View from City Road: Glaxo finds the elixir of growth

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The Independent Online
BY WAY OF a conversation-stopper, Sir Paul Girolami, chairman of Glaxo, pointed out yesterday that the 11 per cent increase in the pharmaceutical group's pre-tax profits to pounds 1.43bn in the year to 30 June was, at pounds 144m, larger than the total profits Glaxo made in 1982/3.

Fans of Glaxo might also point out that if earnings, as they think likely, grow at 15 per cent a year for the next five years, the increase in Glaxo's profits between now and 1997 will be more than the pounds 1.43bn made by the company last year.

If this is indeed on the cards, Glaxo, under its chief executive, Ernest Mario, will be not just a defensive play during the recession but a continuing growth story that would justify its present premium rating.

Others believe that apart from the weak dollar there are plenty of spanners around to wreck the Glaxo compounding machine. Patents for Zantac, due to expire in 2005, could come off in 1995 if court battles go badly, creating an insurmountable product gap. The anti-ulcerant makes up 45 per cent of sales and the lion's share of profits.

New products, the pessimists argue, will not come on swiftly enough to cope with this and financially stretched governments may well keep up intense pressure on the prices of expensive-looking drugs.

The patent odds must favour Glaxo on Zantac. As for new products - mainly the anti-emetic Zofran, Imigran for migraine sufferers and the Serevent asthma treatment - their contribution of pounds 363m or 9 per cent of total sales may look small, but they accounted for 40 per cent of the 21 per cent increase in Glaxo's sales to pounds 4.1bn. And this was without the benefit of approvals for Imigran in main markets including France, Germany, Japan and the US and for Zofran in Japan and for oral use in the US.

Since even conservative estimates expect sales of pounds 1.2bn for these two products by 1995, there is plenty of momentum in store. Zantac, far from fading in its maturity, increased its sales in the US by 19 per cent in the second half of the year. This is, admittedly, exaggerated by using Imigran's US sales force to sell Zantac.

Meanwhile Glaxo can still expect to spend pounds 1.4bn on research and development and capital spending this year without disturbing its pounds 1.3bn cash pile. Growth of 15 per cent in earnings and dividends in 1992/3 indicate a p/e of 19 and yield of 3.5 per cent at 746p, which is cheap by US standards and not too high a price for a remarkable company.

(Photograph omitted)