GlaxoSmithKline

The operating performance of GlaxoSmithKline (GSK) continues to benefit from a high quality portfolio of existing key drugs, fast growing new treatments and a solid development pipeline. Reporting on a constant exchange rate basis (CER) late last month, Europe's largest drug maker, revealed first quarter earnings per share grew by a healthy 17 percent to 26.5p.

Revenue during the period increased 10 percent on a CER basis to £5,813 million. Solid pharmaceutical sales in the US and internationally offset a flat performance in Europe. Operating profits, benefiting from an improvement in margins, rose 15 percent to £2,174 million.

Once again Glaxo's top selling drug, Seretide/Advair, performed well topping £800 million in sales thanks to double-digit growth across all regions. Other top sellers included Avandia, Coreg and Lamictal.

Due to the inevitable expiration of patents on blockbuster drugs, standing still in the pharmaceutical industry is not an option. Therefore, we take great encouragement from the performance of new drugs and the potential of several late stage development treatments.

Requip, a treatment for restless leg syndrome, is one such high flier. Turnover during the quarter increased 83 percent to £58 million. Avodart generated 73 percent sales growth while those of HIV treatment Epzicom/Kivexa more than doubled.

Glaxo's pipeline of potential new drugs is also one of its great strengths. Currently GSK has 149 projects in development, including 25 vaccines. Cerarix, for cervical cancer, and Tykerb, a treatment for breast cancer, should both be submitted for approval in the EU and US by year-end.

The company's much smaller consumer healthcare division increased sales 6 percent to £768 million. Offsetting the loss of sales following product disposals at the end of 2005 was respectable growth from well-known brands such as Ribena, Sensodyne and Panadol.

Cash flow from operations at Glaxo remains buoyant at £1,782 million. As a result, shareholders not only benefited from £219 million share buyback but also £568 million in dividends. Glaxo still intends to buyback in total £1.0 billion of shares in 2006.

Additionally, we value the defensive qualities of Glaxo. The company showed its "metal" (no pun intended) during the recent natural resource lead correction. While markets around the world were markedly lower, GSK shares remained relatively well supported.

From a valuation perspective, we believe GSK's growth potential justifies the current 2006 price earnings multiple of around 16 times (and a yield of 3 percent).