The huge debts taken on in 1994 to buy first Diversified Pharmaceuticals, the US "pharmacy benefit manager" (PBM), and then Sterling Winthrop, a US consumer products group, are being wound down, while earnings growth remains firmly in double figures. Pre-tax profits grew 16 per cent (excluding currency factors and exceptionals) to pounds 1.55bn, while earnings per share jumped by an underlying 14 per cent.
The pound's strength could be a short-term drag, given the proportion of sales on the Continent and the US, but probably not one to lose sleep over. The 14 per cent profits growth to pounds 442m notched up in the fourth quarter would have been a chunky 23 per cent without currency effects, but the group reckons the pound at year-end levels would only have shaved 5 per cent from last year's figures.
It is hard to gauge how successful SmithKline's acquisition record has been, given the opacity of the information on offer. Consumer healthcare trading profits rose a respectable 11 per cent to pounds 372m, and the record on brand growth looks decent. The increased global reach provided by Sterling means that brands such as Aquafresh and Panadol have done well, showing strong growth of 24 and 10 per cent respectively last year. That said, the fall in the first nine months of the over-the-counter version of Tagamet suggests SmithKline's abilities in extending the life of its drugs after patent expiry have taken a while to perfect, although competition has been intense.
The picture is fuzzier at Diversified. The group makes much of the fact that it now "manages" the healthcare requirements of 33 million lives, more than twice the 13.8 million at acquisition, and a drug spend of $5.2bn (pounds 3.2bn). But it refuses to reveal profit figures and in the absence of more concrete evidence, it is hard to avoid the conclusion that the same ends could have been achieved more cheaply by other means.
Acquisitions aside, the record remains good. The pounds 580m rationalisation provision of two years ago has delivered gains of pounds 125m and the core drugs business remains highly successful, growing profits 12 per cent to pounds 1.18bn last year. Sales growth should continue in double digits and the group has no big patent expiries until the next century. Assuming Coreg wins US approval for congestive heart failure later this month, new products, nearly a third of total drug sales, should be performing strongly.
Profits of pounds 1.79bn this year would put the shares, up 13p at 894.5p, on a forward p/e of 21. Hold.