View from City Road: An unhealthy mix at Zeneca

What do non-squashy tomatoes, breast cancer treatments and inks for state-of-the-art printers have in common? The answer is Zeneca, although it might just as easily be 'not a lot'.

The demerged bio-science arm of ICI continues to lack commercial logic, split as it is into three businesses - drugs, agrochemicals and speciality chemicals.

All are loosely linked by R&D but sharply divided by their profitability. While pharmaceuticals rejoiced in trading margins of 31.5 per cent, agrochemicals could only manage 5.9 per cent and speciality chemicals 4.9 per cent.

Zeneca continues to defend this mish-mash of highly and lowly rated businesses. Sir Denys Henderson, chairman, even claimed that the political uncertainty plaguing the drug industry proved how sensible Zeneca had been to 'hedge' its trading bets. The political volatility of agrochemicals and the economic turbulence surrounding chemicals make for a suspect hedging mix, however.

Specialities may be in line for continued recovery. And agrochemicals may have seen the last of disruptive farm policy shifts. But the disparity will remain. Zeneca's management needs to re-think whether it can justify tying up so much of its time, effort and capital in such fundamentally unexciting businesses.

If they do not, sooner or later the market will notice that pure drug companies such as Glaxo and SmithKline are as cheap. Yet their profit margins are much more highly geared to the re-rating of the sector that must come before long.