Glaxo rethinks after collapse of bond market cost 131m pounds: Zantac drives 15% growth in sales at drug giant

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THE BOND market collapse in February cost Glaxo pounds 131m, prompting a radical overhaul of its investment strategy.

The drug giant, which until recently kept most of its pounds 2.2bn cash pile in a mix of bonds and securities, said the cost of liquidating its portfolio would produce a pounds 16m charge in the current financial year on top of capital losses of pounds 115m, taken in the year ended June.

Glaxo has now shut the office in Bermuda that managed pounds 1.7bn of the funds. With the exception of around pounds 300m of Italian bonds the portfolio has been liquidated with the assistance of UBS.

John Coombe, Glaxo's finance director, said the cash would now be managed in- house in London, and would be invested only in bank deposits or highly rated government bonds with maturities of three months to two years.

Mr Coombe said the problems in Bermuda had arisen because the investment managers had been set targets that involved beating the market, albeit by quite a small amount. 'And to do that you have to take some risks,' he said.

In future the aim will merely be to track the market. 'That would at current rates mean returns of about 6 per cent,' he said. The investment approach would be mechanistic with negligible levels of active trading, he added.

He said the board had decided to adopt a more conservative approach even though, on a five-year basis, the previous strategy had still produced above-average returns.

'To beat the market you have to take risks. That may be acceptable for banks or whoever, but we are in the drug business, not the investment business.'

Bond market problems meant Glaxo made only pounds 21m from its cash pile, compared with pounds 150m in 1993. But net liquid funds nevertheless rose from pounds 1.8bn to pounds 2.2bn thanks to strong cash generation.

Sales increased 15 per cent to pounds 5.65bn, generating trading profits of pounds 1.8bn, up 19 per cent. Pre-tax profits rose 10 per cent to pounds 1.84bn. Earnings rose 8 per cent to 42.9p.

The improvement was primarily driven by volume growth, with no overall increase in prices. Underlying sales growth excluding exchange rate movements was 11 per cent, almost double the 6 per cent growth in the drug market worldwide.

Sales growth was driven by Zantac, the company's anti- ulcer drug, sales of which rose 7 per cent at constant exchange rates to pounds 2.4bn. That was despite competition from cimetidine, the generic version of SmithKline Beecham's Tagamet, a similar drug to Zantac, which lost its US patent in May.

The final dividend is 18p, giving full-year dividends of 27p, a rise of 23 per cent. The shares fell 7p to 609p.