Glaxo finds new life after Zantac; The Investment Column

Reports of the early demise of Glaxo Wellcome have clearly been exaggerated. There is life after Zantac with a healthy new drug pipeline making up for declining sales of the best-selling ulcer treatment.

The Wellcome acquisition has bedded in nicely and the debts taken on to finance the pounds 9bn deal last year are coming down at a good lick.

No surprise then that the shares jumped to an immediate premium on the announcement yesterday of better-than-expected first-half figures. Adjusting for the fact that Wellcome only came into the group half-way through the comparable period, which means the reported figures in our table are somewhat misleading, sales pushed ahead by 6 per cent and trading profit rose by 34 per cent. There was a highly encouraging rise in trading margin from 31 per cent to 39 per cent.

No surprise, either, however, that on reflection the market pushed the price all the way back down again as it focused on the long-term outlook for Glaxo. The company is in good shape, but what good news there is rests in the price, and plenty of worries persist.

First and foremost of these is what will happen to Zantac sales once the all-important US patent expires next July. The 16 per cent decline, thanks to competition in Germany, does not augur well for a treatment that still accounts for almost a quarter of Glaxo's sales, even after the introduction of Wellcome products and after the undoubted success of the company's new product portfolio.

Glaxo reckons the pounds 164m loss in sales from Zantac was more than twice made up by increased sales of "new products", those introduced since 1990, which added pounds 327m during the half, a 51 per cent rise. Excluding Zantac, sales growth was 14 per cent at constant exchange rates.

Glaxo undoubtedly has strong positions in a range of important markets, including respiratory disease, which accounts for 22 per cent of total sales, migraine, where Imigran has become Glaxo's third-largest product, and Aids, where recent successful trial results suggest the company has a tight grip on what could be an enormous moneyspinner.

But Zantac is a big millstone around the group's neck, meaning that it will have to run extremely hard just to stand still. Lehman Brothers thinks the long-run growth rate in earnings per share will work out at no more than 8 per cent. Not bad for a pounds 31bn company but hardly the stuff to set investment pulses racing.

On the basis of Lehman's forecast profits of pounds 3bn this year, the shares stand on a prospective price/earnings ratio of 15. That is hardly a recipe for outperformance and there is much better value elsewhere in the sector.