Private investors stake their dreams on risky biotech start-ups

Everyone in the world hopes to find a cure for cancer. But thousands of private investors have staked hard-won savings on their dreams by investing in Aim's biotechnology start-ups.

There are three connected risks in backing drug and technology companies. The first is that of sinking cash into treatments that never work. The second is that it can take decades for boards to accept that their ideas will never be commercial. And then there is the third danger facing ordinary investors: they are likely to be the least informed and the last to know when to throw in the towel.

Silence Therapeutics, which is testing ways of silencing the genes that cause tumours, is the latest biotech to tap investors for cash. Last week it raised £40m at 240p a share to help it realise the big ambitions of its management team, headed by Ali Mortazavi, the former City trader and professional chess player.

Silence Therapeutics has developed ways of editing genes and targeting diseases that are unrivalled, at least in Europe, claims Mr Mortazavi, talking fast from the back of a cab.

The business has been around since the mid-1990s, exploring ways of turning its research to commercial advantage. But like so many, it has failed so far.

By 2012 Silence's investors had lost patience. The shares had hit a low of 38p, valuing the group at less than £10m, and it was "just weeks from going under", says Mr Mortazavi.

Three years ago he bought shares, joined the board and then brought in his former boss Richard Griffiths, as well as Robert Keith, a serial backer of technology ventures. Between the three of them, they own about half the group's shares.

Mr Mortazavi and Mr Griffiths had worked together in the early noughties at Evolution Securities, a small aggressive brokerage firm chaired by Mr Griffiths, a former Welsh hill farmer, professional rugby player and a somewhat controversial and unconventional figure in the City.

Mr Griffiths quit Evolution in 2005 to focus his entrepreneurial spirit on backing start-ups. Mr Mortazavi did much the same from 2008 to 2012 until he alighted on Silence Therapeutics.

The former trader reckons he can get around the biggest pitfalls in biotech. Most drug businesses bet everything on a single drug or treatment, he says. His strategy is to spread that risk.

"Our plan is to have 50 ideas running in parallel. Traditionally, biotech relies on one idea but we have lots, so that we can dump the ones that don't work." He has set up a team to look actively for diseases that could use Silence Therapeutic's technology to "edit" genes. Its strength is that - in theory, at least - it can apply its treatment to any gene and many diseases.

It comes at a big price. Every year since becoming chief executive, Mr Mortazavi has called on investors for more cash, and in increasing amounts.

Mr Mortazavi has been lucky in his timing, though. The news on gene sequencing and therapies is beginning to look more promising. Market confidence in the sector has improved, helping him to win the backing of institutional investors including Henderson, Aviva and, most recently, Neil Woodford.

But savvy shareholders know what they are in for when they sink money into biotech. The cash calls will keep on coming, three out of four investments will fail and there will not be returns for years.

Even Silence's most advanced treatment - for pancreatic cancer - is only in early stage trials. Brokers Cannacord predict Silence will be still be making pre-tax losses of £11m in 2016.

That is the nature of backing biotech, says Mr Mortazavi. It is all about funding businesses early on, and hoping one will make a breakthrough that will catch the eye of a big drug company.

But the risk for small shareholders in biotech is greater. Investors may derive comfort that Aim players such as Richard Griffiths or Neil Woodford are on the register, offering confirmation of Silence's potential.

But big-name investors are not there to champion the interests of other shareholders.

They spend time and money to gain the insights that give them the edge over rivals in the market, telling them when to buy and when to sell.

And as one market sage observes: "You wouldn't want to be a buyer if Woodford or Griffiths were sellers."

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