View from City Road: Faith in Medeva is touching

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The Independent Online
Over the last few months, while the share prices of well established companies such as SmithKline Beecham and Glaxo have tumbled by up to a quarter, Medeva's share price has risen by more than 5 per cent.

Investors have long shown a touching confidence in this group. Three years ago Ian Gowrie-Smith brought in the ex-Glaxo chief executive, Bernard Taylor, and began transforming Medirace, a tiny research-based drug company, into Medeva via the acquisition of Evans Healthcare, a company three times its size.

His highly ambitious strategy was to create an FT-SE 100 company by the year 2000 by combining the products that the giant drug companies find uneconomic to exploit with an international sales force.

Yesterday the trend continued unabated, with the shares adding 3p to 230p on the back of a one-for-four rights issue at 180p a share to raise pounds 94.4m. It was the company's third cash call in four years.

Just over half the funds, pounds 52.3m, will be spent on buying Ribosepharm, a German pharmaceutical company specalising in cancer treatments, a move that gives Medeva a presence in the biggest European drug market. Last year it made profits of DM9.9m ( pounds 4.1m) on turnover of DM30.3m; this year profits are forecast to double .

The rest of the money will be used to clear Medeva's pounds 36m of debt and leave some cash in the bank.

Medeva's accounts are for those with strong stomachs; pounds 76m cash left the company last year, pounds 185m had been spent on goodwill by the balance sheet date and its pounds 490m market value is underpinned by only pounds 73m of net assets, including pounds 45m of brand names, licences and patents.

Admittedly faith in Medeva's acquisition-driven approach has so far paid off, with earnings per share almost quadrupling over the past three years.

But institutional investors, who have been asked for pounds 2.5bn in rights issues since the begining of the year, are getting tired of being asked to stump up cash to reduce balance sheet debt. Though they may not yet have run out of funds, other shareholders could afford to let this cash call pass.

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