Sharp drop in profits at Glaxo worries SmithKline investors

GLAXO WELLCOME, in the midst of negotiating a merger with SmithKline Beecham to create the largest drugs company in the world, yesterday disappointed the market with a 9 per cent fall in 1997 pre-tax profits to pounds 2.68bn. Its shares slipped 21p to 1945p.

A dramatic fall in sales of Zantac, its leading ulcer treatment, higher than expected costs of marketing its drugs in the US and the effect of the strong pound were to blame for the fall in profits.

Some analysts and institutions seized on the figures as pointing to the real reason why Glaxo is seeking a merger with SmithKline.

One industry analyst said: "It is easier to see now why Glaxo was so keen to step in and forge a deal with SmithKline instead of allowing it to team up with American Home Products."

"This deal is all about preventing earnings falling in years to come."

"Drugs companies will be forced to spend more on getting drugs and marketing them in the future," said one of Glaxo's institutional shareholders.

Several shareholders in SmithKline also raised concerns about Glaxo owning 59.5 per cent of the merged company given the fall in profits and concerns about its ability to replace Zantac. Glaxo refused to comment on whether it was renegotiating the terms of the deal.

Glaxo hired 700 more sales staff in the US and launched an advertising campaign to improve drug sales but that led to trading margins falling by more than two percentage points to 35.4 per cent. The drugs giant admitted that it would struggle to see 40 per cent-plus margins it enjoyed when Zantac sales were at their peak.

Sales of the ulcer drug, which has been the best selling drug of all time, fell by more than a fifth after it came off patent in the US last July. Since then, 10 competitors have entered the market, and sales are due to drop 80 per cent by this summer.

Nevertheless, Sir Richard Sykes, the group's chairman, insisted the results were in line with forecasts. He said: "We have delivered on our promises and this is a robust performance."

Glaxo also signalled that thousands of workers at the two drugs groups face weeks of uncertainty before they learn their fate.

Unions are calling on Glaxo to talk about a cost-cutting programme that could lead to 10,000 job losses around the world. Sir Richard said yesterday: "We have nothing to say to anybody at this point." Details of the deal are due to be announced in early March.

Glaxo admitted it was still embroiled in a dispute with tax authorities about liabilities arising from the transfer of funds between different countries. Although it is moving close to an agreement in the UK, the case in the US could hang over the merged group.