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Malcolm's Market Eye, 24 to 30 November 2007

The UK stockmarket is hit by stormy weather as we enter winter, much in harmony with the current season

The UK stockmarket has been hit by stormy weather as we enter winter, much in harmony with the season. Investors are having pre-Christmas nerves about the after effects of the present credit crunch.

The greatest worry is that the financial unrest will spread to Western economies, with a recession in the US predicted ñ when the US economy sneezes the rest of the world catches flu.

The UK stockmarket is clawing its way back after a gain on Wall Street and bear closing, with the FTSE 100 Index recovering and then sliding back to 6,180.

Some UK lenders are feeling the pinch due to their exposure to the US sub-prime mortgage collapse, particularly those who have followed the Northern Rock business model of borrowing short-term money on the interbank market and investing it in long term mortgages.

While bricks and mortar have stood the test of time as an investment (we have had only three major house price falls since the 1930s), it is a highly illiquid investment when buyers stop buying, banks and building societies tighten their lending criteria, interest rates stay high and sellers try to cling to unrealistic house price levels which clinched sales earlier in the year.

Oil, that universal lubricant of the economy, is close to USD 100 a barrel and could go even higher.

Two of the Bank of England gurus sitting on the monetary committee which determines UK interest rates have called for interest rates to be cut to 5.5 per cent as the Bank surveys show the UK economy is weakening far more dramatically than the Office for National Statistics has reported. We could see an interest rate cut before Christmas, but this could be bad news on the inflation front during 2008.

The UK pharmaceutical industry continues to enjoy a strong demand for its shares, with AstraZeneca (AZ) rising GBP 1.38 to reach GBP 22.31, while GlaxoSmithKline (GSK) shares rose GBP 0.61 to rest at GBP 12.21. The reason: Citigroup strategists upgraded the whole European healthcare sector from underweight to neutral.

Pharmaceuticals have been the worst performing sector over the last two years. Citigroup analyst Darren Brooks reckons that some of these neglected shares are overdue for a turnaround. The interest in pharma stocks has supported the FTSE 100 index during a troubled week.

GSK buys Reliant Pharmaceuticals
GSK is spending on more acquisitions to try to replace missing revenues for its blockbuster diabetes drug Avandia (rosiglitazone) cause by evidence linking it to heart attacks by the US medical media. Following the bad publicity, Avandiaís sales fell by 40 per cent in the US.

GSK is paying GBP 800m to buy Reliant Pharmaceuticals, a private US company. The main attraction is Reliantís Lovaza, a cholesterol-lowering omega-3 pill used to control fatty acids that can cause heart disease. It is the only drug based on omega-3 fatty acids approved by the FDA in the US.

Sales for Lovaza in the first nine months of 2007 were USD 200m of sales. It is a fish oil product and GSK will market it alongside its other heart drug Coreg (carvedilol), using its sales force which concentrates on selling medicines to heart doctors. GSK hopes to boost its faltering drug sales in the US. The deal gives GSK the right to sell Lovaza in the US and Puerto Rico.

The GSK shares dipped slightly on the news. Clearly the market reckons not enough revenue will flow from Reliant to replace even a modest part of Avandiaís earning power. Reliant has been following a policy of licensing and developing drugs rather than inventing drugs and medicines itself.

Antisoma shares slide on prospects for its lung cancer treatment ASA404
Antisomaís shares slipped back 15 per cent as the market became nervous about the prospect of its lung cancer treatment battling it out on the market with Avastin (bevacizumab), the worldís biggest blockbuster drug.

Antisomaís lead product ASA404 is to have a wider trial as doctors would have to take patients off Avastin to take part in the clinical trial.

Gyrus recommends bid by Olympus
Gyrus, the medical equipment maker, saw its shares streak up over 50 per cent after recommending a bid of GBP 6.30 per share, or a total of GBP 935m from Olympus of Japan, which also makes medical equipment.

Protherics losses increase, but market waits for pre-eclampsia drug outcome
Protherics, the biotech and specialty pharmaceutical company posted a pre-tax loss of GBP 6m on sales 31 per cent ahead at GBP 14.8m for H1 FY07. The market is waiting for the results, due in H1 2008, of the companyís study of its treatment for pre-eclampsia, which is a big cause of death in pregnancy.

A successful outcome will enable the company to advance its DigiFab product or clinch a deal together with GSKís Digibind treatment.

Protherics makes its money mainly in US dollars and its revenue rose by 41 per cent when measured by a constant currency basis in the half year. Costs have risen by 37 per cent due to more R&D spending plus higher general and administrative costs, which fed through to the higher losses.

Protherics has a potential blockbuster drug in CytoFab, a sepsis treatment, and due to its high potency the assembly of additional manufacturing facilities will be delayed as will milestone payments by AstraZeneca, its partner. A total of GBP 195m is due to Protherics as a result of the deal. Broker Numis Securities is looking for a full year loss per share of GBP 0.05 falling to GBP 0.03 in 2009

Abbott loses key employment data while in transit
Abbott is joining the trend pioneered by the UK Revenue and Customs Department by mislaying key information on 64,000 of its employees, putting them at risk of identity fraud.

The US pharma giant employs 2,000 personnel in Maidenhead. Current and former employee records with vital information on individualís bank accounts, and national insurance numbers were lost while being moved from Logica CMG, which deals with the Abbott payroll, to Abbottís office in Kent. The loss happened despite Abbott using a secure recorded courier delivery service for the package, which also had a tracking facility. So far the package has not been tracked.

Malcolm Craig, a freelance financial journalist and author, is one of the most respected investment commentators in the UK.

30th November 2007

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