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Free falling - Market Eye 22nd April 2008

Pharma sector keeps it head above water while sterling threatens to falter as the UK economy buckles under pressure from the credit crunch
Free falling
Pharma sector keeps it head above water while sterling threatens to falter as the UK economy buckles under pressure from the credit crunch

The UK economy is in such a bad way that we could see sterling fall by 20 per cent according to Legal & General Asset Management. The firm said that global concern over the UK's huge deficit with trading partners and an uncompetitive export sector may trigger off a 'structural long-term decline' in sterling against major currencies such as the Euro. This will provide a currency boost to pharma companies with overseas revenue flows.

In its usual contrary way the UK stockmarket managed to rise as the price of oil bubbled over $114 a barrel, and the FTSE 100 Index rose above the 6,000 mark. Upward momentum was sustained by hopes that the Bank of England will move to ease the credit crisis. However, fears remain that further cuts to interest rates will signal a rise in inflation which, according to Charles Bean, the Bank of England chief economist, is forecast to rise to over 3 per cent.

The Bank of England is trying to limit the impact of the credit crunch by offering to buy packages of mortgages (some of which may enclose dodgy sub prime US mortgages from banks) in exchange for Treasury bonds. However, there are limits to what it plans to do and the offer on the table includes only the least risky mortgages and credit card debts. In essence the taxpayer is not only being made to shoulder the banking community's mistakes on the lending front, but also to pay banks over the odds on the borrowing front, as the falls in Minimum Lending Rate have not been passed on by Britain's banks. Indeed, many have increased their mortgage rates.

The pharmaceutical sector rose in tandem with the market due its defensive attractions in a possible future recession.  Rumours of future bids also drove share prices higher - shares at Shire rose on speculation that either Pfizer or AstraZeneca could make a bid for the company. Such rumours about Shire as a potential bid target are not new, but this time a deal may just happen.

In the biotech sector Cenes has agreed to an acquisition by Psion for £10m - including £4.5m in cash. The consolidation of the biotech sector in Britain via bids looks to have started and over the next six months we should see a major shake out - Ardana has put itself up for sale while Skyepharma faces the major headache that its £70m convertible debt could be put up for redemption.

AstraZeneca clinches deal with Ranbaxy over Nexium
AstraZeneca (AZ) enjoyed a big leap in its share price of 7 per cent on the news that it has settled a patent dispute over Nexium with Ranbaxy. The Indian generics manufacturer put in an early challenge to AZ's patents with a view to launching a generic version of Nexium. Ranbaxy has accepted that six patents asserted by AZ in the litigation are valid and subsequently agreed to delay selling a copycat version of the drug until May 2014.

The news removed a significant risk factor for investors who promptly put on their buying boots. However, AZ still faces patent challenges from two other companies - Teva/IVAX and Reddy's Laboratories - over Nexium. That said, the stockmarket takes the view that the settlement with Ranbaxy will make it very difficult for other generics firms to challenge AZ's patents.

Shire leads the tax migration
The evacuation of Shire Pharmaceuticals offshore, to get away from high tax bills raining down from the UK Inland Revenue, marks the beginning of a general migration of companies facing a similar plight. Shire, the UK's third largest pharmaceutical group, is relocating its holding company in the Republic of Ireland in a move that should save it around 16 per cent of its UK tax bill, which this year came in at £7m. The cost of the move will be £3m.  Shire's current tax rate is just over 20 per cent against the 12 per cent tax bill Novartis pays in Switzerland.

Crossing the sea to Ireland ensures the Shire holding company will pay only 12.5 per cent in corporation tax against 28 per cent in the UK - a big saving. The holding company, Shire Limited, will be incorporated in Jersey to take advantage of the Channel Islands low tax advantages. Shire has stressed that the change will not affect its employees, its operations or its stockmarket listings in London and New York. The move will reduce worries about a potential land grab on overseas profits being worked on by the Treasury with the intention of introducing legislation early in 2009.

The Author
Malcolm Craig is a financial journalist and the author of 14 books on investment ranging from the stockmarket to gold to gilt edged stock and traded options.

22nd April 2008


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