Michael Harrison's Outlook: MG Rover takeover is full of Eastern promise

Drugs don't work
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The Independent Online

The last time I wrote about MG Rover I got an inbox full of grief from irate supporters of the company. They questioned my sanity, my patriotism and my continued employment prospects. One even wondered aloud whether I should be at liberty at all to make such defamatory remarks. Anyway, here goes again.

Today we report a rather different side to the story - that MG Rover looks to be on the verge of an historic deal to link up with a Chinese car maker, Shanghai Automotive Industry Corporation. Many a slip twixt cup and lip and all that. MG Rover has been here before with another eastern motor manufacturer, China Brilliance, only to see the deal turn to dust in its hands before it could be consummated.

It also dallied with Proton of Malaysia to no ultimate avail. So it is important to emphasis that this is not yet a done deal, even though there is a remarkable degree of confidence flowing through the Longbridge car plant that the Chinese are all but signed, sealed and delivered.

If that is correct, then what does it mean for MG Rover? Well, the obvious starting point is that it gives the company a real future for the first time since the four Midlands businessmen from Phoenix Venture Holdings paid BMW a symbolic £10 for Longbridge four years ago. Since then it has been living on borrowed time and borrowed money - the £550m dowry that BMW left behind in the business was as good as a gift.

The second point is that it will mean control of the company passing out of UK hands for the second time. But does that really matter when other UK manufacturing industries - consumer electronics, motorcycle production, machine tools - have long since gone West, or, more often, East? The British car industry today is Nissan, Toyota, Honda and Mini (ie BMW). Their UK plants are all profitable, unlike Rover, Jaguar and Land Rover. As for Ford, it no longer produces cars with a blue oval in Britain at all while Vauxhall is down to one site at Ellesmere Port.

MG Rover, for want of a better description, is still called a volume car maker. But only by dint of the type of models it produces - standard saloons for the mass market. In volume terms, it is anything but a volume manufacturer. This year Longbridge will be lucky to produce 120,000 cars. General Motors produces more than that in a week. BMW's Mini, a lifestyle car if ever there was one, will sell 180,000 this year.

In a world where there is capacity to build five cars for every four that are bought, Longbridge is not even an afterthought. And the Chinese are about to add to that capacity dramatically. MG Rover's chosen partner is growing at a rate of 40 per cent a year, which would take it to 3.5 million cars a year in five years' time.

It makes sense to get in on the ground floor of that dizzy growth story. As befits its relative size, MG Rover will be a junior partner, turning out no more than 200,000 of the one million cars that the joint venture hopes to produce. But what it gets in return are massive economies of scale coupled with exposure to the Chinese market. Together, they offer Longbridge the best chance that it has had in a long time of becoming financially viable.

Signing the deal would also have an important symbolic importance for MG Rover by demonstrating that it is here to stay. It might even allow the punch-drunk company to draw a line under the relentless barrage of adverse publicity its directors have brought upon themselves.

John Towers, the Phoenix chairman, says there is almost something in the national psyche that leads us to run down companies like MG Rover. This is his chance to turn the corner. Will it happen? Hopefully. Does Longbridge deserve it? Undoubtedly.

Drugs don't work

Another day, another drug-induced frenzy on the stock markets. The fallout from the US Senate's investigation into Merck's painkiller Vioxx is having all sorts of unpleasant side effects - mainly on the share prices of other drug companies. In London, AstraZeneca shares slumped as much as 10 per cent after an American safety regulator, David Graham, testified that its anti-cholesterol treatment Crestor was particularly bad karma. Raised blood pressures as well at GlaxoSmithKline, where its asthma treatment Serevent also made his top five list of drugs which carry a serious risk of killing as many as they cure.

There are two debates going on here and Big Pharma is exposed to both. One is the debate about whether regulators such as the US Food and Drug Administration have a life-threatening conflict of interest in that they are responsible for both approving drugs for prescription and then monitoring their safety afterwards during use. Having allowed a treatment on to the market, it is a brave regulator which then admits it made a mistake and orders withdrawal. Dr Graham believes the conflict is untenable and was quickly slapped down by his masters at the FDA, but by then his genie was already out of the bottle. It could be an uphill struggle for AstraZeneca to persuade American doctors that Crestor merits being their cholesterol treatment of choice.

The other is the wider one of how much risk is acceptable when licensing a new drug: in other words, at what point do the side-effects begin to outweigh the benefits of the treatment? Given that all drugs are, by definition, toxins, to have any effect, they also need to have side-effects.

The drug companies have not helped themselves by adding another dimension to the argument - ie what level of disclosure is acceptable. In the case of Vioxx - and GSK's Seroxat before it - the defence has been tainted by the suggestion either that unhelpful tests results were not published or that evidence of untoward side-effects was not acted upon quickly enough.

The twin debates could scarcely come at a worse time for companies such as GSK which are under added pressure to show that their pipelines are not drying up by delivering more blockbusters like Paxil. Next week's R&D day at GSK will give some glimpse of how it is bearing up.

Meanwhile, the prognosis for the pharmaceutical industry is not good. Tighter regulation and a greater level of risk averseness are the likely outcome. Full disclosure also begins to look inevitable with all the cost implications that carries with it.

Should we be concerned? The proportion of drugs that actually work is frightening small - perhaps as few as one in three according to the latest estimates. So, perhaps the public hearings and the high-profile campaigns of consumer groups such as Public Citizen will produce a world of fewer, safer and more effective drugs.

The problem is the pharma industry remains a tremendously fragmented one - Pfizer, the world's biggest drug company, for instance, controls less than 10 per cent of the market. There are, therefore, a lot of pharma companies all needing to generate sales to support their expensive R&D pipelines. Safer and more effective drugs could, therefore, mean fewer companies producing them. Would the activist groups which make life so tough for Bad Pharma welcome an even Bigger Pharma? And, for that matter, what would the regulators (those who police competition and not safety) have to say?

m.harrison@independent.co.uk

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