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High hopes

Analysts remain confident about the near-term value of pharma stocks, but warn that biotechs in search of equity finance could face a harsh climate

Woman prayingFor the first time in four-and-a-half years the UK stock market has broken through the 5,500 level as measured by FTSE 100 Index. The driving power lies in the bids and deals, most notably the merger of Boots with rival pharmacist, Alliance Unichem. However, the high was short-lived as the index, which has risen 750 points this year alone, fell back 66 points as the US Federal Reserve warned that US interest rates will keep on climbing.

Analysts are bullish for the big pharma companies, but bearish for newly floated biotech companies. Deutsche Bank has raised its target price for AstraZeneca from £24.50 to £30.40 and increased estimates for GlaxoSmithKline (GSK), which is already close to its target price, from £13.30 to £14.80.

Biotechs seeking more equity finance are facing desert conditions according to Nomura, the investment bank. The poor, post flotation, performances of biotech new issues in 2005 so far are the reason. Most biotech arrivals on the stock market are trading substantially below their market flotation prices - apart from ProStrakan and Minster Pharmaceuticals.

Pharmaceutical giants are not proof against the current raging bid fever. AstraZeneca's (AZ) share price rose 51p to £27.52p, a two-year high as bid talk swirled around the group. Just a few weeks ago, dealers suggested that Novartis could be a possible suitor for the Anglo-Swedish group, but are now saying that sanofi-aventis could bid for AZ.

Going in the reverse direction is Medical House which fell 6.5p to 54.5p as the orthopaedics and devices company announced it is having a `challenging year' and says that the tardiness of the US regulators to approve a Medical House product will hit future revenues.

Vaccine boost share price
GSK's share price sprinted ahead on news that its experimental cervical cancer vaccine, Cervarix, has proved totally effective in extensive trials in preventing early-stage cervical cancer and pre-cancerous cervical lesions. Cervarix should be available in 2006 and should sell into strong demand.

Jean-Pierre Garnier, chief executive of GSK, believes that Cervarix could shield around 70 per cent of the female population from cervical cancer, which kills some 300,000 women worldwide each year.

City analysts reckon Cervarix is a potential blockbuster drug and could earn revenues of £2.2bn annually.

Merck is developing a similar cervical cancer vaccine, Gardasil, together with Sanofi Pasteur.

Trial results for Gardasil show that the vaccine, given in three doses over six months was successful and a licence will be applied for before the end of 2005. Over 12,000 women aged 16 to 23 from 13 countries, including the UK, were involved in the trial and tracked for two years.

Half were given Gardasil and half were given placebo. Of the women given Gardasil, none developed cell changes that lead to cancer while 22 of those given placebo developed cell changes. Gardasil sales could be worth £567m a year one City analyst calculates.

Controversially, doctors want cervical cancer vaccines to be given to girls and boys aged nine to 11 years - before sexual activity begins - as part of a national programme.

Reckitt snaps up Boots Healthcare
The auction for Boots Healthcare International (BHI) has been won by Reckitt Benckiser following a £1.9bn bid.

Under the deal, Boots investors are to get all the cash from the sale in the shape of a 200p per share dividend worth £1.43bn to be paid early in 2006. Boots is holding some £400m back for its planned merger with Alliance Unichem.

Reckitt had been bidding against GSK, Bayer, Pfizer, Novartis and Johnson & Johnson for BHI. Shares in the company rose sharply as the market woke up to the fact that the Reckitt portfolio of products, which includes Lemsip and Disprin, will fit snugly with that of BHI, which comprises Nurofen and Strepsils.

Broker Panmure Gordon increased its price target for Reckitt's shares to £20 from £18.50 as a result of the higher-than-expected estimated cost-savings worth £75m annually from the deal.

However, the market was not cheering for Boots' link up with Unichem. The merger is not seen as promising by the City simply because analysts believe the two companies will perform better as separate entities. They also reckon that it will be difficult to carry out the deal effectively.

For Boots the strength of the merger is the ability of the combined group to repel continued market pressure from big supermarkets, many of which are broadening their beauty and healthcare product offerings.

Skyepharma slumps
Skyepharma's share price slumped as it announced a pre-tax loss of £9.1m on turnover of £36m for the half-year. In the same period in 2004, pre-tax loss was £8.6m on sales of £35m. The increase in losses resulted from problems with Paxil CR after the Food and Drug Administration stopped sales of the drug following (unconnected) problems at the GSK plant in Puerto Rico.

Skyepharma further rattled the market by announcing a deeply discounted rights issue, with the new shares priced at a 43 per cent discount to the market share price.

The cash is needed for phase III trials of Flutiform for use in asthma sufferers. Skyepharma initially planned to raise the needed capital through a licensing deal, but a series of inadequate offers has resulted in the company taking the plunge to raise the money from the market via a rights issue. Skyepharma plans to seek US approval in 2007 for Flutiform and to sell it in 2009.

2nd September 2008

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