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Britain's Bedazzling Biotech Stocks


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BRITAIN'S BEDAZZLING BIOTECH STOCKS

British Biotech doesn't have a product to sell. But in just three days in late May, its market capitalization surged to nearly $3 billion--up 17%. The flurry of excitement was sparked on May 21, when the Oxford company presented promising results from clinical trials of its anticancer compound, Marimastat. Although the stock has since settled down from $51 a share to around $41, investors are wagering that British Biotech could produce the first blockbuster drug to come out of Europe's fledgling but fast-growing biotech industry.

Investors in the 10-year-old startup are not alone. Since January, shares in Britain's emerging bioscience sector have risen 39%, as measured by Nomura Research Institute's biotech index. As of June 7, the index, made up of 20 publicly traded companies, had outpaced the overall London market's gains by nearly 40 to 1 so far this year. Fueling the rise is favorable clinical news from industry flagships such as British Biotech, Scotia Holdings, and Cortecs International. "It's not just an airy-fairy science story anymore," says Jeremy Curnock Cook, director of Rothschild Asset Management's biotech unit, which runs two global funds with combined assets of $435 million.

"RIDICULOUS." But the high-flying share prices are prompting skeptics to warn that the fresh enthusiasm for European biotech may be just a speculative bubble. Investors such as Henrik Rhenman, manager of SE Banken's pharmaceutical fund, point to the "ridiculous valuations" of many European stocks, compared with America's larger biotechnology sector. And unlike U.S. biotech giants such as Amgen and Genentech, no publicly traded British biotech company has a blockbuster drug on the market. Few can show hefty sales, let alone earnings.

Nonetheless, the sector's recent slowdown following the flurry in May could be a buying opportunity. And one of the most interesting picks remains British Biotech. Trials showed that the company's Marimastat stopped or slowed the progress of pancreatic and ovarian cancer in 56% of patients at the optimum dose, as measured by levels of antigen, an enzyme produced by cancer cells. Assuming an orally administered drug could act against a wide variety of cancers, analysts are estimating that peak annual sales could reach $1.5 billion by 2003.

British Biotech's rising fortunes are rubbing off on other startups. And new biotechnology ventures are popping up fast. Although there are only about 28 publicly traded companies, mostly in Britain, Ernst & Young estimates at least 584 entrepreneurial bioscience companies are scattered across Europe--up some 20% from 1994.

Spurring growth is the rapid restructuring of Europe's pharmaceuticals industry. With the mergers between Switzerland's Sandoz and Ciba-Geigy and between Britain's Glaxo Holdings and Wellcome Foundation producing huge cutbacks in jobs, many former executives are becoming entrepreneurs. For example, in Britain, former Glaxo senior executive John Padfield has become chief executive officer of Chiroscience, which has completed Phase III trials for Levobupivacaine, an anesthetic.

The sizzling market for biotechnology stocks is also encouraging more startups to sell shares to the public. In early June, Scotland's PPL Therapeutics, which is doing research on sheep to help produce human medicines, raised $62 million in an initial public offering on the London Stock Exchange. On the London market alone, the combined capitalization of emerging bioscience companies tripled last year, to $4.7 billion. Now, with new bourses such as Nouveau Marche in Paris, London's Alternative Investment Market, and the planned launch of EASDAQ, a Brussels electronic market for high-tech startups, there could soon be more bioscience flotations--including Germany's MorphSys, France's GENSET, and Denmark's NeuroSearch.

CURRENCY RISKS. Meantime, naysayers such as Rhenman are mostly being ignored. Despite the sector's long-term volatility, investors keep pouring money in. U.S. investors can find a handful of the stocks listed as American depositary receipts on the NASDAQ system, including British Biotech, Cortecs, and Cantab. Or, most full-service brokers can help them buy shares on the London exchange. Of course, foreign shares carry currency risk. If you buy a stock in British pounds and the dollar strengthens, you could forfeit gains or even lose money. But "the rewards are very high if you get it right," says James Noble, British Biotech's finance director. He should know. Soon after his company reported its first promising clinical results with Marimastat late last year, he exercised stock options, netting some $2.5 million. Such numbers are bound to spur the search for Europe's Genentech.EDITED BY AMY DUNKIN By Julia FlynnReturn to top


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