Reap the biotech harvest

The outcry over genetically modified food should not obscure the potential of the life science sector, warns David Brierley

he row about genetically modified foods has exploded just as the Government is striving to boost the British biotech industry.

"Biotechnology is exactly the kind of industry we must support in this country," said industry minister John Battle this month as he unveiled initiatives to help the small-to-medium-sized companies that dominate the industry.

Enthusiasts foresee a biotech revolution in the 21st century comparable with the organic chemistry revolution that has transformed this century. The industry is growing fast. By 2000 it is expected to be worth $100bn (pounds 61bn). The UK biotech sector currently has a market capitalisation of pounds 3.6bn.

"Biotechnology will provide solutions because genetics allows us to understand biological systems," said Nigel Poole, head of regulatory affairs at Zeneca Plant Science.

Britain, with its world-class pharmaceutical industry, has a great deal to gain. "Britain is number two in the world in biotechnology," said Mr Poole. The US is number one, while Germany is catching up fast, having decided to rescind a biotech ban.

Controversial genetically modified foods are just one aspect of biotechnology. Its potential is vast in health care, animal welfare, the environment, agriculture and industry. Biotechnology is beginning to change the way human diseases are diagnosed and treated. It is transforming the treatment of pollution and waste. And it can reduce plant disease, reduce pests and raise crop yields.

Biotechnology was used to clean up after the Exxon Valdiz ran aground in Alaska. DNA fingerprinting was widely used long before Monica Lewinsky wore that dress. Biotechnology will enable replacement organs to be grown for transplantation.

The hottest science is perhaps genomics, which has revealed how genes code the proteins that cause disease. "There is a greater understanding of disease at molecular level. Armed with this knowledge, drugs can be designed to target specific proteins, with fewer side-effects," said Dr Jeffrey Newman, consultant biotechnologist at Cranfield University.

The benefits to mankind could be immense. "In economic terms, biotechnology has great potential to create wealth and jobs, building on Britain's world- class science base. But we must build up public confidence in science, which has been badly shaken by BSE," said Stephen Byers, Secretary of State for Trade and Industry, last month.

Amgen, the world's largest biotech company, illustrates the economic potential. With two drugs selling for $1bn annually, Amgen is valued at $30bn. Within the British biotech industry, Zeneca is the long-established giant. The third largest agrochemicals business in the world, Zeneca, competes with Monsanto, Dupont and Novartis. Its research is carried out in Britain -where it employs 1,000 researchers in Jealott's Hill, Berkshire - and it intends to spend pounds 50m on a new research facility in Norwich. It has pioneered the genetically modified tomatoes used in Sainsbury's and Safeway's tomato puree.

Unlike Zeneca, most biotech firms employ fewer than 50 people and are recent start-ups. The industry boasts 500 companies with 40,000 employees. Its most important markets are diagnostics (typically HIV test kits) and healthcare (the creation, delivery and manufacture of drugs). During the past two years, the quoted sector has suffered a series of high-profile setbacks.

"All the stocks have been sharply in retreat. There are companies priced below their cash value," said Nick Woolf, analyst at BancBoston Robertson Stephens. The sector fell by nearly 50 per cent last year.

No debacle has been greater than that of British Biotechnology, valued at nearly pounds 2bn in May 1996. Last week, after announcing that its key Marimastat anti-cancer drug did not outperform an existing compound, the company was worth little more than its cash. "They were over-optimistic," admitted Mr Woolf, who insists that Marimastat has therapeutic potential.

For investors, judging the potential of hi-tech companies is a nightmare. Having had their fingers burnt on British Biotech, once the flagship of the industry, many are no longer willing to try. New start-ups cannot come to market at present.

Paul Haycock at Apax Partners, the venture capital group, said: "The Initial Public Offering [flotation] market is shut. Yet that does not change the fundamentals. Biotechnology will lead the diagnosis and treatment of disease in the next decade."

Because it takes five to 10 years to bring a product to market, many biotech companies have little or no income for several years. Some solve the problem by arranging joint ventures with the pharmaceutical giants. But such deals are becoming rare. Meanwhile, the sector is chock-a-block with loss-makers which have heavily under-performed. "The sector depends on sentiment because they have no earnings," said Mr Woolf.

"It is not a market for people who want to flip in and out," said Mr Haycock. "But we are still seeking good-quality firms with well-conceived business plans and good technology."

Only one in 10 drugs entering clinical trials receives regulatory approval. In this all-or-nothing business, many directors prefer to dream aloud about future billions rather than talk about nothing. British Biotech hyped up its cancer treatment to such an extent that its head of clinical trials, Dr Andrew Millar, protested and was sacked for his pains. The resignation of the over-enthusiastic chief executive, Keith McCullagh, followed. Last week's poor clinical results seemed both to vindicate Dr Millar and to call into question the realism of the industry.

Bringing the latest science to market is arduous and costly. Dr Newman at Cranfield warned: "A lot of time and money has been invested in genomics. This has already solved some problems. Its full impact may, however, take longer to occur than many people expect."

There is a great deal of time for biotech start-ups to disappoint investors. Management problems seem to have been endemic, and profligacy not unknown. Of the 30 quoted biotech firms, six appointed new chief executives last year, further reducing confidence in the market. Aside from British Biotech, several companies have suffered well-publicised setbacks in clinical trials including Biocompatibles, Celltech and Scotia Holdings. That is normal for the pharmaceutical industry, but these relatively small companies do not have the giants' large cash flow and wide range of drug prospects.

Few have pleased investors. One exception was Phytopharm whose shares rose 260 per cent last year following a licensing agreement with Pfizer for its appetite suppressant.

No British biotech company has yet to bring a compound to market, let alone emulated Amgen's success. Nevertheless, Celltech and Chiroscience are expected to obtain approval for their first drugs shortly. In the US, biotech companies have brought 20 drugs to market. In fact, Chiroscience obtained Food and Drugs Administration approval last month for Chirocaine, a long-lasting local anaesthetic. Even so, the FDA has yet to be convinced of its superiority over a generic competitor. Celltech's leukemia treat- ment is in the late stages of trials. "Both drugs offer advantages and the clinical data look compelling," said Mr Woolf.

However, drugs can and do fail at the last hurdle. This has meant that many biotech companies seek to do something other than create compounds, to generate a secure cash flow. Dolly the sheep produces a rare protein in its milk which is used to treat cystic fibrosis. PPL Therapeutics, Dolly's begetter, employs a flock of Dollies as a cheap medicine factory. But its shares have fallen sharply, too.

A rare success, Powderject, developed a needle-less drug injection system before obtaining a deal with GlaxoWellcome to produce DNA vaccines. Its shares went from 175p to 670p, showing the real potential.

The biotech sector has become a catch-all phrase for emerging life sciences companies. The Government's initiatives are directed at enabling companies to move from re- search to manufacture, improving training and disseminating best practice. "We are taking steps to improve the tax framework. We are looking at equity incentives for key managers in smaller hi-tech companies," said Mr Battle.

The row over biotechnology in this country contrasts with acceptance in the US. This can partly be attributed to the absence of a European equivalent of the FDA - a strong, clearly independent regulator.

While genetically modified foods are only part of the biotech story, rebuilding confidence is vital if Britain is to reap the benefits of the life sciences revolution.