Tomorrow's tonic or today's bitter pill?

Simon Targett discovers how, despite a recent dip in the share price of a major biotech firm, Britain's academic spin-off companies are still on to a good thing.

Just three weeks ago the share price of Celltech, one of Britain's leading biotechnology companies, plunged by nearly a quarter on the London Stock Exchange. On February 1, shares were priced at 681p. But after the revelation that it was abandoning an advanced programme of research on an asthma drug with potential yearly sales of Pounds 600 million, shares fell 163p to 518p.

The news that Celltech's CDP 840 drug offered no "significant therapeutic advance" sent shudders across the stock market's biotechnology sector. At a stroke, hundreds of millions of pounds were wiped off the value of biotechnology shares. Even British Biotech, the flagship company whose value has quadrupled over the past year to Pounds 1 billion, fell 13p to 2110p. Scotia and Chiroscience also wobbled, and for a moment it looked as if the fast-inflating biotechnology bubble had finally burst.

If that had happened, the myriad of small, specialist, university-based spin-off companies - all trying to profit from niche-orientated leading edge research - could have been doomed for lack of investors. But university business chiefs searching for cash remain optimistic.

James Hiddlestone, managing director of Isis Innovation, Oxford's technology transfer company, points out that Oxford Molecular, the pre-eminent start-up company founded in 1989 and floated on the Stock Exchange in April 1994, successfully raised Pounds 16.2 million to pay for three United States acquisitions just days before the Celltech share slide. Also, its share price held up, starting the week on 315p and ending it on 344p.

Also optimistic is Alan Munro, master of Christ's College in Cambridge and founder of Cantab Pharmaceuticals, who observes that Celltech-type fluctuations are quite normal and do not suggest a darkening horizon for university start-up companies. "If the research programmes were never terminated, the companies would not be doing their job properly. In this industry, you have to try more things than are going to work. It is high risk, but the rewards are high if you are successful."

He contends that the wider impact of the Celltech tumble can be explained by the fact that the stock market's British biotechnology sector is still so small - it numbers just 25 pharmaceutical companies and is comparable to the US sector in the early 1980s. Richard Jennings, head of Cambridge University's transfer technology operation, adds that the biotechnology wobble has also been prompted by the inexperience of investors. "It highlights the lemming-like behaviour of the analysts who think that if there is one hiccup the whole industry is doomed," he said. "It also reflects their greed and their belief that biotechnology is a pot of gold."

Certainly the money-making potential of biotechnology is phenomenal, and universities feel confident they can be part of, even central to, this biotechnology explosion. Finding a silver lining in Celltech's gloomy news, Dr Jennings says: "It demonstrates the need for continued research in universities because it is clear that the big companies are trying to exploit things we don't really know enough about yet."

Dr Hiddlestone, confirming that the big pharmaceutical companies need universities more than ever, notes the trend towards firms like Glaxo Wellcome and Pfizer out-sourcing their blue skies research. Only last November, Glaxo's chief executive Sir Richard Sykes announced new plans to link up with more universities and small biotechnology companies, observing that "we cannot hope to do all the R and D on our own". The move to invest in Britain is boosted by the fact that since the early 1950s, 24 British or UK-based scientists have won the Nobel prize for biotechnology research - the highest per capita number in the world.

Oxford already has some leading spin-off companies. As well as Oxford Molecular, there is Oxford GlycoSystems, which concentrates on carbohydrate-protein interactions and which has signed multi-million pound deals with SmithKline Beecham, and Oxford Asymmetry. Dr Hiddlestone is looking for funds from venture capital companies to launch three more biotechnology companies.

Meanwhile, a network of six universities - Birmingham, Glasgow, Leeds, Manchester, Warwick and York - has just set up Calyx Plantech, a start-up company invested with Pounds 500,000 and designed to take commercial advantage of the new research strategy of the pharmaceutical giants. According to business development manager Julian Nicholas, it is expected to raise Pounds 1 million a year for commercial research into plant biotechnology.

In the long run, university biotechnology companies can expect to profit from the deals struck with the Glaxos and the SmithKline Beechams, and so too can individual academics. Already, Graham Richards, reader in computational chemistry and founder of Oxford Molecular, is a paper millionaire, while Dr Munro has made a tidy sum, although he stresses that he took considerable risk, leaving a tenured post and the safety of an index-linked pension to become a full-time businessman.

But the idea that universities can solve their funding problems by relying on successful biotechnology companies is "a myth", according to Dr Munro: "It is absolutely wrong to think that universities can make a huge fortune from these spin-off companies." Oxford's investment in Oxford Molecular was Pounds 350,000 in 1989. Today, the university's 3.522 million shares are worth around Pounds 12 million. But that is unusual.

Most university spin-off companies are linked to the founding institution by collaborative research contracts and royalty agreements. So the return is negligible or nonexistent. As Dr Munro stresses: "The time it takes to develop a lead product into a marketed product is ten to 12 years. During that period, there will be four or five hurdles, and only a 50:50 chance that the product will get through each stage."