Investment Column: Nycomed's merger hiccups

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The Independent Online
NOT ALL mergers succeed. Nycomed Amersham's chief executive, Bill Castell, jokes that it will take 20 years to complete the merger that created the company in 1997. Although the major integration should be finished next year, it is too early to say whether it will be a triumph. But there have been some hiccups.

The merger aims to generate savings of pounds 70m next year; this year it should save pounds 52m. Offsetting these gains are the familiar problems involved in combining two businesses. Merger costs are to top pounds 120m. The management has had problems making its information systems year 2000 computer compliant, and has been bogged down in deciding which of five research and development sites to close. In Europe, it has yet to integrate its ordering systems.

Management admits that, as a result, it has taken its eye off the ball in some areas. In life sciences - pounds 243m of group sales - it has not handled the declining popularity of radioactive gene detection techniques as well as it could have. The division's new MegaBace technology, launched in January, saw market share crash in the middle of the period as a competitor entered the market. Genomics equipment's underlying sales fell by 4 per cent to pounds 77m.

Imaging has had its challenges, too. It is dominated by X-ray products, which have suffered following tough contract negotiations in the US and price deflation in Europe as the Russian economy collapsed. US prices will stay stable now only until the next round of negotiations at the end of 2000.

Meanwhile, Nycomed's hefty investments in new scanning devices are unlikely to yield marketable products before 2002 and 2003.

On the upside, both divisions have other products that are increasing sales. About 20 per cent of imaging's sales are growing at rates well into double digits, as are over one-third of life sciences sales. Nycomed has won a tranche of contracts for MegaBace now that buyers have evaluated the competition.

Merrill Lynch expects pre-tax profits of pounds 228m and earnings of 19.6p per share this year, rising to pounds 255m and 21.9p in 2000, putting the shares - down 19.5p at 383p yesterday - on a forward p/e of 20.

Nycomed's markets are looking particularly vicious at the moment. Whether the merger, with its distractions, will help it sustain the leading positions it commands and turn around the areas in which it is struggling has yet to be established. The shares are risky and could fall further. Sell.