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Turning a corner

Biotech firms desperately need cash to survive, but raising it has been no easy task. Is the sector about to enjoy an upturn in fortunes or is a crash on the cards?

Biotech firms desperately need cash to survive, but raising it has been no easy task. Is the sector about to enjoy an upturn in fortunes or is a crash on the cards?

After a bleak three years, the biotech sector is back in vogue and appears to be finally turning the corner. Companies seeking cash in the City's capital raising markets found it tough to woo investors between 2001 and 2004. Institutional and private investors were scared off by the risks involved in buying into biotechs, and they decided to place their cash into less risky sectors - or out of the equity market altogether.

However, biotech is now riding on the winds of change, helped by a three-year bull market in UK shares. A flood of investment, which bypassed biotech firms for much of its upward surge, has driven the UK stockmarket up in recent years. From a low of 3,287 on March 12 2003, the universally quoted bellwether of the market's health, the FTSE 100 Index, had stormed to over 6,100 by April 2006; a rise of 86 per cent.

As share portfolios waxed fat and investors took profits for onward investment, some of the cash that had been released started to move into riskier sectors in 2004. Investors, heartened by burgeoning share prices, decided to live a little and broaden their strategies to include more high-risk/high-reward opportunities - and that included the biotechs.

All the current signs point to a sector in a period of resurgence. In December 2005 - the most successful capital-raising month so far - UK biotechs completed deals worth more than £750m. Firms able to convince potential investors that they possess the drive and quality to succeed are having few problems raising vital cash on the market, although caveats remain. Price tags are at bargain basement levels and there is still some investor resistance to the sector. Many analysts are of the opinion that the window of opportunity will only remain open to those biotech firms that are making money now, or are at least poised on the verge of profitability.


Success stories
A number of recent success stories have also attracted investors to the biotech sector. Cambridge Antibody Technology (CAT) broke new ground when Humira, its rheumatoid arthritis treatment, became the first UK blockbuster drug to emerge from the British biotech sector. Protherics managed to clinch a £195m deal with AstraZeneca by licensing CytoFab, its antibody treatment for sepsis, to the Anglo-Swedish company, which has also made a formal bid for the CAT shares it does not already own.

Swiss pharma giant Novartis agreed a £300m deal with Astex Therapeutics for its promising cancer treatments, while US biotech giant Genentech agreed a £133m deal with Piramed. The equation is simple; the more success stories such as these, the bigger the flow of risk capital into the sector.

In the UK, the immediate future looks bright, with several of the leading pharma companies having pledged themselves to agree more deals with biotechs during 2006 and 2007. According to Aisling Burnand, chief executive of the BioIndustry Association, corporate activity in the last six months has demonstrated renewed interest in the biosciences sector.

On the fund-raising side too, there has been renewed investor enthusiasm for bioscience companies both public and private, she says. Vernalis' secondary fund-raising of £53m in December, established a new five-year high in the UK. Lectus Therapeutics raised more money in its series A fund-raising in February than has been achieved by a discovery-stage company since 2004.

She points to the number of successful flotations this year already, singling out that of Renovo for particular praise, as it raised £60m, a healthy £10m more than anticipated.

It is extremely encouraging to witness the increasing recognition of the value of UK bioscience, both through partnership deals and investment activity, she concludes.


Floating towards money
Not all investors concentrate on the arm's-length investment opportunities presented by quoted biotechs. Private biotechs have also offered their attractions to 'hands on' investors. For example, Abingdon-based Chroma has pulled in £30m of investor cash to boost its research into small molecule drugs. Meanwhile, Ingenium of Germany has attracted £6.4m from investors to develop its range of painkillers.

An increasing number of biotechs have managed to raise capital by floating on the UK market, a strategy that has led peers to consider doing the same.

As a company aspiring to go public we keep a close eye on the situation, comments Martin Buckland, chief business officer at Astex Therapeutics. This is not the first time there has been a window of opportunity for the sector; there have been other windows open and closed in the past.

However, he argues that there are a couple of interesting factors about the current window. One is that it has been open for some time. Secondly, the open window seems more robust than before and maybe we are no longer in a feast or famine situation. We could now see a steady trickle of companies going public.

He says that Astex Therapeutics is looking to raise funds via an Initial Public Offering (IPO), probably during late 2007 or early 2008 and most probably on the London Stock Exchange, due to the major disincentives to raising capital via the US NASDAQ market. We prefer our home stockmarket to NASDAQ because the US market has been made less attractive as a result of the Sarbanes-Oxley ruling and its concommitant burden of reporting requirements, public disclosure and conflicts of interest.

