MR ANTHONY MILFORD, DR JOE ANDERSON, MR RICHARD SAUNDERS AND MR DEREK BARTLETT

TUESDAY 17 DECEMBER 2002

  680. Picking up on something that Mr Anderson said that the biotech companies had floated too early, is it maybe from what you are saying now that it is not so much they floated too early but the nature of the kind of business they are, the amount of cash they use up and the long period for development, that it is more to do with that, associated with that sector and in a sense there has to be a way of floating that can support that kind of operation.
  (Dr Anderson) I think that is absolutely right. There are different breeds of biotech companies, if you like. What we saw in the class of 2000 IPOs was a lot of what we call "technology platform" companies. These are companies that sell maybe a monoclonal antibody technology platform or proteomics data and their business model was raising revenues by signing contracts with big pharma. During 2000 we obviously had the huge technology boom and tech investors and telecoms investors were looking for the next big thing and thought it was in biotech. So the valuations got pushed up to really unsustainable levels. The implied market capitalisation of some of these technology platform companies meant they would have had to have signed deals with every single pharma company globally to 10 times the value that was likely to be worthwhile. They got pushed up just on the froth of the Nasdaq bubble. A lot of these are Nasdaq stock, as you know, and sure enough they came clattering down. I think what has happened in the cold light of day is that investors have looked at these technology platform companies and thought that there is a business here but perhaps not a sustainable business running forward because technology erodes, and product cycle times are quite short. I think the current mood within the investment community is that products—drugs—are where the value is and that if you can marry technology platforms with products then you are beginning to get the sort of integrated company that you see in the US. There are some moves already amongst the investment banking community in the UK to try and create those integrated companies through M&A and corporate restructuring.

  681. The reward tends to be a long way away from when you make the investment.
  (Dr Anderson) I guess it depends on the stage of the drug. Failure rate for phase two drugs is about 75%. Failure rate for phase three is about 25%. By the time a drug gets to market it is 95% likely to be a viable success. These are the known industry risk coefficients that we can apply. I guess that different fund managers have different risk appetites. I would typically go for phase two and three drugs. We are looking for I guess drugs coming to market within two to three years.
  (Mr Milford) I think there is one issue for the UK companies which is if you go public at a stage in your development where you are going to have to come back to the market to raise more funds—which is the case with most biotech companies which have gone public on both sides of the Atlantic—the restrictions on being able to raise money in the UK (compared to private placements in particular in the UK compared with the US) make it much more difficult for UK companies to raise second and third rounds. I think there is something that could be done to change that.
  (Dr Anderson) Pre-emption rights.
  (Mr Milford) And I believe that the British Insurance Association is adamantly opposed to any change on the rules of pre-emption rights, but I think for the biotech industry in particular it really would made a difference. I think there are cases currently where there are companies that would be able to raise money from venture capitalists who also invest in public companies if it was not for the pre-emption rules.

  682. If you could put yourself in a position with the experience of being fund managers in the past you then move on to be a partner in a biotech firm and you were asking what are the alternatives to the way things have been done so far and where are the gaps in terms of capital support for this kind of company, what would you be looking for do you think?

   (Dr Anderson) There is a range of options. Partnership with big pharma would be one way of raising capital; that is an obvious way, I guess. But then you have to have the products to attract big pharma. If I wanted to hold on to the value of a drug by nursing it through to a later stage of development—if the public markets were closed as they currently are—you would have to seek some form of private equity. It comes back down to this point, that in the UK it is very hard to raise fresh private capital in a bear market. In the US for example there are various instruments such as PIPEs (Private Investment in Public Equity), instruments which we cannot apply in the UK because of the pre-emption rights issue. Biotech firms in the US can raise capital very quickly without expensive roadshows and a prospectus, and can avoid dilution of the existing share price because the placement is private (I believe up to 20% of the share capital can be raised in that way whereas we cannot easily do that in the UK). So if I were sitting as a partner in a biotech company I would be frustrated in the UK that I could not tap the private equity markets due to the current listing rules for publicly quoted companies.

  683. Sitting in your biotech firm you then have a fairy godmother who comes down and says "Right, you can ask the Government to do one thing in terms of easing access to capital". What would you ask the fairy godmother to fix for you?

