Zeneca shows its quality: The Investment Column

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The Independent Online
Zeneca's third-quarter sales figures yesterday continued to demonstrate the quality of Britain's third-largest drugs group. Turnover of pounds 4.1bn in the first nine months of this year represented a 14 per cent underlying improvement over the same period of 1995, or 12 per cent when currency effects are stripped out. The growth is well over double the rate recorded at the half year by Glaxo Wellcome, the industry's leviathan, and an acceleration on Zeneca's own figures for this time last year, when sales were 6 per cent up.

At first sight, the 38.5p mark-down in the shares to 1711.5p yesterday seemed a churlish reaction. Admittedly, the price was hit by renewed political worries emanating from the US. But bid speculation has sent Zeneca's shares soaring this year. They have outperformed the rest of the market by 26 per cent, with more than half that gain occurring since the beginning of August, allowing little room for disappointment. So news that sales by its pharmaceuticals division grew 14 per cent to pounds 1.8bn in the nine months, slightly behind what some in the market were going for, provided an ideal opportunity to take profits.

The big question is where Zeneca goes from here. Its target of 15 per cent earnings growth puts it well ahead of British rivals. It is also rapidly putting its house in order and faces no major patent expiries until 2000. Some estimates suggest new products, principally from Zeneca's cancer franchise, will generate over pounds 1bn of sales by the end of the century, or nearly a third of the total.

Some analysts, however, question the value of some of the new products. Accolate, for instance, hailed as the first new asthma treatment for 20 years, offers no advantage over long-standing inhaled steroids, according to some observers. Meanwhile, despite higher ratings for US groups like Eli Lilly and Pfizer, it would be hard for a bidder to justify offering much of a premium above the current price.

Maintained forecasts of pounds 1.02bn for this year put the shares on a rating of 24 times. A bidder may yet emerge, but holders who have seen their investment almost triple since the ICI demerger in 1993 should lock in some profits.