SPECIALS
Talking to Celltech's Richard Bungay

By David Kuo (TMFDragon)
October 4, 2001

Carburton Street, London – Shares in Celltech Group (LSE: CCH), the UK's pre-eminent biotechnology company, have suffered a setback since the beginning of this year. The decline in the value of the company was further exacerbated by the tragic events of 11 September, when the terrorist attacks on America unsettled global markets. The biotechnology sector was not immune to the sell-off that saw drug stocks decline in line with other non-drug related issues. But shares in Celltech Group have since recovered, though they are still some way off their highs of the year.

The underlying decline in the shares has been attributed to a number of causes, including the market's disappointment with the launch  in the US of the company's Metadate medication for the treatment of Attention Deficit Hyperactivity Disorder in children, and targeting of the shares by short sellers.

We put some of these issues to Richard Bungay, the Director of Corporate Communications and Strategic Planning at Celltech Group, when we interviewed him over the telephone on the corporate strategy that the company has adopted and the strategic options now available.

Celltech has matured over the years into a profitable biotechnology company largely through astute acquisitions and mergers -- and according to the company there could be more alliances to come. In 1999 Celletch merged with Chiroscience. The primary reason for this union, said Bungay, was to form a group that would in time become an expert in the field of antibodies. The company also believed that a specialisation in small molecule research would position it well in what it felt would become a popular field of study for the biotechnology sector.

Celltech had considered developing its research programme in-house but felt that there was little point in trying to reinvent the wheel when an adequate wheel was already on the market. Bungay said the company believed that it was cheaper to acquire an existing business than to try and start something from scratch. It is this pragmatic approach to research and development that has continued to drive Celltech forward.

According to Bungay, the merger with Medeva in January 2000 was for a completely different reason. Medeva had a portfolio of marketable products and that much-needed business attribute, positive cash flow – the lifeblood for any successful company. The merger with Medeva therefore created a more rounded company with research and a ready-made sales and marketing function. He said the subsequent sale of the vaccine business that was an integral part of Medeva to PowderJect (LSE: PJP) was a conscious decision to dispose of a profitable but at the same time cash-hungry business. PowderJect, as a specialised vaccine maker, was better positioned to capitalise and create value from the business.

The Cistron purchase was solely for the purpose of acquiring intellectual property. Cistron had strong intellectual property particularly in the work on cytokines and IL-1. Bungay said the acquisition, which cost the company £9m, had been fully integrated.

The more recent acquisition of Thiemann strengthened Celltech's marketing position in mainland Europe. The German marketing company is, in Bungay's opinion, well positioned to distribute drugs in the therapeutic areas of central nervous system disorders, cardiovascular, rheumatology and gastrointestinal medications. He expects that Metadate, the company's recently approved treatment for Attention Deficit Hyperactivity Disorder will also be distributed in Europe through Thiemann.

Bungay said that Europe is of particular interest in Celltech's strategic plan for future market development and added that "further acquisitions in the mainland could not be ruled out". The company feels that the Scandinavia regions and Italy, in particular, could represent good opportunities for growth.

He said that the joint development programme with Pharmacia (NYSE: PHA) on its proprietary compound CDP 870 was progressing well and that the company plans to give a broad update on its research and development programme in 2002. The company said that Pharmacia was its preferred joint development partner because of its underlying strength in sales and marketing in the US.

He conceded that Celltech had a weak corporate profile in the US and was still overshadowed by the likes of Immunex (Nasdaq: IMNX), Amgen (Nasdaq: AMGN) and Genentech (Nasdaq: DNA). Although the company has ramped up its sales force in the US, it feels that it is could benefit from improved public relations -- something that the company is taking seriously and will address in due course.

As a high-profile biotechnology company, Celltech can at times attract unwanted attention from the hedge funds. On a forward P/E of 52 it is ostensibly expensive when compared with the industry average of 34. But looking ahead to 2002, the forward P/E moderates to a more reasonable valuation of 38. The market expects the company to grow earnings at around 35%, which is at a fair old lick, and failure to do so will prove the shorters right.

More: Celltech Group discussion board

The author owns shares in Celltech Group.