Bottom Line: Expensive Wellcome

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The Independent Online
PHARMACEUTICAL stocks have been experiencing a modest re-rating over the past couple of months but since the beginning of October Wellcome has romped ahead of its main rivals, SmithKline Beecham, Zeneca and even Glaxo.

Yesterday's surging market together with bullish news about a second-generation anti-viral product helped it up another 37p to 823p a share. But at that price even confirmed fans should ask themselves whether it is too expensive.

While Wellcome's product profile is interesting and preliminary feedback about its first big over-the- counter venture, Zovirax for cold sores, is encouraging, there may be more mileage in Glaxo or Zeneca.

Of the big four Wellcome has the largest exposure to the US market. While America has so far made the most noise on the subject of healthcare reform and cost containment, Europe has led the way in terms of falling drug sales. It seems inevitable the US market will now follow suit and that will hit Wellcome hardest.

There is also a substantial wodge of stock overhanging Wellcome's share price. Institutions that took shares in the company when the charitable Wellcome Trust decided to reduce its stake last year bought at 800p and may now look to take a profit.

There is also the Trust itself. Until the shaky state of equity markets knocked the idea on the head, it had intended to scale its holding down to 25 per cent. Instead it had to settle for cutting it to 40 per cent. It promised it would make no further disposals for 18 months - but that deadline expires in January.

Lastly, Wellcome runs a relatively tight ship as far as research and development is concerned. But greater efficiencies in R&D are likely to be one of the ways in which drug companies will ensure growth in the 1990s. Ironically, that makes Glaxo, with more fat to trim, a preferable buy.