The Investment Column: Zeneca keeps pace with rivals

Yesterday's initial 49p drop in Zeneca's share price was a churlish reaction by the market to the drug group's interim figures. Announcing a 22 per cent rise in underlying profits for the six months to June, it was hard not to agree with the group's chief executive, Sir David Barnes, that the results bore comparison with the best of his rivals.

Equivalent half-way results announced by Glaxo Wellcome showed the giant of the sector managing a meagre 6 per cent increase in underlying trading profits, and even SmithKline Beecham's more respectable 16 per cent was still well behind.

The problem, of course, is that drug groups have been in the forefront of the stock market's giddying rise this year. Zeneca's share price, which ended 6p ahead at pounds 20.525 yesterday, has itself risen by around a quarter since the beginning of January.

Based on NatWest Markets' unchanged profit forecast of pounds 1.09bn for the full year, the shares stand on a forward multiple of 27. That is below its UK peers and well below US drug groups, but still leaves little room for mistakes.

Certainly Zeneca was making all the right noises yesterday. Given that the first-half profits had to bear a pounds 90m hit from the strong pound, the 10 per cent increase in the pre-tax total to pounds 669m was more than respectable. Group margins rose a chunky 2.8 percentage points to 24 per cent.

Zeneca gave warning that the continuing impact of sterling, plus higher new product launch costs and the traditional seasonal downturn in agrochemicals, would hit second-half returns. Even so, John Mayo, the group's departing finance director, gave a strong hint that margins would still be ahead in the full-year figures.

Apart from Kadian, a morphine product which is under review, most of Zeneca's recent introductions seem to be selling well. Drugs launched in the past two years, such as cancer drugs Zoladex and Casodex, now represent 16 per cent of sales and the second half will see more, including the further roll-out of the Zomig migraine drug and Seroquel for schizophrenia.

All being well, this investment in new product launches will pay off in higher sales next year.

But the longer-term question is how Zeneca copes with a string of patent expiries early next century, notably its best-selling Zestril heart drug, which saw sales slip 5 per cent to pounds 305m in the first half. Zeneca is clearly confident that with more than 45 products in its development pipeline, it can sail through that squall. Analysts will feel more confident after its next research presentation to the City in early December. Even so, investors should hold on.

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