Investment Column: Drugs woes make Astra too pricey

HMV' s debt shrinkage makes it one to buy; Sportingbet's well worth a little flutter
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The Independent Online

You can see from the figures in our table why it is that the world's giant pharmaceuticals companies fight dirty to protect their intellectual property and stave off the arrival of cheap, copycat versions of their life saving drugs.

The loss of an exclusive brand can put a thumping great hole in profits. At AstraZeneca it was the loss of Losec, an ulcer pill that once had sales of £10m a day, which made 2003 a down year for profits. And at GlaxoSmithKline, its bigger rival, lost US sales of Paxil (the antidepressant sold here as Seroxat) and Augmentin, a multi-purpose antibiotic, mean 2004 will be a "transition year", in the words of Jean-Pierre Garnier, the company's chief executive. Or "awful", in the words of everyone else.

The weak dollar is hurting both companies, since almost half of all drug sales and an even greater proportion of the profits are made in the US, where drug prices are subject to free market rules rather than government regulation.

The pressure to find legal and regulatory ways to push down US drug prices will always weigh on Big Pharma shares, particularly now that we seem to be in a lean period for new drug discovery. But these are robust companies which are generating more cash then they know how to invest. Both AstraZeneca and GSK have multibillion-pound share buy-back programmes underway. GSK at least pays a healthy dividend, with a likely yield of 3.6 per cent this year.

AstraZeneca is proving more miserly, with a dividend yield below 2 per cent. In part, this is because the share price is so high. Up again yesterday after the company showed its vast marketing spend to launch Crestor, an anti-cholesterol pill, is bearing some fruit, its shares trade on 22 times this year's earnings. The premium to GSK shares is vast.

The reason for this is that GSK is a year or two behind AstraZeneca in replacing the sales lost to generic drug companies with new products. As well as Crestor, AstraZeneca showed strong growth in the first quarter for a portfolio of new products for asthma, cancer, mental illness and others.

GSK's shares, though, topped the FTSE 100 as Dr Garnier outlined faster-than-expected progress for its new treatments for psoriasis, breast cancer and neuropathic pain, which could be launched over the next few years. With the drip-drip of positive news in this pipeline over the rest of the year, GSK shares are well worth buying. AstraZeneca's are too expensive.

HMV' s debt shrinkage makes it one to buy

HMV, the music and books retailer, appears to be suffering none of the problems facing high street generalists such as WH Smith, on the evidence of yesterday's trading update.

The healthy sales performance seen at Christmas continued for the remainder of the financial year, to 24 April. That means sales at both the music shops and the Waterstone's book chain were up around 3 per cent on a like-for-like basis. Full-year results would be at the top of City expectations of £117m pre-tax profit.

For analysts, the big news was that, as a result of stronger-than-expected cash generation, net debt will be materially better than market forecasts, despite an expansion programme of 30 new stores. That means that debt by the end of April was as low as £60m, rather than forecasts of some £100m.

The upshot of this news on debt, according to the excited analysts, was that HMV could be totally debt-free by the end of the current financial year. All of which raises the question of what HMV will do to use its balance sheet. Acquisitions are possible but these are likely to be bolt-ons, possibly abroad. So there is significant scope for a return of cash to shareholders.

The company's overseas performance was more mixed. Canada did well but Japanese music sales were weak. HMV said it will finally be out of the loss-making US business by the end of this calendar year, with the closure of the three remaining stores.

Strategic challenges remain, of course. Books and music are some of the goods most suited to internet retailing, providing a massive challenge to high street players. For now though, the big rise in DVD sales is compensating for the drop in music. And physically being in a bookshop clearly has an enduring appeal among shoppers.

HMV shares, at 228p, trade on an undemanding forward multiple of 11. Buy.

Sportingbet's well worth a little flutter

The world is full of closet gamblers, according to Sportingbet, the online bookie. Only five countries around the world have betting shops, whereas the internet is readily available.

Sportingbet yesterday said that profits for the year had more than quadrupled. While sports betting is, obviously, its biggest game, it is also cashing in on the rise in online casino games, particularly in the US. Poker will be onstream in its US sites in June.

In the UK, Sportingbet obviously struggles against the trusted brands of William Hill and Ladbrokes. But it is already a top five player in an increasingly competitive market.

Its cash flow is very strong, with more than 100 per cent of operating profits translated into cash in the 12 months to March. For the next year or so, this is being gobbled up by debts, but from then on, chunky dividends could be on the cards.

An uncertain regulatory environment does, however, overhang Sportingbet. Online gambling is a new concept, and its regulation and duty is in flux from country to country. But the main worry to have kept us out of this stock till now - that of legislative risk in the US - seems to have abated.

At 90.25p, the shares have almost doubled in recent months. Still, they are on a competitive forward earnings multiple of around 12 times. Have a flutter.

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