The Investment column: Medeva's big gamble should pay off

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The Independent Online
Shareholders in Medeva have suffered a stomach-churning voyage over the years, but signs that the drugs group has been steering a steadier course have grown much clearer of late. Market concerns have centred on methylphenidate, the generic form of Ritalin, the controversial treatment for unruly children made by Novartis. It is thought to have represented over two-thirds of group profits in the past, but Medeva's 70 per cent market share could be under attack from three competitors by next year, with Johnson Matthey potentially ready to enter the market with a rival product as early as this summer.

But Medeva has not been sitting on its hands and the first fruits of its labours were apparent in yesterday's results for the year to December. Operating profits cut from pounds 78.1m to pounds 39.9m were hammered by a pounds 65.2m restructuring charge in the wake of last year's $370m (pounds 239m) deal to buy Fisons' old US businesses based at Rochester, New York, from Rhone Poulenc Rorer.

But Rochester, Medeva's biggest buy to date, should do wonders for the group's credibility. Analysts reckon the additional business has diluted methylphenidate profits to around half the group total and the potential is huge. At its most prosaic, the pounds 47m cash spent on integrating Rochester should have repaid itself by the year 2000, when it could be delivering underlying cost savings of around pounds 25m a year.

More exciting still should be the top line benefits. The merged and restructured salesforce, now raised from around 150 to 272, has already managed in six months to generate $77m of sales from Rochester's 10 products, some three-quarters of the total for the whole of last year. And Medeva says only around 15 per cent of the Rochester site was being used when it was acquired, so if it can find the drugs, the capacity is there to multiply by several times the throughput.

Already, over the past two years, Medeva has picked up some interesting prospects. Maiden contributions from RPR products like Ionamin, the anti- obesity treatment which clocked up sales of pounds 22.4m, and the first full year of earlier acquisitions, like Glaxo's Semprex D anti-histamine for allergies, mean new drugs are already reporting sales of more than half the pounds 108m from methylphenidate last year. Given that many of these are growing in double digits and the high margin Rochester products were in for only half a year, the omens are good that Medeva can survive the onslaught on methylphenidate.

Success in a legal dispute over the marketing of Ionamin could deliver a pounds 20m boost to the bottom line, while further out, Hepagene, the hepatitis B vaccine and treatment, could yet turn into a mini-blockbuster. Lehman's profit forecast of pounds 124m puts the shares, up 3.5p at 283.5p, on a forward p/e of 12. Good value against typical industry multiples in the 20s.