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Getting into the swing

Fund managers are uneasy but the swing towards defensive stocks and bid activity has fuelled pharma's rise

swingThe City's fund managers are becoming nervous that the UK stock market, which has risen 11 per cent since the start of the year, is overvalued at current levels.

Citywire's Stock Market Confidence Index fell by 14 per cent in August and is at its lowest level since August 2004. However, there is a glimmer of hope; only 6 per cent of fund managers reckon the market will fall and most feel it will continue to rise but slowly.

The pharma sector has benefited from the unease among fund managers as they swing towards defensive stocks, which include pharmaceutical shares, and bid activity. Meanwhile, the biotech sector received a boost as GlaxoSmithKline (GSK) bought ID Biomedical. The deal underlines the trend by big pharmas to fill their research and development pipelines by buying biotech firms with promising new products.

GSK scoops up ID Biomedical
GSK's shares rose on news that it had scooped up the Canadian biotechnology firm, ID Biomedical for £760m in a deal which is aimed at strengthening its vaccine division. The opportunistic deal, which sees GSK plug a gap in its US flu vaccine sales, comes as the threat of a potential flu pandemic gathers pace.

ID Biomedical is a vaccine specialist operating from factories in Canada and the US, supplying 75 per cent of the Canadian government's flu vaccines. The US Food and Drug Administration has granted fast-track status to ID Biomedical's egg-based Fluviral flu vaccine, which is eligible for priority review.

GSK is also taking on £42m in net debt as part of the ID Biomedical purchase and has agreed to lend the biotech firm £65m to boost cash flow and repay term debt until the deal is completed late this year or early in 2006.

Trial data on GSK's blood-thinning drug Arixtra, presented to the European Society of Cardiology, showed that it measures up well to market leader Lovenox (sanofi-aventis) and is less likely to cause internal bleeding. Arixtra reduced bleeding by 47 per cent in patients with angina.

Slippery slope
AstraZeneca's shares slipped back a little, despite executive vice president for discovery and research, Jan Lundberg, pointing out to a meeting of City analysts that its research laboratories have the muscle to produce new drugs each year. He also confirmed that early-stage research had improved and the fruits of the improvements are now showing through.

Shire Pharmaceuticals is creating a holding company, Shire Plc, which will be listed on the UK stock market. The move will cut the company's share capital, enabling it to pay further dividends. It will increase the reserves available from £87m to £1.65bn. Shares in the company slipped back on the news.

The go ahead
Bristol-Myers Squibb (BMS) and Merck received welcome news from an FDA advisory panel, which recommended approval for Pargluva to treat Type II diabetes. Pargluva is the first drug in the dual peroxisome proliferators-activator receptor agonists (PPAR) class that aims to control blood sugar and diminishes cholesterol effects in diabetic patients.

BMS needs a promising drug to boost its pipeline, which has suffered from a dearth of new drugs. Merck is assisting in developing and marketing Pargluva.

The advisory panel recommended Pargluva for use on its own, or with metformin, another diabetes drug. It also advised that Pargluva should not be used with diabetes treatments known as sulfonylurea. The US stock markets welcomed the news as the product, once approved by the FDA, will replace depleted revenue streams at both BMS and Merck.

BMS has also received a favourable Food and Drug Administration panel recommendation for Orencia, a biotechnology treatment for rheumatoid arthritis.

New rules for paediatric drugs
The European Parliament has given the green light to new rules ensuring pharmaceutical companies develop and test drugs specifically developed for children - a move away from the present system under which children are given reduced doses of adult medicines.

Currently paediatric drugs account for a small percentage of the market due to the harsh reality that testing drugs for children is time-consuming and expensive.

The parliament hopes that extending the patents on children's drugs for an additional six months will act as an incentive for pharma companies.

Malcolm Craig is the author of 14 books on all aspects of successful investment and is a leading UK stock market commentator.

2nd September 2008

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