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Malcolm's Market Eye, December 21, 2007 to January 25, 2008

The UK stockmarket went into freefall on Black Monday January 22, 2008, with the UK terrified of a possible US recession

The UK stockmarket went into freefall on Black Monday January 22, 2008. The reason? As I have been saying on my Market Eye for some weeks now, the rest of the world along with the UK is terrified of a possible US recession.

On Black Monday the FTSE 100 Index, that widely quoted barometer of the UKís stockmarketís health, fell 5.5 per cent, or a fall of 323.5 points to its lowest level since June 2006.

Itís all reminiscent of the steep market fall backs in October 1987 and the grim bear market of 1973 to 1975 when the FT 30 share index lost four fifths of its value and financial Armageddon seemed a certainty.

This time round the market is likely to fall further but there have been and will continue to be sharp rallies as bargain hunters surface.

Indeed on January 24 the FT-SE 100 Index witnessed its biggest ever, one-day rise. City analysts are convincing themselves that the falls are market corrections from an overbought level. Time will tell whether they are right.

The US in a panic decision dropped interest rates by slicing its discount rate by 0.75 per cent to 3.5 per cent ñ the biggest rate cut since 1984 and the first emergency cut since 9/11. Unhappily the US stockmarket continued to fall back.
 
Pressure in being mounted on the Bank of England to make an emergency rate drop on the American lines, but if it does so inflation will rear its ugly head and we will be plunged back into the dismal scenario of the early 1970s and early 1990s.

Investorsí attitudes towards the pharmaceutical sector change
In the past, UK punters looked for quick, large returns from the introduction of blockbuster drugs by selected pharmaceutical companies and making windfall gains from bids within the sector.

Now the sector is regarded as catering for the more conservative investor, willing to take a long-term view ñ even though the two biggest pharmaceutical companies in the UK, AstraZeneca and GlaxoSmithKline are forecasts by analysts to endure flat earnings per share growth over the next two years.

There are also worries about the steady invasion on big pharma companies by copycat generic drug companies and the tightening of regulatory trials on drugs moving through the research pipeline.

Biotechnology companies were one of the worst performers in 2007 and in continental Europe clocked up an annual fall of 37 per cent. They suffered as they are high-risk, small size and with illiquid shares, which are difficult to deal in.

UK institutional investors along with private punters are looking for low risk, large size punts. There have also been well-publicised drug failures such as Vernalisí migraine treatment in the US.

Good results on diabetes drug trial lifts GW Pharma
GW Pharma saw its share price lifted in the market as reasonably good results emerged on a diabetes drug trial.

GW, which makes drugs from cannabis, needed the tonic after delaying a multiple sclerosis treatment in the summer of 2007.

This biotech declared a pre-tax loss of GBP 13m for the year to end September 2007 on turnover of GBP 5.7m. This compares with a pre-tax loss of GBP 15.3m on sales of GBP 2m. The company has cash of GBP 21m behind it.

GW is in the Cityís good books as a result of a massive licensing deal with Otsuka, the Japanese pharmaceutical company.

Market deals are waiting for the final results for GWís phase III trials on Sativex, a cannabis-based drug to alleviate pain caused by MS, and the company intends to enlighten the market on the results ñ and a number of developments ñ as from March 2008.

If it gets the green light the status of the drug would be cranked up in Canada from conditional approval to a full unconditional approval rating. Plus the drug is moving up the ladder toward European approval.

More approvals are anticipated. GW also has three other uses for Sativex, which are now in late stage product development. Otsuka is financing the research for the cancer pain indication of Sativex, which is now in last stage clinical trials in the US.

Alltracel ñ early bid approach
Alltracel shares jumped sharply after it admitted that it had received a tentative bid approach. The company sells wound care and dental products, and in its latest trading update said it expected better growth in 2008.

System C Healthcare posts good interim results
System C Healthcare announced a pre tax profit of GBP 1.5m on turnover of GBP 8.4m in the half year to end November 2007, compared with a profit of GBP 280,000 on sales of GBP 6.5m in the same period in the previous year.

The share price rose sharply as the market woke up to the fact that operating profits rose from break even last time round to GBP 1.1m, driving the cash margin from the red into the black to the tune of 13 per cent.

System C should see a margin of 15 per cent by 2009. Even better, the order book has risen from GBP 18m in 2006 to GBP 28m currently.

System C is winning new contracts at the same time as widening its earnings flow. For example it is developing computerised systems to monitor patients in clinical environments.

EU Commission launches investigation into possible pharmaceutical cartel
A ripple of alarm swept through the pharmaceutical sector of the stockmarket, as the EU Commission started to investigate the UKís leading drug companies.

If it can be established that a cartel exists, fines of hundreds of millions of pounds could be levied. The commission wants to find out if the big pharma firms use their muscle in the pharmaceutical market to limit the flow of new drugs coming to the market.

In particular the commission wants to find out if the pharma giants use legal tactics to stop copycat drugs coming to the market. Included in the investigation are French giant Sanofi-Aventis and Pfizer of the US, Novartis of Switzerland along with AstraZeneca and GlaxoSmithKline of the UK, as well as Johnson & Johnson, Wyeth, Teva and Merck & Co.

There have been worries for some time about the unreasonable delays in developing new drugs and the extraordinary length of time it takes for copycat, cheaper generic drugs to reach the market.

A great deal of money is at stake as the bill for prescription drugs and medicines in Europe cost GBP 150bn. The Commission is planning to announce its interim findings later in 2008. GSK and Novartis said they are co-operating fully with the EU over the investigation.

GSK new boss switches HQ to London from Philadelphia
GlaxoSmithKline is to be managed from London for the first time since the merger in 2001. This announcement follows the appointment of the new boss, Andrew Witty, who takes up his job in May 2008.

His predecessor, J P Garnier ran the group from the groupís US headquarters in Philadelphia. The US is the groupís biggest market providing yearly sales of GBP 20bn.

Vernalis ñ major share placing
Vernalis, the biotech company working on a treatment for Parkinsonís disease, saw a major jump its share turnover to 37.7m shares in a single day. Broker Piper Jaffrey placed 30m shares with institutional clients at GBP 0.07. Vernalis has faced selling pressure since Frova, for treatment of menstrual migraine, did not get approval from the FDA.

Novartis hit by US generic competition
Novartis, the Swiss-based pharmaceutical giant which owns generic drugs producer Sandoz, announced a 45 per cent fall in profit for Q4 FY07 to GBP 465m against the same period last year. The fall was due to intense competition in the US from generic drug makers.

In addition, Novartisí drug for irritable bowel syndrome, Zelnorm (tegaserod), was taken off the market due to safety problems. Novartis reckons it will return to growth in the US, its largest market, at the beginning of 2009.

The EU Commission has visited the company in its attempt to crack down on anti-competitive practices and is concentrating on drugs whose patents will expire between 2003 and 2012.

Meldex in bid talks
Meldex, the speciality pharmaceutical company formerly known as Bioprogress, has received a bid approach. The shares rose strongly on the news, although the identity of the bidder is not being released.

Malcolm Craig, a freelance financial journalist and financial commentator, is one of the UKís most respected investment commentators.

25th January 2008

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