The chemistry is right for SB

The UK's second biggest drug company looks attractive, with a healthy stream of new products
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The Independent Online
INVESTORS who are into drugs have had plenty of trips and some interesting highs for their money of late, as the pharmaceuticals sector outperforms the overall stock market.

Takeover rumours have sent Zeneca zooming, a bid on the table has injected new life into Fisons, and Glaxo Wellcome has seen its shares spark after encouraging reports on the effectiveness of its Aids drug AZT.

SmithKline Beecham has also joined in the party. Its "A" shares, which stood at 460p at the beginning of the year, have gained new momentum over the past few months.

Last week, they hit record highs ahead of the group's key briefing meetings with UK and US analysts, focusing on the group's all-important portfolio of drugs under development.

SB announced it would be seeking approval for around 50 products over the next three years. Among these are 13 new drugs, as well as a raft of variations on existing products.

The most significant of the new products include its Coreg/ Kredex drug for congestive heart failure, Hycamtin for ovarian cancer, Ropinirole for Parkinson's disease, and the asthma treatment Pranlukast.

A healthy flow of new drugs and potential blockbuster products is the life blood of all drug companies, not least SB, whose previous big earner, the ulcer drug Tagamet, came off patent last year. Analysts were impressed, and strong buying on both sides of the Atlantic pushed its "A" shares even higher.

In the UK, SB plays second fiddle to the new Glaxo Wellcome combine, and worldwide it is the sixth largest group. On top of that, last year's flurry of acquisitions helped propel it to number three in the fast-growing consumer healthcare market.

SB also hits the top of the league table for chief executive pay. Former boss Bob Bauman was one of the first to break the pounds lm-a-year barrier, and the current head, Danish-born former Wimbledon semi-finalist Jan Leschley, took home a handy pounds 2.4m package last year.

However, the pace of change since Mr Leschley took over has sidelined the debate over pay. SB's pounds 5bn acquisition bonanza last year added US drug distributor DPS, as well as Sterling Health, a leader in over-the- counter medicines. SB subsequently sold Sterling's US brands to Bayer of Germany, and also disposed of its own animal health arm as part of the group shake-up.

Pharmaceuticals make up around three-quarters of trading profits at SB, while 16 per cent come from its consumer health division, spanning brands such as Panadol, Night Nurse, Macleans toothpaste, Ribena, and Lucozade.

The acquisitions put what Mr Leschley described as the main components in place for future growth. While analysts admire the strategy, reinforcing SB's position in the consolidating international drugs market, some query whether pounds l.4bn was too generous a price for the drug distributor DPS.

The restructuring has left SB with hefty borrowings to finance - net debt is just over pounds 2bn, putting gearing at the half-year at around 100 per cent. A further pounds 580m has been earmarked for restructuring costs over the next three years.

After his racing start as head of SB, Mr Leschley is having to meet high expectations, as analysts look for strong earnings growth and the full benefits of the recent acquisitions to kick in.

SB at least has two significant advantages over rival Glaxo Wellcome. First, it is six years into its big merger, after its link-up with Beecham in 1989, while Glaxo is just beginning to get to grips with Wellcome.

Secondly, SB has already absorbed the impact of Tagamet losing its patent protection, whereas for Glaxo, the end of the line for its key product Zantac looms in 1997.

SB confounded gloomy predictions with its first-half figures in July. Impressive growth from new drugs such as the anti-depressant treatment Seroxat and an anti-nausea drug, Kyril, helped offset the sharp fall in Tagamet sales.

Trading remains tough for all the drugs companies. With the emphasis in the US and UK on cheaper health care, the name of the game, Mr Leschley says, is volume rather than margin growth, topped up by increased efficiency and cost-cutting to drive future earnings growth.

Despite the caution, analysts remain bullish on overall market prospects, a view that has underpinned the sector's growth this year.

Analysts are looking for profits at SB for the year to December to top pounds l.33bn against pounds l.27bn last time, with the group on a multiple around 18, which looks high but is not too demanding given market forecasts.

While the shares may see profit-taking in the short term, SB's promise of strong growth from a broad range of drugs in lucrative markets should ensure they retain their appeal.

SmithKline Beecham

Share price 640p Prospective yield 2.7% Prospective price-earnings ratio 18.7 Dividend cover 2.46 1993 1994 1995*

Sales pounds 6.16bn pounds 6.49bn pounds 6.94bn Pre-tax profits pounds 1.16bn pounds 1.27bn pounds 1.35bn Earnings per share 29.1p 32.3p 34.2p Dividend per share 10.9p 12.9p 13.9p

* Nikko Europe forecast