Comment: Zeneca price a poison pill for potential predators

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The Independent Online
Another day, another rumoured takeover bid for Zeneca, the often mis-pronounced name ICI chose for its demerged pharmaceuticals business. Valued at a touch over pounds 13bn, Zeneca would be a mighty meal even for the likes of Roche and Glaxo Wellcome, the two most widely rumoured suitors, but that doesn't mean it is not going to happen. These days almost any takeover, however large and unlikely, seems possible, and Zeneca certainly seems a very credible target amid the froth gathering at the top of the present bull market.

There are at least a handful of international pharmaceutical companies, Roche and Glaxo Wellcome among them, who would love to take a tilt at Zeneca, given the chance. The problem is that their known interest in the company may have priced it out of the market. As one seasoned industry executive said recently: "At pounds 8.50 a share you would get half a dozen bidders for Zeneca but it is hard to see how you could justify this price." The stock market is clearly right to believe Zeneca is a target, but whether it is also right to think anyone would bid at this price is anyone's guess.

Why Zeneca? Notwithstanding estimates that drug sales last year grew at their fastest rate since the early 1990s, the world-wide pharmaceutical industry clearly remains ripe for further consolidation. The fact that Glaxo Wellcome, the world's largest drugs group, controls just 5.1 per cent of the world market and yet its sales are pounds 2bn greater than its nearest competitor illustrates just how fragmented the industry remains.

In the UK, Beecham has merged with America's SmithKline Beckman, Wellcome has been taken over by Glaxo and, most recently, Fisons succumbed to the French-controlled US group Rhone-Poulenc Rorer. All this corporate activity has left Zeneca looking dangerously exposed. It is therefore hardly surprising that takeover rumours have swirled around the company for months and the shares, up 16p to pounds 14.04 yesterday, continue to bounce along just below their all-time peak.

The group's record since it split with ICI three years ago has been undeniably impressive. Although pre-tax profits have fallen to pounds 619m from the pounds 633m recorded in 1993, Zeneca has won praise for spending the last few years weeding out under-performing operations. Earlier this year Zeneca announced a pounds 60m efficiency improvement drive. But more importantly, unlike many of its rivals, Zeneca has a potentially very strong drugs pipeline for its relatively small size.

Drugs such as Accolate for asthma, Seroquel, a schizophrenia treatment, and its existing strength in anti-cancer drugs, where Zoladex and Nolvadex have made it number two in the world, could drive Zeneca's growth at above the rate of the rest of the market. Lehman Brothers estimates that the two new drugs could be producing sales of $400m each by 2000, while the group's cancer franchise may be worth around $1.6bn, including $700m from new products. That would substantially lift group sales which were pounds 4.9bn last year.

Bulls of Zeneca argue that if the company does fulfil these admittedly optimistic forecasts, then the shares are still cheap. If, on the other hand , it fails, then Zeneca will be taken out, much like Fisons was, and any bidder would still be forced to pay a premium. Furthermore, Zeneca's share price may look expensive by historic standards, but it is not overvalued by international standards. Assuming profits this year just short of pounds 1.1bn, the forward price/earnings multiple would be 19.

Although that is high compared with a UK sector on 16 times current year earnings, it is just below the group's US peers and well below the 22 times on which European pharmaceutical groups trade. Even at present levels, therefore, a bid is not impossible. The most widely rumoured suitor is Roche. Given the recent decision to merge made by its Swiss peers, Ciba and Sandoz, Roche may feel under increased pressure to do something. But there is a feeling that it might be keener on a target like Warner Lambert of the US, which would expand its over-the-counter drug franchise, rather than Zeneca.

A more intriguing possibility is that of Glaxo. Analysts believe the drugs giant may have difficulty sustaining its momentum once the savings from Wellcome have come through. Its blockbuster anti-ulcer drug Zantac goes off patent in the US in 1997 and while the impact of this is probably exagerated by most analysts, there is no doubt Glaxo faces an earnings squeeze two or three years down the line.

But could Sir Richard Sykes, Glaxo's ambitious chief executive, possibly get away with gobbling up his only remaining major independent UK rival? His clinical and ruthless treatment of Wellcome has caused considerable ill-feeling in the world of pharmaceutical research and his contention that one large research department is a more effective way of developing successful drugs than two, competing smaller ones, has yet to be proven. A few bio-tech pilot fish might be left swimming with the shark, but essentially, Glaxo would become British Pharmaceuticals plc. Is this what the policy-makers want? If Glaxo ever did move on Zeneca, you can be sure that its putative target would not take it lying down.

Putting pensions out to pasture

Here's a difficult one for a Saturday morning. You are a company director, looking forward to well-earned retirement not too many years hence. Thanks to Greenbury, you face the weighty matter of having to disclose the effect on your eventual pension of whatever you have earned during the year. Do not despair, those accommodating chaps at the Stock Exchange have given you a choice. You can opt for the method advocated by most actuaries and institutional investors, which estimates the full cost of funding your eventual pension. Or, you can go for the calculation that sets out how much your pension will be. The resulting figures will in all likelihood have as much in common as a mature oak and a bonsai tree.

Now step forward all those directors anxious to choose the big-figure disclosure for their shareholders' delectation over its potentially vastly more modest variant. Blimey. Don't crush us in the stampede.

Choosing the first method, disclosing the full cost of funding the pension, would result for younger directors in figures three or four times bigger than the one thrown up by the second option. For older directors, close to retirement, the difference can be 18 or more times. It is little surprise, therefore, that corporate Britain fought tooth and nail against this method, while actuaries and institutional investors argued it is the only one that gives shareholders any meaningful idea of pension costs. Battered by months of lobbbying, the Faculty of Actuaries has produced a compromise politicians would be proud of. The Stock Exchange, swinging a leg on each side of the fence, will approve it with relief.

Face has been saved, it is argued, because any company choosing the small- number option, must provide eight pieces of supplementary data that will enable people to work out the big, full-cost, figure for themselves. Got that? Well, that's alright then.

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