Biotechs have been battered but Celltech may be a long-term cure
Christmas will make or break Body Shop; Fibernet remains a perilous investment
Friday 18 October 2002
Who would be a biotechnology analyst in the current market? The City's finest were in Slough yesterday listening to news on Celltech's portfolio of potential wonderdrugs, some of which might turn into blockbuster products in five, six, seven years' time. They were impressed, but all the while they knew that shaken, risk-averse equity investors are only interested in where this year's earnings and dividends are going to come from. Since they are not going to come from the biotech sector, shares continue to go down and down, however enthusiastic the analysts. There was a mood of some gloom.
Celltech forfeited its place in the FTSE 100, partly because of the widespread flight from jam-tomorrow biotech companies but mainly because of its own string of disappointments. At the start of the year, Celltech looked as if earnings were just round the corner. Now they are plainly not.
The company is on the verge of dropping its most advanced drug, Humicade, which had been close to launch as a treatment for Crohn's disease, which causes inflammation of the gut. Celltech has a more unequivocally effective treatment for the disease less than two years behind Humicade in the clinic, so there seems little point pursuing both. Great trial data on CDP 870, the second Crohn's treatment (which is also being developed as a treatment for rheumatoid arthritis by the mighty Pfizer and is Celltech's most exciting product) was the centrepiece of yesterday's presentations and sent the shares soaring.
Metadate, a drug for hyperactive children, has had disappointing sales in the cut-throat US market, but even here there has been good trial data in recent days, so the tide may be turning here, too.
Celltech has great technology and after an 18-month hiatus, is soon to start trialling four new drugs on humans. With a replacement for Peter Fellner, the chief executive, due by the end of the year, investors able to take a (very) long view might start to build a stake.
Christmas will make or break Body Shop
There are only 68 shopping days till Christmas. That may not be making you nervous yet, but it is making shareholders of Body Shop International sweat. This festive spending spree is make or break for the recovery at the ethical lotions and potions retailer.
Body Shop has been an erratic performer in recent years, a fact which forced the founder, Anita Roddick, into a non-executive role earlier this year. The new chief executive, Peter Saunders, at least hit market forecasts with half-year figures yesterday showing a £700,000 loss, compared with a £2.6m profit the previous year.
Worryingly, there was a big build up in unsold stocks, partly in advance of Christmas, partly because the company was preparing for the launch of its new range of make-up, and partly because it hasn't yet made enough progress in improving the efficiency of its supply chain. There was a worrying outflow of cash in the period, even if you ignore the £3.6m cost of axing 116 head office jobs. The interim dividend is paid out of reserves, so the final divi will depend on the cash position come March.
All of which means Christmas has got to be good. Mr Saunders is bullish, and it looks as if the new make-up range has driven a very strong pick up in UK sales in recent weeks. This is great news, because the UK has seemed a chronic underperformer, but it means there is still a harsh competitive and economic environment in the US.
Some of the City's influential retail sector pundits came away impressed, but it would be a big gamble to follow them in buying the shares. These were steady at 103.5p yesterday. That is a modest multiple of 10 times forecast earnings for the full year, but remember the forecasts are highly provisional. Potential investors should look for the New Year trading update before making the leap.
Fibernet remains a perilous investment
The telecoms company Fibernet is still desperately trying to demonstrate that it will be among the survivors of the particularly nasty storm raging through the telecoms sector.
Shareholders have been wiped out as sectormates such as Energis have been crushed under their debts and Fibernet is by no means in the clear yet.
The company has scaled back over-ambitious European operations to a single business in Frankfurt and is concentrating on selling telecoms services to businesses in the UK. It is an overcrowded market, and turnover even in the continuing divisions was down to £36.7m in the year to 31 August from £52.3m. The group plunged to a £91m pre-tax loss.
Fibernet says the second half of the year was better than the first with the value of new contracts rising to £26.9m from £9.8m. While that growth is clearly a positive sign, the fear among analysts is that it is taking longer for those new orders to convert into revenues.
The risks facing the business have been "significantly reduced" and the cash pile – which has dwindled to £34.3m from £95.7m a year ago – will be enough to see it through to profitability, the company insisted yesterday. Maybe. Not everyone agrees, and many fear a cash crunch is just over the horizon. Analysts at Investec predict Fibernet, which is not expected to be profitable until 2005, will be down to barely £12m of cash by August 2003. The shares, down 0.25p to 22.5p, remain a perilous investment. Sell.
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