Company Spotlight: 'Ferraris gears up for a swift run of long-term growth'

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The Independent Online

Few British companies, let alone one valued at a mere £70m, can claim to have bagged a billionaire investor as a key shareholder. But the medical devices maker Ferraris Group has done just that, and the City is beginning to take note.

An endorsement from the super-rich is usually a boost for a company's image and profile, if nothing else. In Ferraris's case, it is significant in another respect because the shareholder is Mannheim Holdings LLP, a family trust linked to the founders of Boehringer Mannheim, a major European medical products group acquired by the Swiss giant Roche for £9bn in 1998.

Having cashed in a fortune from the business, we can safely assume the Mannheims know a thing or two about the medical products industry. So its interest in Ferraris provides investors with clues about the potential in the Solihull- based group.

The trust acquired its 10.5 per cent stake in Ferraris for £5m last month when the group raised new money to buy a US counterpart, Bionostics, for £19m. Intriguingly, this also makes Ferraris the first quoted British company in which the trust has bought shares and a Mannheim nominee, Gerald Moller, is on the Ferraris board as a non-executive director.

His wide connections should open doors for the little UK company because he is a former senior executive of Roche and is a director of several medium-sized pharmaceuticals companies around the world. These include the chair at Powderject Pharmaceuticals, the vaccines maker acquired by Chiron for £500m this spring.

The medical products industry is a growth sector where demand is driven by medical need, an aging population and better diagnosis. Nor are the industry's prospects closely dependent on the health of the economy. This means it benefits from steady and predictable long-term trends, though the prospects for individual companies vary greatly.

Thanks to a series of strategic acquisitions over three years, ending in the Bionostics deal in July, the group has built up a prominent global position as a supplier of specialist diagnostic equipment and services in three critical-care sectors: lung, heart and blood. Many medical complications have an impact on more than one of these areas, so there are clear synergies.

The group's products include respiratory devices to monitor asthma, allergy and black-lung disease suffered by coal miners. It makes portable heart monitors worn by patients for long-term testing and mini-labs to monitor infants. Many of its devices have inbuilt memory functions to store test results. The data can often also be sent by patients from their home to a doctor through the internet. Such features are lowering costs and speeding processing of trials.

The Bionostics takeover looks like a transforming deal for Ferraris, taking it into the fast-growing market for blood testing. Bionistics' key products are patented liquids for accurate testing for many different ailments, including diabetes and haemoglobin. These liquids are almost an industry standard and are required by labs and drug companies for quality control. Bionostics's strong market position has enabled it to increase taxable profits from £737,000 to £1.7m in the past three years, on annual turnover up from £6m to £11.4m.

The enlarged Ferraris hopes to achieve annual percentage profits growth in the mid-teens over the long term. The chief executive, Steven Mills, plans to expand the company's services in clinical trials, where demand for outsourcing by drug companies is growing at up to 20 per cent a year. With critical mass established in diagnostics, Ferraris is likely to get rid of its troublesome semiconductor division for £10m.

Expectations are high in the City that Ferraris shares could be rerated. They have already surged from 90p last month to 127p but have room for more gains. Analysts expect taxable profits of £1.8m for the year ending 31 August, rising to £12m next year. That values the shares on a undemanding 10 times expected earnings for 2004. The company pays a generous dividend, with a prospective yield of almost 5 per cent. That looks cheap for a medical devices company. In the US, comparable businesses fetch a share rating 15 times earnings. Good value.

Neil Thapar is equity strategist at the stockbroker Durlacher

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