Glaxo digests Zantac news well

The Investment Column

The ulcer which everyone has been expecting to give Glaxo Wellcome a severe case of the gip is looking much less severe than the entrail gazers have previously forecast. Zantac, the blockbuster anti-ulcer drug which has fuelled the phenomenal growth of one the world's biggest drugs groups, has just gone off patent in the US. But whereas two years ago everyone feared that would hospitalise Glaxo, it looks now as if it will get away with a mild bout of indigestion.

For a start, though the US patent ran out a week ago, legal wrangles mean there are no generic versions yet on the market. This, however, will ultimately prove a temporary distraction. Glaxo is still bracing itself for Zantac to lose 80 per cent of its pounds 800m sales in two years when generics do finally pile in.

What should really make investors cheerful is that, heart drugs aside, and it may start in-licensing more products here, Glaxo probably has the strongest portfolio of new drugs in the UK.

The key figure in the interim results was that sales, excluding Zantac and the impact of sterling, rose 14 per cent - and an impressive 21 per cent in the massive US market. This was despite the patent expiry on Glaxo's second biggest drug, Zovirax, and sliding sales in old asthma drugs. New drugs launched before 1990 grew 50 per cent to pounds 1.3bn in the half year. The drivers were anti-Aids drugs - Glaxo's Epivir and Retrovir represent over half the world market in HIV drugs - and new asthma drugs like Serevent. Glaxo's focus on emerging markets is also paying off.

Of course, Glaxo's second half will be impacted by Zantac, plus rising expenditure on advertising and the addition of 600 sales people. This will mean a slight decline in earnings in 1997 and a flat result in 1998. But investors are prepared to look beyond that to see comfortable double- digit annual growth at a time when rivals SmithKline Beecham and Zeneca will be facing patent expiries of their own.

These thoughts are what has driven Glaxo's share price up 40 per cent this year. Yesterday's 38p fall to 1291.5p, reflects worries that margins will fall as spending rises. But new drugs need support and Glaxo is probably right to be investing in advertising and sales. The tobacco litigation settlement in the US, for example, is perfect timing to advertise Zyban, the group's new anti-smoking pill, on television.

The drugs sector generally will weaken as sterling falls, making cyclical and manufacturing stocks look more attractive. Glaxo itself looks set to be stuck on a forward p/e ratio of around 24 for the next two years. Looking beyond, however, with probably the freshest new drug pipeline in the UK sector, Glaxo has great potential to grow.