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Friday, 4 January, 2002, 17:34 GMT
Biotechs fight to win back investors
By BBC News Online's Mike Verdin

Batten down your centrifuges, cushion your test tubes, stow your pipettes.

Cloning pioneer PPL Therapeutics, the firm that gave us the world's most famous sheep, Dolly, has whipped up a storm again.

You could argue a correction was needed [but] they never deserved to go down that much

Sam Williams, analyst at Robertson Stephens
Dolly, it now appears, has not just the same genes as her "mother" but the joints of an ovine granny, raising doubts over the usefulness of cloning.

This news came hard on the hooves of an announcement which saw PPL become one of the few firms condemned both for its business ethics as well as the ethics of its business.

Headline coup

By, on Wednesday, trumpeting the birth of its next-generation pig clones before seeking a peer critique, PPL stole publicity from beneath the snout of US rival Immerge Bio Therapeutics, some observers said.

IBT, which produced similar piglets in September, had observed protocol by keeping the breakthrough under wraps until it had been reviewed by outside scientists.

So it was PPL which claimed another first for its laboratories near Edinburgh, and saw its stock price soar by almost 50% to 73.5p in a day.

While the shares have retreated since the emergence of IBT's claim, and Dolly's ailments, they ended the week 20% more expensive than they started it.

Not bad in a sector which depends for its lifeblood on attracting outside investors, yet has suffered a dramatic leaching in market confidence.

Four letter word

Shares in biotechnology firms have proved among the duffest performers in a dismal period for stockmarkets.

With a high mark-up, huge market, and patent protection for 10 years or more, you are talking huge profit potential

Sam Williams
The sector has been damned by its "tech" tag, at a time when the word has achieved four letter status in investors' eyes, analysts said.

Shares in biotechnology firms have followed those in information technology companies - steeply lower - since the bubble burst in March 2000.

PPL stock was then 250p, while British Biotech stock has lost almost two- thirds of its value since, and Oxford Glycosciences shares dropped by three quarters.

"You could argue a correction was needed," said Sam Williams, analyst at Robertson Stephens.

"But it just seemed that it was because it was a technology sector that shares suffered the way they did. They never deserved to go down that much."

Wane and wax?

There is, to be fair, a certain symmetry between the histories of the two sectors.

Both were nurtured in California, where pioneer Genentech was founded in 1976, have made fortunes for sharp investors, and lost fortunes for others.

Markets watchers longer in tooth, and perhaps burnt of finger, may remember the biotech bubble which burst early in 1997, as promising medicines failed successfully to complete the journey from test tube to pharmacy jar.

But, consultancy Ernst & Young has argued, the UK biotech sector is poised at last to culture something nearer prosperity.

In the European biotech sector, which Britain leads by most measures, the number of companies has risen from 586 in 1996 to near the 1,400 boasted in the US.

When you invest in a biotech firm, you invest in its potential, the chance for higher returns than you can achieve with your Glaxos

Biotech investor
Treatments such as Frovatriptan, an anti-migraine medicine produced by Wokingham-based Vernalis, have won regulatory approval and are set for imminent release.

And, for drugs reaching the market, their biotech developers are reaping an ever greater take of sales - some 50% these days compared with perhaps 5% a decade ago.

"With a high mark-up, huge market, and patent protection for 10 years or more, you are talking huge profit potential," Mr Williams said.

Rare breed

However, all too often biotech profit has never made it from potential to actual stage. Europe boasts only one profitable biotech company, Celltech.

Even in the US, there are "10 or 11" running in the black, Mr Williams said.

Shares in biotech firms may have fallen over the past two years, but many say they still look expensive.

The average biotech share will trade at a price of some 60 times earnings, compared with about 25 for a more plodding, if copper-bottomed, pharmaceutical giant.

The sector may have looked to corporate solutions to boost its potential - in the US, biotechs announced mergers worth more than $19bn last month, presenting opportunities for cost-cutting.

But, at the end of the development cycle it is products which are "all important", Robert Atwater, managing partner at Thalassa Capital, a newly launched biotech hedge fund.

Hedge fund professors

"When you invest in a biotech firm, you invest in its potential, the chance for higher returns than you can achieve with your Glaxos," Mr Atwater told BBC News Online.

The difficulty for investors is to sort out the sector's bread-winners from its genetically modified chaff.

"For that you need information. You need to know what the potential for a drug under development is, and what its likelihood is for ever getting to market," he said.

Hence Thalassa Capital includes in its management team as many professors as masters of financial markets.

Last word

Investors without laboratory hotlines will have to rely on press articles, reports from the likes of Mr Williams, and company announcements.

For those analysing PPL statements, a word of advice. Think what you like of the potential of the company's research, of the opportunities it presents for medical advance.

But remember that this week's episode is not PPL's first demonstration of questionable timing.

When the firm unveiled first-generation pig clones in 2000, it named one Dotcom.

"Any association with dotcoms right now seems to have a very positive influence on a company's valuation," managing director Ron James said.

He was speaking four days into a Nasdaq slide which turned out to be the worst in the history of the bellwether tech index.

See also:

02 Jan 02 | Sci/Tech
New pig clones born
14 Mar 00 | Sci/Tech
Scientists produce five pig clones
09 May 01 | Sci/Tech
Australian researchers clone pig
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