Outlook: Making the best of a bad job at nil growth British Telecom

Celltech; King's message
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The Independent Online

He doesn't like to be reminded of it, but when Ben Verwaayen, chief executive of British Telecom, started with the company in March last year, he set himself the target of achieving top line growth of 6 - 8 per cent in each of the next three years. It was the overenthusiasm of the new boy, and to his credit he was quick to admit he had set himself far too big a challenge.

Even so, to achieve no growth at all was not at all what the doctor ordered. Sales have been flat or falling for each of the last four quarters, and though BT might have hoped otherwise, any number of promises on higher dividends, share buybacks and even deeper cost cutting is not going to disguise the latest of them. In the second quarter to the end of September, sales were down a further 2 per cent.

Most of this can be attributed to ever higher levels of competition. BT has broadly held its market share in the residential market, despite the competitive onslaught from carrier pre-select services, but only at the cost of slashing prices.

Yet there have plainly been some serious management mistakes as well. The trouncing of BT's near monopoly in directory inquiries is a terrible indictment which no amount of explaining can excuse. After deregulation, BT's share of this nice little earner more than halved, and BT lost market leadership to its brilliantly marketed 118-118 rival. That's called being asleep at the wheel.

More seriously, BT and its investors are having to reconcile themselves to the notion that the company is highly unlikely ever to recover its growth stock status. The excitement over broadband, and the possibilities opened up by wi-fi for re-entering the mobile market, have failed to dispel the dawning realisation that BT is in truth just a bog standard utility, no more no less. That means running the business for cash. In recognition, BT promises to pay out 50 per cent of its earnings in dividends, rising to 60 per cent by March 2006. Some investors think it should be higher still.

After the profligacy of the previous regime, this was always likely to be BT's fate once it had paid off sufficient of its debt. Yet it cannot have been what Sir Christopher Bland had in mind when he spent £2.3m on BT shares shortly after becoming chairman in the spring of 2001. Sir Christopher is a wealthy as well as a resilient character, so it won't bother him to have lost half his money. Even so...


When Celltech Group signed a licensing agreement in March 2001 with Pharmacia for its CDP 870 compound, or to give it its full name, the PEGylated anti-TNF-alpha antibody fragment, it was the biggest and most lucrative such deal ever signed by a British biotech. In total, it was to have been worth $280m in milestone royalty payments, and once the product had won clinical approval, 40 per cent of all operating profits earned thereafter. Heady times.

In today's more austere environment for the pharmaceuticals industry, Pfizer has taken a long hard look at the deal, and decided to scrap the guts of it, which is a letdown not just for Celltech but also for Pfizer when it is recalled that CDP 870 and its supposedly miraculous effect on rheumatoid arthritis was one of the major reasons Pfizer acquired Pharmacia. Still, that was then and this is now, and with prices, Research and Development budgets and sales under pressure all round, Pfizer has decided to cut and run. Either that, or Celltech must agree a deal that is a pale shadow of the one it signed up for.

Celltech has received $60m so far in milestone payments, while Pfizer has already shelled out a large part of the expenditure necessary to get the product through Stage III trials, so Celltech can hardly be said to have done badly out of the arrangement. Furthermore, at this stage Pfizer is only asking for a re-negotiation of the deal. None the less, it must be questionable whether this core product for Celltech will ever now reach the market.

Dr Goran Ando, who ironically joined Celltech as chief executive only quite recently from Pharmacia, attempted to sugar the pill as best he could by stressing that the product was still being aggressively developed for alternative use as a treatment for Crohn's disease. Surprise, surprise, he now thinks that Crohn's disease represents a much larger commercial opportunity for Celltech than originally envisaged.

His comments failed to prevent a near 20 per cent slump in the share price. Celltech was once thought of as one of the least high-risk of the biotechs, in part because of the way it had insulated itself against the very high costs of product development by licensing to others. It doesn't seem to work that way.

King's message

Paul Volcker, former chairman of the Federal Reserve Board, once advised Mervyn King, Governor of the Bank of England, that the secret of being a good central banker was "mystique and mystique". Ever since, Mr King has been striving to demystify what it is that central bankers do and why. Sometimes it must seem like an uphill struggle.

Regrettably, there is often a world of difference between what the media reports and what is actually said, but over-egged is hardly the expression for the way Mr King's press conference on Wednesday to launch the Bank of England's latest Inflation Report was covered. "Warning of debt disaster", screamed the Daily Express on its front page. Others (though not this newspaper) were scarcely less alarmist.

Could this really have been the same press conference that I had witnessed on webcast, or was I watching it in a parallel universe? In the press conference I observed, Mr King had gone out of his way to stress that there was no systemic problem of over-indebtedness in Britain, or put another way, high levels of household debt did not seem to him or the Monetary Policy Committee to pose a significant threat to the health of the UK economy. Yet because some people plainly will be badly affected by rising interest rates, he added the rider: "Everyone needs to think carefully about the amount of debt they can afford".

Talk about sexing it up. This was widely read as code for "batten down the hatches and prepare for storm force ten", and just goes to show how difficult it is for central bankers to get the balance right in their public utterances. Because it is generally assumed that central bankers cannot say what they really think for fear of frightening the horses, there is a perpetual search for hidden meanings, innuendos and coded messages. It's all Alan Greenspan's fault. The delphic comments of the present chairman of the Federal Reserve have turned the coded message into something verging on a whole new art form.

Rising household debt is a hugely emotive subject, the dangers of which bring out the puritan in the most unlikely of people. That it might all end in tears is manna from heaven for an industry as much driven by sensationalism as getting at the truth. What was it that Mr Micawber said? "Annual income twenty pounds, annual expenditure nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

Yet what Mr King said (and I'm pretty sure I'm summarising him correctly) was that although too much debt was plainly going to be a problem for some, it wasn't going to bring the British economy crashing down all around us. Indeed, according to the Inflation Report, the economy will grow by more than 3 per cent next year and the year after, which scarcely squares with the idea of a debt crisis. Still, no harm done. The more newspapers scare their readers, the less work there is for the Bank to do. Who'd have thought it? The Daily Express as a tool of monetary policy. Perhaps there is something to be said for mystique after all.