Focusing on a product spread

THE INVESTMENT COLUMN

The last year or so has been a period of consolidation for SmithKline Beecham, after a period of giddy expansion for the drugs giant in 1994. In May that year it paid $2.3bn (pounds 1.6bn) for Diversified Pharmaceutical Services, went on to pick up the consumer health-care operations of Sterling Winthrop for $2.9bn and two weeks later off-loaded part of that deal in a $1bn disposal to Bayer. Along the way, the group dumped its animal healthcare operation on Pfizer.

The resulting spread of health-related products at the reshaped SmithKline Beecham was evident in yesterday's announcement that it had received US regulatory approval both for a new dosage for its Augmentin antibiotic and an over-the-counter version of the Nicorette anti-smoking treatment. Unlike others in the sector, the group has taken a deliberate view that there is money to be made both in so-called ethical patented pharmaceuticals like Augmentin and in self-medication, ranging from Panadol analgesics to Nicorette.

It is a strategy that has raised some eyebrows amongst pharmaceutical analysts, given the prevailing fashion for focus.

In drugs groups, current received wisdom has it that the big ones should focus on a few "blockbuster" treatments. Instead, the Sterling buy took SmithKline further into the consumer area.

But the surprises have been good so far, with an encouraging recent report on its drugs pipeline, in contrast to more lacklustre showings from rivals Zeneca and Glaxo Wellcome.

The shares' 23 per cent outperformance against the rest of the market over the past 12 months says as much about the ferment affecting the rest of the market as SmithKline Beecham's performance, however. Glaxo's pounds 9bn purchase of Wellcome and the mega deals in the US set shares in the sector alight in 1995 and there has been strong US buying of SmithKline units, the more actively traded of the group's two classes of shares in New York.

But as results out next Tuesday should show, the group has been doing an effective job of managing the decline of its one-time best-seller, the anti-ulcer drug Tagamet.

That is expected to have seen its sales slump from pounds 480m in 1994, when it went off patent, to just pounds 280m last year. Seroxat, the anti-depressant competitor to Eli Lilley's Prozac, could have seen sales rise from pounds 333m to pounds 474m, while the Engerix-B hepatitis vaccine could be near to the pounds 400m mark with Augmentin showing continued growth. Consumer health is expected to have done well and chief executive Jan Leschly has promised double digit earnings growth going forward.

The problem is that all the good news is in the share price, which stands on close to 22 times last year's estimated earnings and 19 times the current year's forecast. Any slippage will take its toll on the shares which are high enough.

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