DAVID BRENNAN, who takes over formally at AstraZeneca on January 1, has hit the ground running. Shortly after his appointment was confirmed, he promised more collaborations and acquisitions in a tacit acknowledgement that the pharmaceutical group’s late-stage pipeline of new drugs was inadequate. In the past month, no fewer than four such deals have been announced. The latest, and biggest, sees the group sign an agreement with Targacept, a biotech company that is working on a treatment for Alzheimer’s disease and other neurological disorders.
This is a familiar area of research for the Anglo-Swedish pharmaceutical, which already is a leading player in neuroscience, with products such as Seroquel, a schizophrenia treatment. The deal is potentially worth $300 million (£175 million) for Targacept, if the product makes it all the way to licensing. For AstraZeneca, just shaking hands with Targacept has added £500 million to the company’s worth.
AstraZeneca’s shares have performed strongly in the past ten months since hitting a two-year low back in February, after 2004 had descended into something of an annus horribilis. Yet the company got over its troubles quickly and looks in rude health, with strong sales of its bestsellers. Margins were also high.
However, the share-price climb appears to have been based on short-term prospects and seems to ignore a potential profit fall in 2007. Higher profits this year have come partly because failures in the drug group’s development pipeline mean that AstraZeneca will not have to pay for expensive phase-III trials for a number of potential treatments.
This is the nub of the problem that Mr Brennan appears to be determined to address. Licensing compounds from other companies and investment in biotech firms is not a new departure for the group — some of its best-known drugs came from this route — but it is a strategy that has been used rarely of late.
All four December deals demonstrate that under Mr Brennan Astra will address its challenges, which include the fact that copycat rivals for the group’s bestsellers will appear from 2007. Astra’s share-price performance has been attributed in part to rumours of a pharma mega-merger. On balance, the chances of that happening look low and the risk of a share-price correction grows as the medium-term pipeline problem gets closer. Sell.
Rank Group
IT IS somewhat ironic that, after well over a year of waiting for Rank Group to offload its Deluxe film services arm, the deal should be announced at 8pm on the Friday before Christmas, long after everyone had gone home for the festive celebrations.
Readers of these pages will have known already that the $750 million (£437 million) business was being acquired by Ron Perelman, the billionaire owner of the Revlon cosmetics empire. What is less certain is what will happen to the rest of Rank.
The Deluxe business has long been seen as a poison pill to any would-be bidders, and the general view seems to be that Rank will now be swallowed by a private equity firm or a trade buyer such as Ladbrokes or William Hill. Indeed, this month it emerged that William Hill had tried to nip in early and negotiate a deal before the Deluxe sale.
Although that deal fell apart over the disparity in stock market valuations between the two companies, it is possible that William Hill will return to the fray as it seeks to follow in Gala Group’s footsteps in creating a mini-conglomerate with a presence in bookmaking, casinos, bingo and internet gambling.
Yet if William Hill is to snap up Rank, it may have to fight off Ladbrokes, which is about to be separated from the Hilton International hotel business. Ladbrokes bosses are known to be keen to acquire a business such as Rank, partly to prevent Ladbrokes itself from becoming a target.
The main problem for predators is that Rank, after the Deluxe sale, is trading on a multiple of more than 20 times 2006 earnings. Given the lacklustre trading reported by the company recently, it may be hard for suitors to justify paying a further premium.
If it were to survive as an independent company, the sale of Deluxe could threaten the dividend. However, it would also make Rank a far more focused entity, better placed to take advantage of gambling deregulation in 2007. The company has also hinted at the possible return of capital to shareholders, although it will be March before they discover how much they will get. Hold.
House of Fraser
RUMOURS of a profit warning at House of Fraser have been circulating for weeks, but nothing has come to light. It looks as though this perennial underperformer may have scraped through Christmas intact. Indeed, there are hopes that the strong pre-Christmas trading figures released by John Lewis yesterday might be reflected at Fraser stores.
Figures out just before Christmas showed that the “non-specialised store” sector — department stores — was performing significantly better than the rest of the market, so there is reason to have hopes for House of Fraser, although the near-12 per cent increase in December sales enjoyed by John Lewis is unlikely.
Barkers, House of Fraser’s 135-year-old landmark store in Kensington High Street, West London, is due to close next month, marking the end of an era for the group. It is in transition and new stores are performing better than old ones, but the cost of the recent Beatties acquisition still weighs heavy. The shares yield more than 5 per cent, but in the current flat retail climate still look risky. Sell.
