22 - 28 March 2001

Investors Corner

The Market
The rout in London showed no sign of letting up on Friday, with leading shares almost going into free-fall as the sell-off in telecoms and technology stocks continued – with sharp falls on Wall Street in the morning session adding to the general misery. The slide saw the FTSE 100 index close at its lowest level since 15 December 1998, closing down another 166.4 points at 5,585,4, and just four points above its 5556.2 session low.
All the broader FTSE indices posted sharp losses, with the techMark bearing the brunt of the decline – down a massive 103 points and a new all-time low. This means that techMark is now some 65 per cent off the peak reached on 6 March last year. Volume was a solid 2.062 bn shares in 144,562 trades, partially swollen by mid-morning futures and options expiries in London, and hefty trading in Vodafone.
The mood in the market right from the outset was grim as investors digested another slew of after-hours profits alerts from major US blue chips – Compaq, Oracle and Intuit, with more bad news on the economic front from Japan. The profits alert from Dutch group ASM Litho, which specialises in semi-conductor components, added to the bleak tone – which was evident across European markets. In London, the now almost habitual sell-off in technology and telecom issues kicked off within the first few minutes of trading, with the prop provided by Nokia’s soothing comments gone.
Investors could do little but stand on the sidelines as the two sectors were marked lower, with traders desperately seeking support levels. Friday’s futures and options expiry mid-morning failed to move the market either way and certainly did nothing to halt the general slide. Corporate news and results provided the only pockets of interest during the Friday trading session, largely in second line and Smaller Cap stocks.
With yet more bleak earnings news from US group Computer Services Corp. around midday, the market fell back even more sharply as traders fretted about further losses on Wall Street at the opening bell. But the real focus in early afternoon trade was the raft of US data. Initially, the data seemed to provide some cheer, with the core PPI for February coming in well below expectations.
US producer prices showed a rise of 0.1 per cent in February and were up four per cent year-on-year. But excluding volatile food and energy prices, the PPI core rate fell 0.3 per cent in February and was up 1.3 per cent year-on-year. This fall in the core rate was the largest decline since August 1993, and totally unexpected by economists. The weak figures prompted some players to suggest that the Fed. could move to ease rates as early as next week’s FOMC meeting. Nevertheless, the bears felt that the weak inflation data signals just how dire the US economy actually is, which could have a rapid knock-on effect on the global economy.
Although Wall Street kicked off fairly quietly, both the Dow and the Nasdaq quickly extended their losses – also hit by sharp falls in tech and telecoms issues. At the London close, the DJIA was down around 112 points, hit hard by falls in IBM, while the tech-dominated Nasdaq shed nearly 31 points.
The rout in tech stocks was led by software companies, which were hit hard by the Oracle and Intuit warnings. Autonomy, which lost its FTSE 100 index status on Friday, led the pack lower – falling 171 pence at 1019 – as the tracker funds sold down. Sage Group was a notable casualty, 41-1/2 pence lower at 260, with sentiment additionally hit by news of a downgrade in rating from ABN Amro to “hold” from “add”, and impacted too by Oracle’s move to lower current quarter estimates. Logica was down 174 pence at 1151, with Misys 50 pence easier at 560, CMG 58 pence lower at 702 and Dimension Data losing 13 pence at 352.
UBS Warburg published a software and services sector review on Friday repeating a “buy” rating on CMG, and a “hold” stance on Dimension Data. Chip maker ARM Holdings was also under pressure, affected by the ASML warning, with the group shedding 20 pence to 298 pence. Telecom issues were back under pressure, with alternative carriers affected again by Cable & Wireless’ earnings caution earlier last week. C&W itself lost a further 26-1/2 pence to 455-1/2 as Goldman Sachs trimmed estimates and repeated its “market performer” rating.
Colt Telecom fell 101 pence to 895, Telewest eased 6-1/2 pence at 120, and Energis shed 11 pence at 349. Sentiment in Energis was further undermined by Deutsche Bank’s decision downgrade to “underperform” from “market perform”. Market heavyweight Vodafone featured among the blue chip fallers, off 8 pence at 200, on reports that Italian utility Enel could be close to finalising its renegotiated acquisition of the UK firm’s Infostrada business after agreeing a big cut in the price tag. The real difficulty, especially at the end of the day, was finding any blue chip gainers.
Troubled high street retailer Marks & Spencer provided the only real bright spot in the market, up 9-1/4 pence at 222-1/4, as Deutsche Bank upgraded its recommendation to “buy” from “hold” after a one-to-one meeting with the firm’s management. The broker has also added the stock to its European Recommended List. Although Deutsche Bank remained cautious on the timing of any turnaround at the beleaguered retailer, it feels that M&S’ prospects for recovery are the best for a couple of years.
However, fellow retailer Kingfisher slipped back four pence to 435, as Morgan Stanley cut its rating to “outperform” from “strong buy”, with cuts also made to its price target and earnings estimates. Goldman Sachs also cut its estimates for Kingfisher, but kept a “market outperformer” rating after the retailer’s recent results. Stronger-than-
expected UK retail sales data, and John Lewis’ solid stores figures, lent support to other retailers, with blue chip Boots up three pence at 590, and Dixons up to 246.

