Outlook: Zeneca has been slow to change

When ICI and Zeneca demerged almost five years ago there seemed little doubt as to which company would offer investors the most excitement. How could the yawn-making world of commodity chemicals governed by little other than economic cycles compete with the frenetic pace of change in the pharmaceutical industry, where innovations in biotechnology and genetic research were piling on competitive pressure and forcing the major drug companies to get nimble or get taken over?

However, as Zeneca yesterday defended itself against accusations that it has failed to respond quickly enough to market changes and has let its drug pipeline run dry, it is Zeneca, not ICI, which looks unable to throw off the shackles of its old corporate identity. While ICI, under ex-Unilever man Charles Miller Smith, has been busy reinventing itself, swapping at record speed commodities business for high-margin speciality chemicals, Zeneca looks like it has only just caught the boat on many market developments - biotechnology alliances, genomics, for example - which have turned its more aggressive competitors Glaxo Wellcome and SmithKline Beecham into world forces in the drug industry.

Not surprisingly Zeneca has been a much better investment than ICI. Over the past four years, shares in Zeneca have outperformed the market by almost 70 per cent, compared to a dismal 21 per cent underperformance from ICI. However the chemicals and drugs sectors naturally attract different share price ratings. Moreover, much of Zeneca's share price growth has been driven by bid speculation.

There aren't many medium-sized drug companies left to buy and in an industry where global consolidation makes sense, Zeneca has been a natural bid target. Unfortunately, potential buyers look in short supply. Roche has splashed much of its cash on other acquisitions and Glaxo would have to think hard about another hostile bid, given the disruption that integrating Wellcome caused. Without a bidder, Zeneca looks exposed. Though it tried hard yesterday to point out how many new products it had coming on line, most of what it has to offer are new versions of existing drugs rather than a full pipeline of late-stage products ready to launch.

Zeneca's main problem is management in general and the congenial Sir David Barnes in particular. Those who know the company talk of an English gentleman's club atmosphere where never a harsh word is raised. In the absence of a bidder, things plainly need to change.