Meconic rises high on opiates

One of the more unusual ways of investing in the world healthcare boom is bearing fruit for a small company, Meconic, which was floated in June 1995 at 135p and has seen its shares climb to 353.5p. Part of its attraction is its strong position as the world's leading manufacturer of opiates. Based on this core activity the group is developing as a supplier of services to other pharmaceutical companies. Prospects for the recently acquired Phoenix Chemicals are described by finance director and shareholder James Cook as very exciting.

Recent interim figures showed profits up by 94 per cent to pounds 4.8m, on sales up 33 per cent to pounds 22.1m, helped by a maiden contribution from Phoenix which traded strongly in its first four months within Meconic.

Meconic's core business is as the world's largest supplier of opiates for manufacture into painkillers. Typical end products include codeine used for branded items like Nurofen Plus and morphine used for relief of pain in cancer.

There has been pressure on margins because of poor harvests in poppy- producing countries, restricting the supply of raw material. Opiates are controlled drugs, with UK production licensed by the Home Office. Meconic is the only licensed UK manufacturer. Because of its monopoly, the group has felt unable to pass on the increase in costs to customers. Profitable exports take around half Meconic's output, but this has been restricted as the group has given UK customers preference. The change is expected soon with legal poppy production slow to respond and vulnerable to the climate.

Sales in the pharmaceutical "actives" division, which includes opiates, rose by 21 per cent to pounds 16.1m in the first half out of total sales of pounds 22.1m. The group sees its major growth opportunity in building its non- regulated business where margins are significantly higher.

The first of these areas is fine chemicals where the group has developed a bitter-tasting product,Bitrex, which is used to give an unpleasant taste to household products like cleaners, slug bait and antifreeze. Margins are high although the company has to spend heavily on sales and promotion to build sales initially. The group is beginning to make inroads into the US and has had some notable successes in continental Europe. Another successful product in the fine chemicals division is Aloin, which is a key constituent in a new arthritis drug now being "rolled out" in continental markets.

The most exciting prospects for the company are in the third division, contract manufacture, where first-half revenues increased from pounds 363,000 to pounds 3.0m, helped by the maiden contribution from Phoenix Chemicals. Phoenix uses engineering and computer technology to perform high-speed chemical experiments using small samples. The advantage of the faster experiments is a reduced susceptibility to impurities. The computers are needed to monitor and shut down experiments where a potentially explosive reaction develops too fast for staff to abort the process.

Great secrecy shrouds Phoenix because it is involved in sensitive product development. Phoenix provides a manufacturing service as well as testing chemical reactions. Some idea of the potential is that the consideration for Phoenix was an initial payment of pounds 6m with a further pounds 12m payable in 2000.

A further speculative spice for Phoenix is its involvement in a new therapy for Alzheimer's Disease, currently in trials. Meanwhile analysts are looking for profits to advance from last year's pounds 5.8m to pounds 7.1m and then pounds 8.0m to drop the p/eto 25.6 and then 23. That looks good value for a business with exciting prospects and strong growth.

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