Pharmaceuticals market gets a mite overheated

City & Business

ODD to think that the faeces of dermatophagoides pteronyssinus, the housedust mite, were responsible for most of the excitement in the stock market last week. But it is mite faeces, along with cat dandruff, grass pollen and other microscopic debris, which sends the bronchial tubes into spasm, causing asthma. And it was for Fisons' respiratory drugs, inhalers and salesforce that Rhone Poulenc Rorer pounced with a hostile pounds 1.7bn bid. The offer helped propel the stock market to an 18-month high on Friday.

The asthma drugs market is estimated to be worth $6bn a year and is growing at more than 10 per cent annually. Asthma kills increasing numbers of people and impairs the lives of many more. Children in particular are more and more prone to the ailment. Not that asthma, per se, was much in any of the protagonists' minds on Friday. This bid battle is more about earnings multiples, international alliances and business strategies, plus a sprinkling of bluff and counter-bluff.

As we report on page 3, the temperature is already rising. I don't think there is much love lost between RPR's chief executive, Michel de Rosen, graduate of the exclusive Ecole Nationale d'Administration and a former diplomat, and the down-to-earth Fisons boss Stuart Wallis, a former tax accountant.

RPR has got off to a solid start. It is offering lots of cash. Even by the sky-high prices paid for drug companies in the last 12 months, pounds 1.7bn is not to be sneezed at. Measured in terms of a multiple ofsales or earnings, 240p a share compares favourably with other deals in that most bid-prone of sectors, pharmaceuticals.

Of course, Fisons' argument is that its 1995 figures are irrelevant. The company is changing so fast that you have to look at the likely 1996 figures. By next year, it hopes, it will have sold both its laboratory supplies business and its scientific instruments operation. (The horticultural products, for which Fisons is probably best known, went long ago.)

By Christmas Fisons should be sitting on a cash pile of around pounds 500m and starting to lavish it on an array of licensing deals, joint ventures and acquisitions. That, at any rate, is the plan, and it will be at the heart of the argument between Fisons and RPR.

The RPR line is that the competition to clinch such deals is intense. There simply aren't that many exciting products around. And fewer still have the potential individually to make much of a difference to Fisons' earnings. Moreover, RPR contends, Fisons has been painfully slow to negotiate such deals in the past. The abortive attempt to take over Medeva earlier this year demonstrated the problem, argues RPR.

Fisons will stress its record since Wallis arrived last year. It has streamlined itself into a pure drugs marketing company. It has two reasonable, though mature, products in Intal and Tilade; it has some exciting technology in the form of a dry powder inhaler; it has a well-regarded international sales force; it has a secure foothold in the respiratory market.

Whether all this is enough to draw out a white knight, especially one prepared to pay cash, is doubtful. Fisons may have a better chance in forcing a higher offer from RPR. The market thinks so: Fisons shares closed the week at 264.5p - 24.5p above the offer price. But even eliciting a hike in the bid price won't be easy.

Shareholders are faced with the choice between certain cash now or the vague prospect of greater capital gains if they sit things out. Wallis has done a brilliant job of disposing of Fisons' non-core assets over the last nine months. But he faces an even tougher selling job over the next few weeks - dissuading his investors from taking the money and running.

Bad news

I CAN'T remember a time when WH Smith has not been regarded by the stock market as a bit of a dinosaur. It has the Woolies Disease even worse than Woolies: you can't help suspecting that shoppers wouldn't care terribly much if the stores ceased to exist. The management valiantly peddles the line that the shops are still (in retail jargon) "destination stores" - that customers deliberately go out of their way to shop at WH Smith outlets.

The reality is that specialist bookshops, music stores and card shops long ago removed any specific reason to shop at the core Smith's chain. The irony is that the wider Smith's group itself owns the very specialist chains - Virgin, Our Price and Waterstone's - that are cannibalising the core chain.

The traditional WH Smith shop nowadays is more of a "convenience store", without, alas, being all that convenient. That is why it is being raided on a second flank by supermarkets. Food retailers are cleaning up in traditional Smith's product areas like best-selling books, videos and greetings cards - piddly value items, true, but boasting some of the most mindboggling margins on the street.

The group's profits warning in May revealed how bad things had got. In an attempt to give WH Smith shops more appeal they are being kitted out with multi-media departments selling CD-Roms and fun-zones to attract more children. No one seems much impressed.

Meanwhile, other parts of the Smith's empire continue to suffer, not least newspaper wholesaling and the direly performing Do It All chain of DIY sheds. We'll know a bit more about the current state of trading on Wednesay, when Smith's reports its interim results.

The group is not helped by the uncertainty created by the imminent retirements of the chief executive, Sir Malcolm Field, and finance director John Napier. So far there is no sign of a successor to either. After the tribulations of the last few years, I can't see an internal candidate going down well with investors. And the company hardly looks enticing to external candidates. But WH Smith desperately needs a credible leader with fresh ideas about what to do about the core chain.

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