When Vectura bought Skyepharma for £441 million in the summer, it looked like a sensible deal between two middle-ranking British pharmaceuticals companies in which both contributed products with little obvious overlap. They make treatments for asthma and chronic obstructive pulmonary disease, but have different technologies to deliver these. Vectura uses dry powder and Skyepharma aerosol inhalers.
The first set of interim figures shows revenues up by 31 per cent on a strictly comparable basis, driven by higher sales of the seven products on the market. Sales of flutiform, Skyepharma’s most significant compound, rose by 35 per cent. Pro forma earnings were ahead by 63 per cent at £30.8 million.
The company gets most of its revenues from joint ventures with a stable of other, larger operators that take and market its products. A further deal with Hikma Pharmaceuticals was announced this week.
Vectura has £92 million in cash to spend on further R&D. It has just taken full possession of a manufacturing facility in Lyons, France, that could be used to manufacture oral treatments on behalf of other drugs companies.
The shares, up 4½p at 150¾p, are difficult to value and have been held back this year by a disappointing news flow, fairly typical for pharmaceuticals producers with a lot of new products in the pipeline. The key is the other seven products in late-stage development, including a generic replacement for Advair, the market lead, in the United States, which is produced by GlaxoSmithKline.
The figures confirm an upbeat trading statement earlier in the autumn. The potential for those new drugs is hard to measure, but Vectura is in an area of medicine that can only continue to expand, driven by pollution and increased smoking in places such as China.
On one analyst’s reading of future profits for the first full year of the merger, the shares sell on ten times’ earnings, which does not look challenging, although the numbers look somewhat premature. There is, inevitably, no dividend, but the company would appear to be in an interesting place and looks an intriguing long-term bet.
MY ADVICE Buy
WHY Shares are hard to value because of the amount of product still not on the market, but its chosen area of healthcare can only grow
United Utilities
The initial rise in United Utilities shares yesterday was a surprise. The shares were up 3 per cent on halfway figures that should have contained nothing untoward. The dividend policy is well signalled beforehand, increasing at least in line with inflation, and the company announced a rise of 1.1 per cent to 12.95p. The core business of supplying water to homes and businesses in the northwest is so heavily regulated that profits are equally easy to forecast.
The rise was not maintained, the shares ending up 6½p at 902p. Shares in utililities that offer a high and assured income such as United and National Grid have been falling recently because they are seen, rightly or wrongly, as less attractive investments as US bond yields rise. This makes little sense from the perspective of the retail shareholders that make up many of the investors.
The results, though, seem to have highlighted to the market again the attractions of such stocks. The yield is 4.3 per cent, while that inflation protection is even more attractive as the rate looks set to rise again. For retail investors, this remains a core holding.
MY ADVICE Buy
WHY Market is coming around to attractions of such stocks
Thomas Cook
Thomas Cook says that it can trade its way out of high levels of debt, but it is going to be a long business. The travel operator’s recovery from the dark days of a few years ago, aided by a £305 million rights issue in 2013, unfortunately has coincided with a rise in terrorist incidents on the Continent, with German holidaymakers understandably unwilling to travel to Turkey and with markets such as Belgium also disrupted.
Against this, margins from the Nordic countries rose to 11 per cent and the British business had its fourth consecutive year of earnings improvement and record margins, so something is going right.
In Germany, winter season demand is down by 10 per cent and bookings by 5 per cent. The Condor airline continues to be a drag on performance and is being restructured, but progress can be judged only by its performance in the run-up to the summer season.
Thomas Cook made a welcome return to the dividend list after more than five years but the payment, 0.5p, is purely nominal and there is little guidance henceforth except that the payout will represent 20 per cent to 30 per cent of earnings. For the year to September 30, earnings from operations of £205 million were largely wiped out by £163 m llion of finance charges and an after-tax profit of £9 million was almost absorbed by the cost of that dividend.
One analyst’s reading of this year’s earnings suggests a dividend yield of 4.5 per cent. Better than nothing, but the shares, up 5½ p at 79p, could struggle to make further progress.
MY ADVICE Avoid
WHY Debt will take a while to reduce to reasonable levels
And finally . . .
Another interesting investment by Allied Minds, an incubator of advanced technology coming out of American universites and the US military. This column has suggested before that this is an investment almost impossible to value by any normal means but attractive to those prepared to take a long-term view. Its HawkEye 360 subsidiary has raised $11 million to complete the development of three small satellites that will go up late next year, to be used to collect and monitor data. Allied Minds is participating in the fundraising.
