View from City Road: Wellcome high on drugs

ALTHOUGH Wellcome generates 43 per cent of its pounds 1.7bn sales from the US its shares have not suffered in the same way as those of US pharmaceutical companies from the threat of drug price controls by a Clinton administration.

While transatlantic share prices have come off by 10 per cent, Wellcome shares have simultaneously risen by 23 per cent since the Wellcome Trust share offering ended in late July, outperforming the market by 10 per cent.

Much of this difference is probably attributable to Wellcome's impressive performance in lifting trading margins. They have risen by more than 3 percentage points in each of the past two years and at 27.7 per cent are well on line to meet Wellcome's internal target of 30 per cent.

A 15p fall in the price to 985p, despite a much-as-expected 25 per cent increase in pre-tax profits to pounds 505m for the year to 29 August and a 30 per cent dividend rise, does, nevertheless, reflect some degree of nervousness about an increasingly hostile pricing environment for drug prices on both sides of the Atlantic and in Japan.

Fortunately Wellcome can still boast that it is a 'volume-driven' enterprise. Price changes accounted for only 3 per cent of an underlying 18 per cent sales rise last year.

Last year cost-cutting added 2 percentage points to margins and disposals a further 1.2 points. From now on there will be more emphasis on managing the Wellcome product mix.

Sales of Zovirax maintained a cracking pace throughout the year with underlying growth of 24 per cent before exchange-rate effects. Extension of the drug to chicken pox in the US and shingles in Japan, and over-the-counter approvals in New Zealand and Germany point the way ahead.

Retrovir sales rose 20 per cent amid high hopes for combination therapy. Encouragingly, as patent expiry draws near for Zovirax, other patented products sales, although only 10 per cent of the total, rose by 36 per cent.

With a favourable wind from devalued sterling Smith New Court expects pre-tax profits of pounds 620m in line with recent growth rates indicating a premium p/e of 22.5. Justifiable but perhaps vulnerable to drug pricing horror stories in the short term.

(Photograph omitted)