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Bearing the brunt

Heavyweight pharma stocks perform well as stock market holds up well against a bearish backdrop

The stock market held up well in the face of the threat of terrorist activity, adding to the growing list of investor concerns about the darkening outlook for equities.

A pause in the interest rate rising cycle in the US, a welcome ceasefire between Israel and Hizbollah, softer oil prices and positive European economic data helped ease the bearish backdrop for the equity market. Apart from increasing geopolitical problems, the outlook for US and UK inflation, interest rates, economic growth, and oil prices are still major issues causing much investor uncertainty.

Heavyweight pharma stocks performed nicely with some investors piling into them because of their perceived safe haven status in troubled times. GlaxoSmithKline (GSK) edged higher despite news that it will pay about $70m to settle claims brought about in the US that it had inflated the prices of drugs used by cancer patients. AstraZeneca (AZ) was a little softer although it still managed to outperform the blue-chip index that was down more than 1 per cent last week with the FTSE 100 staying above the 5,800 level.

Shire Pharmaceuticals sparkled on the big cap board on Tuesday morning after announcing that it had settled its pending lawsuits with Barr Pharmaceuticals, the US group, over its best-selling Adderall XR hyperactivity drug. Shire agreed to sell the older version of this drug for $63m to Barr, which has agreed not to market a generic version of Adderall XR, the extended release version of the drug, until April 2009, on the condition that a competitor does not launch a rival generic version. As part of the settlement, Shire will pay Barr up to $165m over eight years for licences for at least eight women's health products.

Shire's share price had already moved up strongly in the days prior to resolving the pending lawsuit after competitor Cephalon, a US group, halted development of its competing hyperactivity treatment, Sparlon. The US regulatory authorities decided not to approve this drug. JP Morgan had reiterated its outperform recommendation on Shire even though the broker was not expecting Sparlon to compete directly with Adderall XR. The fact that Sparlon would not be on the market is viewed as being positive for Shire.

A further slide in the share price of drug delivery group SkyePharma was arrested towards the end of last week, after the group issued a statement that it is not aware of any fundamental reason for the recent decline in the company's share price. SkyePharma has seen the value of its shares almost halve since the start of this year. Frank Condella, chief executive, noted the disappointment in Skye's share price fall over the past few weeks but maintained that he is confident that the group will deliver the objectives it outlined in its strategy earlier this year. SkyePharma is looking to divest its injectables unit and outlicence Flutiform, its asthma drug, outside the US.

Among the smaller cap stocks, despite the general lull in trading because of fund managers and traders enjoying their summer holidays, there were a few bright spots. Shares in GW Pharmaceuticals, the maker of drugs derived from cannabis, were on fire rising by more than a fifth over a few days. Some investors/speculators decided to take positions ahead of the results of important phase III trials for Sativex, its under-the-tongue spray for multiple sclerosis, which could be launched in the fourth quarter. Sativex is already on the market on a limited basis in the UK, Canada and Spain.

GW's share price was already moving strongly higher before the group announced that it was embarking on a final trial for neuropathic pain expected to be reported in about a year's time. A similar pivotal phase III study has already produced positive results. This announcement of additional trials has provided a catalyst for more buying interest, helping to push even higher the price of this depressed share. It is down heavily this year on concerns that Sativex trial results will not be conclusive enough for regulators to grant marketing approval.

Shares in Alizyme, the drug developer, whose share price has nearly halved since its peak earlier this year, managed a strong gain after a well-received post-results presentation by the company. News that its finance director had bought 25,000 shares, lifting his stake to 0.57 per cent in the group, also helped the shares to rise. Interim losses narrowed sharply, thanks mainly to substantially lower research and development costs that are expected to rise as products progress through late-stage trials.

Alizyme's failure so far to do a deal with a big pharma group for gastrointestinal lipase inhibitor, Cetilistat, an obesity treatment which is entering the final stage of clinical trials next year, has pulled its share price down strongly this year. The bulls argue that Cetilistat is a potential blockbuster and in time an appropriate partner will be found.

Another bright feature was BioProgress, whose share price soared in the run up to and after the announcement that it had received registration for its Ronflux anti-snoring nasal product as a medical device in the UK. Ronflux has been launched on the French market and the company is in discussions with potential partners across Europe and South East Asia to market the product in several countries. Analyst Katrina Preston at Bridgewell still has a buy recommendation on the stock even after the latest heady share price rise.

2nd September 2008


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