Glaxo overshadows AstraZeneca

Hold on to Rio Tinto for Chinese fireworks; Crest Nicholson foundations look safe enough

Friday 31 January 2003 01:00
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So life at the drugs group AstraZeneca hasn't been quite as bad as many had feared after copycat versions of its best-selling ulcer drug Prilosec appeared and started chipping away at sales.

The stock rallied 8 per cent yesterday to close at 2,078p after the company posted results for 2002 that beat most analysts' forecasts. Sales grew 9.9 per cent to $17.8bn (£10.8bn) and pre-tax profits before exceptionals were 3 per cent higher at $4.4bn.

Not that AstraZeneca hasn't felt the heat. Since generic forms of Prilosec were introduced last quarter, life has certainly got tougher. Sales of the drug, which accounted for just over a quarter of sales in 2002, fell 18 per cent last year.

There was a similar story with Zestril, its hypertension treatment. After the introduction of generic products in July, sales for the year slumped 18 per cent to $877m.

But the news wasn't all grim and AstraZeneca's total sales grew 23 per cent in 2002 if you strip out sales of the blockbusting Losec/Prilosec, showing the rest of the portfolio is holding up reasonably well. Sales of its Nexium ulcer pill came in at just under $2bn for the year, up from $568m in 2001, and sales of its schizophrenia drug Seroquel were up 67 per cent at $1.1bn.

Sales of its controversial lung cancer treatment Iressa, meanwhile, reached $67m in just four months on the market in Japan. And the launches of AstraZeneca's cholesterol treatment Crestor, and Exanta, for thrombosis, are yet to come.

But investors seem to be getting more excited about the prospects at rival group GlaxoSmithKline, which is widely expected to hold an R&D day later this year to flag its drug pipeline.

AstraZeneca is forecasting earnings this year of $1.50 to $1.65 a share ­ down from the $1.84 of earnings recorded in 2002 ­ but the company seems to be weathering the storms well, setting the stage for a recovery over the longer term. Given all the excitement around Glaxo at the moment, though, it probably looks the better bet in the short term.

Hold on to Rio Tinto for Chinese fireworks

While China keeps on building and is in need of industrial commodities, the prospects for Rio Tinto, one of the world's biggest mining companies, look solid.

That will be welcome news after the tough year that was 2002. The Anglo-Australian company reported a 40 per cent fall in net income to $651m (£395m) on weak commodity prices. A sizeable write-down in one of its copper plants also took its toll although that was more a sign of conservative financial management on Rio's part than any fundamental problem.

Looking ahead, China is the great hope where demand for commodities is growing at a dramatic rate as its construction industry booms. The country is consuming more copper and steel than the US and does not have the raw materials to produce its own aluminium.

Demand there rose 10 per cent in 2002 and, according to Rio, shows "no sign of slowing". It even indicated such strong Chinese demand would not only lead the metals and mining sector out of recession, but would help it forge ahead of other sectors.

But such a reliance on a single market has to be some cause for concern. Moreover, the strength of the commodity market is tied to economic confidence, which, as Rio freely admits, is yet to show signs of recovery. A prolonged conflict in the Gulf, for example, would only serve to exacerbate economic nervousness, particularly in the US. Were Rio to have a greater exposure to the gold market and platinum mines, it would have some extra security should the economic uncertainty prevail.

The company has, at least, demonstrated in the past year that it can keep generating cash ­ $3.74bn in 2002 ­ while commodities fall to rock-bottom prices. Nevertheless, the shares, which closed up 2.7 per cent at 1,093p yesterday, are trading at 14 times 2003 forecasts, making it still rather expensive despite its growth potential. Hold.

Crest Nicholson foundations look safe enough

For all the dinner party speculation on house prices, Crest Nicholson, for one, is still confident that the property market will do well in 2003.

Its decision to sell its construction arm to focus on house building looks to have paid off. It is still seeing strong demand for its property and its forward order book, which stood at £239m, is up 14 per cent on the year before.

Last year was clearly a bumper year as low interest rates helped keep the market buoyant. In the year to 31 October, it sold 1,899 houses, up from 1,543 the year before, and average prices rose to £225,100 from £186,700. Profits in the period were £63m in the year, up from £50.5m.

Better still, since the 31 October year-end, reservations have been "excellent", the company says, both in terms of quantity and the price achieved.

And if there is a serious correction in prices, it reckons its focus on developing more reasonably priced housing will stand it in good stead, as will its lack of focus on Central London.

About 15 per cent of its turnover comes from Greater London, about 70 per cent from the South-east and the South-west, with the balance from the Midlands.

Analysts forecast Crest will make a profit of about £73m this year, translating to earnings of about 45.7p a share, which puts the stock on a multiple of about 4.5 times. That does not seem particularly expensive but the ongoing uncertainty in the market makes the shares a hold.

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