Cancer share shakes Medeva

Our suggestion earlier this month that an investment in Medeva, the drugs group, could prove exciting has already been borne out by events. Unfortunately the subsequent one-fifth fall in the share price, even after yesterday's 5.5p uptick to 223p, is not what we had in mind.

The sudden change in sentiment was prompted by last week's warning from the US Food and Drug Administration that Medeva's best-selling behaviour- modifying drug, Methylphenidate, could potentially cause cancer. This bolt from the blue came after tests on the 40-year-old drug, which treats so-called attention deficit disorder. The tests showed a higher than expected incidence of a rare liver cancer after laboratory rats and mice were treated at 30 times the normal dose over two years. Five male mice out of a sample of 70 developed tumours. The FDA described these findings as only a "weak signal" of the drug's potential for cancer, but has called for doctors to be notified and warnings to be printed on the packaging.

Bill Bogie, Medeva's chief executive, points out that research has shown that the sort of liver disease in question is normally apparent by the age of four in humans, while Methylphenidate is only prescribed from six and above. He also stresses the FDA's continued belief that Methylphenidate is a safe and effective drug.

But the share price reaction shows just how vulnerable Medeva remains to bad news. The latest tidings come just as Medeva was rehabilitating itself in the City after a 1993 profits warning halved its market value. Continued growth of Methyl-phenidate and the prospects for a range of new products ranging from a generic metered-dose inhaler for asthma to Hepagene, a vaccine for hepatitis B, spurred the shares' 39 per cent outperformance against the rest of the stock market last year.

The problem is that the balance between risk and reward is very finely poised at Medeva. Methylphenidate is crucial in the short term, representing as it does all the group's sales growth and a substantial proportion of profits. NatWest Markets calculates that a halving of the drug's expected rate of expansion to 13 per cent in 1996 would cut Medeva's earnings growth from 16 per cent to 6 per cent this year.

The deceleration means profits would rise from an estimated pounds 79m last year to just pounds 86m in 1996, compared with consensus estimates of around pounds 95m, raising the prospective multiple from 11 to 13. That is still not high for a fast-expanding drugs company, but there are plenty of other problems.

Medeva's new inhaler has now lost the race to be the first on the US market to use albuterol - generic Ventolin - after Ivax won approval from the authorities last month. Competition is set to intensify, with the imminent introduction by Glaxo Wellcome and Schering-Plough of generic versions of their own patented products. Elsewhere, several other new Medeva products are caught up in patent litigation.

Law suits are not uncommon in the pharmaceuticals world, but provide a degree of uncertainty at a time when Medeva is also about to change its chairman and finance director. The shares could drift for several months while the effect of the latest news becomes apparent.