Select Committee on Science and Technology Minutes of Evidence


Memorandum submitted by Perpetual Investment Management Services Ltd

1.  ABOUT PERPETUAL

  1.1  Perpetual plc is an independent, publicly listed UK asset management company with over £10 billion under management. The majority of this money is in authorised unit trusts but a significant amount is in investment trusts and funds managed on behalf of overseas clients.

2. OUR INVESTMENT IN BRITISH BIOTECH

  2.1  We hold 62,336,502 shares of British Biotech (9.44 per cent of shares in issue) across 20 different funds.

  2.2  While the size of our holding in British Biotech (referred to below as "the Company") has varied since 1992, the major part of the holding has now been held for a number of years.

3.  OUR INVOLVEMENT IN RECENT DEVELOPMENTS

  3.1  In February 1998, conversations with a City analyst heightened concerns we had about the Company's level of spending and its ambition to develop into a fully integrated pharmaceutical company. As a result we arranged a meeting with Dr Andrew Millar (with whom we had had contact previously) on 18 February 1998. To avoid any risk of abuse of information, we immediately imposed a freeze on all dealings in the Company's shares.

  3.2  Following this meeting, we contacted Mercury Asset Management, the Company's largest shareholder, and we jointly agreed that Perpetual should discuss the concerns with the Company's advisers, Dresdner Kleinwort Benson. A meeting with the Company's advisers, took place on 11 March and included Dr Millar. Following this meeting, late on 11 March, Dr Millar was suspended by the Company "pending an inquiry into alleged misconduct."

  3.3  On 25 March, Perpetual and Mercury had a meeting with the Company at which the Company made a presentation discussing a number of issues including the possibility of an out-licensing agreement in the US, cutting the cash spending and the current status of the product portfolio. This meeting was followed up by a meeting with the non-executive directors on the 26 March.

  3.4  At this stage, our concerns centred on a number of issues:

    —    whether the Marimistat study 128 was likely to be successful given the uncertainty about dosing levels and the difficult target of pancreatic cancer.

    —    whether the information that we were getting from the Company's news releases was reliable and whether analysts were receiving the information that would enable them to form a balanced view of the Company's prospects.

    —    whether the Board of Directors was fulfilling its duties to shareholders in providing effective leadership and control of the Company.

  3.5  In addition, there were allegations of wrongful share dealings by directors in January 1995 and that the Company was the subject of an SEC investigation into certain press releases made in 1995-96, both of which served to undermine investor confidence. The non-executive directors of the Company promptly commissioned reports into these two matters by Cameron McKenna and these reports were released to our lawyers in strict confidence on 17 April.

  3.6  On 20 April, Dr Millar was dismissed by the Company. Subsequently, the Company became the subject of intense press interest and the share price suffered a significant fall. Although we were still optimistic about some of the products, we still had concerns and continued to press for clarification of certain issues. The Company announced its intention to publish a circular to shareholders.

  3.7  On 19 May, the Company published a detailed circular to shareholders addressing the various press allegations and setting out the Company's approach to strategy and its operating plans.

4.  INVESTING IN THE BIOTECHNOLOGY SECTOR

  4.1  In assessing the impact of these developments, the Committee may find it useful to have our views on the current nature of investing in the biotechnology sector.

  4.2  Companies in the sector are financed almost entirely by equity capital. Investors are attracted by the possible enormous financial rewards of a successful product but the investment is long-term and high risk. Investors face two main risks:

       2.  that the development of the product will be mismanaged and its potential not realised. This involves a judgement about the management of the company. They should have an appropriate balance of qualities (see Table 1 below) as well as experience of bringing products to market.

Table 1

MANAGING DEVELOPMENT

keeping together a team of exceptional scientists and motivating them to overcome technical setbacks husbanding cash over a long development cycle keeping investors informed and supportive of further cash calls

REQUIRED QUALITIES OF MANAGEMENT

strong leadership with a clear vision an understanding of the technology prudence, scepticism, conservatism and focus objectivity and cautious handling of expectations

  4.3  Investors have various sources of information about such companies: regular releases of information from the company, for example concerning the status of clinical trials and likely timetable of events; the views of stock market analysts and independent scientific experts, contact with individual directors and senior managers and events such as research days and conferences organised by the company. In addition, the traditional forms of financial report provide information about the balance sheet, level of cash and the rate of "cash burn".

  4.4  As most of the companies in the sector are not yet profitable, their share prices are heavily influenced by investor sentiment towards the products of an individual company and the sector as a whole.

  4.5  Where sentiment is so important in determining the share price and hence the value of a businiess, the accuracy, precision and objectivity of information released by the company is vital. Diseases like cancer, Alzheimer's and AIDS give rise to strong emotions and stock market speculation can be extreme (seeTable 2 below).

Table 2

In the US recently, the New York Times carried a front page story about a product that seemed to be successful in reducing the blood supply to tumours in mice, thereby shrinking the tumours. The company concerned `Entremed' went out of its way to caution about over-optimism on a product that was, at best, many years away from the marketplace. The shares in one week went from $12 to over $80 back to $33.

  4.6  As a result, companies should be especially careful not to fuel speculation particularly when the products are in clinical trials and unlikely to be marketed for a number of years. The hyperbole may lie not in what is actually said in a particular press release but in the context in which it is said and the pattern of news that it creates. Thus, for example, an unremitting stream of announcements about the encouraging results of clinical trials, untempered by reminders of the scale of future uncertainty, may create a false expectation of success. Similarly, the announcement of new marketing expenditures might be taken to presage an imminent product launch even though it contains no technical information relating to the outcome of clinical trials.

5.  CONCLUSIONS ABOUT THE IMPACT OF THESE DEVELOPMENTS

  5.1  Recognising that all of this has been disastrous for the company in its effect on the share price, recent developments will, at least in the short term, have the effect of making investors more careful and realistic about investing in the biotechnology sector.

  5.2  These developments do however make clear the need for the boards of directors of companies in the sector to be required to exercise proper control over press releases and other public announcements of information. We believe due diligence should be required to be applied at board level before such releases are made public. The market volatility created by potentially misleading statements is ultimately detrimental to the ability of the company and others to raise financing.

  5.3  Such precautions will not fully cure the problem; some investors will inevitably get over-excited about the prospects and possible financial rewards of a product that might be efficacious in the treatment of a serious disease.

  5.4  In its circular to shareholders of 19 May, the company pointed out that the SEC investigation was disclosed in a Form 20-F filed with the SEC. We found it surprising that apparently there is no similar requirement in UK reporting.

  5.5  Our main conclusion, however, is the need to introduce proper controls, at board level, over press releases and similar announcements of information.

6 July 1998


 
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Prepared 14 September 1998