Small drugs firms make big strides

SMALLER British drug companies are suddenly looking like exciting investments. Sentiment has been helped by a wave of corporate activity, most recently Rhone Poulenc's contested bid for Fisons. Also stimulating interest is a realisation that real progress is being made by some smaller companies.

Two I particularly like are ML Laboratories at 242p and Chiroscience at 237p. Their shares have moved up strongly, in Chiroscience's case on the back of an analyst's visit, but there should be plenty of exciting news from both companies over the next 18 months and beyond to sustain interest.

ML Laboratories is best known for its dialysis solution for patients suffering from kidney failure. But among the other strings to its bow are a therapy for Aids which could also have applications in cancer treatment, and an inhaler for asthma treatment.

One unexpected side-effect of the Fisons bid battle has been to highlight the value of such inhalers, which, in asthma drugs, are an integral part of the product. Licences are awarded by the regulatory authorities not just for a drug but for the specific inhaler used in delivery. This is a highly technical instrument required to deliver exactly the right amount of the drug, in microscopic quantities, to the lungs of a person possibly suffering a severe asthma attack. Since the main drugs are now off-patent and older inhalers are being phased out, new delivery systems assume critical importance.

One of the main planks of Fisons' bid defence is its multi-dose, breath- activated dry-powder inhaler, which is on target for a licence application in 1997.

ML Laboratories has a similar inhaler, but it is probably two years ahead of Fisons, because it has already filed a licence application.

On the Aids front, ML has announced encouraging results from trials for a product using its polymer-based dialysis solution to coat cells produced in the lymphatic glands and protect them from attack by HIV, the virus that causes Aids. This should enable patients to rebuild their immune systems.

Similarly, the company has under development a use of the solution to deliver anti-cancer drugs accurately to some sufferers. Early results suggest that use of the solution reduces the amount of toxin used in chemotherapy by a factor of 2,000 with a consequent reduction in side-effects.

Meanwhile, ML has exchanged contracts on a joint venture with Fresenius of Germany to market its dialysis solution to kidney patients. Fresenius is No 2 in this growing market, and the collaboration should be highly profitable to the group.

Like ML Laboratories, but in a very different way, Chiroscience, capitalised at pounds 159m, has developed a technique for creating effective new drugs rapidly without having to reinvent the wheel. It takes drugs that have come off- patent and reformulates them to work better with fewer side-effects.

The star prospect for the immediate future is a compound called Levo- bupivacaine, which is an extremely powerful and effective painkiller. Its drawback in its original formulation as bupivacaine was that it had adverse side-effects for patients with heart problems, severely limiting the size of the market.

Chiroscience's own version is in advanced trials, and a marketing partner has been signed up. Its name is to be announced shortly. Once it is in production, peak sales could reach $350m (pounds 226m), with Chiroscience receiving chunky access and milestone payments plus a stream of royalties.

The highly technical nature of their products makes it difficult for a lay investor to assess the true value of such companies as Chiroscience and ML Laboratories. But my hunch is that they are about to have their day in the sun.

Investors who like a more dramatic combination of risk and reward could look at Oxford Molecular Group, capitalised at some pounds 67m at 132p. The shares have jumped on news that the group has appointed heavyweight Cazenove as its new stockbroker, reinforcing expectations that the next year or two could see the group making significant profits.

Deputy chairman Dr Tony Marchington describes the group's core specialisation as "understanding the action of binding of small molecules to proteins" and the use of powerful computer techniques to advance that understanding.

It is not an easy-to-understand business but there is no question that Oxford has considerable intellectual firepower and is operating at the leading edge of the process ending with new drug discoveries.