Glaxo cost cuts are crucial for life after Zantac
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Your support makes all the difference.Last year was always going to be a transition year for Glaxo Wellcome, but yesterday's figures clearly confused some in the City. The 44p slide in the shares to 876p came in spite of figures which carried few surprises for most people. They did, however, require a deal of interpretation.
Glaxo having splashed out pounds 9.3bn for rivals Wellcome in March and then changed the year end from June to December, the scope for confusion was always going to be large.
The bald figures for the 18-month period to December showed profits of pounds 2.39bn, as against pounds 1.84bn in the previous 12 months. More meaningful were annualised results which saw pre-tax profits rising from pounds 1.93bn to pounds 2.51bn in 1995.
The figures excluded integration costs for Wellcome, which at pounds 1.22bn, were bang in line with the group's estimate made in mid-year. Glaxo remains on target to achieve cost savings of pounds 700m a year by the end of 1998.
Achieving those savings is going to be increasingly important after Zantac, the group's blockbuster anti-ulcer drug, goes off-patent in the US and UK in July 1997. Here the market's nerves look more justified. Last year's 4 per cent fall in sales of Zantac will be as nothing compared with the cliff they will dive off in 1997. Sales of the drug crashed 33 per cent last year in Germany after it went off-patent. In the main US market, the impact could be closer to the 80 per cent fall suffered by SmithKline Beecham's Tagament after it lost patent protection.
Glaxo was yesterday highlighting the 43 per cent growth in sales of new drugs introduced since 1990 as evidence that the decline of Zantac can be absorbed. But, at 17 per cent, new drugs' share of total sales still lags Zantac's by 11 points. It could be 1999 before they can fill the hole left by the world's most successful drug.
Further out, the potential is certainly there. Respiratory drugs grew a fifth last year, based on long-established treatments like Ventolin. But Flixotide, the new inhaled steroid, could be worth $1bn in sales by the end of the century and Serevent could more than double current sales of $425m.
In the short term, earnings may slip beyond the current year, when Lehman Brothers expects profits to hit pounds 2.9bn. A forward price/earnings ratio of 16 looks high enough, unless Glaxo gives a shove to growth by buying something else.
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