Biotech consolidation puts Fellner under the microscope

Business Profile: Celltech chief believes acquisitions are key to growth

Investors have waited years for consolidation in the UK biotech sector. Then a merger comes along, then a hostile counter-bid, then the biggest biotech company promises to do a mega-deal in the US. And then, for good measure, the oldest biotech company takes out a privately-controlled rival and promises more deals within months. It is investment banking Christmas come early, and Peter Fellner is Santa Claus.

As the chief executive of the biggest listed UK biotech, Celltech, and also now executive chairman of the oldest, British Biotech, Mr Fellner is suddenly the pivotal figure in the sector. British Biotech made its first, desperately needed acquisition last week; Celltech might be just a week away from winning control of Oxford GlycoSciences. Both his companies are already searching for their next deals.

He modestly parries this description of himself as the key figure in biotech at the moment. "Only in as far as people might say I have been involved more than most people in merger and acquisition activity, while you have got a sector in urgent need of consolidation," he says.

But, if successful, his arrival at British Biotech will transform the sector. On Friday, British Biotech tied up an all-share acquisition of RiboTargets, a private firm run by Mr Fellner's old colleague from Celltech, Simon Sturge. British Biotech was brought to its knees in the late Nineties by the failure of what the company had hoped would be its "cure for cancer", a drug called Marimastat; RiboTargets has drug discovery technology that, if all goes to plan, will give British Biotech's scientists a second shot at developing useful medical products.

This first deal was easy, but now Mr Fellner hopes to slash costs at the merged group and use it as the "nucleus" of a much bigger biotech enterprise. He seems confident that he will succeed where Elliot Goldstein, chief executive until last autumn, had failed.

He says: "I am getting more optimistic. What British Biotech has to offer is a lot of cash for its size (it will have a pile of more than £50m), a clinical development capability and some management expertise. But its drug portfolio is poor."

British Biotech needs to buy in new drugs as desperately as many others in the sector, but biotech companies are now cheap enough that if Mr Fellner likes a rival's product so much, he can buy the whole company.

His appointment as chairman of British Biotech was given a touch of spice because of the rivalry in the Nineties between Celltech and British Biotech and between Mr Fellner and his then opposite number, Keith McCullagh. While British Biotech soared on hopes for Marimastat, Mr Fellner had to sit in the shade. But Mr McCullagh is long gone, and Mr Fellner would love to raise British Biotech from those ashes.

The strategy is much the same as that which created Celltech, Mr Fellner agrees. "There are certainly similarities with Celltech in the Nineties. When I joined that we had a company with very interesting science, some cash, and some issues with the business model. The first period I was there we paid a lot of attention to the cost base, and with the wonderful benefit of hindsight we can see that the acquisitions we did have made Celltech massively more solid than anything else in the sector."

That company acquired its shape through the purchase in 1999 of ChiroScience and in 2000 of Medeva. Mr Fellner is proud of the Celltech business model. This involves using sales of some boring cough and cold medicines, acquired through those turn of the century deals, to cover the costs of developing more exciting biotech drugs, including ones for rheumatoid arthritis, asthma and cancer.

It means that, unlike almost all other biotechs, Celltech is not constantly having to go back to shareholders for more funds.

"I suppose it is cyclical, but I think the destruction of shareholder funds was so much in the late years of the last decade that it will take a long time to turn," Mr Fellner says. "We need people who remember that to have gotten out of the system. Until then, I think that late Nineties model is unattractive. You don't want something that is going to burn the GDP of Guatemala. In 2003, the focus is on cash and what investors want is cashflow that can fund the innovation."

It was this focus on cash that drew Celltech's attention to OGS. Celltech now has a blocking stake of more than 10 per cent and looks likely to win with a cash offer that trumped an agreed all-paper merger with Cambridge Antibody Technology. The Celltech bid is less than the value of the cash in OGS so, provided Mr Fellner can close most of its operations cost-effectively, Celltech will be getting the OGS library of human proteins free.

The real focus for Celltech is on a big takeover of a US company, perhaps worth up to $500m (£320m). Such acquisitions are the best way to create a global drug company. "The problem in this industry is the cycle time, the length of time it takes from drug discovery, through development to launch," Mr Fellner says. "Creating a large company has to involve acquisitions. My successor has the same view."

"My successor" has to be discussed in these anonymous terms because he has not been officially named. Even though everybody knows it is Goran Ando, currently head of research and development at Pharmacia of the US, he still works for that company and has to hang on until its takeover by Pfizer is completed.

The delay is having knock-on effects across the industry. When Mr Ando finally gets to Celltech, Mr Fellner can move up to the chairmanship, freeing himself to take a more hands-on role at British Biotech. The rise to Celltech chairman is, Mr Fellner says, a natural progression for a man with experience in academic research and then as a business executive. "This is a youngish man's business. It has to be because it is based on innovation, and you need turnover at the top to change some of the thinking patterns. Chief executives of 59 are not going to bring in a lot of new thinking."

PETER FELLNER - BIOTECH BOFFIN

Title: Chairman-designate, Celltech; chairman, British Biotech.

Age: 59.

Pay: Celltech salary £420,000 in 2001 with £370,000 bonus. Other pay undisclosed.

Career: Chief executive of Celltech since 1990. Chief executive of Roche UK from 1986 to 1990. Prior to that, director of research at Searle UK Research Laboratories. He is also chairman of two privately held biotechnology companies, Astex Technology and Ionix Pharmaceuticals.

Interests: Country walking, good food.