Health industry changes give Glaxo ulcers: Pressure mounts on latest drugs

POOR old Glaxo. Britain's biggest pharmaceutical company badly needs a dose of Zofran, its own anti-nausea drug. Despite pre-tax profits of pounds 1.7bn for the year to June 1993 and a dividend up 30 per cent, Glaxo has seen its shares rise and drop with sickening volatility.

The stock market thermometer has proved more than usually mercurial. In August, the shares were languishing at 514p, almost half the 916p they reached at their giddy height in early 1992. In October, they struggled back to 700p, with a buy note from Hoare Govett and a generally brighter prognosis from the City. But a second opinion proved less reassuring. A sell note from Morgan Stanley and a barrage of problems in the past few weeks have knocked the shares back to 643p.

Last week saw Flavio Maffeis, Glaxo's Italian managing director, put under house arrest as the campaign to rid Italy of political corruption spilled into the drugs sector. Maffeis is accused of bribing the former head of the Italian medicines directorate.

In the same week, Glaxo admitted that some of its staff have been using sales techniques banned by the industry's code of practice. It has now sacked five employees following reports of 'irregularities' concerning the use of company funds to host meetings or events with little medical content.

In neither instance is Glaxo alone. Italian executives of SmithKline Beecham have also been accused of bribery, while earlier this month Fisons launched an inquiry into allegations that sales staff were offering to wine and physicians and fly them to exotic foreign locations.

But the news coincided with an issue more serious for Glaxo's long-term health - reports last weekend that Kytril - the rival anti-nausea drug made by SmithKline Beecham - was more cost-effective than Zofran, one of its most important new drugs. Trials in Jerusalem suggested that Kytril, at a cost of pounds 36 per patient, delivered the same level of effectiveness as Zofran, which costs almost three times as much.

The findings come at a critical time, as governments everywhere seek to control the soaring costs of health care. A series of measures across Europe has been compounded by the package of reforms on the Clinton agenda.

With its provisions to control drug prices and cap budgets, Robert Gilbert, industry analyst at Panmure Gordon, said: 'There is a general worry that the Clinton bill contains more bite than bark.' He also pointed to the growing power of the big managed care organisations in the US, which buy in bulk at hefty discounts.

Events in the US have a double significance for Glaxo. Not only does the US account for about 40 per cent of the company's sales, but it also holds 21 per cent of the stock. This stake has already fallen from a high of 27 per cent in June 1992, with increasing wariness about the sector on Wall Street.

Glaxo is more vulnerable to these jitters than its US counterparts, since there is little reason to hold a non-US stock - with its accompanying drawbacks such as currency risk - unless it has specific advantages.

But the very advantage Glaxo once enjoyed is now the main ground for concern. The company is heavily dependent on Zantac, the anti-ulcer drug which generates 45 per cent of its sales. Although it has successfully fended off challenges to its patent, next May will see the expiry of the patent on Tagamet, SmithKline Beecham's alternative. Mr Gilbert said this would open the market to generic products, prompting 'fears that the ulcer market will develop into a free-for-all'.

The purchasing power of the managed care providers has placed new emphasis on therapeutic substitutes. But the anti- ulcer market is itself changing, according to Duncan Moore of Morgan Stanley.

There is now considerable evidence to suggest that certain chronic ulcer conditions - traditionally treated with Zantac as a maintenance therapy - can be eliminated by other drugs.

Under pressure from economic and medical changes, revenues from Zantac are believed by many analysts to have peaked. But neither Zofran nor Imigran, Glaxo's migraine treatment, is likely to replace the income it has generated.

Apart from new evidence questioning the cost-effectiveness of Zofran, there are claims that Imigran - at about pounds 15 a migraine - is too costly. The drug is also battling to break new territory, in addressing a condition for which there has previously been nothing available on the market.

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