The Investment Column: Fading prospects for smallpox vaccine leave Acambis with long wait for profit

Don't go shopping for N Brown shares - Sales outlook is blurry at camera retailer Jessops
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The Independent Online

The terrorist attacks of 11 September 2001 transformed Acambis, a previously sleepy biotech.

The terrorist attacks of 11 September 2001 transformed Acambis, a previously sleepy biotech.

The heightened fear of a biological attack led the US government to build a stockpile of vaccine against smallpox. Acambis reopened its mothballed factory in Cambridge, Massachusetts, to produce 182 million doses and generated a £100m cash bonanza from the contracts.

It gave Acambis the opportunity to build a sustainably profitable company in shorter order than most of its biotech peers. The question for a long while was how it would seize that opportunity. The question now is whether it has already missed it.

The City has punished Acambis for its lack of imagination. Instead of a transformational deal, creating something close to a sustainable business in one leap, shareholders have had to settle in for a long wait. It ploughed money into developing a pipeline of new vaccines for travellers' diseases such as West Nile virus, Dengue fever and Japanese encephalitis. It bought a small company selling a typhoid vaccine, whose salesforce will be used to market future Acambis products. And yesterday it bought a manufacturing plant capable of filling syringes. These are modest acquisitions but they will create value.

The shares have fallen since we advised readers in November 2003 to tuck them away for the long term. Most of the new vaccines will not be approved until 2008 and beyond. The nearer-term hope, a yellow fever vaccine, has been delayed indefinitely because of manufacturing problems at Acambis's development partner, Chiron.

The prospect of significant further revenues from smallpox vaccine has also dimmed. The US government is looking for supplies of a weaker strain to give to people with compromised immune systems, but Bavarian Nordic is in pole position for this contract, and Acambis shares are vulnerable if it wins less than half the contract when a decision is made at the end of the year. Meanwhile, Acambis is trying to persuade the US to pay for it to keep its smallpox vaccine plant running to top up the stockpile and meet emergencies, but the urgency seems to have gone. Contracts from other governments have been few and far between, and there seems to be a push to internationalise the issue, with talk of a global vaccine bank that would limit the need for countries to shell out for their own stockpiles.

While sustainable profitability remains over the horizon, it seems likely the shares will get cheaper yet.

Don't go shopping for N Brown shares

With the retail sector producing profits warnings at the rate of almost one a day, and with the British Retail Consortium reporting the worst April in a decade, N Brown has surprised everybody by saying it enjoyed a very good couple of months, thank you.

The home shopping group, owner of catalogues Simply Be and Fashion World and the doorstep business House of Stirling, specialises in larger-sized clothes. After years of problems, it showed that a more disciplined management and a more targeted approach to mailings can reap useful sales benefits. Like-for-like sales rose 5 per cent in the last 10 weeks.

A little light restructuring has also helped N Brown improve operating margins in a core business that needs to be squeezed all the time if it is to prosper within an industry in gentle decline. If the pressure on consumer spending persists, it will face harsher competition from high-street discounters that could take the shine off its good start to the new financial year.

N Brown is a relatively highly indebted business and there are still problems in its finance arm. Although its shares snapped back to 120p yesterday, roughly where we said "sell" last year, we stand by our recommendation.

Sales outlook is blurry at camera retailer Jessops

Investors who snapped up shares in Jessops when the photographic retailer floated last October at 155p had the smiles wiped off their faces when the company issued a profits warning five months later.

Digital cameras, one minute the most exciting new product since someone started pre-slicing loaves, were suddenly yesterday's news. How else to explain the market's collapse from 30 per cent-plus growth last autumn to zero in February?

The group did say following "significantly negative" sales in February, the picture had improved so that like-for-like sales were down only 2.4 per cent in the six weeks to 8 May.

To meet its full-year financial targets, Jessops is banking on slashing costs and persuading its suppliers to share the pain. It is not banking on a pick-up in sales which, considering its shares were sold as a growth story, is more than a little disappointing. Although there is doubtless more growth left in the digital camera market, for the moment Jessops is relying on the relatively new digital SLR market to drive demand. These are still too pricey, at about £800, to tempt the average snapper.

The next few months are make or break, containing the summer holiday snapping season, and the company said it is too early predict the outcome.

Shares in Jessops, which fell 2.75p to 85p, do not look expensive on the City's current numbers. But what good is a price/earnings ratio of just 9 times if no one has any faith in the earnings forecast? Avoid.

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