Strong pound hits Glaxo margins

Glaxo Wellcome, the pharmaceuticals giant, warned yesterday that the strength of sterling and increased marketing spend would mean a sharp fall in margins in the full year.

John Coombe, finance director, said that at current rates, the strong pound would impact full-year profits by 8 per cent - around pounds 240m off current forecasts of pounds 3bn. However, as with all drug companies, sterling's effect will be mainly in translation of currencies rather than a direct financial impact.

Mr Coombe said trading margins could fall as low as 35 per cent, compared to 38.5 per cent at the half year. In a generally weak sector, Glaxo's shares fell 38p to 1291.5p.

Speaking at Glaxo's results, which showed that half-time sales to June were up 8 per cent to pounds 4bn in constant currency, Sir Richard Sykes, chairman, said falling sales in Zantac, the anti-ulcer drug which lost its US patent last week, had been more than compensated for by growth in new products.

Comparing Glaxo's drug profile now to before the acquisition of Wellcome in 1995, Sir Richard said: "We have a wider, deeper, more balanced portfolio now. Once we get over the Zantac patent issue in the US, we have the products to fuel growth in the future."

Excluding Zantac sales, which fell 12 per cent to pounds 808m, group sales rose 14 per cent and sales of new products, those introduced since 1990, rose 50 per cent. New product sales at pounds 1.3bn in the half year now represent almost a third of total group sales. In contrast Zantac comprised a fifth of Glaxo's total sales compared to more than 40 per cent in 1994. Respiratory drugs represented the largest slice of total sales at 22 per cent, compared to 1994 when Zantac dominated.

Sir Richard said drivers of growth were the group's Aids drugs Retrovir and Epivir and new asthma products Serevent, Flixotide and Flixonase. Sir Richard said the Aids drugs, which had more than half the world's anti-HIV market, were "the cornerstone of modern HIV treatments". Epivir more than doubled sales and "is one of the fastest-growing products that we have ever had".

Sir Richard said the company had launched 12 products in the half year with another eight to come in the second half. These include Romozin for the treatment of type II diabetes, which received approval for marketing in the UK yesterday. He said advances in combinatorial chemistry and drug screening increased the chances that drugs currently being developed would be successful.

Commenting on the legal wrangle that has kept generic competition against Zantac out of the US market so far, Mr Coombe said: "We are sitting back and trying to keep straight-faced about it. There are no medals for crowing."

Genpharm, which was granted an exclusive right to sell Zantac until 29 August, cannot do so as it faces a legal challenge from Glaxo over patent infringement which begins on 19 August.

Investment column, page 24

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