View from City Road: Bitter pill for drugs firms

TWO SCHOOLS of thought are slugging it out for the hearts and minds of pharmaceutical investors. One says drugs companies are cheaper compared to the rest of the market than they have ever been and that is unjustified. Share prices are down, says the other camp, but the bad news has only just begun - a barrage of patent expiries will clobber the sector even further this year.

The latter group is winning the fight: since Black Wednesday, Glaxo has underperformed the rest of the market by 20 per cent, a similar showing to SmithKline Beecham. Wellcome has lagged the market by 10 per cent.

Bulls of the sector point to double-digit earnings and dividend growth. Although recovery stocks may look more attractive in the short term, profits from drugs are likely to look healthier than from the rest of industry in the long term. Worries about pricing pressures from the Clinton administration in the US will be proved unfounded.

The bears, led by Nomura, have come up with a new reason to shun the sector, however. Tenormin, ICI's heart drug, has lost 50 per cent of its sales in the year since its protection from generic rivals was lifted. The speed of its decline is unprecedented and suggests that, with continuing pressures on doctors to save money, patented drugs could come a cropper even more quickly.

Nomura reckons a quarter of the industry's profits could be affected by patent expiries or disputes this year. The list includes blockbusters like Glaxo's Zantac and even Wellcome's Retrovir, which faces a court challenge. The numbers may be a touch hyperbolic but the argument is compelling. The sector's underperformance is likely to continue.