Bottom Line: S&N still vulnerable

IF ethical drug companies are high-tech then Smith & Nephew is the healthcare equivalent of a widget maker. The group's name is synonymous with such solid products as bandages, specialist wound dressings, orthopaedic implants and casts.

Its shares may have underperformed the market by around 20 per cent in the past 12 months, but while the likes of Glaxo have floundered they have outperformed the sector to a comparable degree. So Smith is on a 1993 prospective price earnings rating of around 14.4, about the same as the market, while Glaxo is on an equivalent p/e of around 12.4.

Smith's reassuringly tangible products are seen as more immune than expensive drugs to price pressures - especially as far as US healthcare reforms are concerned. The bulls argue that its American sales - 40 per cent of turnover - are heavily biased towards the over 65s, and thus mostly paid for by Medicaid, seen as politically untouchable.

Its products can also be viewed as cost effective, since proper 'wound management' and similar techniques can cut expensive stays in hospital. At around 16 per cent, Smith's margins, though healthy, also look less hefty than the 30-odd per cent achieved in prescription pharmaceuticals.

But Smith is still arguably vulnerable. A rising tax rate and extra shares will remove a fair slice of the currency benefits to earnings this year. It is also hard to see next year's growth beating this year's likely 8 per cent - unlike the forecasts of 10 per cent or more expected forthe big drug groups. It is a very well managed company but the bull case may have been overstated.