First Aid for Queasy Investors

GlaxoSmithKline PLC (GSK ) just may have the antidote to today's turbulent markets. Born of the $154 billion merger last December between rival British drugmakers Glaxo Wellcome and SmithKline Beecham, GSK has reported strong sales, ample cash flow, and double-digit earnings.

That's in stark contrast to the former highfliers in telecom and technology, many of whom have stunned the markets with profit warnings. Now, heightened fears over a slowing global economy are adding to the behemoth's appeal. "Glaxo represents a very safe haven," says Martin Hall, European pharmaceuticals analyst at HSBC Securities Inc. in London.

With a market cap of $169.24 billion, GSK shot up to No. 15 in this year's Global 1000, from No. 42 in 2000. The dramatic rise is proof that skittish investors are shunning more volatile areas of the market in favor of companies whose earnings come from steady, predictable franchises. Drugmakers with established blockbusters fit that criterion nicely. GSK is tied with Pfizer Inc. in the U.S. as the world's biggest drugmaker. Its sales reached $22.5 billion last year, equal to 7% of the global drug business. And at nearly $4 billion, its research and development budget is one of the industry's largest.

BURSTING PIPELINE. GSK is likely to continue to gain market share, thanks to its arsenal of top-sellers. And it plans to introduce 15 new drugs by 2005. Already the world leader in AIDS and HIV therapies, which are expected to bring in around $2 billion in sales in 2001, GSK will start human trials of a new AIDS vaccine later this year.

Treatments for respiratory illnesses are another GSK strong suit: Sales of such drugs were up 21%, to $1 billion, in the first three months of 2001. Also, analysts say Advair, an inhaler that combines two of GSK's existing asthma drugs into a more effective single drug, is well on its way to blockbuster status in the U.S., where it debuted in April. It is already the fastest-growing asthma medicine in Europe, where it sells under the name Seretide.

Meanwhile, sales of a number of GSK drugs already on the market are still going strong. Antidepressant Paxil and antibiotic Augmentin, for instance, reported gains of 17%, to $608 million, and 19%, to $564 million, respectively, in the first quarter of this year. The company is also betting heavily on Avandia, a new diabetes drug that went on sale in the U.S. in 2000 and is now becoming available in Europe. The drug, which is taken orally, helps the body use its own insulin more effectively to control blood sugar levels. It's expected to rake in more than $1 billion worldwide by yearend. GSK could post an $8 billion profit in 2001, on sales of $28 billion.

Hoping to keep up the momentum, GSK Chief Executive Jean-Pierre Garnier signaled earlier this year that he is on the lookout for possible acquisitions and joint ventures. Analysts say the company is likely to cut a deal that strengthens its position in the lucrative cardiovascular segment or in the Japanese market, where European and U.S. drugmakers are underrepresented. No deal seems too daunting. "As a big company, Glaxo is able to do deals that other companies would find too dilutive," says Jo Walton, pharmaceuticals analyst at Lehman Brothers Inc. in London. Looks like the world's biggest drugmaker might get bigger still.

By Kerry Capell in London

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