Big dose of risk in AstraZeneca

Rio Tinto; Crest Nicholson Â

So far, so good. AstraZeneca, the UK's number two drugs company, is having to steer a dangerous course through the biggest patent expiry in history, but there is no sign yet of it hitting the rocks. Losec, its stomach ulcer drug, is one of the world's best-selling medicines, accounting for $5.7bn of AstraZeneca's $16.5bn revenues last year. Omeprazole, the active ingredient, lost patent protection in October. Rivals have their copycat products at the ready, and the fear is that those $5.7bn of sales are about to collapse.

That process hasn't started yet, though. AstraZeneca has tied up its rivals in a court battle over claims they infringe its patents on the way Losec is made. Meanwhile, the company is having great success switching patients on to its newer drug, Nexium. The fact Nexium has been gaining new market share as well as winning over Losec users gives some confidence it can hold up well when generic competition arrives, although it is just as possible all the brand-name drugs will see their sales slide.

The Losec patent result is due in the spring, with the outcome and its implications for the timing of rival product launches impossible to predict. All this puts increasing pressure on the next wave of drug launches. Luckily, AstraZeneca has one of the best drug pipelines in the industry. Symbicort, for asthma, has been going great guns since its launch, with sales of £49m in the last three months of 2001. Iressa, a lung cancer treatment due on the market this year, is also looking promising. Crestor, a cholesterol lowering drug, is also due this year, but its blockbuster potential has been questioned after a similar drug, Bayer's Lipobay, was withdrawn on safety grounds.

AstraZeneca is being characteristically cautious, telling analysts to expect a decline in earnings this year, as it ramps up the marketing of its new products. The consensus is that AstraZeneca will lose its patent battle and face competition to Losec in the second quarter, but every day's delay adds $2.5m to group profits, so it could still beat 2001 profits of $4.3bn. That figure, unveiled yesterday, was 7 per cent higher than 2000, if currency fluctuations are stripped out. But with falling earnings for the next one, or maybe two, years, and AstraZeneca shares on 29 times the consensus forecast for this year's earnings, the risks are too great.

Rio Tinto

The recent rally by shares of the mining giant Rio Tinto provides cast iron evidence that fund mangers believe the global economy is on the mend.

Since mid-September the FTSE 100 stalwart has delivered a 40 per cent return, amid hardening expectations that a turnaround in the US and Europe, if not Japan, will bring higher metal prices by the end of this year. And yesterday the shares gained a further 5 per cent after Rio Tinto posted pre-exceptional earnings for 2001 towards the top of forecasts, at $1.66bn (£1.17bn). Operating margins were held at 30 per cent, as firm iron and coal prices, combined with helpful currency movements and acquisition synergies, offset weaker metal prices.

But the chairman, Sir Robert Wilson, wasn't altogether upbeat. The signals about the economy remain mixed, he said, despite signs that the US is stabilising. A significant improvement was unlikely until the middle of the year at the earliest.

Yet for this stock to gain much more momentum and break through the apparently impenetrable 1,400p barrier, much greater certainty over the economic outlook is required.

Investors were in a similar position in the spring of 1999, when the stock had gained 40 per cent after the Russian banking crisis the previous autumn. By the end of 1999, it was up a further 80 per cent.

This time round, however, Rio Tinto has started out enjoying a higher valuation – a premium to its net asset value rather than the discount seen three years ago. Moreover, it would be a mighty gamble to bet on an economic recovery later this year as swift 1999's.

Dresdner Kleinwort Wasserstein expects net income of $1.57bn for 2002, with earnings per share of $1.15 (81p) and a dividend of 59 cents (42.5p). The shares, up 60p at 1,393p yesterday, are close to their all-time high and now could be a good time to lock in some profit before nervous fund managers decide to do the same.

Crest Nicholson

Crest Nicholson is proving one of the nicer little earners among the housebuilders. It made £53.1m in the year to October, up from £48.1m, and things should really get motoring in 2003 when its new "concept schemes" are completed. These are, in effect, tiny towns built around a central feature such as an old dock or abbey. The profits are sky high on these developments, since the accommodation densities are higher and yet they fetch premium prices. Crest can also sell off chunks of the adjacent land for a tidy profit.

Crest's commercial property arm and contract construction business have both underperformed, but analysts are hoping the latter can be sold. The shares, at 210.5p, trade on 6 times 2002's forecast earnings, and are worth a look.