Surprise profit warning wipes pounds 250m from Medeva's value: Results likely to be pounds 10m below City estimates - Announcement prompted by severe problems in US

SHARES in Medeva crashed by almost half after the pharmaceuticals company warned that its profits would be substantially lower than market estimates.

The warning, which has been prompted by severe problems at two US subsidiaries, wiped about pounds 250m from the company's stock market value as the shares plummeted 100p to 116p amid heavy trading.

The news shocked the City as Medeva has been widely regarded as one of the market's fastest-growing companies, largely through a pounds 400m acquisition spree financed with paper.

However, it now joins a growing list of former high-flyers that have failed to live up to investors' hopes because of unexpected problems.

A total of 28 million Medeva shares changed hands yesterday in sometimes panicked selling by investors on both sides of the Atlantic.

The company said that its taxable profits for this year were likely to be about pounds 10m below the market's estimates of between pounds 53m and pounds 57m.

As a result, City estimates for this year for the company have been slashed to about pounds 40m against pounds 36m taxable profits reported last year. Next year's profit forecasts have been cut by about pounds 15m to pounds 60m.

Medeva's problems stem from lower than expected sales at IMS, an American drug business acquired last year. The company said that it had discovered a significant build-up in stock levels, resulting in a 'misleading indication as to actual net sales so far this year and the likely level of sales in the remainder of the year.'

As a result IMS is expected to make a loss this year.

The full implications of the problem have yet to be assessed. IMS sells drugs through wholesalers, which in turn sell on to hospitals and healthcare organisations.

In addition, the company's other big US subsidiary, MD Pharmaceuticals, has been forced to shut down production for two weeks after a critical report from the Food and Drug Administration, the US industry watchdog. The FDA censure related to production standards affecting MD's manufacture of methylphenidate, a drug used to treat hyperactive children. Medeva said it had brought in consultants to resolve the problems and believes that it will able to correct the FDA's demands. Although production at MD's sites has been resumed the issue will not be resolved until the company meets the FDA later this year.

However, there is considerable disquiet in the City about yesterday's disclosures. Three months ago it launched a pounds 94m rights issue.

'This is a major blow to the company's credibility,' Robin Gilbert, an analyst with Panmure Gordon, said. 'The market has been rattled by the bad news as investors fear that there may be more to this situation than it appears. People are going to ask questions concerning management controls at the group.'

Bernard Taylor, Medeva's chairman, said: 'It is naturally disappointing to have to report these developments. The directors have long appreciated the great care that an expanding group such as Medeva must take in ensuring proper management and control systems at its newly acquired subsidiaries. It is up to us to get the results to win back confidence.'

View from City Road, page 22

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