The next generation

The distinction between biotech and pharma is becoming increasingly blurred. It is now commonplace for pharma and biotech companies to forge alliances and partnerships and, as a result, the most promising biotech companies have the opportunity to translate themselves into the next generation of pharma companies.

Economically, the UK is finally beginning to close the gap with the US biotech sector, with an increasing number of UK biotech companies now posting profits.

However, global stock market analysts still tend to regard pharma in a much more favourable light than biotech companies so price their shares accordingly. The biotech sector is viewed as risky, due to variable cashflow and drug discovery rates.

The main advantage the best biotech companies have over pharma is that they are the source of many of the drugs discovered. Pharma companies, plagued by generic copy-cat drug producers nibbling at their blockbuster drug revenues, tend to depend on biotech as a source of late-stage drugs to supplement their own R&D programmes.

Strong contenders
One biotech company that may become a pharma specialist is SkyePharma ñ a promising firm with a couple of launches under its belt.

At the end of last year, SkyePharma jointly launched DepoDur, a post-operative pain reliever, in the US with its partner Endo Pharmaceuticals. As a result of the partnership, SkyePharma received milestone payments from Endo amounting to $5m.

The company has also launched Depocyt, a treatment for lymphomatous meningitis, in the US via a partnership deal with Enzon Pharmaceuticals, Nippon Shinyaku and MundiPharma.

Key to the success of SkyePharma's next full-year results is clinching a deal to license out its pulmonary portfolio. This market is valued at around $30bn and SkyePharma will make a loss if a deal is not sealed in the second half. SkyePharma also has an environmentally friendly version of AstraZeneca's asthma inhaler, Pulmicort, in phase III trials.

Another promising player is vaccine specialist, Acambis. The company is robustly profitable, having achieved record profits of £39.4m on sales of £169m in 2003. Acambis gets a solid flow of income from its lucrative smallpox vaccines contract with the US government. Recently, US drug regulator, the Food and Drug Administration, granted fast-track status to the company's smallpox vaccine, ACAM2000.

However, last year Acambis suffered a setback when the US Centers for Disease Control and Prevention decided not to buy the 26.5 million smallpox vaccine doses it had ordered. Instead of making revenue estimated at £90-140m, the company estimates it will make £85-90m in 2004.

Acambis' closest vaccine to market is ChimeriVax-JE for the prevention of Japanese encephalitis. Although 18 months behind schedule, it heads into late-stage trials this year. Another future winner is ChimeriVax-West Nile, to prevent West Nile virus.

The company should also benefit from the US government's bioterrorism scheme Project BioShield. To do so, it will need to produce a diluted strain of smallpox vaccine for vulnerable patients.

Cash mountain
Another biotech company with a bright future is Ark Therapeutics, which came to the fully-listed stock market only last year. The previously loss-making company can soothe institutional investor nerves on the debt front, as it now has a cash mountain of £54m to get it back on its feet.

Ark has a portfolio of drugs coming through the pipeline. Future winners include Vitor to treat cancer-related muscle wasting. This is now in phase III trials. Cerepro, a gene-therapy drug for the treatment of malignant brain tumours in phase II trials is also looking promising and is estimated to reach peak sales of £300m.

Ark has also launched Kerraboot, a leg and foot ulcer dressing device which cuts nursing time spent changing dressings. It is currently being used in the UK and due to a recent agreement secured with Teva Medical is soon to be employed in Israel.

Healthy scepticism
Some, however, do not believe that biotech will take on pharma in the future. Andy Smith, manager of 3i's Biotechnology Investment Trust, explains: Where's the attraction to the biotechs in becoming pharma companies given the pressures the pharma companies are under?

Even in the US, major biotech players such as Amgen and Genentech are not regarded as pharma companies. Biotechs concentrate on the higher profit-margin drugs while pharmas tend to cater for mass markets offering lower profit margins than the archetypal biotech drug.

Whatever the future holds for biotech, prospects are promising and the sector will be more than capable of holding its own against the pharma giants.

The Author
Malcolm Craig is one of the country's leading commentators on the investment sectors and the author of 12 books on successful investment