SMALLER COMPANIES: Alzheimer's boost for Shire

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Shire Pharmaceuticals hit the news last week with positive details on Galantamine, writes Richard Phillips. In the final stages of patient trials, Galantamine, billed as a treatment for Alzheimer's disease, is said to have produced excellent initial responses. The company said the results made "highly significant improvements in cognition".

Nevertheless, the shares came off from 270.5p before recovering to close at 273.5p on Friday. Are the results as good as they sound, or is this just another fledgling biotech company carried away by the brilliance of its research?

Shire is something of an exception, as it can boast substantive sales, if achieved partly through acquisitions. When floated in early 1996, it had annual sales running at more than pounds 7m, and was on the verge of moving into the black. Much of that early foundation was in hormone replacement therapy.

Since then, it has transformed itself, first by the pounds 105m acquisition of US-based drug-delivery business Pharmavene in February, and then, in August, by the pounds 113m purchase of Richwood Pharmaceuticals, also in the US. Loss-making Pharmavene was bought to strengthen Shire's research. Most of the deal was funded by new shares. Richwood, by contrast, brings in a sales network and, through it, instant access to the fast-growing market for treating children with attention deficit disorder. Its sales were $15.3m (pounds 9.5m) in 1996.

With all this action, Shire can boast the advantage of a distinctly different approach to its peers. Its strategy may be closer to Medeva, which from a small start leap-frogged its way up the ladder by concentrating on acquisitions, and sales, rather than research and development.

Back to Galantamine. While there is no treatment for Alzheimer's at present, the drug, made from daffodil flowers, does seem able to halt the disease's progress.

Clearly, the market for anything like this is significant, with some estimates running into $2.5bn. Not only that, but patients have reported improvements in arthritis, while it is also being trialled for sufferers of ME.

While the current market capitalisation is pounds 222m, much of that potential is already discounted, selling as it does at roughly 10 times sales. Shire's safety-first approach to building a business limits some of the downside, but it has also bitten off a lot with its two acquisitions. It is too early to say how well it is integrating the two deals; while the shares are tempting, they are only a speculative buy at this stage in the game.