View from City Road: Depression among the drug stocks

Just when investors in drug stocks must have felt they were out of the woods, the doomsters seem to have re- gained the upper hand. Latest to join in is Salomon Brothers, which confessed to over-optimism about its earnings expectations for all four big UK drug stocks - SmithKline Beecham, Wellcome, Glaxo and Zeneca - and promptly downgraded the lot.

Given that stockbrokers are pre- disposed to be over-optimistic about the companies they follow - success is better for business, and more fun - this burst of pessimism warrants attention. It has been provoked by renewed worries about pressure on drug prices, slowing sales growth and the limited response of the industry so far on costs.

They are the same fears that were voiced a year or more ago. But since then we have had a false dawn, created by a flurry of corporate activity in the US and the busy cheque books of the likes of Merck, SmithKline Beecham, Roche and Elf Sanofi, among others.

The sector, which was once more than 10 per cent cheaper than the market, is now almost as expensive. But its earnings growth, at around 12 per cent this year, is likely to be significantly below the market's.

All four big UK stocks have their corporate worries too. Wellcome has seen a series of key and unexplained management changes, and faces impending competition for Zovirax, the anti-viral drug that contributes some 60 per cent of its profits. Glaxo - with or without a big US acquisition - is undergoing a deeply upsetting revolution in its corporate culture.

SmithKline Beecham faces a tough task integrating its purchase of a US pharmaceutical benefit manager. And Zeneca still has to face up to the fact that it is too small to be a pure drug company, but too incoherent as a drug to agrochemcials combine. Sometimes it seems as if the woods stretch to the horizon.