Drugs Sector's High Set to Last
Stevenson, Tom, The Independent (London, England)
The pharmaceuticals sector has staged a spectacular recovery from its dismal performance in 1992 and 1993. The 33 per cent outperformance by the index against the market has been one of the best on record, although it failed to match the 55 per cent notched up in 1991, when investors fled to drugs stocks as a safe haven from impending recession.
A combination of the lifting of the threat of major US healthcare reforms by President Clinton and an outbreak of takeover fever helped lift the share prices of all the large companies last year. Most analysts are now looking forward to a continuation of the trend, albeit at a less impressive rate.
Most believe the pressure on drugs costs from governments, one of the sector's major depressants since 1991, may hit bottom this year. That should help arrest margin erosion, particularly as the cost-cutting on which recent mega-mergers have been predicted should start to bear fruit.
Perhaps even more significant, given the importance of sentiment to investment, is a possible repeat of the 1991 experience. If current forecasts prove correct and economic growth decelerates, then the sort of low double-digit earnings increases likely to be notched up by drugs companies in 1996 and 1997 will look attractive as more cyclical sectors enter a down-trend.
Finally, the optimists are pointing to further mergers and acquisitions this year, although on a smaller scale.
SmithKline Beecham could turn out to be the safest bet in 1996. The 1989 mega-merger between SmithKline Beckman of the US and the UK's Beecham which created the group is now well bedded down. It has also coped well with the ending of the patent on its best-selling Tagamet anti-ulcer drug in 1994.
A recent presentation on the group's research and development effort went down well with analysts, in contrast to similar briefings by Glaxo Wellcome and Zeneca. Products now in late-stage phase III trials and expected to come to market over the next two years could eventually represent peak sales of pounds 1bn or so.
The company should also be well placed to benefit from trends towards so-called self-medication, as people increasingly fight shy of doctors to treat themselves. The net $1.9bn (pounds 1.2m) acquisition of Sterling Winthrop in 1994 created the world's biggest non-prescription healthcare company, a strategy reinforced by last month's pounds 91m acquisition of a German maker of grocery-store medicines. More of a gamble was the $2.3bn addition of Diversified Pharmaceutical Services in the same year. DPS should allow SmithKline to cash in on the moves in the US by drugs "wholesalers" to manage the market on behalf of customers such as insurance companies.
Now the sector giant since last year's pounds 9bn takeover of Wellcome, Glaxo's attention is going to be focused in the medium term on integrating its new partner. Crucial to that will be promised cost-cuts, which brokers estimate could be a higher-than-expected pounds 800m by the end of 1998. But equally important is what it does to replace Zantac, one of the world's most successful drugs, and Zovirax, Wellcome's best-selling herpes treatment, when the patents on both run out in 1997. Zantac's profits in the following year are set to halve from just under 40 per cent of Glaxo's total now.
Imigran, a migraine remedy, could by worth over pounds 260m to the bottom line this year and the new 3TC-Retrovir anti-AIDS combination is expected to contribute a further pounds 200m or so. …