Outlook: And now for pharma's next trick: er, no rabbit

Boom and bust; BAE Systems

As heroic biotech failures go, they don't come any more spectacular than Antisoma's R1549, an apparently ground breaking ovarian cancer treatment which managed to get all the way to phase III trials before anyone realised the product had no more effect on patients than the placebo. R1549 may not yet have been given a name, but the stock market had invested an awful lot of hope in its success, and the shares more than halved yesterday on the announcement that Roche, the biotech tiddler's big pharma sugar daddy, was no longer prepared to bankroll the treatment's development.

As heroic biotech failures go, they don't come any more spectacular than Antisoma's R1549, an apparently ground breaking ovarian cancer treatment which managed to get all the way to phase III trials before anyone realised the product had no more effect on patients than the placebo. R1549 may not yet have been given a name, but the stock market had invested an awful lot of hope in its success, and the shares more than halved yesterday on the announcement that Roche, the biotech tiddler's big pharma sugar daddy, was no longer prepared to bankroll the treatment's development.

Only last November, Glyn Edwards, Antisoma's chief executive, raised £15.2m via an open offer of new shares at 40p each. This has at least guaranteed that Antisoma can survive, despite yesterday's setback, but with the shares changing hands last night at just 20p, investors are left what on earth went wrong. Roche's observation that "such results are not unexpected in the development of novel treatment modalities" seems in the circumstances a trifle insensitive.

Regrettably it is also a statement of fact. The pharmaceuticals industry is getting progressively worse at new product discovery. R1549 is only the latest in a growing list of biotech and pharmaceutical industry failures. What's more, the number of late stage dropouts - that's after the bulk of the research and development money has been spent - is rising strongly, suggesting that the industry is failing to nip new compounds, which may initially look promising but in the end come to nought, in the bud early enough before too much is invested in the product's future.

Over the 20 years from 1980 to the turn of the century, annual R&D spending by the pharmaceuticals industry rose 15-fold to $30bn, yet the number of new product approvals by the Food and Drugs Administration (the US regulator) rose by less than a half to just 50. To make matters worse, many of the latest generation of approvals are not really product innovations at all, but me-too variations of existing treatments.

Much of the low hanging fruit of drug discovery - treatments for common, often non-life threatening ailments and disease - has already been plucked. Today, the industry faces a much more challenging phase, as it enters the realm of more complex, less well understood, genetically based disease, particularly cancers and dementias.

The successful mapping of the human genome eventually promises a whole new era of drug discovery and disease prevention, with products customised to an individual's genetic finger print, but the new dawn is proving a lot slower in coming than many had hoped. Nor have the mega mergers of big pharma, many of them justified by the expected increase in drug discovery that would result from higher R&D budgets, succeeded in reversing the trend of ever less effective new product discovery. The efficacy of many of the products now coming to market is widely challenged and ridiculed in medical circles.

The safety first approach pursued by the FDA in recent years has hardly helped matters by enormously increasing the cost of drug development and thereby raising the barriers of entry to prohibitively high levels. Few biotechs can afford to fund their own clinical trials, which is why, like Antisoma, so many of them have formed development partnerships with the big pharmaceutical companies. With new product discovery becoming ever more difficult, the big pharmaceutical companies are left to fall back on copy-cat versions of each other's blockbusters to sustain their earnings. The result is an ever tightening noose of competition and public scepticism. Many of them now look to the biotechs for genuine product innovation. Antisoma and others like it don't give reason for optimism.

Boom and bust

Gordon Brown thinks the housing market boom is nothing to worry about and suggests that some humility is appropriate from the doomsters who warn otherwise; many of them have been predicting an economic bust of some sort ever since he became Chancellor, yet none has so far materialised. The Chancellor thinks they'll be wrong again because although housing has become considerably more expensive under Labour, low interest rates make borrowing against property a good deal more affordable. Boom and bust have been abolished, and that's official.

Interestingly, scarcely anyone outside Britain and America agrees with this view. In Europe, the superior economic performance of Britain and America in recent years is seen as almost wholly the result of a manufactured credit and mortgage boom. As one senior German CEO put it to me recently, eventually these booms will turn to bust, at which point the tortoise (Europe), will catch up and overtake the exhausted hare (Britain).

I'm not so sure about that, but it seems to me beyond doubt that the UK housing market has become an unsustainable, speculative bubble. House prices are rising not because of demographics or lack of supply, but because money is so cheap and plentiful. To most buyers, house prices already look crushingly expensive, but as in all speculative bubbles, the belief that they may be even higher in six months time is driving an increasingly frenzied buying spree.

Nobody yet knows what the consequences might be. It would be nice to believe in happy endings, as the Chancellor is bound to given that he thinks of himself as fully in control of the script, but the history of such bubbles suggests strongly that this is not the way to bet.

BAE Systems

Take out a mortgage with the West Bromwich and get a free Rover. Buy a warship yard from BAE Systems and win a £3bn aircraft carrier contract. BAE sounds about as desperate to offload its naval ships business as MG Rover is to find customers for its ageing 25 series. Perhaps it is just a co-incidence that they were once part of the same company.

In industrial terms, the "for sale" sign that BAE has hoisted above the gantries at Scotstoun and Govan in Scotland and VSEL in Barrow-on-Furness, amounts to a U-turn on a par with Tony Blair's sudden conversion to an referendum on the European constitution.

Can it really only be three months ago that BAE was proudly showing the press around its shipyard facilities and enthusing about all the new jobs it would bring to the Clyde when it won more Type 45 destroyer orders from the Ministry of Defence? Indeed it can. Just as it was a mere two months ago that Mike Turner, BAE's chief executive, said that his number one priority was to start making acceptable profits on MoD work, by which he meant, among other things, the Type 45 and aircraft carrier contracts that BAE's shipyards are about to embark on.

Now Mr Turner seems to have decided that having the MoD as a customer is just too much of a liability, so why not get shot of the yards altogether and turn it into someone else's problem? Yet there is perhaps a more devious purpose at work here. BAE has already had to share the prime contractor's role on the carriers with Thales of France and now the MoD is proposing to dilute its control further by turning the contract into an alliance involving every shipyard in the country as well as an external project manager.

It is just conceivable that BAE could keep its hands on the carrier contract without any shipyards of its own in which to build the vessels, but it is unlikely. So BAE's real purpose in putting the yards up for sale - perhaps to be bought by foreigners - may be as a shot across the bows of the MoD. It would not be the first time it has sent its gunboats down the Thames. As ever with BAE, it is only possible to speculate on what the underlying strategy might be.

jeremy.warner@independent.co.uk