier this month, shares in SmithKline Beecham fell by a dramatic 7 per cent when its heart drug Coreg was surprisingly rejected at the last hurdle by the US Food & Drug Administration. Despite evidence showing that it reduces deaths from congestive heart failure, the FDA voted four to two against approving the drug - a decision which analysts predicted could cost the firm up to pounds 200m a year in sales.
All of which excitement about biotech companies adds to the frisson of City life. Just don't put your pension in them.
Stock market valuation: pounds 1.6bn
Wonder drug in prospect: a cure for cancer
When British Biotech was floated on the stock market in 1992, few City investors and analysts noticed. A company with no products, no sales and uncertain prospects, many might have thought it over-valued at pounds 4.25 a share. Today those shares are worth pounds 28 and the company has enjoyed one of the fastest rises in recent stock-market history.
If today's results of the Phase II tests on its anti-cancer drug, Marimastat, are as good as predicted, the shares could rise to pounds 35 or more. Last month, one team of analysts predicted that its shares could be pounds 70 by early next year.
British Biotech was founded in 1986 by Keith McCullagh and Brian Richards, who headed the research department of the drug company Searle until it was taken over by the US chemicals giant Monsanto 10 years ago. Its labs are behind the Rover car plant in Oxford in a mundane steel and glass office building that the company refitted at a cost of pounds 4m.
It has previously tried, unsuccessfully, to find a vaccine for Aids and has worked on treatments for asthma and septic shock.
Stock market valuation: plans a pounds 100m flotation
Wonder drugs in prospect: treatments for cystic fibrosis, thrombosis, and haemophilia B
PPL owns some 200 transgenic animals: sheep in Scotland and New Zealand, pigs in Virginia, three bulls, several cows and numerous rabbits. The animals have been cloned so that they contain human gene fragments. They produce large amounts of relatively pure and low-cost complex human proteins in their milk, which can be formulated to treat a variety of human diseases. Eventually, such animals might produce organs suitable for transplanting into humans.
Dr Ron James, managing director, has announced plans for a flotation worth about pounds 100m. The firm, with more than 100 employees, including 86 scientific researchers, is co-operating on some projects with the Scandinavian drugs company Novo Nordisk, which has put up pounds 6.6m for 13 per cent of the equity. But the pharmaceutical giant Bayer has dropped out of a research agreement, which means that PPL's losses will leap from pounds 1.44m to pounds 7m for 1996.
Stock market valuation: pounds 507m
Wonder drug in prospect: an antibody for Crohn's disease and a new leukaemia drug
Celltech suffered a serious setback in February when it announced that it had abandoned research on one of its most advanced asthma drugs. Its share price collapsed by 24 per cent in a day when it stopped work on CDP840. The drug was being developed with Merck, the world's second-largest drug company, and had already reached phase II trials in humans.
The company has since recovered after announcing advances in two other important product development programmes. The company stated that tests of an antibody used to reduce inflammation in victims of Crohn's disease, an inflammatory disease of the gastrointestinal tract, were "encouraging"; phase II tests will start in the US soon, conducted with the German pharmaceutical group Bayer. A drug for leukaemia is being tested and a secondary phase study on a rheumatoid arthritis treatment is being extended.
Celltech announced lower pre-tax losses - pounds 3.7m (in the half-year to 31 March) on turnover of pounds 9.5m, but this was compared with a pounds 4.1m loss in the previous period. Shares rose 38p as Peter Fellner, chief executive, reiterated his prediction that Celltech would move into profitability in the year to September 1998.
Stock market valuation: pounds 342m
Wonder drugs in prospect: a cure for cancer and an arthritis inhibitor
Chris Evans (right), who has floated three biotech companies on the stock market, has seen one of them, Chiroscience, rise in value by 40 per cent in the past month.
Its chief executive, Dr John Padfield, worked for Glaxo, where he was part of the team that developed Zantac, an anti-ulcer treatment that has become the world's biggest-selling drug. He has recently been working on treatments for cancers and arthritis.
Chiroscience shares doubled after an announcement last month that it may have developed a more advanced form of British Biotech's Marimastat anti-cancer drug. It is also working on an enzyme-blocking inhibitor for arthritis, which would diminish the disorder rather than merely alleviate the pain, as most anti-arthritis drugs do. It is also working on a new anaesthetic.
This month Padfield took advantage of a buoyant share price to raise pounds 40m from investors for new research. Yet Chiroscience has never made a profit and had a turnover of just pounds 5m for last year. "High risk, but highly promising," is one pundit's verdict.
Stock market valuation: pounds 600m
Wonder drugs in prospect: a cure for cancer and a treatment for diabetes
A general pharmaceuticals group with a key interest in biotechnology, Scotia was the subject of some controversy when its chief executive, David Horrobin (right), received emoluments of pounds 429,000 last year, although losses at the group more than tripled.
Some analysts insist that the group is having a more successful time than the market recognises. The preliminary results, and its spring research and development review, confirmed good progress. At least one product will be approved this year, one or two licensing deals will be completed and one other product is likely to be filed for approval.
The firm was said to have raised pounds 10.2m from a prominent but anonymous US institutional investor to accelerate the development of Foscan, a cancer drug. Its leading product, a diabetes drug called Tarabetic, has yet to receive regulatory approval, even in Britain.
Stock market valuation: pounds 150m
Wonder drug in prospect: migraine treatment
Shares in Vanguard Medica made a spectacular debut on the stock market earlier this month. Shares soared to a massive premium within the first 15 minutes of trading on the stock market, valuing the company at pounds 150m. The enthusiasm was despite the fact that the company does not even do its own research.
Vanguard, which has only 24 employees, is made up of a team of experienced managers who contract out the research to other groups. It was founded by a group of eminent scientists, including a former Nobel prize-winner, Sir John Vane; Sir David Jack, who was previously head of research and development at Glaxo; and Dr Roger Brimblecombe, former chairman of SmithKline Beecham Research. Vanguard's chief executive, Robert Mansfield, has share options worth pounds 4.5m from the flotation.
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