View from City Road: SKB is looking in shape

ANY drug company chief striking a bullish note at present is whistling in the dark. President Bill Clinton's proposed shake-up of the US healthcare system and the threat of indigestible rights issues from a newly demerged Zeneca and an expansionist Glaxo overhang the sector like twin swords of Damocles.

Nevertheless, Bob Bauman, SmithKline Beecham's ebullient chief executive, had more cause than most to be cheerful yesterday, presenting the healthcare group's creditable 1992 results. SmithKline is looking increasingly nimble compared with its giant competitor Glaxo. While the latter is still dependent on one blockbuster drug, Zantac, which accounts for half its sales, SmithKline's portfolio is becoming more diverse, which should make it more able to withstand any bricks that may be lobbed by the US administration. It also has non-drug products that should benefit from the end of the recession.

Pre-tax profits were up 11 per cent last year, to pounds 1.1bn on sales up 11 per cent at pounds 5.2bn. Sales growth of 15 per cent in its pharmaceutical division was achieved entirely on volume; average prices fell 0.5 per cent.

Unlike Glaxo, where sales of new medicines have been disappointing, SmithKline's improvement came roughly equally from established drugs and the better-than- expected success enjoyed by its new products, especially the anti-depressant Paxil and arthritis drug Relafen.

Most importantly, SmithKline has already begun to tackle the replacement of its biggest-selling drug, Tagamet, its Zantac equivalent, which accounts for about 12 per cent of sales. In the US the group has linked up with Marion Merrell Dow to replace lost prescription sales of the drug with over-the- counter ones. Mr Bauman expects it to be on sale OTC in the US, UK and Japan by the time its patent expires in May 1994. Glaxo, in contrast, has yet to do more than make a declaration of intent as far as switching Zantac to OTC sales is concerned.

President Clinton is due to reveal his plans in May. Until then expect the market to look for excuses to sell. But switching now from Glaxo to SmithKline, which closed up 3p at 424p a share, could prove to have been a smart move once the clouds clear.