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Bursting through

UK stock market moves closer to all-time record on back of bid speculation

The UK stock market, burst through the key 5,800 level for the first time since June 2001, as measured by that much quoted indicator of financial health, the FT-SE 100 Index. Another 1,100 points or so and it will hit its all-time record peak reached on the last trading day of 1999 - 6,930. On Thursday, February 9, the Bank of England is expected to leave UK interest rates on hold at 4.5 per cent, due to the world economy getting a fresh head of steam.

The pharma sector was unsettled by threats of generic competition to some key AstraZeneca (AZ) drugs, and investor uncertainty over whether blockbuster revenue flows for other major pharmaceutical companies will be affected by the copycat threat in the future.

AZ posts better than expected results - but shares slump on generic threat
AZ's shares slumped despite posting better than expected results. The company's share price lost 96p, or almost 4 per cent, slashing £1.5 billion from the AZ market price tag.

Is the Square Mile being cruelly irrational? No, there is method in its apparent madness. The City scribblers are worried about copycat competition against several of AZ's drugs by generic pharma companies.

One drug being challenged is Toprol XL, AZ's top-selling high blood pressure treatment with US sales of $1.3 billion. An American court overturned the patents protecting Toprol XL recently - although AZ is appealing against the verdict. New chief executive David Brennan predicted that earnings growth from Toprol XL will shudder to a grinding halt.

Also being challenged by generic competition are Nexium, the global bestseller for heartburn, with the latest full-year sales up by 18 per cent at £2.6 billion, and Seroquel, for schizophrenia, which posted sales up 35 per cent at £1.5 billion.

The market's view is that despite AZ recently splashing out via a string of licensing deals on new drugs nearing the end of their trials, its drug pipeline is lacking a new blockbuster drug with huge earnings potential.

To make matters worse, there is a two-year delay to AZ's replacement drug for Exanta, for the prevention of strokes, which was rejected by the US Food and Drug Administration (FDA) back in 2004. AZ will also be seeking regulatory approval for Galida, the diabetes medicine - but this has been delayed until the autumn of 2007.

Contrasting with the bad news, AZ's latest full-year profits came in at the top end of City analyst's forecast with a rise of 34 per cent to £3.76 billion. Sales rose 12 per cent to $23.9 billion, boosted by strong growth from AZ's five main drugs. Earnings per share are expected to rise to between $3.40 and $3.60 in 2006 against $2.91 in 2005. Earnings will be driven by higher sales of Nexium and Seroquel. The trouble is that 45 cents of the anticipated earnings per share are scheduled to come from Toprol XL.

GSK poised to bid for Serono?
Serono, the Swiss biotech company, failed to find a buyer after a recent auction which put the company up for sale at a $15 billion price tag.

The failure was due to the perception of Serono, Europe's largest biotech company, by market analysts as a mature company facing aggressive competition for its existing drugs and with a limited array of new drugs in the R&D pipeline. Serono's biggest selling drug is Rebif for multiple sclerosis treatment.

Now there is speculation in the market that GlaxoSmithKline (GSK) could launch a bid at a lower price than that set for the auction. First there is some tidying up to complete at Serono - Goldman Sachs, the investment bank, has been hired to find buyers for the 82 per cent of shares held by the family of Serono's boss Ernesto Bertarelli. Once this is out of the way, there could be a public offer for the rest of the shares. Interested buyers are thought to include Switzerland's Novartis, Johnson & Johnson of the USA, Pfizer and GSK.

GSK's drug range barely overlaps with Serono's and there is speculation that if GSK bought Serono, parts of the group could be sold off. GSK is thought to have offered a price of near the $11 billion mark.

The head of research at GSK, Tachi Yamada, is leaving the group in June 2006 to join the health charity run by Bill Gates, the world's richest man. His successor is Moncef Slaoui, currently head of business development at GSK and a leading expert in vaccines. Tachi Yamada has the reputation of turning GSK from a company with the worst pipeline of new drugs into one of the best.

Battle over SkyePharma chairman continues
SkyePharma's board has defied a significant bloc of its own shareholders by selecting Dr Argeris 'Jerry' Karabelas (also formerly chief executive of Novartis Pharma) as its new chairman and Frank Condella, former president of European operations for Ivax, as chief executive.

The dissident shareholders were led by North Atlantic Value (NAV), which pushed out SkyePharma's founding chairman, Ian Gowrie-Smith. NAV, which speaks for 13 per cent of SkyePharma's shareholders, had been pressing ahead to install Bob Thian, chairman of Whatman, who formerly worked for GlaxoSmithKline and Abbott Laboratories as their first choice boss.

The SkyePharma share price fell back nearly 4p to 39.75p as the market lost hope that SkyePharma will be scooped up by a big pharma company. SkyePharma's strategic review will lead to the sale of a unit, rather than the whole company going to an opportunistic bidder. Skye will sell its US injection technology operation and use the cash released in its business.

Provalis sells off pharma business
Provalis, the ailing diagnostics company, has sold its pharmaceutical business - subject to shareholder approval - for £10.5 million to Kogen, which is part of Galen. The cash raised will go to paying off debt and sorting out the technical problems with its `in2it' analyser, which, along with poor pharmaceutical sales, had put the share price into reverse.

Betapharm to go to Dr Reddy's?
There is speculation that Dr Reddy's, the Indian pharmaceutical group, will bid for Betapharm, a leading German generic drug company. The owner of Betapharm is 3i, the venture capital investment trust, which acquired the company in a Ä300 million management buy out in March 2004. A price of Euro 470 million (£320 million) is reported as being offered. Other contenders for Betapharm are thought to include sanofi-aventis of France and Teva of Israel.

Actelion sleeping drug candidate may have spin off benefits for memory and curbing appetite
Actelion is developing the drug orexin-RA-1 as a sleeping pill and it is claimed that the drug can also boost memory and may curb over-eating as the drug acts on the orexin hormone system, which governs appetite. Orexin-RA-1 blocks the orexin system. So far the drug has been tested only on rats.

Malcolm Craig is the author of 14 books covering aspects of investment ranging from shares to bonds and gilts to gold. He is one of the UK's most respected investment commentators.

2nd September 2008

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