Bottom Line: Beyond the Boots drug fiasco

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The Independent Online
IF COMPANY annual meetings were a serious forum for investors to question their management boards, then Boots' yearly jamboree on Thursday would provide an ample opportunity.

Less than seven weeks after Sir James Blyth, the chief executive, reassured all and sundry at the company's preliminary results that he was confident that regulators would approve continued use of Manoplax, its over-hyped heart decongestant drug, Boots has had to scrap it.

Not only will the bill for shareholders approach pounds 200m in wasted development costs of pounds 100m, futile marketing expenditure totalling pounds 20m to pounds 30m, a pounds 35m write-down of stock and manufacturing facilities and a likely pounds 10m to pounds 15m staff redundancy charge.

The Manoplax disaster also raises the vital question of the future of Boots' pharmaceutical division, which contributed pounds 121m out of 1992/3 operating profits of pounds 422m.

Synthroid, the thyroid replacement therapy, is a resilent enough off-patent drug, but there is nothing significant in the pipeline.

Minus Manoplax, Boots, if it wasn't already, is now a relatively negligible force in prescription pharmaceuticals, which produce perhaps 70 per cent of the division's earnings.

This points firmly to divestment of ethical drugs and reinvestment in over-the-counter products or an accelerated expansion into pan-European retailing. The problem is that Boots' ethical drug portfolio isn't worth much, which is affecting its share rating, and corresponding buying opportunities are expensive.

Some estimate that Boots could get pounds 400m to pounds 500m for the ethical drugs business. To replace perhaps pounds 80m of operating profits with the proceeds without diluting earnings is a tough proposition for a company that perpetrated Ward White.

Recognising that Boots is in a cleft stick, the stock market has put the boot firmly into its share price this year, causing it to underperform by 25 per cent. There has also been a stream of negative publicity about its successful core business, Boots the Chemist.

This has left Boots shares languishing on a p/e of 14.5 and 13 for the next two financial years respectively, adding back non-recurring Manoplax operating expenses, or a 2 or 3 point discount to its peers.

Despite a 13p flip-up in the shares to 435p, this rating gap will not be closed until Sir James Blyth and his team take a more comprehensive grip on pharmaceuticals and do something about Do It All - ghoulish reminder as it is of the disastrous Ward White acquisition - which is losing pounds 20m to pounds 30m a year.