Biotech merger creates £280m group

Two of the UK's richest biotech companies unveiled a surprise merger yesterday in a move hailed as a significant breakthrough for a sector long in need of consolidation.

Cambridge Antibody Technology is buying Oxford GlycoSciences in an all-share deal to create a £280m group developing new drugs for rheumatoid arthritis, cancer and allergies.

David Ebsworth, chief executive of OGS, won praise from investors for agreeing to give up the top job, breaking the mould of biotech bosses who have often been seen as putting egos in the way of consolidation.

After six months helping integrate the two loss-making companies, Mr Ebsworth will become a non-executive director of the enlarged CAT, which will have a cash pile of £260m to pursue new drug development work and to licence in new products.

CAT's shareholders will own 64 per cent of the combined company and Peter Chambré, its chief executive, will lead the enlarged group.

Mr Chambré said: "We are both highly regarded companies in the UK, but when you compare us to the top tier of global biopharmaceutical groups there is quite a gap. It is a gap which we wish to close and our ability to do that will be enhanced by this merger." He argued that drug discovery technologies at the core of the two companies would fit well together. OGS is an expert in proteomics, and as such is able to identify proteins in the human body which may be linked to disease. CAT's expertise is in the identification and manufacture of antibodies, which are formed in the human body to fight disease.

The merged group will have seven products being trialled on humans and another seven in pre-clinical development. Both companies also bring one finished product: CAT's Humira is a treatment for rheumatoid arthritis which is ready for launch in the US, and OGS's Zavesca treats Gaucher disease, a rare condition in which the body has difficulty breaking down fat. Zavesca is approved in Europe but has been held up by sceptical US regulators.

The group still needs to broaden that pipeline of drugs if it is to reach profitability within five years, as Mr Chambré has promised. Although CAT is now more likely to buy in individual products than other companies, he said further deals could be expected when OGS was integrated.

CAT is targeting £10m of annual cost savings from cutting administrative staff at OGS in Oxford and selling property. There will also be a cull of the least exciting drug development work to save further cash and the combined group is expected to have an annual cash burn of about £50m.

The biotech industry has fallen as dramatically from investor favour as internet companies. The UK sector has suffered a chronic shortage of funds and few investors believe many businesses will survive to turn a profit. CAT has tumbled from £29 at its peak and fell a further 40p to 500p yesterday. OGS is down from £48, but jumped 32.5p to 185p on news of the takeover.

The deal was sealed after CAT settled two long-standing patent disputes last month.