Relenza only short-term cure for Glaxo's ills

23rd Jul 2009 16:36

A dose of swine flu is not the only thing worrying GlaxoSmithKline shareholders this summer, having watched the drug giant lose half its value since the start of the decade.Glaxo should do well out of the pandemic. It's received orders for 195m doses of its Relenza vaccine from governments around the world and expects "substantially more" over the coming months. Sales of the treatment are up 780% to £282m. But the Uxbridge-based drug giant will need more than a quick jab if it's to pay back loyal shareholders, many of whom have stood by the company since Glaxo merged with Smithkline Beecham in 2000. It still hasn't recovered from the ill effects of the technology crash in 2002 that sent its shares plunging from about 1,800p at the start of the year to 1,000p 12 months later.Although the shares recovered to almost 1,600p in 2006, the recent slump in global stock markets has sent them back to a tenner at least three times since March 2008.The main concern remains revenue growth. Sales rose 15% in sterling terms during the second quarter to £6.7bn, but fell 2% at constant exchange rates, while US pharmaceutical sales sank 15% to £2.3bn. Glaxo has lost patent protection for migraine pill Imitrex, epilepsy drug Lamictal and antidepressants Wellbutrin XL and Paxil CR, and faces a growing threat from generic competition as other patents expire. All these drugs saw sales plunge in the three months ended 30 June.It desperately needs new blockbusters to replace its fading money spinners and hopes some of the 30 products in late-stage development will pay out big.The company, also responsible for the Lucozade energy drink and Aquafresh toothpaste, admits that product development remains "challenging" and "disciplined allocation of capital in R&D is paramount". R&D expenditure was 13.7% of turnover in the quarter.Of the seven new phase III programmes added over the last 12 months, Menhibrix, a meningitis vaccine for infants over 2 months old, is being closely watched, while Phase III development of its Horizon programme, the successor to asthma treatment Advair, will begin in October. Advair brought in £1.2bn last quarter.The Cervarix vaccine against cervical cancer is already making money, with sales more than doubling in Q2 to £73m and to £121m for the half-year. There's also Mosquirix, an anti-malaria treatment which could be a potential break through product, although it'll take another around three years to get to market. That's one of the big problems these pharmaceutical companies face. The financial cost of getting a drug onto the shelves can run into hundreds of millions of pounds and take as long as ten years.It's a stroke of luck then that Relenza will bring in oodles of cash pretty quickly, although margins could be modest at £6 a pop, leaving investors grateful for a yield of over 5%, a compelling reason to hold the shares for now.