Investment Column: Shire rides out threat from generic drugs

Topps Tiles; Patsystems
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The Independent Online

Our view: Buy

Share price: 919p (+37p)

From an investment point of view, in many ways the recession has saved the bacon of the big pharmaceutical companies.

Most drugs firms have a looming problem that for some years now has made punters very nervous: cash cows, in the form of blockbuster drugs, are coming under increasing pressure from lower-cost alternatives designed by generic drug companies, which have severely eaten into the revenues of the more established groups.

Shire is an example in point. Just two years ago, it made it made 51 per cent of its revenue from Adderall XR, an ADHD treatment that has now been copied by Israeli generics group Teva. The effect is that Adderall XR now contributes just 12 per cent of revenues, according to yesterday's second-quarter numbers. Sales of Adderall XR were down 77 per cent.

But that is where the bad news stops for Shire. Sales of the company's other treatments, many of which have long patent protection in place, were up 20 per cent, with chief executive Angus Russell claiming that while others in the industry may suffer from generic competition for the next five years, Shire's only major exposure is through Adderall XR.

For investors, we think this is good news and it would persuade us to back the shares. The stock has treaded water for the last year or so, largely, says Mr Russell, because the second quarter was always going to be the period when the group got hit from falling Adderall XR sales.

While a number of punters may wish to wait to see how the group performs in the longer term, we would be encouraged that a number of analysts see the share price making substantial gains in the next year.

Those at UBS, for example, say the stock will reach 1040p, while the company itself argues it is aiming for mid-teens growth for the next few years. Buy.

Topps Tiles

Our view: Cautious hold

Share price: 87.25p (+2p)

We have been downbeat on Topps Tiles in the past. Despite circumstantial evidence that people are doing quite a bit of home-improvement work, which should help Topps with sales of tiles and flooring, the group has struggled in the recession, especially with fewer people moving house.

However, on a day when plenty of other green shoots were sprouting, Topps said that it was on track to meet its own full-year expectations, after reporting that sales in the 18 weeks to the start of August were down 10.9 per cent, compared to a drop of 11.9 per cent in the first seven weeks of the period.

While this is not exactly brilliant, it does add (an ounce or two of) weight to the thesis that the worst is over and it may persuade the cautious punter that now may be the time to get back into some of the racier stocks.

Indeed, those investors that foresaw the improvement from Topps have done exceptionally well in the last six months, with the share price rising by an astonishing 459 per cent, albeit from low levels. Certainly, there is momentum behind the stock, which buyers may be able piggy-back on for another few months.

On the other hand, the watchers at Numis reckon the stock has now reached a suitable level: "Topps remains a high-quality, cash-generative business, but in the absence of upgrades we expect the stock to consolidate at these levels," they say, advising clients to hold the stock.

Frankly, we think the improvement from Topps does not warrant anything more excessive, but while we have suggested that investors avoid the shares like the plague in the past, we would now keep hold of any in the portfolio. Cautious hold.

Patsystems

Our view: Buy

Share price: 25.25p (+0.25p)

Barclays Bank proved earlier this week that despite our financial system nearly destroying life as we know it, those at its centre can do very nicely, thank you.

Patsystems, the group that provides IT systems that support the electronic trading of futures and options, also posted stellar numbers yesterday, saying that first-half adjusted pre-tax profits were up 82 per cent. The order book is just about where the group hoped it would be at the full year and, most importantly, the interim dividend is up. The full-year dividend is also expected to rise.

It is impossible to argue that Patsystems is not doing well, and with more growth expected in the emerging markets and Asia, we would expect the full-year results in six months' time to be equally good.

True, the shares are not cheap, but even if the stock stagnates in the coming months, the dividend will more than compensate. Buy.

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