The Investment Column : Glaxo riding high on Aids research

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The Independent Online
The two ends of the pharmaceuticals sector have been moving in different directions this week. While share prices of the biotech stocks have been falling out of bed on signs of indigestion at a flood of new paper hitting the market, Glaxo Wellcome, the industry's giant, has been on a wave of euphoria due to its anti-Aids drugs. This reversal of recent fortunes will confirm the scepticism of many investors about biotechnology after its storming rise at the turn of the year. It could also mark the start of a new phase of Glaxo's rehabilitation in the eyes of the stock market as the shadow of the Zantac patent expiry lifts.

Fears for Zantac, the anti-ulcer drug which formed the basis of Glaxo's phenomenal growth in the 1980s, hit the share price earlier this year. The patent on that drug runs out next July, a date that is becoming uncomfortably close, as a court ruling against Glaxo reminded everyone last weekend. In normal circumstances, the successful patent challenge by Novopharm, a small Canadian group, to the so-called form 1 version of Zantac should have hit Glaxo's shares by around 50p. As it turned out, they ended the week 18p down at 876p.

This relative firmness was accounted for by the release of a flood of new test results at the 11th international conference on Aids in Vancouver. The focus was on triple drug "cocktails" involving the group's existing Retrovir (also known as AZT) and Epivir (3TC) anti-Aids drugs and, separately, on a new Glaxo compound, codenamed 1592U89. The currently used double drug combinations have been shown to cut the blood concentration of the HIV virus, a precursor to full-blown Aids, by over 90 per cent. The claims made in Vancouver were that the new three-way dosage regime, using drugs developed by three drugs companies, cuts the amount of HIV to "undetectable" levels over periods of 12 to 48 weeks.

The Vancouver results were being hailed as a breakthrough in Aids treatment, but they have also had the happy result of throwing the spotlight on Glaxo's new product portfolio. Previous doubts about the group's ability to offset the inevitable decline of Zantac sales are passing. Retrovir and Epivir alone could be chipping in up to pounds 900m by 2000, according to Barclays de Zoete Wedd. The brokers reckon new and recently launched drugs will represent pounds 6bn sales by then, or double last year's pounds 3.1bn contribution from Zantac and Zovirax, Wellcome's blockbuster anti-herpes drug which also goes off patent next year.

That is not to say that life will not be tough for Glaxo over the next two or three years. When the patent on SmithKline Beecham's Tagamet, another anti-ulcer drug, expired in 1994, sales crashed by nearly three-quarters in the space of nine months as non-patented, generic competition piled into the market. Glaxo is already bracing itself to combat four known competitors, but even if the worst happens with Zantac, Hoare Govett, the group's own brokers, reckons the group will manage single-digit earnings growth up to the end of the century. Pre-tax profits of pounds 3bn this year would put the shares on a prospective price-earnings ratio of 15, which looks modest against multiples of 18 and 20 for rivals SmithKline Beecham and Zeneca. With current political and economic worries pushing investors back towards the pharmaceuticals sector and its defensive qualities, Glaxo should make further progress.

It is hard to be as sanguine about the biotech sector of the market. Cambrio, a fledgling pharmaceutical group which had hoped to come to market in early July, has already put back the date of its launch to later this month. There has also been a minor glitch at Therapeutic Antibodies, another new issue hopeful, which now hopes to announce its pricing early next week, some days later than scheduled.

British Biotech's mammoth pounds 143m rights issue being left with the underwriters after it closes on Wednesday would be a real body blow. The company's shares were dancing around the pounds 20.50 rights price on Friday, leaving little incentive for shareholders to take up the new paper.

It looks as if the wobbles which have affected the US biotech sector over the past two months have spread to London. Until nerves steady a little, investors would be wise to steer clear.

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