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Malcolm's Market Eye, February 01, 2008

The UK stockmarket continues its roller coaster ride into 2008, with sudden plunges and bargain hunting rebounds ensuring a bumpy ride for the investor

The UK stockmarket continues its roller coaster ride into 2008. Sudden plunges and bargain hunting rebounds ensure a bumpy ride for the investor. The near nine per cent fall of the stockmarket in January marked its worst ever start to the year.

There are fears that the Bank of England wonít make that longed for interest rate cut to turn the bear market in residential property back into a bull market ñ or even ensuring that house prices stay on a plateau.

Others fear more interest rate cuts by the Bank will pave the wave for the high inflation, which was a normal part of the economic scene from 1970 through to the middle of the 1990s.

The UK stockmarket scented another panic interest rate cut in the US, took heart when it happened and US interest rates fell to three per cent. But we can expect more big falls followed by investors hunting for oversold shares and touching off rebounds in the months ahead.

One thing is for sure, the US panic rate cutting may help the US economy in the short term ñ but big problems will arise in 2009, and the year after that ñ as inflation creeps steadily upwards on both sides of the Atlantic.

The pharmaceutical sector held up well during the panic waves of selling as investors sought out safe havens, of which the pharma sector is one. And there are more speculative bid possibilities in the pharmaceutical and biotech sectors for dealers to gossip about.

GSK poised to bid?
GlaxoSmithKline (GSK), one of the UKís biggest pharmaceutical companies, saw its share price slip back as a result of speculation in the market that it is working up a bid for a large European biotech company.

AstraZeneca disappoints with fall in FY07 profits
AstraZeneca (AZ) saw its share price fall back GBP 0.26 to GBP 20.94. Pre-tax profits fell seven per cent to USD 8bn in FY07.

Reasons for the fall back are the competition from generic pharma companies, falling sales of Nexium (esomeprazole), the ulcer and heart burn drug, and AZís big redundancy programme, which saw one in 10 staff made redundant in 2007.

Nexium provided the drama as AZís best-selling drug saw US sales slump 18 per cent in Q4 FY07 and 12 per cent worldwide, compared with Q4 FY06.

Overall revenues at AZ managed to rise 12 per cent over the whole year to USD 29.6bn. Restructuring costs clipped 13 per cent off profit before tax for Q4 FY07 to USD 1.8bn. A silver lining was presented by AZís cholesterol drug Crestor (rosuvastatin) and asthma treatment Symbicort (budesonide/ formoterol), sales of both rose 21 per cent in the quarter.

CEO David Brennan warns that profits will stay on a plateau during 2008, with sales of Nexium falling further and generic competition keeping profits flat. Generic competitors want to introduce cheap versions of Nexium and the anti-schizophrenia drug Seroquel (quetiapine) this year.

Apart from its blockbuster hypercholesterolaemia drug Crestor, AZ has few promising drugs in its own pipeline. The company is planning to file licence applications for up to three new medicines in 2009 and plans to introduce two new medicines to the market every year from 2010.

Another bull factor for AZ was provided by its purchase of MedImmune, the US biotechnology company, for USD 15bn in 2007. MedImmune does have a portfolio of promising biological drugs, which could boost AZís fortunes in the long term.

MedImmune is reducing R&D expenditure on cancer-related, inflammatory and respiratory drugs and is spending more on biological medicines with the aim of ensuring that 25 per cent of all late-phase development pipeline will be comprised of biological medicines.

Meldex ñ more potential buyers appear
Meldex International, at the opposite end of the size scale to GSK, saw its share price continue to climb after other potential bidders entered the arena. The first tentative approach was made earlier in January 2008 and the market speculates that this approach may have come from a former Meldex International director, Barry Muncaster.

ValiRx gets Aussie patent approval for GenetICE
ValiRx, the cancer therapeutics company, saw its share price rise ñ the reason being that its proprietary gene silencing technology, GenetICE, has been given patent approval by the Australian Patent Office.

Shire bombs out on negative Vyvanse prescription trends
Shire Pharmaceuticals saw its share price hit a two-year low point during the week. Shire is the third biggest of the UK-headquartered pharmaceutical companies and investors are worried about the level of future sales of Vyvanse (lisdexamfetamine), the companyís treatment for attention deficit hyperactivity disorder (ADHD) in children.

Dealers believe that Vyvanse is the solution to Shireís continued independent future, as the blockbuster drug was expected to produce around one third of Shireís revenues by 2011.

However, Goldman Sachs carried out a proprietary survey of doctors and concluded that it no longer anticipates acceleration in Vyvanse prescription trends. The shares hit a low of GBP 8.90, having dropped 24 per cent over the last three weeks. The low share price could tempt the UKís second-largest pharmaceutical company, AstraZeneca, to make a bid for Shire, which has a good drug portfolio in its pipeline.

A foreign pharmaceutical company could also put its hat in the bidding ring, which would drive the share price ahead at a fast pace if a bid and counter-bid scenario materialises.

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

1st February 2008

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