Touch Of The Flu For British Biotech

Biotech investments can be like that old saw about second marriages: They represent the triumph of hope over experience. That dictum certainly seems to apply to Britain's biotech industry this year. Biotech companies are still finding backers, despite the industry's spotty performance record. But increasingly, those backers are big corporate partners, while institutional and private investors grow wary.

Britain's biotech industry, second in size only to that of the U.S., has yet to roll out a single commercial product from its labs, which are working on everything from cancer drugs to reengineered food crops. Investors are accustomed to lengthy waits in biotech, but what they haven't liked in Britain is the spate of bad news hitting some of the industry's flagships.

NOSEDIVE. First, British Biotech PLC halted the latest trial of an abdominal cancer drug because of a production problem. Fixing the glitch may delay the drug's launch by an additional 12 months. The news wiped out more than $110 million in the company's market value, before the stock recovered some ground. Two weeks later, Cantab Pharmaceuticals PLC said its corporate partner, Baxter International Inc., had discovered in clinical trials that Cantab's drug to prevent kidney transplant rejection wasn't any better than a placebo. It was Cantab stock's turn to nose-dive--by some 40%.

The Cantab and British Biotech debacles "heighten investors' awareness that this is a risky business," says Stephen W. Bunting, a director of Abingworth Management Ltd., a venture capital firm that recently raised $50 million to invest in American and British biotech ventures. Now, even the biggest hotshots are pulling back some. Chris Evans, the Welsh academic who has formed three biotech companies since 1987, has called a halt to further startups. Says Evans: "I don't want to stretch my credibility too thin."

Fortunately for Evans and other industry executives, they are still finding established drug companies that want some sort of biotech product in their portfolios. More and more, the biotech companies are relying on payouts from conventional pharmaceutical manufacturers. The mainstream companies are agreeing to finance drug trials in stages, in exchange for marketing rights to the compounds once they get the nod from regulators. Evans' Chiroscience, for instance, boosted its staff by more than one-third last year, to 150 employees. Its deep-pocketed partner, Italian drugmaker Menarini, is aiming to launch the Cambridge-based company's first drug in Europe this summer--an anti-inflammatory called Dexketoprofen.

Celltech, based in Slough, also has a strategy of licensing out products that is being closely watched by other companies in need of product-development funds. Founded in 1980, Celltech has alliances with Bayer, American Cyanamid, and Schering-Plough. Each of these alliances is a relatively low risk to the larger partner but a major boost for Celltech.

SEPTIC SHOCK. One of Celltech's most recent and biggest deals is with Merck & Co., which has agreed to pay Celltech a total of $50 million in stages if its once-a-day asthma drug reaches the market, then double-digit royalties on sales after that. Although the drug is only in early clinical trials, analysts figure it could generate sales of more than $750 million per year if it gets regulatory approval. More advanced is Celltech's septic shock drug, developed with Bayer, which could hit the market by 1998. Since British Biotech and Cantab have their problems, Celltech has become the industry's best shot at a U.S.-style success. That's why Celltech stock reached an all-time high recently of around $4.72 a share.

In another deal, Edinburgh-based PPL Therapeutics in late January extended its research collaboration with Denmark's Novo Nordisk to develop novel proteins, including a potential blood clot dissolver. The collaboration was cemented by Novo Nordisk's decision to take a $5.3 million equity stake in PPL Therapeutics. Predicts Jason E. Avery, a biotech finance expert at Ernst & Young: "We'll see even more companies entering into partnerships at an earlier stage."

The question is what happens to the marginal players that need godfathers but cannot get them. The growth of partnerships might accelerate the emergence of a small number of winners from Britain's 100 or so biotech startups, with the rest turning into losers. Even then, the strongest companies will have to manufacture something more than promises. "We've got to prove we can really deliver," says Celltech CEO Peter Fellner. That proof may still be years away.