View from City Road: Bears are right to be nervous about Glaxo

The way things are going, Sir Richard Sykes, chief executive of Glaxo, will soon be needing a powerful dose of his own company's excellent anti-ulcer treatment, Zantac. Since mid-March, Glaxo's stock market value has fallen a fifth, twice as much as that of its rival SmithKline Beecham. Less than two years ago Glaxo was riding high as Britain's most highly valued company. Today it's just an also-ran. The latest precipitous fall goes way beyond the general malaise in healthcare stocks.

The City is scared witless by the prospect that the Swiss group Ciba- Geigy might produce a competing version of Zantac by the end of next year. Zantac is the world's biggest selling drug; its pounds 2.1bn of sales probably account for 60 per cent of Glaxo's profits. The company would be lost without it.

Sir Richard is plainly a man of steady nerves, however. Having patiently and regularly drawn attention to the possibility that the patent on an earlier form of Zantac, known as Form 1, expires at the end of 1995, he sees little reason for the City's sudden panic.

His argument has always been that any pretender to Zantac's patent faces a daunting series of hurdles. Glaxo has never marketed the earlier version of the drug and it may not be therapeutically equivalant to the later version. That could mean the all-powerful US Food and Drug Administration would refuse a licence.

Form 1 is also difficult to manufacture - the reason Glaxo developed the later version, Form 2. And in any case, it is probably impossible to make Form 1 without also producing some Form 2 at the same time - which would be a breach of Glaxo's Form 2 patent.

Mr Sykes' phlegmatic attitude can only be admired. Investors nevertheless have every reason to remain concerned. The City's sudden nervousness stems from a much more basic worry - that to have such an edifice of profits balancing on the narrow tip of Zantac's market dominance will always make the company highly vulnerable. Analysts have long been looking for an excuse to lambast Glaxo. Ciba provided it.

Zantac is under attack on all sides. Within a matter of weeks, the patent on its nearest rival, Tagamet, expires. Already manufacturers of generic versions of Tagamet are offering to supply US healthcare organisations for just dollars 10 per patient per month. Zantac's list price is dollars 90. The product may be superior but it's hard to see that counting for much against such a price differential.

Glaxo is not to be written off; it has many strengths. Its huge cash reserves, and the enormous scope for cost cutting offered by its giant US sales force and research and development budgets will help sustain profits and dividends for a long time to come. But until the future looks much more certain, the bears seem to have it about right.