CAT's bid hopes floored by royalties dispute

Cambridge Antibody Technology's attempt to take over its biotech sectormate, Oxford GlycoSciences, was holed below the waterline yesterday, when CAT said its own future royalty revenues may fall well below expectations.

A dispute with its drug development partner, the global giant Abbott Laboratories, threw CAT's financial plans into chaos and sent its shares down 17 per cent. Analysts said that made it impossible for CAT to improve its all-share offer for OGS to trump a rival bid from Celltech.

OGS maintained its opposition to the £101m cash offer from Celltech, saying three more companies had indicated they may be interested in bidding.

Abbott wants to cut the royalties it pays on drugs developed using CAT's "phage display" technology, which identifies antibodies in the human immune system that can be copied to treat disease. It says their collaboration, signed in 1993, allows it to reduce the royalty rate paid to CAT if it has also needed to license intellectual property from elsewhere to develop the drugs.

Peter Chambré, CAT's chief executive, disagreed. "Our interpretation is that this change should only be made if they have had to take other phage display licenses, which they haven't. Abbott are seeking to draw into the net other licences they have taken that relate to drug targets and the antibody manufacturing process."

The dispute immediately threatens royalties from Humira, a rheumatoid arthritis drug launched in January and which Abbott believes could have annual sales of more than $1bn (£640m). The royalty received by CAT could fall from an estimated 3 per cent now to 1 per cent.

But the dispute also affects other drugs that Abbott is developing with CAT, including a second rheumatoid arthritis treatment, seriously complicating the biotech group's plan to reach profitability by 2008. CAT shares tumbled 73.5p to 355p as it became clear the issue would take months to resolve.

CAT had been considering whether to raise its all-share offer for OGS this week, ahead of the first deadline for OGS shareholders to accept the higher cash bid from Celltech next Monday. CAT may not make any final decisions until next month, but analysts said they did not now see how OGS shareholders could be persuaded to take CAT shares in preference to a cash offer. A disappointed Mr Chambré said: "Our offer can only be progressed if we can persuade the OGS board to put it before their shareholders, and today's developments are clearly not a step forward in that."

David Ebsworth, the chief executive of OGS, said he had solicited interest in the group from "an international pharmaceuticals company, a US-based biotechnology company and a European private equity house" who were all looking over the books. He said the Celltech offer undervalues OGS, which had £130m of cash at the end of December.

Mr Ebsworth asked shareholders to give him until the second week of April to conduct talks with the three new parties.