Bottom Line: Time on SmithKline's side

SMITHKLINE Beecham's better-than-expected performance yesterday was almost wholly attributable to timing.

The US patent on Tagamet, its key ulcer product, expired in the middle of the quarter but legal action by SmithKline, challenging the copycat appearance of the competing tablets planned by generic drug manufacturers, muted the impact of the sales drop.

But the 9 per cent sales decline seen in the US should nevertheless accelerate to 30-40 per cent during the current quarter. Currencies also appear to have given SmithKline a timely, if one-off, boost.

SmithKline's drug pipeline continues to look exciting and new products showed a very satisfactory sales growth of 81 per cent in the second quarter.

Profits from those new products, which generated a fifth of total drug sales of pounds 909m in the fourth quarter, will not arrive in time to compensate fully for the decline in earnings from Tagamet.

The former blockbuster and cimetidine, its generic doppelganger, generated revenues of more than pounds 165m in the same period, two-thirds of them in the US.

Among its British rivals - Glaxo, Wellcome, Zeneca - SmithKline is the only drug group to have developed a cogent and coherent strategy for dealing with the tough new pharmaceutical world of the 1990s.

However, it remains to be seen whether its daring attempt to transform itself into a broad health care group will work.

The performance of its peripheral businesses, animal health and laboratories, this time around was mildly disappointing, which may not augur well for the future.

Like the rest of the drug sector, SmithKline is on a rating close to the market.

But the outlook for earnings growth is only half that of the market, so the shares look fully valued for the time being.

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