Medeva may be the cure Fisons needs

AFTER MONTHS of bold restructuring that has changed the direction of the company, Fisons is taking its biggest gamble yet. Its plan to take over Medeva, a rival drugs company, is not only a clever strategic move - the entire future of Fisons may also hang on its success.

If it succeeds, the rapid conversion of Fisons from the sick man of the pharmaceuticals sector to a company with a bright future will be complete. If it fails, the restructuring will have left Fisons looking extremely exposed and possibly lacking the expertise to survive in its field.

That the company appears a credible predator for Medeva at all is a tribute to its resurrection. A year ago it was widely seen in the stock market as lacking direction or strategy. Sales were falling and it had few new products in development to make up the shortfall. Almost every large drug company in Europe and the United States had examined it as a takeover target and rejected it. It desperately needed strong medicine to survive.

This is what Stuart Wallis, the chief executive brought in late last year, has provided. In the space of a few weeks he dealt with the loss- making scientific instruments operation by selling it rather than shutting it down. Then, in an almost heretical move for a drugs company, he sold the research and development arm to Astra, the Swedish company, for £202m. The laboratory supplies arm is also expected to be sold.

All of this will raise in the region of £470m in cash for the company while saving it some £70m a year that used to go on research spending. These were the kind of bold decisions that many believe could only have been taken by an outsider to the industry. Mr Wallis was one of the directors involved in changing Bowater, the struggling paper company, into a successful packaging group. He has no background in pharmaceuticals.

What he has done, however, is to turn Fisons from a conventional drugs company researching its own products into one that buys in products and uses its substantial sales force to market them. This strips out the huge development costs of new drugs although it now means the company must find drugs in a late stage of development to "license in" from outside and then market.

But Mr Wallis's restructuring can be seen in another light, too. "It is classic conglomerate financing," says one analyst. "It's the kind of thing Bowater might have done. You write down the assets, sell off the loss-making bits, boost the share price, and then make an acquisition that will improve the earnings per share."

Either way, a link with Medeva makes perfect sense for Fisons. It would not only get its takeover, it would also be buying the company on which it is modelling itself. Medeva, under its chairman, Bernard Taylor, a former Glaxo executive, has grown rapidly as a drug marketing company. It has bought in several successful "late-stage development" drugs, including respiratory drugs and a promising hepatitis B vaccine that is to be marketed soon.

Medeva's sales last year were £239m compared with £450m at Fisons. But while Medeva's sales have soared sixfold in the last five years and growth could reach 20 per cent, Fisons's sales growth is steadily falling into single figures.

Until Fison's transformation, Medeva was virtually the only UK drugs company occupying this niche in the sector. To find, buy in and exploit successful drugs in an increasingly competitive market requires management with long experience of pharmaceuticals and wide contacts in the industry. Led by Mr Taylor, Medeva has this.

Fisons does not. All its experience is focused on research and development rather than buying new drugs on the open market. Capturing Medeva's expertise would solve that at a stroke.

"The easy bit for Fisons was changing the company," says Peter Laing, analyst at Salomon Brothers. "Now it has to survive in its new form. It will be left in an exposed position if it doesn't pull off the deal with Medeva. Companies would not rush to buy Fisons, even though it is more attractive now."

This is why Fisons may be willing to pay £3 a share or more for Medeva, valuing the company at £900m, compared with a current market price below 250p. It is also why the deal may in the end look more like a merger or a reverse takeover than an outright purchase by Fisons. The stock market would almost certainly take more comfort from a combined company run largely by Medeva executives than one controlled by the Fisons team. Indeed, the outcome of the deal talks will almost certainly hinge partly on how the jobs will be shared out.

But while Fisons has everything to gain, Medeva's motive for the deal is less clear. The fit between products, such as its respiratory products and Fisons' asthma drugs, makes sense. Moreover, Fisons brings a large European sales force, which Medeva lacks since most of its marketing effort is in the US.

Yet in the near term, its sales and earnings will almost certainly be impaired by linking up with Fisons. Pushing up the sales of the combined group will also become a mammoth task that will require the company to find some remarkable new drugs - not an easy job, even for Medeva's talented management.

For these reasons, Medeva will have to drive a hard bargain to justify the deal. It is said to have set a minimum of 280p in the negotiations so far, but its US shareholders - about half the investor base - may demand more. In the end Medeva may find it hard to accept anything less than £3 per share. Fisons may, ultimately, have to scrape together substantially more to clinch the deal.

Even then, the takeover is by no means in the bag. Most analysts give it a 50-50 chance. But if Mr Wallis does not pull it off and his company has to face the future on its own, things may start to look bleak for Fisons.