After a dismal first three months of 2008, the stock performance of Britain’s big three pharmaceutical companies suddenly found favour four weeks ago, as a sharp sell-off in financial and property-related stocks prompted a scrabble for safe havens. AstraZeneca, Britain’s second-largest drugs company, was the greatest beneficiary of the sector’s rerating as its shares gained about 15 per cent from the ten-year low of £17.48 touched in March.

Investors woke up to the yield differential that existed for less than a week between GlaxoSmithKline, Britain’s largest drug company, and Astra, with the former yielding about 5 per cent and Astra nearly 6 per cent, despite the near-term outlook for revenue growth from each company looking broadly similar.

Glaxo shares have also rallied over the past month, up about 7 per cent to £10.71, benefiting from the rush to safe-haven stocks, bringing the yield for Astra and Glaxo back in line to just under 5 per cent.

The question for investors who may have missed this mini-rally is whether there is still fundamental growth to be had from buying into big UK pharma. The big risk factors hanging over Glaxo, Astra and Shire, Britain’s third-largest drugs company, are the threat of generic competition and the depth and reliability of each company’s pipeline of new drugs. Yesterday one of those big risk factors was removed for Nexium, Astra’s blockbuster heartburn drug, as it settled a patent infringement lawsuit with Ranbaxy, the Indian company, that was to be free to start selling its generic version of the drug this month. Ranbaxy must now hold back selling its version until 2014.

Astra shares gained another 141p yesterday to close at £21.22, but they are still off from January’s high of £23. Astra has still to quash in the courts efforts by Teva Pharmaceutical Industries to market a generic to Seroquel, its schizophrenia drug. This explains why Astra is still trading at a 15 per cent discount to the sector.

Astra shares peaked at £35 in the summer of 2006, but quickly suffered from the failure of three late-stage trial drugs, earmarked as blockbusters. Astra has replenished its drugs pipeline by buying drug development companies. Investors will be relieved by the removal of competition for Nexium, but they have a long wait for the next generation of blockbusters. Hold.

Investors in Glaxo are also in need of a quick-fix cure for the company’s flagging drugs pipeline. Safety issues surrounding Avandia, its diabetes treatment, have kept the shares hovering near four-year lows. The answer to Glaxo’s growth plans a decade ago was to merge with SmithKline. Ten years on with Glaxo shares showing little improvement, that path for growth - either buying Astra or Shire - may be revived. Buy.

SSL International

After a slew of recent profit warnings from consumer goods companies and retailers, SSL International, the maker of Durex-branded condoms and sex toys and Scholl shoes and footcare products, provided some light relief to the sectors. Underlying sales for the year to March 31 are expected to be up by 7 per cent at £532 million. A strong euro means that reported sales will come in 10 per cent higher than the year before.

The sales performance meant that SSL confirmed yesterday that it was on track to fulfill the target set in 2006 for a double-digit improvement in operating profits over each of the three years ending in March 2009. Last year operating profits rose 14.3 per cent to £56.1 million, driven by a 17 per cent rise in Durex sales and a return to growth in Scholl footwear.

The latest trading update suggests that sales momentum has continued. Net debt at the September half-year fell to £77.5 million from £88.7 million at the start of the year. Borrowings will be up at the March year-end because of a recent £15 million cash acquisition in footwear, but yesterday’s sales update suggests that debt is under control.

SSL shares have fallen from a high of 564½p in January amid fears of a consumer slowdown. At 450½p, up 9¼p yesterday, the sell-off may now seem overdone. Buy.

Chrysalis Group

Owning the publishing rights to David Bowie and Blondie sounds glamorous, but investors in Chrysalis Group, the publisher behind the Seventies legends, will be keen to know the range of today’s artists under contract who could become tomorrow’s pop icons. It is they who will be driving revenue growth for several years to come and that is how long investors may have to wait before they get close to another chance of a takeover coming in close to the 155p cash bid offered by EMI, valuing Chrysalis at £103.5 million.

Chrysalis said yesterday that it had terminated bid talks with EMI – the last of several publishers originally lined up as buyers - stating that the bid significantly undervalued the company, thanks, in large part, to the effects of the credit crunch.

The statement was accompanied, however, by a trading update for the first half to February 29 giving warning of a 10 per cent decline in profits from royalties – the payment made to a publisher every time that an artist’s work is broadcast.

EMI’s bid suggests that it valued Chrysalis at a generous 11 times future profits from royalties.

At 115p, off 20p yesterday, the shares are still up from this year’s low of 97½p amid hopes that a sale may yet materialise. Yet debt markets are likely to remain shut for the rest of the year. Uncertainties also persist about Chrysalis’s rosta of new artists who can deliver a rapid improvement in royalty profits. Investors may be in for a long wait for recovery. Take profits.

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