Biotech star Acambis still worth a flutter

Edinburgh Fund Managers; RM

Shareholders sitting on a 210 per cent return from their stock market gamble of a year ago, would be forgiven for cashing in their chips and leaving the casino. But if their punt was on Acambis, the vaccines company which got lucky with its smallpox product, they may want to hang on. The biotech star is odds-on to keep rising.

Acambis' work in counter-terrorism for the US government turned its fortunes after 11 September. The company was already contracted to supply a stock of ready-to-use smallpox vaccine, in case of a bioterrorist attack, but has been given more money to speed up and extend that contract. It has promised to make enough vaccine for every US citizen by the end of this year, bringing in revenues of some £250m and turning a speculative vaccines developer into a profitable company overnight.

The shares came under pressure yesterday after Aventis, the French pharmaceuticals giant, apparently found in one of its freezers enough unprepared smallpox vaccine to make 90 million doses. The stock, dating from the 1950s, has been given free to the US government, raising fears it may no longer need all of the 209 million doses Acambis is contracted to supply.

Acambis felt the need to say that its deal with the US authorities remained unchanged as a result of the gift. A contract is a contract and its product is superior. But the scare did draw attention to a few of the uncertainties still surrounding its US relationship. It still needs to do some dotting and crossing on a contract to maintain the whole of the US stockpile, which will need replacing every five years, but it is unlikely the US government will look elsewhere in the short or medium term. The company will still need to get its vaccine through the US regulatory approval process, but scientists insist it is a safe and easy-to-make vaccine – not the sort of scraping from the belly of poxy cows used in the Aventis supply and which might raise regulators' eyebrows in this day and age.

So the risks are small, the opportunities as large as ever. Other governments may wish to hire Acambis to produce stockpiles. Meanwhile, it can plough the smallpox proceeds into its other work, including a promising vaccine for Japanese encephalitis. This could prove its ability to churn out effective products, although development work may push the company back into losses a few years ahead.

It is far too early to measure Acambis on traditional measures such as price-earnings multiples, and the shares are likely to be volatile. But most analysts discounted cash flow models (using admittedly subjective risk adjustments) to justify much higher share prices than yesterday's 324.5p.

More importantly, news from the vaccines portfolio and progress with the US contract should keep the momentum with Acambis shares for a time yet. Still worth a flutter

Edinburgh Fund Managers

Edinburgh fund Managers has not been belle of the ball recently. The company has put off two suitors in as many months, sending its shares down 25 per cent in the past four weeks.

Of course, it's not been much of a ball. The tragic markets of the past year pushed EFM's funds under management down 18 per cent in the 12 months to 31 January. There was also a 77 per cent slide in pre-tax profits to £2.8m, forcing the group to halve its dividend.

EFM, like most small but generalist fund managers, needs to find a partner because, aside from relying on a dramatic and speedy rebound in the market, scaling up is the only way to achieve decent profits in the sector. The problem for potential buyers of EFM is that Edinburgh Investment Trust and Bank of Scotland, two clients accounting for 25 per cent of its funds under management, could walk out the door at any moment.

This put off Hermes, the BT pension scheme fund manager, which considered buying EFM last month. Hermes could stand in the way of other attractive deals, since it owns 29 per cent of EFM.

At least the group pulled in more business than it lost last year, although after acquisitions are taken into account the increase was unimpressive. A move into higher-margin private client business helped, but is not the basis for a rebound in EFM's shares.

Clouds on the horizon include the group's exposure to the troubled split-capital investment trust sector – it has four split-caps and at least one is expected to announce a dividend cut soon. EFM is also betting heavily on the quick return of a bull market as about 90 per cent of its funds are invested in equities.

With projected pre-tax profit of £6.4m for 2002, EFM shares (down tuppence to 422.5p) are valued on a forward p/e of 27. This is particularly expensive given future uncertainty. Sell.

RM

It was like the heady days of the dot.com boom where IT services companies put out stock exchange statements on every last contract win, the smallest

alliance. RM, supplier of computers and software to schools, said it has a £1.4m contract to develop online teacher training for the Government. But yesterday the shares rose just 2p to 81p. RM is far from favour.

It has misjudged the educational market, finding schools willing to shop around for cheap hardware, rather than opting for RM's all-in package.

Analysts are confident a strategic review will set it on a better course, perhaps outsourcing PC manufacture to concentrate on software and services. But with the BBC wanting to start providing free IT content to schools, it needs to come up with something radical. The shares' p/e of 27 does not reflect the uncertain outlook. Sell.