Glaxo's Revival May Indicate a Remedy for Astra's Patent Headache
Bloomberg News
July 30, 1998, 10:48 a.m. ET
Glaxo Revival May Indicate Solution for Astra's Patent Headache
London, July 30 (Bloomberg) -- Glaxo Wellcome Plc's first-
half earnings contrasted with those of most of its international
rivals: While Pfizer Inc., Eli Lilly & Co., Astra AB and others
posted higher profit, Glaxo today said earnings fell 21 percent
-- yet its shares rose as much as 9.1 percent.
Investors cheered Glaxo's confirmation that it's on track
to resume sales and profit growth in the second half of 1998
after losing patent protection last year for ulcer treatment
Zantac, which made up 43 percent of sales as recently as 1994.
The recovery will be driven by new drugs it developed by itself
and others it acquired by buying fellow drugmaker Wellcome Plc,
creating what was then the world's largest drugmaker, now No. 2.
That achievement may provide a model for Astra, Europe's
seventh-largest drugmaker, which today said second-quarter
profit rose 19 percent. It's only three years until Astra's
newer ulcer drug Losec/Prilosec, which took over from Zantac as
the world's No. 1 prescription drug, goes off-patent. Swedish-
based Astra relies on Losec for more than half its sales, and
can expect the arrival of competitors' Losec-style drugs to
batter sales of its product.
''I'd rather be in Glaxo now than Astra,'' said Charlotte
Schmid Stary, who manages 910 million Swiss francs ($615
million) in assets at Credit Suisse's Equity Fund Pharma. ''With
Glaxo, we seem to have the problems behind us. Perhaps Astra
should buy someone.''
Glaxo has said it expects to increase sales by a double-
digit percentage in 1999, while earnings should rise
''significantly.'' In the first half of 1998 profit fell to 827
million pounds from 1.04 billion a year earlier.
Wellcome Acquisition
The huge expense of finding and developing new drugs,
though, means that even a company as big as Glaxo balked at the
task of trying to replace Zantac all by itself. Part of the
solution was to buy research capacity, by taking over Wellcome,
then the U.K.'s third-largest drugmaker and the developer of
AIDS treatment Retrovir, for 9.1 billion pounds ($14.7 billion)
in 1995.
The result is that sales excluding Zantac grew by 11
percent at constant exchange rates in the first half of 1998,
led by a 36 percent gain in sales of migraine drugs, including
Imigran/Imitrex, and 24 percent more sales of respiratory drugs,
such as Ventolin and Serevent.
Wellbutrin, a depression treatment developed by Wellcome,
is one of the products that are filling the gap left by Zantac.
Its sales jumped after Glaxo put its marketing muscle behind a
drug that wasn't a stellar performer under its previous owner.
''If you look through the sales trough resulting from the
loss of patents, there are some good prospects coming through,''
said Stephen Thornber, who helps manage 12 billion pounds in
U.K. equities at Threadneedle Asset Management. ''They have a
good product pipeline and could be growing in a year or so, when
U.S. rivals have peaked.''
Market Reaction
In contrast to Glaxo's share surge today, Astra's Class A
shares fell 5.5 kronor, or 3.5 percent, after the Swedish
company said its profit rose a smaller-than-expected 19 percent.
A strengthening Swedish krona took the edge off the earnings
increase, even as Losec continued to soar -- for now. Sales of
the ulcer drug rose 39 percent in the first half.
''Dependence on Losec is increasing and the patent expires
in 2001,'' said Nigel Keegan, an analyst at Daiwa Europe, who
has a ''sell'' recommendation on Astra and a ''buy'' on Glaxo.
''They need new products -- otherwise earnings will get
slaughtered in 2002. That's why the focus is on smaller products
and not the bottom line.''
Keegan said that while Losec has eclipsed Zantac in sales
terms, Astra looks less well placed as far as certain newer
drugs are concerned.
Although Astra's Pulmicort asthma treatment increased sales
by 8 percent in the first half to 2.678 billion kronor ($338
million), Glaxo said its sales of Flixotide, also an inhaled
steroid for treating asthma, rose 71 percent to 226 million
pounds ($371 million) in the half.
''Pulmicort got U.S. approval in November 1996 and Astra
couldn't get the drug onto the market until this year,'' said
Keegan. ''You can't afford to let a company like Glaxo get any
advantage at all, not with the sales team they have.''
Eyes on a Merger
Astra may try to follow Glaxo's example by combining with
another company to achieve the size necessary to prosper in the
post-Losec era. President and Chief Executive Haakan Mogren told
Swedish newspaper Dagens Industri in March the company is
looking for a merger partner among similar-sized companies to
itself, including the U.K.'s Zeneca Group Plc, Schering-Plough
Corp. of the U.S. and the drug unit of Germany's Bayer AG.
The maker of Losec last month set aside a major obstacle to
a merger when it agreed to take full control of Astra-Merck, a
marketing joint venture with Merck & Co., the world's largest
drug company, by 2008. The venture, which sells Losec and other
Astra products in the U.S., is currently owned 50:50 by the two
companies.
Astra agreed to acquire Merck's share of Astra-Merck for a
minimum of $4.4 billion. While the venture generated record 1997
sales of $2.3 billion, its existence impeded Astra's ability to
grow by merger.
Cash Pile
Now that the obstacle is effectively out of the way,
investors will be looking for indications of how Astra will use
the cash pile generated by booming Losec sales. Its cash
resources grew to 26.3 billion kronor ($3.3 billion) at June 30
from 19.3 billion kronor a year earlier.
If Astra has decided to seek a merger, though, there's no
guarantee it will find the right partner.
Astra's Mogren could just ask Glaxo Chairman Sir Richard
Sykes. He was in merger talks for weeks with U.K. rival
SmithKline Beecham Plc earlier this year, only for the talks to
break up amid disagreement over management control. The fact
that the talks took place at all, though, is a sign Glaxo hasn't
resigned itself to its current rank as the world's second-
biggest drugmaker.
--Adrian Bowden (44-171 330 7782) in the London newsroom with |
