AstraZeneca looks the safest bet for recovery in big pharma shares

Dividend worries continue to weigh on RMC; Newcastle United is best left on the bench

And still we wait. For three months Judge Barbara Jones has deliberated on attempts by AstraZeneca, the UK's number two drugs group, to extend patent protection on Losec, its multibillion-selling ulcer drug. Depending which way she tips the scales of justice, the group's shares could leap or plunge.

It's an anxious time for the company, and indeed for the whole drugs sector, which once seemed the safest of safe havens for investors. After all, people will always get ill, right?

AstraZeneca and its bigger rival GlaxoSmithKline have results due next week, but while both should be able to show advancing sales of their latest drugs, propelled by worldwide marketing machines of extraordinary power, each has seen its shares collapse. Historic financial results count, but the focus is on the future, and not just the immediate future. The medium and long-term outlook for profits hangs on developments in the clinic, in the courts and in Congress, and there are dangers everywhere.

With several blockbuster products losing patent protection, opening up the market to cheap copycat competition, the double-digit percentage annual earnings growth of the Nineties may well be a thing of the past. US politicians and medical bodies are examining ways of encouraging a faster switch to generic drugs when they become available. That they are already having some success is seen in the number of recent US profit warnings. Meanwhile, AstraZeneca has been hit by delays to crucial new products, while GSK is criticised for not having any close-to-launch blockbusters at all.

So that's the bear case, and it has had the upper hand this year. But a reaction is developing and, with shares looking cheap even with the new consensus on lower growth, it may be time to bet on a recovery for the UK's big pharma shares. The long-awaited appointment of a new boss for the Food & Drug Administration could help speed the US regulator's approvals process and improve sentiment for the sector.

This column has traditionally had a preference for GSK over AstraZeneca, because of the inevitability of a collapse in Losec sales when generics arrive. That is now in the price. What isn't is the upside (albeit delayed) from its new drugs and the cancer treatment Iressa. By contrast, GSK could be just a year away from losing protection for Paxil, its anti-depressant, and faces sliding sales of its top-selling antibiotic, Augmentin. Choose AstraZeneca.

Dividend worries continue to weigh on RMC

The management team at RMC, the building materials company, has about as much room for manoeuvre as if they were wearing concrete boots. The group is weighed down with £1.2bn of debt and, with its bankers' most likely breathing down its neck, looks to have been forced into some substantial disposals.

So the ready-mixed concrete group said yesterday it had started talks to sell its Hales waste management business, which carts in rubbish to fill the quarries RMC has emptied. Analysts forecast it could fetch anything from £70m to £160m

The disposal will go a long way towards cutting debt to RMC's target of £1bn by the end of 2003, but it will also dilute earnings, and an extra push will be needed to improve cashflows. The City would like to see innovative thinking to shake up the businesses that remain.

RMC's share price has fallen so that the dividend yield at current levels is almost 8 per cent. There is every chance that fact, and a big corporate move such as the disposal of Hales, will tempt the company into cutting the pay-out, or "rebasing" it, as the practice is called these days.

The shares are prone to spiking higher on takeover speculation. Superficially, the company looks a tasty morsel. With the capacity to produce 20 million tonnes of cement, it has assets that are worth £2.5bn at least, before the land and quarrying rights are added on top. That compares with an enterprise value (market capitalisation plus debt) of about £2.3bn. The trouble is RMC is not alone in having a stretched balance sheet and there is no obvious suitor with deep pockets. The German operations, which we know for sure attracted a bid, would not be saleable at anything approaching their current book value.

So it is left to the concrete-shoed management to try to manoeuvre their own way out of the mess. It is true that, if the economic good times were to roll again in Germany, there would be considerable upside. But that looks unlikely for the time being, and dividend worries will continue to weigh on the shares. Up 5p to 395p yesterday, they are no more than a hold.

Newcastle United is best left on the bench

Jean-Pierre Grenier is the future of football, apparently. Aged six, the little Geordie lad is believed to be the youngest player to attract the interest of a major club, in this case Newcastle United, which has an option to take him on at their academy when he turns nine. Maybe this is what the club's chairman, Freddy Shepherd had in mind when yesterday he said he was putting his faith in younger players as a means of keeping wage costs down.

It's no joke. The spiralling cost of paying star footballers has pushed the whole sector to the fringes of the stock market, where few serious investors will touch the shares. At 20.5p, Newcastle United shares are worth a fraction of the 135p at which they were floated in 1997, and results yesterday, covering the year to 31 July, showed another grim set of losses. The wage bill was up 20 per cent and ate up 45 per cent of turnover. The pre-tax deficit was £3.1m, though it compared favourably with the £8.9m loss last year thanks to a leap in turnover from the Premiership TV deal and from sales of replica kits.

While last season's strong performance earned the club a place in the Uefa Champions League, this appears already to have been squandered. The shares dropped last month as it became clear the club is unlikely to be able to progress further in the competition, cutting off the flow of television money and gate receipts.

Newcastle United is not on football's financial injury list, but neither is it a fit and healthy investment. Not one to pick.