In the first of an occasional series, one Fool looks at two of the better UK biotechs.
Biotech is a very risky investment area. Share prices can tumble 50% in a week. But the potential rewards are large too; so here's a look at two of the UK's more promising biotech companies.
Vectura
(LSE: VEC)
I like Vectura because, by biotech standards, it's relatively low risk. It has five products in mid-stage Phase II trials, plenty of cash in the bank, and some impressive licensing deals too.
The most impressive deal is with Novartis, the Swiss drugs giant. Novartis may end up paying $177.5m (£94m) to Vectura for a respiratory treatment called NVA-237, and on top of that, Vectura will receive a royalty on sales -- perhaps around 6%. Broker Piper Jaffray reckons the product could be launched in 2010 and peak sales might be as high as £1.7bn a year.
So, scribbling on the back of a fag packet, if sales hit £800m by 2013, Vectura might receive something like £48m a year in royalties. That's an excellent return for a company with a £162m market cap (96p share price.)
There is a catch though. 237 is far from a dead cert. It's successfully completed Phase II trials, but the Phase III stage is yet to come. That means there's a 40 to 50% chance that 237 will fail to reach the market. And even if 237 does get the thumbs-up, there might be delays or it might not be as successful as some observers expect.
Vectura's second biggest plus point is its cash pile. It had £29m in cash in May and then raised a further £43m in a placing last month. The cash means that Vectura can take a couple of its products through to the end of clinical trials which should allow it to retain more value.
And then there's VR315, a promising asthma treatment. Vectura has already done a European licensing deal for this product; a US deal may be signed later this year and that could deliver a modest fillip to the share price.
If 237 fails, Vectura's share price would be badly damaged, but you wouldn't lose all your money. In fact, even without 237, you might make a profit if you stayed invested for the long-term. So for me, Vectura is definitely one of the UK's better biotechs.
Antisoma
(LSE: ASM)
I wrote about Antisoma earlier this month after several directors bought shares in the cancer biotech. These purchases followed a decision by Roche to give up licensing rights to two of Antisoma's leading drugs, even though trial data for one of those drugs, AS1404, suggested that further clinical trials would be well worth doing.
Since then, I've found out a bit more about why Roche may have given up its rights to 1404. One possible reason is that 1404 clashes with two of Roche's current cancer drugs, Avastin and Tarceva. Roche may also have been worried about patents.
I can understand why Roche might have been fretting on the patent front. The core composition of matter patent for 1404 expires in 2011. However, Antisoma has other patents which protect its use in conjunction with other drugs until 2021. What's more, any new drug is normally protected by data exclusivity rules in the years immediately after a market launch -- 5 years in the US.
So, in spite of Roche's pullout, I think 1404 should be of interest to some other larger drugs companies, and Antisoma thinks so too. A statement earlier this month said:
"Over the past two months, there has been considerable interest from potential licensing partners for AS1404. Discussions are advancing with a number of these."
If you buy shares now, you're taking a punt on whether Antisoma can get a new deal. It's definitely a risky bet, but I put some money on the table and bought a few shares a couple of weeks ago.
More: Looking For Biotech Bargains | Waiting For A Fat-Busting Deal
Ed owns shares in Antisoma.
