Investment: Zeneca profits slip to pounds 1.1bn

ZENECA, the drug giant in the throes of a pounds 48bn merger with its Swedish rival Astra, yesterday revealed that a pounds 130m currency hit had caused a drop in 1998 earnings.

In its last results before the Astra deal, Zeneca said that the strong pound wiped around 12 per cent off group operating profits, pushing the pretax figure to pounds 1.063bn, 2 per cent down on 1997. Zeneca sales also suffered a pounds 208m blow due to the strong pound, ending 1998 at pounds 5.5bn, 6 per cent up on the previous year.

Sir David Barnes, the chief executive, defended the company's performance and said that the results showed strong underlying growth. He added that, excluding currency effects and a pounds 44m expenditure on the millennium bug, pretax profits and sales were up 10 per cent.

Sir David, who is to become deputy chairman of AstraZeneca, dismissed fears that the merger, set to be approved by Zeneca's shareholders today, could be delayed by anti-trust regulators on both sides of the Atlantic. He said that last week's requests for more information from the US and European authorities centred on "relatively narrow areas".

"We continue to be hopeful that the merger can be concluded in the second quarter [of 1999] as planned," he said.

But even assuming that AstraZeneca is waved through, questions remain on the combined group's future growth. The key issue is whether the two companies have the drugs to fill the gap left by the expiry of patents on some of their blockbusters in two years' time.

Between 2001 and 2002, Zeneca will lose exclusive rights on Zestril, its pounds 600m a year hypertension product, while Astra will lose protection on the anti-ulcer treatment Losec, the world's best-selling drug. Together, the two products make up some 30 per cent of AstraZeneca's sales of over pounds 10bn.

Tom McKillop, the chief executive designate of the combined group, yesterday said growth will come from 14 new products set to be launched by 2001. AstraZeneca was also looking at licensing more compounds from smaller companies. The problem is that the new products are not growing as fast as expected and may not be enough to plug the hole left by the waning blockbusters. Yesterday's results seemed to confirm these fears and caused a 41p drop in the shares to pounds 25.76.

Seroquel, Zeneca's anti-schizophrenia treatment sold pounds 39m last year compared with pounds 31m in 1997. Zomig, its asthma treatment, reached sales of pounds 61m but was hit by a downturn in the market for respiratory drugs.

Mr McKillop yesterday maintained that sales growth will pick up and claimed the $1.1bn of merger savings would also help, but some analysts remain sceptical.

The worries over the future are reflected in the new group's discount to its UK rivals. Zeneca's shares - a proxy for the merged entity's stock - trade on around 28 times 1999 earnings of around pounds 1.8bn. This is well- below the 30-plus forward multiples of other drug giants such as SmithKline Beecham and Glaxo Wellcome.