It has been another bad week for Britain’s beleaguered band of biotech stocks. Not at the top end, where the FTSE 100’s Shire Pharmaceuticals – more strictly a specialty pharmaceuticals developer – reported strong full-year figures.

However, at the lower reaches of the stock market, a tide of unremittingly dire Stock Exchange announcements reveals the sector to be in a poor state of health.

Vernalis, which last year failed to gain approval for its menstrual migraine treatment from the US Food and Drug Administration, unveiled plans to cut its workforce by more than half and parted company with its chief executive. Shares in Medical Marketing International, the developer of a cancer vaccine, tumbled by 58 per cent after its chairman was ousted in a shareholder-backed boardroom coup. And Scotland’s Ardana, which is left with £6 million of cash after consuming more than £10 million last year, put itself up for sale and halted development on its Tevelerix LA cancer treatment. Its shares have more than halved since the start of the year.

Elsewhere, AIM-listed Idmos, the disease and detection monitoring specialist, admitted that it had only enough cash to last it until the beginning of March, while Cambridge-based Stem Cell Sciences unveiled a radical restructuring, including the departure of its finance director, in an effort to conserve funds. The only cheer came from Antisoma, the anticancer specialist, which said that it is considering using its £53 million cash pile to buy other companies in areas that are struggling to secure funding.

Given the recent tenor of announcements, it is not surprising that investors continue to steer clear. The FTSE techMARK Mediscience index – not the most precise proxy since it includes low-risk medical device makers such as Smith & Nephew – has fallen 26 per cent over the last 12 months, against a 5 per cent slide in the FTSE all-share. A tighter measure, Seymour Pierce’s UK Drug Discovery and Development index, which consists of 47 biotech stocks, underperformed the FTSE all-share by 36 per cent last year.

The industry’s biggest problem is that it has conspicuously failed to produce any high-profile winners in recent years. Whereas other high-risk sectors, such as oil exploration and IT, boast stocks that have progressed from start-up to large-cap – Tullow Oil and Autonomy, for example – biotech lacks an obvious standard bearer. That is partly because its more successful constituents tend to have been swiftly acquired by larger rivals: Celltech by Belgium’s UCB, Cambridge Antibody Technology by AstraZeneca, and NeuTec Pharma by Novartis.

But faced for the most part with drugs that have taken longer than expected to develop, or in some cases have failed altogether in late-stage trials, fund managers are now choosing to sit on their hands. The upshot is that the stock market is now left with two distinct categories of biotech stocks: those with cash and those without.

Some have the benefit of already-approved drugs whose profits they can use to fund experimental treatments: Protherics ploughs cash from its CroFab rattlesnake bite remedy back into its portfolio of early-stage cancer, hypertension and septic shock medicines.

Others have secured large slugs of cash by forging partnership deals with big pharma. Last year, Antisoma struck a deal with Novartis on its lead lung cancer drug that is potentially worth $890 million (£452 million). Elsewhere, Renovo tied up with Shire, while Oxford Biomedica and Acambis entered alliances with Sanofi-Aventis. There is also the odd company that has succeeded in raising fresh funds in the face of equity markets that otherwise appear shut: Ark Therapeutics, the cancer and vascular disease specialist, secured £35 million in November through a placing and open offer.

However, for those with dwindling cash reserves, and little hope of finding external funding, 2008 threatens to be difficult. One beneficial side-effect of the biotech gloom is that it has left a clutch of its well-funded constituents trading on lowly valuations. Conventional methods of measuring worth tend to be meaningless in biotech – balance sheets are of little use in capturing the potential of intellectual property – but those companies that might be considered oversold relative to their cash reserves include Antisoma, Ark, Oxford BioMedica, Renovo and Vectura.

However, as Samir Devani, biotech analyst for Nomura Code Securities, points out, we are not yet near a historic low: in March 2003, one third of the European biotech sector was valued at a discount to its cash position. With updates on new drugs from the sector likely to be less plentiful this year than in 2007, merger and acquisition activity provides a better short-term hope for investors than breakthroughs on the laboratory bench.

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