Doubts dominate biotech babes

The sparkle of biotechnology is turning out to be a disappointingly damp squib for investors.

Last week's long-awaited announcement by British Biotech, the leader of the biotechnology pack, on its potential blockbuster anti-cancer drug Marimastat extended November's successful findings about the drug.

But instead of the euphoria of November, when the company's shares soared nearly 50 per cent overnight, the shares drifted back on Friday, after a brief surge to around pounds 38, to close at pounds 27.90. That is some pounds 2.40 below their price before the latest news.

Perhaps just as surprising, the rest of the sector, which was dragged up in the explosion in British Biotech's shares last year, has this time stubbornly refused to respond.

Many in the City remain seriously sceptical about biotech companies, despite the surge in share prices during the past six months, which has seen them grow to a pounds 4bn sector.

For investors who have seen the value of their stake in British Biotech multiply more than five times over the past 12 months, the temptation to sell and lock in profits must have been difficult to resist. Many professional investors only started to turn more positive about the sector last year.

As it has mushroomed in size, it has become increasingly hard to ignore even by those who steered clear at first. But there is also evidence that institutional fund managers still remain very wary about biotechnology. Employing analysts who are experts in the field, many are particularly cautious about the heady valuations being attached to companies which make no profits and have no products to sell.

One big London fund manager describes as "quite terrifying" the recent capitalisations of the biotech companies. "I can understand why people are investing in them, but at these levels it is getting a bit hairy. I don't think [the current] ideas are any more viable than five years ago, when we last had a biotech bubble."

That view is echoed by a senior manager at one big Scottish institution. "We like to invest in things we have a good understanding of and this sort of thing presents us with a serious difficulty. It is a real fundamental problem. Science is very imprecise and although it can often help you decide what is a winning strategy, it can never predict what will be a winning product."

Another institutional investor with "modest" funds in the sector is sceptical about the sort of valuation methods being applied to biotech companies. When people are trying to estimate returns from drugs way into the future, "you could work out circumstances where the price of shares is 100 per cent wrong, both on the downside and on the upside."

He views calculations by analysts of future values using discount factors and capital asset pricing models as "a bit bookish and academic". At the end of the day it comes down to a matter of judgement, he believes, and at the moment he sees the main question as whether British Biotech can become a serious drugs company.

"There is a bit of hype in it at the moment," he says. "The balance of risks is tipping into this being a bit of a bubble."

Jeremy Curnock Cook of Rothschild Asset Management, who has probably one of the longest track records in the biotechnology investment business, puts the UK's fledgling market into context. He points out that there are around 260 listed biotechnology companies in the US, against just 15 over here. "The UK is a market with slightly different characteristics to the US. For a start, it's much smaller, so when investment sentiment turns positive, it's spread over a smaller number of companies and my view is that tends to have a greater effect than is the case in the US."

There are also a great many more analysts covering the industry across the Atlantic and they tend to take the risks to the sector more seriously than their UK brethren. He estimates that if British Biotech were translated to the US, it would be valued at somewhat over $500m in the US, a fraction of the pounds 1.6bn capitalisation put on it by the London market.

The US has become a serious industry, generating most of the $10bn annual sales now clocked up by biotechnology companies around the world. A drug like Epo, an anaemia treatment developed by Amgen of the US, alone represents sales of $2.2bn.

The UK sector is showing growing evidence of solidity, surviving shocks like the abandonment by Celltech of a key anti-asthma drug in February. But Mr Curnock Cook concurs with other UK fund managers who say that what would really transform the industry would be evidence that a company can take a product all the way through to market.

He draws comfort, however, from the fact that over the past two years the mainstream drugs companies have come to provide at least as much investment in the biotechnology sector as the public equity markets. A real partnership is growing between the two sides of the industry, which he says gives him comfort for the outlook over the next five to 10 years.