View from City Road: Medeva's whole strategy is thrown into doubt

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The Independent Online
Cynics might say that the time to sell Medeva's shares was in May. That is when it won an industry award for becoming Britain's most successful company through the recession. Such accolades seem to have an unnerving habit of turning into a jinx for corporate high-flyers.

Ahead of yesterday's profits warning, Medeva seemed to have few detractors, apart from a nagging unease in some quarters about its break-neck growth. Starting as a speculative medical research tiddler, in four years it saw its market value soar from pounds 1m to peak at nearly pounds 600m.

But the problems in the US throw the firm's entire strategy into doubt. IMS was bought for dollars 54m last year and was supposed to make a strong profits contribution from 1993. However, it now seems unlikely to make any profit at least until next year.

Meanwhile, another key US purchase, MD Pharmaceuticals, has run into problems with the Food and Drug Administration. Although production is back to normal a final clearance from the FDA is not expected until later this year. What is already clear is that MD will not deliver the margins Medeva had hoped for.

Embarrassed analysts sitting on buy recommendations should now be asking tough questions about the company's management controls and whether they are good enough to avoid further shocks. But they cannot complain about the way they were warned, since Medeva followed the book by disclosing as soon as it could.

As for shareholders, three months after they backed a one-for-four rights issue at 180p a share, against the Independent's advice, they now face a capital loss as well as a probable earnings dilution. The shares are to be avoided.

There is a wider lesson about high- growth stocks. Medeva's problems have surfaced at a time when the market's faith has been sorely tested by the likes of Spring Ram and Hartstone. Spectacular returns always bear big risks.