Smaller companies spotlight

EACH week, former Fleet Street City Editor Patrick Lay keeps This Is Money readers up-to-date with a neglected, but exciting sector of the stock market - smaller companies.

Drug of choice

IT HAS not been a good week for bio and pharmaceutical companies. AstraZeneca is having to start new trials on its planned cholesterol drug that will delay its launch for at least a further year. It has also been revealed that a collaboration between British Biotech and BraseGen over clinical trials on a product to help cure acute leukaemia has been ended.

Bio companies are much like mining and oil exploration vehicles, in that they tend to take the chances and pour money into deep holes – in their case called research, development and clinical trials – in the hope that one will produce a miracle cure that will provide profits for years to come.

The problem is that until the drug is proved over several years through a series of trials, and the product is taken on by a major pharmaceutical company, money just pours away.

Oxford BioMedica is one such company. This week I had a one-to-one tutorial with chief executive Professor Alan Kingsman. We discussed why this company should be worth more than its current £31m, which is no more than the cash in the bank, and is what remains from a £35m rights issue last year.

The company is a spin-out from Oxford University that came to AIM in 1996 and moved up to the official list in April 2001.

Another similarity between bio-scientists and mining and oil men is that they communicate in a language of their own which makes it difficult for the ordinary investor to know just how much progress is being made at any one time.

Phrases such as 'some patients showing reductions in levels of circulating tumour marker proteins that are used as indicators of tumour load,' do not give a ready clue as to whether the shares are a buy or a sell.

However, after nearly two hours of looking at unpleasant pictures of tumours, before and after treatment, and hearing tales of stomach-turning treatments on mice and men, I can report that Oxford BioMedica has a portfolio of 77 patent families of which a quarter have already been granted patents.

The company has nine commercial alliances with some of the bigger pharmaceutical companies, and at least one major company is in talks about doing a deal on products that are in Phase 11 trials.

There is no doubt that when a major does become involved the cash flows build rapidly. Normal agreements are for a fairly large downpayment of £3m-£5m plus royalties. Sometimes, the giants are so enthused by results that they set out to buy the whole company.

Oxford BioMedica could be reaching such a stage, but in the meantime it is burning cash at the rate of around £1m a month and potential investors should be aware that, without a take over, it could be years before real profits come through.

Some 60 institutions in London and Europe were confident enough to take up their rights a year ago and are still on board. With the shares currently at 13p each, individual investors may find a modest gamble proves highly profitable. On the other hand?

Bully boys

LARGE companies pay lip service to supporting Government plans to help entrepreneurs. This week, British Airways turfed out some 20 smaller companies from Eastman House in Crawley, Sussex without a minute's notice. 'We had no option,' said spokesman Leo Seaton.

Eastman House is owned by Norwich Union and BA is a tenant. BA had sub-let part or all of the building to Airport Parking Agency (APA). It sub-let serviced offices - against the terms of its lease - to 20 smaller companies, including the Sussex Enterprise Unit.

Norwich Union said APA was in the wrong and wanted BA to end its agreement with the firm. 'When an agreement like this is terminated, unfortunately it means that all other occupiers lose their right to be in the building,' says Mr Seaton.

It's tough, but 20 entrepreneurs were shut out immediately and have been told to clear the building. It‘s not strictly a market relevant story, but no wonder small companies struggle against a tide of red tape and 'jobsworth' bully boys.

Some you may have missed

WYATT Group, an AIM-listed support services consultancy group that invests in start-up opportunities reported a gross profit of £167,000 from a turnover of just £175,000 for the year to end March.

The company, part of the Bob Holt stable, bought 90% of fire regulations adviser Firesmart when it started in June last year. It was making profits by last February. It has already agreements with AXA Insurance, Chubb, Burger King, Oracle Corporation, Unwins and Comet as well as various Chambers of Commerce and the Fire Service.

Wyatt also owns 25% of Audio Medical Services with an agreement to buy the remaining 75%. This business provides a wide range of on-site occupational health screening services to industry to ensure compliance with health and safety requirements. 'The business continues to grow and will form part of a national network of health screening providers,' says Mr Holt.

He also revealed that talks are going on which could lead to a major acquisition in the next few weeks.

DOCTORS Direct, which provides a network of mobile doctors and consultants, is to float on Ofex and raise up to £1m through a subscription of 2.5m new shares at 40p each.

Established in 1993, the company provides healthcare delivered to the home, office or hotel for corporations and private individuals, 24 hours a day, 365 days a year.

NO GLASS ceilings at Hemscott, the business and financial information supplier. Rosalyn Wilton, chief executive, announced this week that Natalie Newton, formally financial controller, had become Chief Financial Officer and joins the main board. Meanwhile, Hemscott reduced its pre-tax loss to £1.44m from £2.11m last year, despite a £150,000 drop in turnover to £2.5m.

COUNTRYSIDE Properties has received planning permission for a substantial mixed-use scheme at Booth Street in the heart of Manchester City Centre. The £75m development is a joint venture with Citigroup Alternative Investments. The 1.5 acre brownfield site fronts on to the River Irwell and is very close to Rocco Forte‘s five star Lowry Hotel and the new Trinity Bridge.

AS one would expect from the current state of the housing market, pre-tax profits of AIM-listed residential property developer, Propan Homes, were good and bouncy. Profits rose more than 28% to £2.474m from sales which rose 29.5% to just under £13m. The dividend is 14% higher at 0.6p a share, which is good news for serial investor Nigel Wray who owns 4.85% of the company.

Chairman James Dubois says: 'We do not expect a downturn in the foreseeable future.'

Some to look out for

TRANSPORT group Southern Vectis receives a 'buy' recommendation from Stephen Thomas, analyst at brokers Teather & Greenwood. 'Given the yield, strong cash flow and improving balance sheet,' they are a 'buy' at 32.5p.

INTERNATIONAL Greetings are a 'buy' at 185p says Ben Archer, analyst at Teather & Greenwood. He says the shares are undervalued 'although we do not expect significant upside until the announcement of the interim results in December'.

LUKE Ahern, analyst at brokers Seymour Pierce, believes the price fall to 314p in the shares of Menzies Group represents a 'buying' opportunity. The interim results on 10 September should show that the aviation side came back from losses of £1m a month in the fourth quarter of 2001 to break even in May and, meanwhile, the news wholesale side still performs as a solid cash cow.

The interim results are likely to come with the appointment of a new chief executive and a new finance director. Mr Ahern has a price target of 413p on the shares.