THE WORLD'S DOCTORS write more than 1,100 prescriptions for GlaxoSmithKline medicines every minute. The company made pre-tax profits of £6.7 billion ($11 billion) last year. Making people better is big business.
UK pharmaceuticals group GSK's products treat asthma, depression, diabetes, migraine, nicotine addiction and a host of other ailments. But GSK hasn't always been so multi-faceted. Long before its merger with SmithKline Beecham, Glaxo Wellcome's growth was largely driven by the success of a single product, Zantac, which soothes ulcers, indigestion and heartburn.
"That's the beauty of this industry," says Chris Collins, chief executive of life science and medical technology specialist Code Securities. "You can suddenly develop a blockbuster that sells in billions every year and is protected by patents for 10 or 12 years."
Because blockbuster drugs that generate over $1 billion a year can transform a company, global pharmaceuticals companies like GSK ? big pharma ? invest heavily in research and development. GSK spent £2.7 billion on R&D in 2002.
But internal R&D programmes are not providing enough blockbusters. So big pharma is turning to smaller companies specializing in biotechnology that, in Europe at least, are often short of cash.
Biotechnology is any process, such as brewing, that uses living organisms to make or run a commercial or scientific product or process. Today, the term is commonly used to describe the use of genetic science to create medicines and drugs.
A modern biotech is unlike any other business, and financing it is concomitantly difficult. Getting a drug from the idea stage to regulatory approval can take more than 10 years. Last December, management consultant Bain & Company calculated that the average cost of discovering, developing, and launching a new drug had risen 55% since 2000 to a staggering $1.7 billion. The figure is so high because it includes the cost of discovering, developing and testing drugs that don't make it to market. For every Zantac, literally tens of thousands of potential new products fail.
So a biotech can burn cash for a decade before it starts making any money. Even the earliest stages of drug research involve testing as many as a million combinations of chemical compounds and proteins. This is technology intensive and needs large investment.
After refinement, human testing starts in three-phase clinical trials. Crudely, phase I establishes if a drug is safe. Phase II finds out if it works. Phase III repeats phase II on a larger sample of patients.
A developer then takes its drug to the regulators. Roughly two-thirds of drugs are denied approval. With these rates of attrition, investing in a biotech business is a high-risk affair.
"If done the wrong way, this can end up like making massive bets at the races," says David Schulman, a London partner at law firm Dechert. "Risk one is whether you can tell good science from bad science: will things work therapeutically and in a safe way? Risk two is patent law: do you have a monopoly and for how long? Risk three is the regulatory wild card, because sometimes approval doesn't come through in a timely way or with the right prescription label."
Investors trying to spot the next GSK by investing in biotechs are playing molecular roulette.
This is less of a problem in the US. The American biotech industry is 10 years older than its European counterpart, and a specialist investor community has grown up to fund it. "In the US there are funds focused on healthcare and biotechnology that can analyze this sector to death," says David Rasouly, a biotech specialist with Nomura International in London.
London's potential
Europe is different. Outside the US, the UK biotech industry is the most advanced in the world. And while US healthcare and specialist biotech funds are dispersed around the country, London is potentially biotech's single most important financial centre.
"There is more money for biotech in London than in New York, although probably less than in New York and Boston combined," says Code's Collins. "If we can get the London market excited, it has the greatest concentration of biotech finance in the world."
The problem is that London has been excited about biotech before. The industry caught the imagination of the mid-1990s' bull market, and investor interest peaked with the mapping of the human genome in 2000.
As biotechs failed to deliver not just blockbuster drugs but, in many cases, any revenue-generating products at all, the bubble burst. It has taken some high-profile casualties with it. PPL Therapeutics, which cloned Dolly the Sheep, was once valued at £500 million. But it ran out of cash and put itself up for sale last year. In February, PPL confirmed that it was in talks with an unidentified potential buyer, which reportedly values the company at around £6 million.
European biotechs faced a funding crisis last year. It is the public markets, not the private equity markets, that have dried up. According to Ernst & Young's 10th annual European Biotechnology Report, published in May, the amount raised through biotech initial public offerings in Europe collapsed from over e3 billion in 2000 to e24 million in 2002. In the same period, the amount of venture financing raised hovered between e1.1 billion and e1.32 billion.
"Venture capital funding has been pretty constant," says Tim McCarthy, finance director of UK drug development company Alizyme. "The VCs are not short of money, and the specialist biotech funds have raised money quite successfully over the last couple of years."
They've had little choice. Because of the dearth of IPOs and other exits, they've had to keep investing. London-based Merlin Bioscience raised e62 million for the first major seed fund for UK biotechs in 1997. Its fully committed Fund II, which closed four years later, totalled e247 million and is one of the largest dedicated healthcare venture capital funds in Europe.
A handful of listed European biotechs went back to the markets in 2003. In February, Alizyme raised £16.1 million by issuing over 57,000 new shares at 28p a share. By the time it raised £11.5 million in October, Nomura was able to place new shares at 168p each. Antisoma, which is developing anti-cancer drugs, completed its £15.2 million placing and open offer in December. In the same month, Xenova Group's £21.1 million financing through UK and US share placings and an open offer was the largest fundraising by a UK-listed biotech company in 2003. Xenova also specializes in cancer treatment.