SmithKline poised as a big player

The Investment Column
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The Independent Online
Jan Leschly, SmithKline Beecham's chief executive, was in a confident mood at the drug group's second quarter results yesterday. He has reason to be. In record time and from a shaky start after its heart drug Coreg was rejected by the US drug regulator earlier this year, SB now looks poised to become a big player in the cardiovascular field.

The market for drugs which lower cholesterol is alone worth $4bn worldwide and is growing fast. SB's deal with Bayer, announced yesterday, allows SB to co-market Baycol, a cholesterol-lowering drug, in the US. With Bayer a relatively weak player in pharmaceuticals, SB has undoubtedly struck favourable terms for Baycol and has gained control over promotion and marketing. What is more, SB is an obvious candidate to co-sell the drug outside the US when Bayer is ready.

Meanwhile, SB has just launched Teveten, a hypertension treatment, in Germany and is on track to market the drug world-wide from next year. It has also in-licensed a drug, which prevents arteries closing, from a Japanese company. All that and SB also finally managed to get Coreg approved in June. Not bad for six months' work.

The rapidity with which SB has established itself in such an important market shows what a bit of aggressive marketing and clever in-licensing can do. SB is also right to be backing up its lead drug, Coreg, with a stable of other products, particularly given the competitiveness of the market. The success of the strategy is all credit to Mr Leschly and SB's equally forceful head of pharmaceuticals, Jean Pierre Garnier.

SB is also convincing the sceptics that there is value in DPS, the US drug-buying group which SB bought for $2.3bn in 1994. For sure, SB overpaid and DPS is probably not profitable, but there is some sense in the argument that the company needs to offer an integrated healthcare approach.

Through DPS, SmithKline has developed a relationship with managed healthcare organisations - the groups which act for big buyers of healthcare services in the US - to push up volumes of the company's drugs. That makes sense. If SB can offer these healthcare organisations a whole range of services, including diagnostics via its clinical labs business and market data on patient outcomes via DPS, it is hardly surprising that SB's drugs find their way on to the HMO's lists of preferred drugs.

Certainly sales of SB's new drugs are growing fast, ahead 42 per cent in the half year. Paxil, the new anti-depressant, has entered the world market at number three behind Eli Lilly's Prozac, but is now the fastest growing drug in its class.

James Culverwell of Merrill Lynch is forecasting profits of pounds 1.7bn for the full year. The shares, ahead 49p to 1219.5p are on a forward p/e ratio of 30. With 15 per cent earnings growth over the next two years and no important patent expries until 2002 to trouble the market, the shares have further to go.

More bad news

from Menzies

It has been a grim 18 months for John Menzies, the retail and news distribution group. At the start of 1996 it issued a profits warning after being hit by problems in its news distribution side.

In January this year it issued a fresh warning, this time caused by difficulties at its Early Learning Centre retail subsidiary, which was suffering from competition from Boots, Argos and Woolworths.

The impact on the share price has been severe. Trading at well over 600p 18 months ago, the shares have been sliding ever since and closed 11p lower at 422.5p yesterday, their lowest since early 1993.

The company is now attempting to put recent scares behind it. A new managing director, Charles Mackay, joined in January and new management is being sought for the Early Learning Centre.

The strategy has been to use the cash-flow from established businesses like news distribution and retailing to invest in growth businesses, such as distribution of computer games and the like.

In fact retailing now accounts for less than one-third of sales and just 13 per cent of operating profits.

This sounds good in theory but yesterday's figures only highlighted how far they are from being put into profitable practice.

Pre-tax profits in the year to 3 May were pounds 5.3m lower at pounds 30.6m due mainly to problems at the ELC.

Once the jewel in the Menzies crown, profits have slumped from around pounds 12m just two years ago to an estimated pounds 2m in the latest period.

Current trading is tough, with sales 3.9 per cent lower on a like-for- like basis, though a 30 per cent increase in the number of lines from September should start to make a difference.

Menzies has experienced mixed results with its diversifications. Funsoft, a CD-Rom distribution business in which it has a half share, produced a loss of pounds 2.5m last year.

The Samas office supplies business did better, with profits of pounds 4.4m in its first year.

On a Societe Generale Strauss Turnbull's profits forecast of pounds 33m for the current year, the shares trade on a forward rating of rating of 12. Not one to chase.

Mitie set to clean up on services

The almost unbroken six-year run in shares in Mitie, the building maintenance to cleaning group, has been interrupted this year. From a low below 26p in 1990, they hit 194p in January and have since yo-yoed back to 171.5p, up 8p yesterday. Brokers blame variously an unsustainably high rating of above 20 times earnings and share sales by managers unlocked from Mitie's particular brand of incentivisation for its workers.

Certainly, yesterday's figures suggest any fears the market may have on the trading front are groundless. Pre-tax profits rose 30 per cent to pounds 8.21m in the 12 months to March - the eighth year on the trot Mitie has notched up this rate of growth - on sales up by the same amount to pounds 209m.

The star of the period was the building side, boosted by some chunky contracts. Broken down for the first time, the division chipped in pounds 4.52m to these figures, against pounds 3.7m for support services, involving cleaning and the like.

The latter sustained a pounds 452,000 hit from a disastrous cleaning contract with a large food processor, which has resulted in the closure of Mitie Hygiene Services. This follows problems the previous year in the jobbing maintenance operation, which recovered from losses of over pounds 200,000 to about break-even.

But Mitie's ability to withstand these failures suggests the formula is relatively robust. And the potential remains for the group to equal the impressive record of the much larger Rentokil Initial, which has grown fat on so-called "support services".

The fashion for outsourcing peripheral activities, such as property management and cleaning, continues to grow apace - cleaning alone could now be worth pounds 3bn a year. Already existing contracts and orders mean much of Mitie's work is in the bag this year, when margins are set to rise from 3.9 to above 4.3 per cent. There are potential dangers in the group's move into the cut-throat world of plant hire and Rentokil may prove a revitalised competitor when it has fully absorbed BET. But profits of pounds 10.7m this year would put the shares on a multiple of 16, falling to 14. Reasonable value.

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