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:
1. that the patented research turns
out to have no clinical utility. This involves a judgement about
the quality of the science and product portfolio—the intellectual
property of the Company.
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
