Cel-Sci and some other small US biotechs that trade on Euro markets may get better exposure with the merger activity discussed in this article.
"Top Financial News Sun, 27 Jun 1999, 1:35pm EDT
European Biotech Companies Attract Investors in
Search of Merger Premiums
By Dane Hamilton
Mergers Prompt Funds to Revisit High-Risk European Biotechs
London, June 27 (Bloomberg) -- Nora Frey, fund manager at
Switzerland's BB Biotech AG, Europe's biggest biotechnology fund,
previously looked mostly to the U.S. for investments in high-
growth bioscience stocks. Not any more.
With a spate of mergers in the European and U.K.
biotechnology industry and the prospect of more to come, Frey is
looking to shift some funds to Europe. And she's not alone.
With several stock prices close to all-time lows and many
institutional investors unwilling to touch any but the largest-
capitalized, low-risk biotechnology investments, some companies
are choosing to merge to attract investors.
That's good news for fund managers because mergers -- like
that announced last week by the U.K.'s Celltech Group Plc and
Chiroscience Group Plc -- create companies with more potential
products, more investors and better stock liquidity. One- or two-
product companies, which once found willing investors, are way
out of favor in Europe.
''European companies are maturing and liquidity is
improving, so we're taking a closer look at European biotechs,''
said Frey, whose $866 million fund holds stakes in North American
biotechnology companies like Medimmune Inc., Centocor Inc.,
Aviron and BioChem Pharma Inc.
In London's financial community, interest in mergers between
biotech companies -- some of which only recently joined the stock
market -- is high, if only for the hope that such moves will give
a spur to shares which have dragged down investors' portfolios.
More Mergers
Nomura International, for instance, owns stakes in Xenova
Plc, Quadrant Healthcare Plc and Phytopharm Plc, all U.K.
biotechs capitalized at between 40 million and 80 million pounds
($64 million to $128 million). David Porter, Nomura's head of
health-care corporate finance, said he would be ''disappointed''
if there aren't at least six more mergers involving U.K. biotech
companies in the next six months.
''There is a lot of pressure for people to do things,'' said
Porter, who engineered one of the first mergers this year in the
industry, Shield Diagnostics Group Plc's $74 million purchase of
Norway's Axis Biochemicals ASA, creating Axis-Shield Plc. ''A lot
of investors just won't play in the small caps. It's much easier
to do a fundraising on the back of a consolidation.''
The European biotechnology industry now extends to some 70
publicly traded companies, according to consultant Ernst & Young.
Most were formed in the past 10 years as entrepreneurs set out to
mimic the success of older and now profitable U.S. biotechnology
companies like Amgen Inc., Chiron Inc. and Genentech Inc. Such
companies typically make losses for years, relying on investor
funding and agreements with big drug companies to finance the
development of what they hope will be profitable drugs and
medical products.
Hopes Dashed
In recent years, though, many investors were burned as
expectations that lucrative products were just round the corner
proved too optimistic. One of the most damaging cases was that of
British Biotech Plc, which in 1993 became the first European
biotechnology company to go public.
British Biotech shares surged to a record 290 pence in 1996
-- valuing the company at nearly 2 billion pounds ($3.2 billion)
-- on hopes that marimastat, a cancer drug it is developing,
could cure the disease.
Now its shares are worth little more than 5 percent of that
peak price, after setbacks in the progress of marimastat and
other British Biotech drugs. Stock market regulators in the U.S.
and U.K. this month both cited the company for misleading
shareholders over the outlook for Zacutex, a drug it tried and
failed to bring to the market to treat pancreatitis.
Spreading the Risk
Other European biotechnology companies, including Scotia
Holdings Plc, Biocompatibles International Plc, Neurosearch A/S
and Cortecs Plc, also hit difficulties in developing their main
potential products, leaving investors holding stocks valued in
pennies rather than pounds. Now many companies can't attract
investor interest unless they spread the risk across more
products, to cushion their shares against inevitable declines
should one product fail.
''There are a number of reasons why just being bigger is
better,'' said Guy Wood-Gush, director of corporate finance at
Robert Fleming & Co., which executed Celltech's 331 million-pound
stock purchase of Chiroscience, a surprise move that created the
biggest emerging European biotechnology company. ''So many
companies have had such a difficult time on the stock markets.''
Already the industry has seen the start of what is expected
to be a substantial consolidation.
Consolidation Under Way
Recently, Peptide Therapeutics Plc, a vaccines developer,
bought OraVax Inc., a U.S. rival, for $15 million in cash and
shares. And offers pending include one from Valentis Inc., a U.S.
drug developer, for PolyMasc Plc for $20 million, and Proteus
International Plc's for Therapeutic Antibodies Plc for 24 million
pounds in stock. Core Group Plc, once a favorite among analysts
and investors because its products were expected to be among the
first to reach the market, said last week it's in merger talks.
Consolidation hopes are also fueled by a recent spate of
purchases of U.S. biotechnology companies by big drugmakers,
demonstrating the intrinsic value of such science-based research
companies to the $300 billion pharmaceutical industry.
Abbott Laboratories Inc., for instance, last week offered
$7.3 billion in stock for Alza Corp., while Pharmacia & Upjohn
Co. the previous week offered $650 million in stock for Sugen
Inc. Last month Warner-Lambert Co. bought Agouron Pharmaceuticals
Inc. for $2.1 billion, and investors betting Centocor Inc. may be
next sparked a surge in its shares this month after up the
Malvern, Pennsylvania-based company held acquisition talks with
Johnson & Johnson, according to a person familiar with the
situation.
Technology 'Underpriced'
''Everyone in the sector is looking at everyone else,'' said
Andrew Clark, a fund manager with Finsbury Technology Trust, a 55
million-pound U.K. fund that buys bioscience and other technology
stocks. ''Companies are just too small and lack critical mass.''
Furthermore, said Clark, ''there is a lot of high-quality
technology that is very underpriced.''
As speculation rises about who may be next to seek a partner
-- with analysts highlighting as candidates older U.K. drug
developers like Cantab Pharmaceuticals Plc, Vanguard Medica Plc,
British Biotech and Shire Pharmaceuticals Group Plc -- not
everyone agrees bigger is necessarily better.
Some say companies should stick to developing their
technology, rather than focus on distracting corporate activity,
which may double the number of products but make it harder for
the company to keep track of its business.
Moreover, many companies are so small compared to U.S.
counterparts that they would have to engage in a number of
mergers to even get out of the FTSE Fledgling Index, an index
that embraces all the London stock exchange's companies too small
to be listed in the broad-based All-Share index.
''You put two farthings together and you still only make a
halfpenny,'' lamented Iain Ross, chief executive of Quadrant
Healthcare. ''A lot of small companies could get together but I
don't know if they will achieve critical mass.'' |
