What the doctor ordered

SHARES An effective array of drugs has kept pharmaceuticals giant Glaxo Wellcome in rude health
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The Independent Online
It used to be that the merest hint of a possible treatment for Aids would send drug company shares shooting off into the stratosphere.

In the case of Wellcome, the company that developed Retrovir, the world's most widely prescribed Aids treatment, its shares were probably the most volatile of any British blue chip. Each rumour of Retrovir's efficacy, or lack of it, would send the shares racing higher, or plunging.

For the merged combine of Glaxo Wellcome, however, the market seems less willing to be carried away by such stories. In recent months, Glaxo has been quietly posting progress on its new HIV treatment, Epivir.

So successful has the drug been deemed in a clinical trial, that an independent panel of doctors and statisticians has had to call a halt to further testing, so that Epivir can be made available to Aids and HIV patients around the world.

Patients in the trial showed that 54 per cent fewer of those infected with HIV and treated with Epivir, went on to contract Aids, or die, compared with patients receiving a placebo. Five years ago, the shares would surely have bounced 10 per cent or so. Instead, they climbed 41p to 911p.

To put this further in context, the gain is even less remarkable, given that the shares hit a five-year-high of 952p in February. Since then, they have come off substantially, and now stand below their peak in 1991. But since the merger of a little over a year ago, the shares have had a storming run.

One reason why investors may not be carried away by Epivir, is that it is only one of the bright prospects in Glaxo's bag of developing and recently launched drugs.

Alongside Epivir, Serevent, an asthma drug - and the first long-acting bronchodilator - has made substantial progress since its launch in 1990. It has sales of over pounds 250m, and analysts see further growth to come.

Then there is Valtrex, the follow-on product to Zovirax, the herpes and shingles cure. Imitrex, the migraine product, is also making rapid progress.

Or there are the anaesthetics, Ultiva and Nimbex, which will be launched around the world later this year. Further news of progress on these two products may emerge at the company's interim figures, on Wednesday. It seems that Glaxo's portfolio is in robust good health.

But investors are also likely to be pleased by financial performance. Sales should continue the pattern of the first quarter figures in May. Then sales rose 11 per cent, a clip ahead of sales growth of 3 per cent in 1995.

Part of the improvement stems from an improving climate for drugs in general. Disenchantment over pharmaceuticals rose from 1991, as governments around the world, but particularly President Clinton, struggled to balance budgets, and rein in health spending. But President Clinton's ambitious health reform programme has faded, and with it, greater scrutiny of health expenditure. Furthermore, health administrators have cottoned on to the fact that sometimes, the more drugs are prescribed, the less need there is for even more expensive hospital beds.

Both companies entered the merger with unique skills and strengths. For Glaxo, it was Zantac, its blockbuster anti-ulcer drug, which lay the foundations of its fortunes. Wellcome's strengths lay with its anti-viral products, notably Retrovir, and Zovirax, its anti-herpes treatment, and now the world's fourth largest selling drug. But Zantac comes off patent in the US next year, while competition in the segment is intensifying rapidly. Sales are declining rapidly. Although it is still the world's best-selling drug, Sir Richard Sykes, Glaxo chief executive, is keen to point out that "new product revenues rose 43 per cent in 1995 - more than three times the decline in Zantac sales". The argument seems to have moved on from doubts that the merger would disguise the decline in Glaxo's R&D potency, and would substitute a cost-cutting regime.

Wellcome, a reluctant bride, had to be dragged kicking and screaming to the altar. Costs are a major issue for the new combo: Glaxo has promised annual savings of pounds 700m. But this, as Duncan Moore, an analyst at Morgan Stanley, notes, would mean Glaxo's margins would rise from 33 per cent, to closer to 40 per cent. That, of course, is no more than a pipe dream.

The true story is unlikely to be revealed. As old costs are excised, new costs - product launches and marketing of new drugs - take their place. But the culture at Wellcome, stemming from its ownership by the Wellcome Foundation, had left it with a civil service mentality: plenty of scope to exercise a more ruthless approach.

At the current price, the shares trade at around 15 times 1996 earnings, and 14.5 times 1997. Hardly the sort of rating drug shares carried back in the go-go days of the early 1990s. For existing shareholders, there may be some incentive to take some profit on the back of recent rises. But it may just be, that a new chapter of one of the few great British success stories is about to unfold. The shares remain a buy.

Glaxo Wellcome

Share price 886p

Prospective p/e 15*

Gross dividend yield 4.3%

Year to 31 Jan 1993 1994 1995 1996* 1997*

Turnover (pounds m) 4,930 5,656 7,638 8,732 8,887

Pre-tax profits (pounds m) 1,675 1,835 2,505 3,035 3,207

Earnings per share 39.9p 42.7p 50.3p 57.9p 61.1p

Dividend per share 22.0p 27.0p 30.0p 32.0p 37.5p

* NatWest Securities forecasts

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