House of Commons - Science and Technology

Select Committee on Science and Technology Fifth Report

APPENDIX 4

Memorandum submitted by Mercury Asset Management Ltd

1. Mercury Asset Management Ltd ("Mercury") provides investment management and advisory services to clients in the United Kingdom and internationally. Assets under management exceed £100 billion. Since 22 December 1997, Mercury has been a subsidiary of Merrill Lynch & Co Inc, an American company.

2. Mercury has invested in British Biotech ("BB") on behalf of its clients since BB's flotation in July 1992. We have had regular contact with BB since then and were involved in discussions with BB in March 1998, after Perpetual shared with us their concerns about the strategy being pursued by BB.

CONTENTS

3. We have been requested to set out:

(i) the basis of Mercury's interest in BB;

(ii) the extent of Mercury's involvement in various meetings from February 1998 onwards;

(iii) the extent to which Mercury thinks Dr Millar's concerns are well-founded; and

(iv) the impact, if any, on the wider biotechnology industry.

(i) The basis of our interest

4. Our interest is as an investment manager investing in shares of BB on a discretionary basis on behalf of our clients. As a consequence we endeavour to maintain an ongoing understanding of the business of BB, the prospects for that business, the ability of its management and the likely outcome of any strategy which is implemented.

(ii) The extent of our involvement

5. We were contacted by Perpetual in February 1998. We were informed that they had obtained price sensitive information about BB which was not publicly available information, as a result of which they believed that action by the shareholders was necessary.

6. We informed Perpetual that we did not wish to receive this information and suggested that they bring these matters to the attention of BB's advisers, Dresdner Kleinwort Benson ("DKB"), who would be able to evaluate the information and determine what BB should do as a result.

7. Perpetual persisted in requesting a meeting with us. We agreed to meet but only to discuss BB in the context of publicly available information. A meeting took place on 3 March 1998. As a result we repeated our view that Perpetual should speak to DKB.

[Explanatory Note: as investment managers for clients we have to evaluate on a case-by-case basis whether we are willing to receive price sensitive information about companies which may prevent us from carrying out transactions for clients. It is rarely in our clients' interests for us to be unable to effect transactions. However, there are circumstances where, for limited periods, we will be willing to be restricted from dealing, usually where our clients in aggregate hold a significant proportion of the share capital of the relevant company. The longer the potential timescale and the more ill-defined the proposition, the less likely we will be to agree to receive such information.]

8. Following Perpetual's meeting with DKB, which they reported to us as being wholly unsatisfactory, and in the light of the subsequent news about the involvement of Dr Millar, we agreed to meet Perpetual again to hear their full version of events accepting that we would become insiders. That meeting took place on 13 March 1998.

9. From that time, until the subsequent publication of the circular by BB, we attended a number of meetings at which our objective was to unravel the conflicting opinions of the various parties, establish the facts, decide what inferences we should draw from the facts and thereby determine what action to take in the best interests of our clients. During this period we met Perpetual, Dr Millar, DKB, the executive management of BB, non-executive directors of BB, the chairman of BB and Dr Noble, a former executive director of BB.

(iii) Do we believe Dr Millar's concerns are well-founded and why?

10. Dr Millar's concerns included:

— the clinical strategy relating to Zacutex/Marimastat

— the corporate strategy of BB, particularly external communication and expenditure rates

— dealings in BB shares by certain directors.

CLINICAL STRATEGY

11. In any business there are a variety of opinions on how to proceed. Clearly Dr Millar's views differed from those of Drs MCCullagh and Jensen. The detail of trial design appears to us to be a matter of judgement, the validity of which can only be assessed at the end of the process once the data is analysed and the regulator's response is known. External investors have to rely on company managements to establish appropriate structures to deal with such issues. Dr Millar's views called into question whether the clinical strategy was optimal but did not prove that it was inappropriate.

CORPORATE STRATEGY

12. The main concern related to the rate at which money was being spent compared with the likely timescale for a successful outcome from the clinical trials. The management had taken a calculated risk in beginning to spend to support a corporate strategy in the expectation of early revenues from Zacutex. This had failed. However, in our discussions with management it appeared that they were already committed to reducing the rate of spend and were actively reviewing this following the EMEA decision on Zacutex.

13. The other concern was whether BB had misled investors in providing information on clinical and regulatory progress. BB is no different from any other company in trying to put the best gloss on any developments. Having spoken to the various participants we were unable to establish conclusively whether this optimism had been taken too far.

SHARE DEALING

14. We are aware of the conclusions of the report by MCKenna & Co into allegations surrounding share dealings by directors of BB. We assume that The Stock Exchange will have reviewed these dealings and the circumstances surrounding them.