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Healthy boost for Nycomed shares after pounds 223m profit

NYCOMED AMERSHAM, the Anglo-Norwegian health technology group, yesterday pleased the City with a solid set of results despite tough conditions in some of its important markets.

The company, which produces high-technology equipment to diagnose diseases and test drugs, dispelled some of the stock market's worst fears with a 12 per cent rise in 1998 pre-tax profits to pounds 222.8m. Sales were up 1 per cent to pounds 1.38bn.

The figures were at the top end of analysts' expectations, and triggered a 25p rise in the share price to a five-year high of 460p. The stock was also boosted by the announcement that the group, formed from the 1997 link-up between Britain's Amersham and Norway's Nycomed, had achieved pounds 32m of merger savings and was "firmly on course" to meet its target of pounds 70m annual cost cuts from next year. The final results, the first since the merger, were buoyed by good sales growth in the group's core imaging and drug discovery divisions.

The performance of Nycomed's imaging products, used to diagnose and treat diseases, was one of the City's main worries. The company has been hit hard by a slump in the price of X-ray equipment in the important US market amid fierce competition, and it had been feared that the fall in those products could drag down the whole division.

However, profits in the imaging division, accounting for nearly 60 per cent of group profits, rose 14 per cent to pounds 158.9m. Bill Castell, chief executive, said sales growth in Nycomed's high-technology products had offset the expected collapse in X-ray turnover.

Star performers were the heart-imaging agent Myoview, which experienced a 43 per cent leap in sales, and iodine seeds, used to treat prostate cancer, where turnover more than doubled. Mr Castell said that this year the division should benefit from an improvement in the US X-ray market. "We think that the market has bottomed out and should be flat in 1999," he said.

But even if X-rays recover, they are unlikely to provide much of a fillip for Nycomed, as they are a low-margin product. The key to the group's future growth lies in its more sophisticated, higher-margin equipment. Myoview and iodine seeds are promising products and should grow strongly in the next few years as they increase penetration of the lucrative US market.

The pipeline looks interesting, with an ultrasound heart product and a device to detect Parkinson's disease expected to yield solid sales.

On the drug research side, Nycomed's pledge to buy out its joint venture partner, Pharmacia & Upjohn, in the near term will give it control of a cash-generative business.

The company's promised disposal of its underperforming drug division, which last year suffered a fall in profits due to the Russian financial crisis, will also help to streamline operations.

Michael King, pharmaceutical analyst at SG Securities, believes that, given Nycomed's earnings potential, the shares - on 21 times 1999 forecast earnings of pounds 253m - are a buy.

"I am forecasting earnings growth of 12 to 15 per cent in the long term and I believe that [the share price] is still good value," he said.