View from City Road: US is the test of Glaxo's health

THE rise and fall of Glaxo is extraordinary. After years of outperforming - it briefly became Britain's largest company - its shares turned down a year ago, and apart from an autumn rally have continued downhill.

By historical standards, shares in Europe's biggest drug company look cheap. Less than six months ago they were trading at a 70 per cent premium to the UK market; now they have sunk to less than 10 per cent. In America Glaxo trades at a slight discount. Fund managers say the derating has gone far enough but they are still not buying.

Glaxo's sudden fall has been driven by two main factors. As investors began to believe recovery was under way, they switched out of defensive stocks such as Glaxo and into cyclical stocks, which they believed would benefit more from a sharp economic bounce.

This trend was amplified by the appearance of the health reform bogeyman. In the US - and to a lesser extent in Europe - controlling drug prices is high on the political agenda. The industry's future is tied up with Hillary Clinton's healthcare review.

As Ernest Mario, the chief executive, must be painfully aware, Glaxo has suffered more than most pharmaceutical companies as investors have fretted about a possible rights issue to pay for expansion in the over- the-counter market. They are also worried that more than half its profits come from the ulcer treatment Zantac, the US patent for which could expire as early as 1995.

Though US fears may prove overdone, much depends on the views of American investors. Until they start buying, the shares are unlikely to recover.

(Photograph and graph omitted)