Fool's Eye View

[ September 26, 2000 ]

Scotia Slips Up

By Christopher Spink (TMFEagle)

Great Titchfield Street, London -- Should companies like Scotia (LSE: SOH) be listed on the stock market? Or rather: should I be devoting this space to discussing the travails of this loss-making biotech venture? By lunch the company had lost over half its market value, with investors selling in their droves and sending the share price diving 69.5p, or 56.5%, to a lowly 53.5p.

This plunge happened after the American Food & Drug Administration (FDA) had refused to approve the company's principal product Foscan, a treatment for head and neck cancer. This story brings back painful memories of the fate British Biotech (LSE: BBG) after its main product Marimastat also fell foul of the mighty FDA.

Indeed, both companies were valued at roughly £120m before Scotia's fall this morning. What do you get for backing such an enterprise? Mostly a bunch of company promises, investor hopes (now severely dented) and perennial losses. The only way many individuals make money on such stocks is by trading them, gauging investors' reactions. This is an expensive habit, which only a handful of punters can do and far, far from Foolish.

Think like a venture capitalist

No, if you want to delve into the murky biotech waters, be very careful and think like a venture capitalist. The only people who can really afford to take such sustained losses -- Scotia for example has made £72.5m of losses over the past three years -- are venture capitalists. Indeed before flotation Apax Partners, a noted VC as they are known, held a majority stake in Scotia.

The company floated in 1994 at 286p. The shares reached a high of 797p in 1996 but for the past three years have been below the initial float price. The company also raised money, via share offerings at 320p, 620p on the way up. This January Scotia went back to investors in a desperate attempt to raise £11.2m to survive and continue research. These shares were placed at 146p and have now lost two-thirds of their value as well.

At the end of June the group said it had £18.4m cash. Since the group lost £13.8m in the first half of the year, that means it only has sufficient funds to continue researching and developing its products for another year, maximum. Presumably, though, time and resources spent on looking at Foscan will now be less, following the FDA's rejection.

So if Scotia does wind up its activities and sell its research facility and findings to someone else, then the only beneficiaries will be Apax and its fellow early-stage investors, who presumably took a stake in the company years before flotation. If you want to invest in biotechs, think like a venture capitalist. Be prepared to take losses on some of your ventures, since not all will succeed. And make sure you only invest what you can afford to lose.

Where Next?

Have your say on the Fool's Eye View discussion board, via the resources section below.

Take solace and discuss the fallout on Scotia's shell-shocked discussion board