GlaxoSmithKline
GlaxoSmithKline (GSK), the pharmaceutical group, at its inaugural meeting for analysts and investors, outlined its R&D and business strategies for the newly-merged company. The group announced that, while improving pharmaceuticals sales growth is a key driver of GSK’s current strong business performance, the company is also expected to benefit from the delivery of at least £1.6 billion in cost savings by 2003. This represents a result of both the merger and the manufacturing plans already in place before the merger.
These benefits of the merger and the performance of the business have led the company to forecast EPS growth (excluding merger and restructuring costs and the effects of currency) for 2001 of around 13 per cent, despite the adverse effect of product divestments and reduced dependency on profits from disposals of investments. Importantly, the divestments required by regulatory bodies in order to complete the merger have had the effect of reducing the company’s EPS expectation for the year by six per cent.
Additionally John Coombe, GSK’s chief financial officer, indicated he expects a trading margin improvement of up to two per cent in 2001 as well as an improvement in the tax rate of 0.5 per cent. In 2002, the company expects EPS growth to accelerate to the mid-teens, reflecting strong business performance, boosted by cost savings. For the second year in a row, one-time gains are expected to decline.
Meanwhile, GSK is set to benefit from the recent launch of two potential blockbuster drugs, a unique source of strength for the company. Avandia, GSK’s treatment for Type 2 diabetes, has done well with total sales of £462 million in 2000. Avandia offers significant opportunities for growth as it continues to be launched in Europe and the rest of the world during 2001.
Moreover, the company is pursuing an extensive clinical programme to attempt to demonstrate Avandia’s ability to prevent disease progression and reduce complications associated with Type 2 diabetes. In February 2001 the company received an approvable letter from the FDA for the use of Avandia in combination with insulin.
The company’s other potential blockbuster, Seretide – the combination of a corticosteroid and a long-acting bronchodilator for the treatment of asthma – is planned for launch in the US under the name Advair in April this year, giving it access to the world’s largest market where the benefits of inhaled steroid treatment are increasingly being recognised.
The antibiotic Augmentin has always been associated with superior efficacy, and current treatment guidelines include it as one of only a short list of antibiotics recommended for acute otitis media and sinusitis. In a continuing programme to increase its competitive advantage, the company is planning to launch extra-strength formulations of the product for both the paediatric (Augmentin ES) and adult (Augmentin SR) markets to meet the challenge of emerging bacterial resistance.
In the CNS (Central Nervous System) category, GSK will pursue a dual strategy to continue growing the Seroxat/Paxil business. With its immediate release (IR) formulation, the company will expand into new markets and will offer a complete spectrum of treatment for depression and anxiety disorders.
This will include launches in 2001 for GAD (General Anxiety Disorder), and PTSD (Post-Traumatic Stress Disorder). Coreg (carvedilol) is the first beta-blocking agent to be indicated for the treatment of mild or moderate heart failure. It is also the only beta-blocking agent to show a mortality benefit in the treatment of severe heart failure, and a filing for this indication is expected to be made with the US FDA later this year.
The company has created six Centres of Excellence for Drug Discovery (CEDDs) designed to act as small business units within the larger R&D organisation. The CEDDs can select the best assets from either internal discovery or in-licensing to move rapidly from the identification of promising compounds to the proof of concept stage. The CEDDs are structured to encompass both discovery and early clinical development. Each CEDD is autonomous, accountable, and entrepreneurial along the lines of a biotech company.
In addition to the agility of the CEDDs, the new structure retains the benefit of scale and size in drug discovery and development. In particular, the company is benefiting from its previous investment in technologies in genetics and discovery research such as high throughput gene-sequencing, chemistry and screening. Integrating these technologies further with high throughput biology will be the key to unlocking the value of genomics through a better understanding of gene function.
The announcement of the latest results for the year ended 31 December, has led to various reactions from analysts. Some said that management has gone some way to reassure investors about its flagging pipeline for new drugs. US competitor Pfizer is growing earnings at around 25 per cent but is trading on a PE ratio of 43. GSK is not growing as fast but on a forward rating of 27 the shares are good value. Others however, have taken a more cautious stance and have showed concerns over the possible harm that Imigran, also known as Imitrex, could cause. The drug has annual sales of over £700 million, worth more than £300 million in profits. GSK is facing more than a dozen legal actions in the US alleging that the drug, which can be taken orally or injected, causes side-effects as severe as heart attacks, strokes or a wasting illness.