The Investment Column: Zeneca attraction's in the price

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The Independent Online
David Barnes' refusal to suffer fools gladly was in evidence yesterday as he branded press stories about the imminent demise of Zeneca's independence as "fictional and irresponsible".

His irritation has a point. The constant barrage of stories circulating about his company must be placing a serious strain on a workforce that knows full well it is operating in a fast consolidating industry.

But staff anxieties apart, the stories about a takeover of Zeneca are probably wide of the mark for the prosaic reason that nobody could afford to buy the company and take the goodwill write-off it would involve. Shareholders' funds of pounds 1.9bn have a market value of almost pounds 14bn. A bid might run to the best part of pounds 20bn.

Even if anyone could afford to swoop, they would have a job persuading Zeneca's shareholders that they would not be better served sticking with the incumbent management who are doing a tidy job. The spin-off from ICI was, admittedly, fortuitously timed, but it is hard to argue with a 70 per cent outperformance of the market since the middle of 1993.

The promise of earnings growth of an average 15 per cent a year for the next five years is a bold pledge, even if it is no more than the company has achieved over the past two years. But it is a useful pointer to the sustainability of profits growth now Zeneca has created what some analysts see as the best new product portfolio in the industry.

Zeneca received 42 new product approvals in the six months to June, as many as it achieved in all of 1995. The decision to leave the balance sheet almost ungeared, to give the scientists and not the accountants the scope to take risks, appears to have paid off.

Certainly half-way figures showing pre-tax profits up 21 per cent to pounds 610m (pounds 506m) were impressive enough. Sales rose 16 per cent to pounds 2.94bn, with drugs sales ably supported by a strong performance from agrochemicals, earnings per share were 20 per cent better at 42.9p and the dividend increased from 11.25p to 12.5p.

Two factors are driving Zeneca's share price. On fundamental valuation measures it is firmly in the pack of US and European pharmaceuticals majors and rather cheaper on a comparison of future growth rate with price/earnings ratio than, for example, Merck.

Those considerations, however, are likely to continue playing second fiddle to bid speculation which will remain a substantial prop to the share price. While the deal may be too big a mouthful at current levels, were the price to fall significantly rumours would certainly re-emerge and see the price rise again. As a result the shares, down 20p to 1,431p, are likely to fluctuate in a relatively narrow range and there is little scope for outperformance.