  (Dr Anderson) Changing the rules on the pre-emption rights could have quite an immediate favourable effect.
  (Mr Bartlett) Basically I am a free market man myself. I think if a company has a product that is commercial it would be able to find the money. Of course, if the Government were to make available soft loans—or something along those lines—for companies which are in earlier stages of development, I think that would be a great help. If there was a revolving fund—more or less like you have in the film industry—giving soft loans to intermediate stage companies, that would be a great help rather than having them come onto the market.

  684. Clearly from our point of view the exit for venture capitalists and the going to market is an important stage in ensuring that this sector has a future and clearly it is going through hard times at the moment and raising money is tough. But looking to the future do you see future opportunities coming up in biotech? Do you have views on where this is heading?
  (Mr Milford) Looking on a world-wide basis, certainly. We are big investors in the industry and think it has a great future. I think I am less optimistic about the UK biotech industry than I am about the US for a variety of reasons, of which the difficulty of raising capital is one and the quality of the management pool available is another. I think that is an issue we have not really talked about. I think on the whole that the management of the UK biotech companies has not been as good as certainly some of the people I meet and we do most of the US investing. A lot of the people I meet running the American biotech companies are of the highest quality both as scientists and as managers. I am sorry to say that I have not, even on a relative size of economy basis, met as many outstanding managers in the UK sector.
  (Dr Anderson) I hope that is just a question of the course of time. You cannot force and construct an industry. I am not an expert on Germany, but the Government did provide soft loans to get the industry started and quite honestly in Germany the quality of the assets is still not that high. So whether or not this mechanism works or not remains to be seen. A lot of German biotechs came to market as technology platform companies at the end of the day. The UK is ahead of Germany in terms of depth and length of experience, but we are some way behind the US. I see this as partly a matter of the course of time. We have a tremendously strong science base in the UK and it is absolutely right that the management pool needs to deepen in the UK to exploit this. That may naturally happen. The pharmaceutical industry is in a period of consolidation and management will become available from the industry. I am very optimistic on the biotech industry, but it will take time. I think if we are looking for the industry to be at the stage America currently is, within the next three to five years, this would be perhaps a little over-optimistic.

  (Mr Bartlett) I would like to refer back to a comment you made about consolidation within the industry. That is something which must happen. I think people on our side of the fence have been trying to encourage companies to get together. I can name three at the moment which should actually get together because they have a joint core competency and they would open up a company which would be of investment grade because of size. Most of these companies now are not investment grade because they are too small. That is a subject we have to address. I think if we can either willingly or unwillingly get companies to get together it is going to be a great help. At the moment we are trading at a significant discount to the US market. If you look at some companies in this country and compare them with a similar one in America, you can get the idea that we are 20% of their valuation. It is ridiculous.

  685. Do you think one of the problems of management is that in small companies they do not have a lot of resources and think they do not need a lot of managing and therefore we have perhaps cheaper managers than perhaps the business needs?
  (Mr Bartlett) Yes, you are absolutely right. In the UK invariably the science is good. The financial and commercial management is absolutely abysmal in most companies.

  686. We have had the Minister, Lord Sainsbury, talking to us about what he regarded as the increasing entrepreneurialisation of our universities and saying that this an achievement, but that is getting the technology transfer but not actually running the business. Do you think that venture capitalists are not paying enough attention to proper management skills in the early stages? One imagines that they would have been taking a rather intense interest in them.
  (Mr Bartlett) When a company is in the control of a VC the VC gives management by remote control, they put the restrictions and the disciplines on and things like that. Once they get out of the VC control they tend to be left to their own devices.
  (Mr Milford) One of the advantages of being private is that you do have access to the advice from venture capitalists who have experience in the area which is why we have made the point already that for a lot of these companies it would actually be better to remain private. Not only would they probably have more access to capital, but they would also have access to the sort of advice which would enable them to become successful companies. Going public too early can, in the long run, just make it more difficult for the company to raise money and perhaps they tend not to have the same level of guidance.

  Chairman: Thank you very much. That is very helpful. You have filled in a gap in our knowledge and although it has not been a particularly long session I think we have the answers we needed and if we do need anything else we will get back to you. Thank you very much for your time this morning, gentlemen. We appreciate it.