Bottom Line: SmithKline confounds the critics

IN 1989, when SmithKline Beecham, newly emerged from the ashes of SmithKline Beckman and Beecham, produced a corporate strategy that involved the over-the- counter market, the sceptics were too numerous to count.

To many of them it was simply a case of making the best of a bad job - the new pharmaceutical group was stuck with a lot of OTC medicines and had little choice but to put a brave face on things, the argument went.

In those days OTC was viewed as distinctly second-best. The narrow profit margins of such products lacked the lustre of blockbuster prescription drugs such as Zantac or Ventolin.

Today the revisionists are out in force as SmithKline's figures repeatedly demonstrate the soundness of that original strategy.

In the second quarter, for example, sales were up 8 per cent on a year ago in a difficult market, a doubly creditable performance since growth was driven predominantly by new products.

It may have been luck rather than judgement. But the growing burden of healthcare costs, which has led governments to switch public prescription medicine costs into the private over-the-counter sector, was discernible then and SmithKline's management deserves the benefit of the doubt.

So far the main market benefit to SmithKline of getting it right has been reflected in the way its share price has withstood the decline that has shaken the rest of the sector.

Glaxo's share price is 23 per cent down on a year ago and Wellcome's is 26 per cent lower. SmithKline's has dropped only 5 per cent.

Drug stocks will continue to be overhung for the next six months by the uncertainties that Bob Bauman, SmithKline's chief executive, underlined yesterday - a realism much to his credit.

But the sector is probably near the bottom and the gains to shareholders will come now from backing the winning horse emerging from the pack.

SmithKline's strategy and management both still look ahead of the field and the shares should be bought. As an aside, the relative attractiveness of OTC products revealed by SmithKline emphasises how expensive it will be for post-Manoplax Boots to expand its interests in this area if that is its strategy.