View from City Road: Glaxo must state its intentions

ERNEST MARIO, Glaxo's chief executive, was in uncharacteristically humble mode yesterday, apologising fulsomely 'if we have in any way misled the markets or the media about our intentions'.

He was referring to the uncertainty that has dogged perceptions of the world's second-biggest pharmaceutical group since it disclosed its intention to develop some of its prescription drugs for sale over the counter.

Glaxo plainly underestimated the extent to which investors would fret about any possible dilution of the group's successful strategy of concentrating on the pursuit of research-intensive, highly priced, prescription drugs. In particular, fears that it would seek a fast-track route into the OTC market by buying a company like Warner Lambert, the pounds 6bn US group, have raised the spectre of a pounds 4bn rights issue.

Against the prospect of penny-pinching healthcare reform in the US and a switch from defensive to cyclical stocks, which has affected all pharmaceutical companies, the shares have taken a battering.

Dr Mario's apologies are not enough to bring round investors. Though he tried to reassure, he offered nothing concrete on how Glaxo intends to approach the awkward OTC market. These were 'tactical' issues he insisted - though he expressly refused to shut the door to a substantial takeover.

In such circumstances investors are left to draw what conclusions they can from the figures. These contain two signposts. First, Glaxo's cash pile is accumulating fast - it had reached pounds 1.5bn by the end of December, up more than 12 per cent on 1991. Yet interim dividends rose only slightly more than earnings - by 17 per cent to 7p a share. Glaxo is not a bank, and with interest rates tumbling, the only good reason for not distributing more of its cash pile would be if it had plans for the money. A big acquisition may still be the subject of boardroom debate.

The second message is that Glaxo's traditional strategy continues to be successful. Pre-tax profits were up 16 per cent to pounds 819m in the period, well ahead of analysts' expectations, even taking into account the pounds 19m boost the group received from the weakness of the pound.

The shares added a modest 22p to 684p but that was far from a wholesale re-rating. Until Glaxo gives a clear signal as to where it is going, investors will not give it the benefit of the doubt. Physician, heal thyself.

(Photograph omitted)