The Investment Column: Medeva on its way out of the woods

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The Independent Online
Medeva is showing signs of growing up after five years of heady expansion. In April, Bernard Taylor, the former Glaxo chief executive who chaired the the pharmaceuticals group during its formative years, bowed out, following in the footsteps of Ian Gowrie-Smith, the group's founder. But Medeva has survived the loss of two key figures and is starting to convince the City that it has a coherent strategy for developing into a serious drugs company.

But yesterday's half-year figures to June show that it is not yet out of the woods. Pre-tax profits rose a healthy 17 per cent to pounds 33.9m, but they remain heavily dependent on methylphenidate, an unbranded treatment heavily used in the US for hyperactive children said to be suffering from attention deficit disorder. Medeva's reliance on a product based on a controlled drug which, over the next year or two, could be subject to competition from up to four rivals, has unnerved the stock market.

There are continuing fears that the powerful Food & Drug Administration in the US could clamp down on what is still a controversial treatment and, despite its 25 per cent sales growth in the first half, the market is clearly slowing down. Analysts expect the growth rate for methylphenidate to decelerate to 5 per cent from 15 per cent in the current year.

Given external estimates that the drug could represent as much as 60 per cent of operating profits, that puts the onus on Medeva's newer drugs. It is the growing conviction that these can take up the running from methylphenidate that is starting to turn sentiment in Medeva's favour.

One of the most exciting is a whooping cough vaccine, codenamed 69kDa, which will form part of a SmithKline Beecham triple vaccine. That has just won approval from a crucial FDA committee and one observer expects 69kDa to be contributing royalty income of nearly pounds 22m by 2000. Hepagene, a hepatitis B vaccine, is another product under development with substantial potential, given the 500 million carriers of the disease in Asia alone.

But the best near-term prospects lie with the Rochester New York-based business of Rhone-Poulenc Rorer, acquired for $370m (pounds 239m) last month. Ionamin, a treatment for the chronically overweight, has the potential to be another methylphenidate. Sales have grown from almost a standing start to $26m over the past five years and it now sells into a market which has ballooned from $80m to $200m over the past 18 months.

Dangers remain for Medeva. Its large generic portfolio is easily attacked by competitors, as the continuing fall in sales of its respiratory and hospital products shows. Its figures will also remain obscured by the pounds 360m of deals done over the past 18 months. But profits before exceptionals of just over pounds 100m this year, rising to above pounds 120m next, would put the shares at 234p, up 7p, on a forward multiple of 10 for 1997. Worth holding, with the outside chance of a bid adding spice.