The Investment Column: GSK is no longer on the sick list

Amvescap is only worth holding on bid hopes
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The Independent Online

We have nearly crossed the desert, Jean-Pierre Garnier says. The chief executive of GlaxoSmithKline, the UK's biggest drug maker and the world's number two, means that a period with few new drug launches is about to come to an end. Profits have been withered by the collapse of sales of two antidepressants and an antibiotic, all of which lost patent protection within 18 months. The next generation of drugs to replace them failed to arrive in time. But there are signs of green in the middle-distance.

Investors in GSK are betting on a pipeline of new drugs that include several potential blockbusters. There was great news to announce on one of the most exciting when the company put out its (slightly disappointing) third-quarter results yesterday. A vaccine against the viruses that cause most cervical cancers, which was previously expected to go before US regulators for approval in 2008, is now going to be ready in 2006. This could become a must-have vaccine for half the population.

There will be three modest drug launches in the next six months, for diabetes, bladder problems and a disorder called "restless leg syndrome" which stops people sleeping. Further out, and more exciting, are potential blockbuster drugs for rhinitis and other cancers, although there have been setbacks, too. An arthritis pain drug (in the same class as Merck's withdrawn Vioxx, which was linked to heart attacks) will need more work in trials and a next-generation antidepressant failed its latest trials, which have to be restarted at a higher dose.

So it was a fairly positive update yesterday, and GSK's broad pipeline should yield plenty of news over the coming year. Meanwhile, there is plenty of scope for a company of this size to trim expenses outside of research and development to ensure it meets its promise of flat earnings this year and a return to growth next. Its biggest drug at the moment is Advair for asthma (sold as Seretide in the UK) which has sales of almost £7m a day, up 20 per cent on this time last year. GSK's operations throw off more cash than it can invest and the pressure on drug prices in the developed world is well reflected in share prices. The downside, after years of underperformance by GSK shares, is limited, and the stock yields a 3.6 per cent dividend.

Buy.

Amvescap is only worth holding on bid hopes

Amvescap's Customers are deserting. The fund management group is finding it difficult to reverse outflows of money from its US funds. Don't let it blame the phenomenon entirely on its reputation-trashing run-in with Eliot Spitzer, the New York state attorney general, over the market timing abuse scandal. Amvescap's fund managers have simply not been as good at generating returns for their clients as most rivals.

The company was managing $363bn ($199bn) at the end of September, compared with $371bn at the start of the year. As well as $12bn of fund outflows, markets moved against them on the funds that remained, and only $6bn of funds from acquisitions helped to offset the problems.

So this is a company in trouble, and whose AIM and Invesco brands have been further tarnished in the US by the scandal. A settlement with Spitzer and the regulators, costing $450m, forced the company to halve its dividend, but there is extra financial damage from the enforced agreement to cut fees.

Clearly the group has been successful in cutting costs (via about 1,500 job losses) to bolster underlying profit, but the real efforts from here will have to be in improving the performance of its funds and redoubling the marketing efforts for the brands it is keeping. It is a rescue job and it has to be done at a time when Charles Brady, the 69-year-old who has run the business and its predecessors for a quarter of a century, needs to withdraw from the business and is searching for a chief executive to take over.

Investors who have followed our poor advice to buy over the past year should hold on to see what happens, in case of a bid. Outsiders should stay on the outside for a while yet.

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