He does concede that there are indications the US market recognises the problem and the need to redress it: The London Stock Exchange would be a natural market for us and we would likely aim for a main market listing rather than raising capital via the Alternative Investment Market (AIM). The latter market has attracted a few biotechs with relatively small market capitalisations, raising capital via relatively small IPOs.

AIM for choice
Smaller biotech companies may see market access through AIM as the most sensible option, bearing in mind it offers benefits such as a more flexible regulatory regime and no minimum market capitalisation. Stem Cell Sciences came to the Alternative Investment Market (AIM) last summer, and has so far clinched three deals, with more in the pipeline. Phoqus came to AIM last November to get cash for its drug coating technology. While it floated successfully, it was forced to cut its offer price. The firm's experience illustrated the lack of funding enthusiasm; a perennial bugbear of the European biotech industry.

In the US, there has also been a slowing down of funding, although not to the same degree as in Europe. Smaller US biotechs in particular are facing a difficult situation following the Enron scandal, litigation over conflicts of interest by investment banks on Wall Street, and the drying up of small market capitalisation company research. Such developments effectively mean that many small US biotech companies have no institutional research.

While the European biotech sector has been the poor relation of its US counterpart (with US institutions more willing to invest on the back of high-profile successes, such as Amgen and Genentech), the recent funding situation Stateside for smaller biotechs has mirrored that of the UK. However, the biotech sector giants have experienced no problems on the capital-raising front.

Amgen is the biggest biotech firm in the world. The company's head of communications, Nigel Thornton, says that most of the company's capital raising is carried out in the US. Amgen is quoted on NASDAQ, with a market price tag of around $80bn, a turnover of $12bn and pre-tax profits of $1bn. The firm has injected £1bn into Ireland by way of research and development expenditure and £100m into the UK, where it is planning to create a European Development Centre in Uxbridge, while adding to existing facilities in Cambridge.

Dr Jeremy Haigh, Amgen's European head of R&D says that the expansion will almost double our current UK-based R&D capacity, creating new job opportunities in all aspects of drug development, including clinical research.

Robin Bhattacherjee, senior marketing director at CV Therapeutics Europe, is encouraged by the more positive investment environment: Hopefully, there will be a greater willingness to invest in UK biotechs and start-up pharma companies which, in turn, gives them a much stronger chance to become established, realise their objectives and take the opportunities that might be out there for them. That can only be good for UK R&D.


White knights to smaller biotechs
During the time when smaller biotech firms in the UK and US found raising finance a difficult task, venture capitalists rode in to the gap supplying private equity to small biotechs with promising drugs in phase III trials. One venture capitalist, Celtic, based in New York, is focused on creating a clutch of companies with late-stage drugs and seeing them through regulatory hurdles before selling them to large pharma companies at a tidy profit.

Big US pharma firms are willing to pay premium prices for biotechs with newly-approved drugs, which are immediately earnings enhancing - otherwise they have to write their investment off as R&D expenditure. With almost one-third of big pharma's drugs destined to go off patent in the next few years, it is not difficult to see the reasoning behind this opportunitstic approach.

The UK government is providing more assistance to the biotech sector, recently committing itself to making the country a world leader in biotechnology by attracting more R&D investment. It has introduced financial inducements via R&D tax credits on qualifying expenditure, or by means of a cash sum for loss-making biotechs. Capital expenditure is not eligible for tax credits - this is covered by the 100 per cent capital allowances instead. Between 2005 and 2008, the government has promised to make £370m available to businesses in all industries as direct grants to support more R&D, a measure biotech could profit from.

Each year, businesses, including British biotechs, have the opportunity to compete for funding using two Department of Trade and Industry business support financing channels, Collaborative R&D and Knowledge Transfer Networks.

In addition to taking full advantage of government help, the biotech sector would be well advised to make the most of the cash-raising opportunities available, particularly given the capital raising window's past history of being opened and closed with alarming regularity.

A growing number of City pundits are predicting an end to the current bull market in the UK and inevitably, at some stage, they will be proved right. The one question no one can provide a definite answer to is 'when?' The next bear market could well see funds dry up for biotechs as investors seek less risky homes for their cash, or with UK interest rates set to rise, leave cash on deposit.

The author
Malcolm Craig is the author of 14 books on different aspects of successful investment and a respected stockmarket commentator

2nd September 2008


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