Celltech prospects look sickly

BBA; Wyevale

Celltech needed a little magic yesterday. Half the biotech company's market value has vanished over the past year, and later this week the FTSE 100 trap door opens and the stock falls into the lower profile mid-cap index. Some heavyweight fund managers had been waiting for the 2001 results before deciding if it is worth sticking with Celltech for the long-term. The company needed to pull something out of the hat but investors ended up with, well, not a lot.

Celltech just looked too risky to justify its exalted share price. The company is under pressure on two fronts. It has poured money into research and development (more, in fact, than analysts had been forecasting) but there are growing doubts about the returns that can be expected from the investment. Meanwhile, its portfolio of drugs already on the market – acquired a couple of years back – have been performing less well than hoped.

Figures yesterday showed poor sales of Metadate, a treatment for hyperactivity. It has failed to take a big share of the US market in the year since launch, and now even more rival products have been introduced. While the group has changed the division's chief executive and promised a renewed marketing push, it is likely there are further disappointments to come.

Back in the clinic, Celltech's leading product, code-named CDP 870, is looking set to be a blockbuster treatment for rheumatoid arthritis. But it is taking longer than hoped for its partner, Pharmacia, to start crucial Phase III trials of the drug. Pharmacia is giving mixed signals over whether investors should expect annual sales to top the psychologically important $1bn mark, or whether projections should be for a more modest $750m.

CDP 870 is also being trialled as a treatment for Crohn's disease, at the same time as the company is spending on more advanced trials of another product for the same disease. The prospect of launching this one, Humicade, only to have its sales cannibalised by CDP 870 is confusing, to say the least.

And there is no clarity on the new asthma drug being developed with Merck. Celltech is tempted to exercise an option to increase its share of development costs in return for a bigger share of the royalties. But the effect on medium-term earnings could be large and unwelcome. A decision may be as far away as next year.

With £90m in the bank, Celltech has no financial pressures. But there is no obvious catalyst to levitate the shares, either and they fell 28.5p to 617p yesterday. The issue of whether investors can expect significant medium-term earnings growth remains a complete mystery. Avoid.

BBA

"Good results against a background of difficult market conditions." It is the choice phrase of companies posting appalling results thanks to the economic downturn. BBA – which provides ground support for the corporate jet market, but also makes bits of nappies – had its appalling results yesterday. Pre-tax profit slumped 88 per cent to £34.6m in 2001.

Of course, things took a turn for the worse when the events of 11 September closed US air space and depressed commercial air travel. The dent in profits was about £14m. But things had been dicey all year.

To the future, though, and there was much better news. Trading in airport services is expected to accelerate throughout the year, and analysts upped forecasts as a result. Earnings should benefit from improving margins at last year's acquisitions and the group has another £200m to spend building this side of the business in 2002.

At the materials technology division, which will only be part of the group until the right offer comes along, the benefits of last year's job-cutting exercise should show through. And industrial demand for its non-woven fabrics, of the type found in nappies and sanitary products, is looking up.

With the stock up 1p at 282p, it sits on 14 times new forecasts of this year's earnings. Buy.

Wyevale

Having swallowed Country Gardens at the end of 2000, Wyevale Garden Centres has been busy with the secateurs. It is reshaping the business as a fancy chain selling anything from Christmas decorations to gifts, as well as the traditional offering of plants. And it has paid off, giving a 54 per cent rise in sales last year, and a 26 per cent hike in profits to £19m.

Stripping out Country Gardens, sales growth was a much more modest 4 per cent, but this was despite a steep decline in the first quarter when all garden centres were hit by one of the wettest winters in 20 years.

Wyevale, Britain's largest garden centre group, has beaten its mainly family-run rivals by revamping its centres and diversifying into higher margin goods. This has the added bonus of lessening its dependence on the British weather.

Wyevale is now keen to pick off some more rival centres, and is able to stretch its bank facilities further to do so. The company is forecast to make £25m profit in 2002, putting the shares at 476.5p on an undemanding forward price-earnings ratio of 15. Buy.