COMMENT
Looking For Biotech Bargains, Part II

By Ed Bowsher (TMFArkle) (TMF Arkle)
October 28, 2005

Last Friday I wrote a guide to some of the biotech basics. This week I'm writing a brief introduction to three of the most promising UK biotechs.

Vectura (LSE: VEC)

Vectura had a big success earlier this year when it signed a licensing deal with Swiss drugs giant Novartis. This was one of the most impressive deals in the history of UK biotech.

Novartis has paid an initial $15m to Vectura for the rights to a respiratory treatment called NVA-237. That figure could rise to $177.5m depending on future success with the regulator, and eventual sales. On top of that, Vectura could be paid royalties probably in the region of 5 to 10% of total sales.

NVA-237 is in mid-stage (Phase II) clinical trials, so it may never get to market. But if it does get the thumbs-up, it could be prescribed on its own or in combination with another Novartis drug. Broker Nomura reckons sales from both therapies could reach $2bn a year. Not bad for a small British company with a £90m market cap!

Vectura is also developing a promising rival to Viagra, and it could win some other deals for its inhalation technologies.

Oxford Biomedica (LSE: OXB)

Oxford Biomedica is the purest biotech of the three companies in today's feature. It's using true 21st century technology - gene therapy.

OXB's most important product is Trovax, a potential treatment for colorectal and renal cancer. It might also be used to treat other cancers in time. OXB recently announced decent Phase II data for the drug, and the company hopes to start Phase III trials next year.

OXB's share price has had a very good run this year on excitement about Trovax and takeover rumours . However, the share has fallen back in the last fortnight after OXB hinted that a Trovax licensing deal probably wouldn't be struck this calendar year.

If OXB doesn't find a licensing partner in the next 12 months, cash may become an issue, and there could be a dilutive share issue to raise cash.

Still, worries about cash and licensing will be forgotten if Trovax is launched on schedule in 2009.

Phytopharm (LSE: PYM)

Phytopharm has the potential to be a strong performer over the next few years, although it's a high risk bet.

Strictly speaking, Phytopharm isn't a biotech at all. It's not working with monoclonal antibodies, proteomics or other new-fangled technologies. Instead it's developing new medicines from plants.

Phytopharm's most exciting product is called Cogane. Remarkably, this drug may be able to reverse the progress of Alzheimer's - something which no current treatment can do. Results from a crucial clinical trial are due in December. When those results come out, the share price should either soar or tumble. I'd be very surprised if it moves sideways.

Even if Phytopharm announces good results, further trials will be needed, and the earliest likely launch date is 2011. Analysts have estimated that Cogane sales could be as high as £2bn a year, and Phytopharm's cut from that will probably be between 10 and 20%. But don't get too excited. Right now, there's an approximate 80% chance that Cogane will fail to get to market in the end.

Phytopharm is also working on an appetite suppressant called P57. This product has been licensed to Unilever (ULVR) and could be added to meal replacement products such as Slimfast from 2008 onwards. That's assuming P57 gets through two more clinical trials in the next couple of years.

Phytopharm's current market cap is £20m, so there's plenty of potential upside. However, if you buy shares now you're effectively taking a punt that one of Phytopharm's two leading products will hit the big time. Very risky......

Indeed, all three companies are high-risk, and they're all losing money. Vectura is the lowest risk of the bunch, but even Vectura could inflict some serious damage on your wealth if a couple of clinical trials went wrong.

Ed owns shares in Phytopharm.