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Peptide Therapeutics Group - by Tom Barr, 22/3/99

Peptide, like most Biotechs, presently makes losses, not profits. Research & Development costs result in a constant "Cash Burn" now estimated at £1m per month. This is the investment for the future in their portfolio of development products or "pipeline". It cannot be known with any certainty if this will pay off.

Peptideís business model (perhaps the only realistic business model in the current climate) is to develop products in collaboration with "Big Pharma", the giant international pharmaceutical companies that have the muscle to bring products to market. Biotechs, generally, cannot "go-it-alone". Peptide has had outstanding success to date both in recent clinical trials and, equally importantly, in doing ongoing collaborative deals with Big Pharma. These collaborations result in trial funding or cost sharing spreading Peptideís overhead costs and commercial risks of failure. Big Pharma partners benefit by obtaining the option, or first refusal, on successful products. For this, if they decide to go ahead, they will pay a mixture of milestone, licence and royalty payments. Peptide has recently acquired a similar U.S. company, Oravax, and completed a successful fund raising in the process. This has strengthened the balance sheet (plenty of cash) and the development pipeline to enviable levels.

So what exactly does Peptide Therapeutics do? They develop vaccines, using their own proprietary technology which enables rapid targeted development of products into the Clinic Human Trials. Peptide have eight products in clinical trials with two more to come in í99. Significant vaccine products in trials (collaborative or option partner in brackets) are: Oral Typhoid (Medeva), Rye Grass Hay Fever (SmithKline Beecham), Veterinary Allergy (Pfizer). With the acquisition of Oravax, products in development also include vaccines for travellers diarrhoea, peptic ulcers, meningitis, encephalitis and yellow fever. The one of these entering the market will result in good ongoing revenues for Peptide. The Oravax acquisition was an outstanding opportunistic move by Peptide. Oravax, having run out of cash, has effectively been taken for far less than its R&D spending to date.

I have saved the best bit for last. There is one further product that has the potential, if successful, to eclipse every other product in the Peptide development pipeline. The potential is easy for the layman to understand. The product is a General Allergy Vaccine. It is hard to believe, given the share price, but Peptide have, in collaboration with SmithKline Beecham, a possible compound that may universally protect against all allergies. The vaccine is currently in phase two trials, where larger groups of patients test the vaccine. The results of this trial are due in the third quarter of this year. It is not known how well these trials are progressing but the phase one trial, a small group of about dozen people, was very impressive. These carefully monitored volunteers were vaccinated and, as a company spokesman said recently, "fed their particular allergen, for example peanuts, in a meat pasty". These volunteers were severely allergic, including anaphylactics for whom the reaction, left untreated, could be fatal. The result? 100% protection. With no reported side effects. Imagine the potential market. Do you know of an allergy sufferer? I, for one, know two severely allergic people, including one peanut anaphylactic.

Peptide have, on the advice of SmithKline (who are paying for and carrying out the phase two trial), elected not to self-publicise or co-operate with media in order to raise the profile of the allergy vaccine. This, according to Peptide, is to "avoid raising hope for the Peanut People, where we cannot yet legally supply the product in the market." When the vaccine was first announced, Peptide was flooded with desperate letters from the public. Particularly from parents who were anxious to protect their children. The company found this quite disturbing as, of course, the vaccine must successfully pass a larger trial, Phase 3, and then be approved, before marketing. I take this to be a very responsible stand on the part of the company.

The success of the General Allergy Vaccine is not assured. Protection may not be long enough or other factors, such as side effects, may limit itís usefulness. But, Peptide Therapeutics, at 103.5p, newly refinanced and with a strengthened pipeline, is valued at less than £70m of which about £30m is currently cash. This is not a high valuation when considering potential revenues from successful products. For example, the Oravax purchase in isolation has the potential to inject $60m in milestone payments alone with ongoing royalty payments on top. It looks like an outstanding opportunity.

Like all Biotechs, share turnover is low in the absence of news. Market Makers habitually mark the stock down in this vacuum in order to scare out the uniformed speculator. I call this the "No-News Discount". Emerging information about new collaborations or take-up of existing development options will move the share upward. A positive result on the General Allergy Vaccine will propel the price into the stratosphere.

The Cityís view? Despite the current share price recent brokerís estimates put the potential for the shares at 200p in a years time - and some are even higher than that. A speculative BUY.

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