Yesterday's third-quarter earnings are a case in point. Underlying profits rose 10 per cent to an expectation-busting pounds 415m, meeting SKB's target of double-digit earnings growth. Paxil was again the healthiest performer, with sales up 20 per cent. The antibiotic Augmentin, another big seller, bounced back from a rotten first half. Margins held firm, despite the company's increased spending on research and development - now a massive 18 per cent of sales.
On the minus side, turnover on over-the-counter drugs suffered from competitive pressures, while vaccines, an SKB strength, were down.
In the longer term, the problem will come in 2002, when SKB will lose patent protection on a number of money-spinners, including Augmentin. More worryingly, Paxil will go off-patent in 2005, with sales expected to drop by around 50 per cent almost immediately. But this is where SKB's huge R&D budget comes in - the money should speed up development of four products to plug the gaps.
The key is smooth approval for Avandia, a diabetes drug, which could be the next pharmaceutical blockbuster with estimated sales of $1bn (pounds 590m) a year. Progress is encouraging, with approval expected around the end of next year.
The rest of the pipeline looks fairly solid, and although earnings growth will be constrained by R&D spending, it will remain in double digits for the foreseeable future. The shares leapt 27.5p to 686p yesterday and now trade on 32 times 1998 earnings forecasts, a slight discount to Glaxo. Merger or no, SKB is a good long-term punt. Buy.Reuse content