Glaxo can adapt to life without its wonder-drug

The Investment Column
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The Independent Online
Glaxo Wellcome, easily the UK's leading drugs group since the 1995 merger with Wellcome, was doing its best yesterday to reassure investors that the world does not end with Zantac. The basic US patent for the anti- ulcer wonder drug, which propelled Glaxo's phenomenal growth in the 1980s, expires in July.

On what Sir Richard Sykes, chief executive, sees as a worst-case outlook, that could result in sales of its best-selling drug collapsing by up to 80 per cent in the following 12 months, equivalent to nearly a fifth of last year's turnover for the whole group.

But, as Sir Richard was at pains to point out, competition from rival drugs and the dilutive effect of adding the Wellcome portfolio has been steadily reducing the importance to the group of Zantac. Competition shaved pounds 324m from the drug's sales last year, leaving them at pounds 1.93bn, representing just 23 per cent of the total, down from a half at the beginning of the decade.

Total sales of new products launched since then, such as Imigran for migraine and Epivir for Aids, have overtaken Zantac and will eventually take up the running. But despite the 50 per cent growth rate chalked up by the new products in 1996, the decline of Zantac will continue to be the main feature of Glaxo's results for the next two years.

So while Sir Richard's aim of producing low single-digit sales growth and at least maintained earnings looked uninspiring at first sight, in fact it should give some reassurance to bears who had been forecasting earnings declines up to the end of the century. There is, of course, plenty that can go wrong for Glaxo between now and then.

Currency and the speed and extent of generic competition to Zantac will be crucial. Meanwhile, the group is warning that last year's chunky margins, up from an underlying 33.1 to 37.5 per cent on the back of Wellcome rationalisation, will fall two points as the marketing push behind new products is stepped up.

Even so, sentiment was moving in Glaxo's favour yesterday. Integrating Wellcome, which delivered pounds 150m of savings last year, still has further to go on the manufacturing side. But what excited analysts was Glaxo's forecast that sales growth by 1999 should be back in double digits. Last year's like-for-like 6 per cent sales rise becomes 14 per cent when Zantac is stripped out. As Zantac becomes less important and another 20 products are launched between now and 2000, that underlying figure should assume greater importance.

So, even if this year's profits dip slightly to pounds 2.84bn, the shares, up 14p at pounds 10.49 on a forward p/e of 19, are probably at an unjustified discount to rivals like Zeneca and SmithKline Beecham. Hold.

BTR is a dog without bite

BTR has proved a real dog of an investment over the past three years, underperforming the FT All Share index by a thumping 45 per cent. What the City is hoping for is a recovery and rerating prompted by the streamlining strategy of Ian Strachan, who joined as chief executive from RTZ last year.

After ruling out any de-merger, his plan is to sell the poorly performing operations and concentrate on higher-margin businesses that have market leadership. So far the plan is running to schedule, with pounds 1.75bn worth of businesses sold and the pounds 500m rump expected to be shifted by the end of this year.

The only problem is that a turnaround of this rather boring conglomerate is likely to be measured in years rather than months. Analysts reckon resuscitating BTR is a two to three-year task so shareholders who have seen their shares lose more than a third of their value since their peak in 1993 will have to be patient.

Yesterday's full-year results showed the impact of the pruning. Pre-tax profits for the year to December slumped from pounds 1.6bn to pounds 679m due to pounds 622m of restructuring charges. As forecast, the dividend was cut to 9.6p from the previous 14.7p.

The main problem area was in the automotive division, where profits were 11 per cent down due to start-up costs in a North American factory and difficult trading conditions in Europe. Power drives and process control, two areas BTR sees as core businesses, showed the best profits growth at 9 per cent and 10 per cent respectively. More disappointing were building products, where profits crept ahead 2 per cent, and the polymers business, where returns slumped by 12 per cent.

Looking forward, much will depend not just on market conditions but management's ability to change the culture of the BTR behemoth to one of longer-term investment and growth. On analysts' forecasts of pounds 1.35bn for this year the shares, up 7p at 259.5p yesterday, trade on a forward rating of 12. Inexpensive but unexciting.

More than a pause at Cookson

Bob Malpas, chairman of Cookson, yesterday claimed that 1996 was a year of pause in the progress towards superior performance at the industrial materials group. A look at the figures suggests that is something of an understatement.

Five new businesses were acquired and two sold in the pursuit of the group's performance target, but operating profit still fell 6 per cent to pounds 189m, profit before tax and exceptionals was down 8 per cent to pounds 166m, while exceptional items - mainly provisions on disposals and discontinued activities - reduced the final figure to just pounds 45m.

Even excluding those charges, underlying earnings dipped a tenth at 17p, while gearing jumped from 6 per cent to 35 per cent. In what was once a go-go area, electronic materials, profits fell by 18 per cent to pounds 65m, reflecting continuing excess capacity worldwide in the printed circuit board industry and a rundown in stocks of chips and semiconductors. There was some improvement in the second half.

But Cookson Matthey Ceramics, the joint venture with Johnson Matthey, also had a difficult year, while the plastics division slipped backwards, more than offsetting the improvements from the advanced refractories and engineered products divisions.

The downturn affected the group's main markets across the Atlantic, with US profits dipping from pounds 121m to pounds 117m. Europe and especially the UK, though less important, suffered bigger percentage falls.

Operating profit was about pounds 4m below the consensus forecast. Chief executive Richard Oster admits that current trading conditions will remain unchanged for the balance of the first half and the size of the recovery he still expects in the second half depends on a recovery in the electronics industry and some weakening in the strength of sterling.

Many analysts were yesterday starting to shave their forecasts for 1997.

The shares, up 5.5p to 235p trade on just 13 times prospective earnings, but they remain unattractive for now.