The Investment Column: SmithKline Beecham's rating is hard to swallow

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The Independent Online
THE CITY has feted SmithKline Beecham since the collapse of merger talks with Glaxo Wellcome last year, principally because of hopes for Avandia, its new anti-diabetes drug. The company, which also makes Aquafresh toothpaste and anti-depressants similar to Prozac, has taken heart from the success of Avandia's recent launch the US. Its chief executive, Jan Leschly, says that, on its 10th anniversary, SB is on a roll. Many analysts agree, recommending SB ahead of Glaxo Wellcome and AstraZeneca. But uncertainties surround SB and investors should read the label carefully before they consider buying.

Avandia is already taking 3,200 prescriptions a month in the US. Its success comes after an existing product treatment was found to cause side effects. Predictions for Avandia's annual sales vary, with some estimates hitting pounds 1.5bn. The only worry is that a rival product, Eli Lilly's Actos, is expected to hit the market within weeks.

Actos's impact is hard to predict. It has approval to be used in combination with existing treatments that Avandia has not received - yet. And coming so quick on Avandia's heals rather erodes SB's first mover advantage. Just because the diabetes market is large does not mean one will not ultimately be preferred. At least Avandia will enjoy the benefits of SB's experienced marketing skills and relations with community doctors.

Meanwhile, the stars of SB's current portfolio face hurdles. Paxil, the anti-depressant which saw sales rise 16 per cent year-on-year in the second quarter, is coming under pressure from a rival product which has taken 8 per cent of the market in just 9 months. The patent for Augmentin - sales rose 23 per cent - expires in 2002. Still, these drugs are, for the time being, delivering strong growth and Paxil is being applied to other anxiety conditions.

Longer-term, the development pipeline has narrowed. SB yesterday said it had abandoned its anti-breast cancer drug, Idoxifene. Ariflo, a potentially blockbusting respiratory treatment, is now being targeted at only one condition instead of two. SB is confident of delivering 13 per cent earnings growth this year. Analysts expect pre-tax profits of around pounds 1.9bn this year and earnings of around 23p per share, putting the shares, down 23.5p at 790.5p, on a forward price-earnings ratio of 33. If Avandia becomes the world's preferred diabetes drug, then the racy rating will be justified. But this is yet to be proved and the shares are risky.

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