GSK's new drugs growing up fast

CSR float looks too frothy for now; Bars group is a Pope in need of a miracle
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The Independent Online

Glaxosmithkline has been a dog of an investment since the merger that created it in 2000. The world's number two pharmaceuticals giant has been slow to develop a pipeline of new drugs to replace a trio of blockbusters which have lost patent protection. Augmentin, the antibiotic, and Paxil, the anti-depressant, both now face cheap copycat competition in the US, the most lucrative pharmaceuticals market, and Wellbutrin faces the same fate in months.

The slide in the dollar comes at just the worst moment, making a 7 per cent dent in profit this year. There is going to be a messy gap in the company's growth, and GSK shares now trade at a valuation about a third below those of its peers.

Yesterday's share price fall was an understandable reaction to GSK's decision to cram lots of one-off charges into the 2003 figures, meaning they missed forecasts. But it lowers the bar for 2004's promised "flat or better" earnings. By the end of this year, GSK will be growing again.

It shouldn't take that long for the stock market to wake up to the turnaround, and the company should also have a steady feed of news on the progress of its pipeline of new drugs.

This is looking one of the fattest in the industry. Jean-Pierre Garnier, the chief executive, used to say of the new drugs that he "can't choose between my babies". Yesterday, the metaphor grew up. The pipeline is a "teenager" being marshalled "towards maturity". Three dozen drugs have passed proof of concept stage and will be in late-stage trials this year.

They won't come of age until late in the decade, sure, but analysts will soon be plugging first guesses on potential sales into their forecasts for the future. Long-term winners could include another blockbuster asthma treatment being hailed as "better than Advair", currently GSK's best seller.

Dr Garnier says 2004 is a transition year for GSK's product mix, and it should also mark the company's transition from dog to darling. Investors get a 3.7 dividend yield for their patience, and should buy.

CSR float looks too frothy for now

During the technology boom, Cambridge Silicon Radio, a microchip company, was talking about getting its technology fitted into training shoes. Its kit, it said, would monitor how fast you were running and communicate the info to a watch which was simultaneously monitoring your pulse rate.

All clever stuff, but the reality, four years on, is somewhat different and the devices the technology is in - mobile phones, wireless headsets and laptops - are rather more mainstream. Bluetooth chips such as CSR's enable gadgets to talk to each other without wires.

The company's upcoming flotation on the stock market is a key indicator of the health of both the technology sector and the initial public offerings market. And, with such a glittering cast of shareholders - 3i, Intel, ARM, Sony, Siemens and Compaq, to name a few - it is imperative it goes well.

It is operating in a growing market. Analysts think 103 million Bluetooth gadgets will be sold this year, twice as many as in 2003, and that sales will rise to 190 million in 2005.

As with all private companies, information on CSR is scarce, although sources say the bankers bringing it to market are forecasting profits of $15m-$17m this year, rising to $23m-$29m next year. That means it plans to float on a toppy earnings multiple of between 30 and 35 times this year. And with so many shareholders looking for an exit, there will undoubtedly be a stock overhang once CSR reaches the market, although the lock-ups will range from 6 to 12 months. From the private investor's point of view, it is best avoided in the short term.

Bars group is a Pope in need of a miracle

The Toad chain of high street bars, owned by Eldridge Pope, stands zero chance of ever turning into a prince, no matter who kisses it. Which considering the beleaguered state of the pub industry, which claimed another victim in Springwood earlier this week, is bad news for shareholders.

Since this column called time on the former brewer more than a year ago, the Dorset-based group has found life tougher than a pork scratching that has passed its sell-by date.

Eldridge Pope rebuffed a series of takeover bids last year, parted company with both its chief executive and chairman, and gained something of a loose cannon of a major shareholder in the form of Michael Cannon. The entrepreneur might have failed in his attempt to acquire a 29.9 per cent stake in Eldridge Pope in a miserly tender offer, but after lifting his stake to about 16 per cent in November, he is no innocent bystander.

Miles Templeman, the former Whitbread brewing supremo who joined the group as chairman last month, warned yesterday that there were no quick fixes from the new chief executive Susan Barratt's "back to basics" strategy.

Despite falling back from the bid speculation-induced 191p peak they hit last summer, the shares still trade on a hefty 19 times this year's likely earnings. Given that the group lacks the safety net of a decent property portfolio, this is too much. Avoid.

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