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Malcolm's Market Eye: 12 to 19 April 2007

The UK stockmarket, untroubled by superstition, hit near seven  year high on Friday 13 April and on the following Monday hit 6,516.2 - its highest level since 14 September 2000

The UK stockmarket, untroubled by superstition, hit near seven  year high on Friday 13 April and on the following Monday hit 6,516.2 - its highest level since 14 September 2000.

The FT-SE 100 Index, the blue chip measure of the market's health, or lack of it, was driven higher by a strong pharmaceutical sector. UK drug companies were generally marked higher ahead of the US pharmaceuticals season which starts this week.

US giant Merck & Co raised FY07 earnings guidance by as much as seven per cent. Brokers SEB Eriskilda saw this as a signal that the pricing environment in key drug markets is better than originally assumed in company guidance. Merckís earnings were also boosted by the news that a Federal judge in New Jersey had dismissed a securities class action suit against the company relating to its pain reliever, Vioxx (rofecoxib).

This could be the year when the old stockmarket adage sell in May and go away...come back on St Leger Day could prove true once again. It has been proved right about 50 per cent of the time throughout the history of the stockmarket. The saying comes from the UKís agricultural past when farmers sold shares to finance crops and stock in the spring and moved back into the stockmarket later in the year when the crops and stock were sold.

The main bear influence lies in the probability of an interest rate rise next month along with the weak dollar, which now trades at GBP 2.00, which will hit UK exports. The British Retail Consortium has reported a big rise in high street spending: up 6.2 per cent in the year to March 2006 the biggest annual increase since May 2006, which could force the Bank of England to act sooner rather than later. A further problem is the rate of inflation, which has risen to 3.1 per cent, putting even further pressure to raise rates.

Pharma sector buoyed up by bid talk
Buyers have proved equally keen on buying the big pharmaceutical shares on hopes of possible bids, with the main attraction being GlaxoSmithKlineís (GSK) bid for Astra Zeneca (AZ) to establish a dominating European pharmaceutical giant.

GSK, which reports Q1 FY07 trading results on 25 April saw its share price rise on bid rumours, as did AZ's, which reported Q1 trading results on the following day.

Genosis share price bounds on US deal to sell its fertility testing kits
Genosis, the biotech  company  listed on the Alternative Investment Market,  saw its share price rise 2.5p to 18.5p on news that the biggest drug store chain in the USA ñ 6,000 store strong ñ will be selling the biotechís ëhis and hersí Fertell fertility testing kits for use at home. Its first order will go to CVS regional distribution points later in April 2007.

AGI working on potential block buster drug for IBS treatment
AGI Therapeutics announced a loss of EUR 4.2m on sales of EUR 200,000, compared with a pre-tax loss of EUR 5.2m on zero sales the year before.

AGI concentrates on gastro-intestinal problems. Its strategy is to take drugs which have an established reputation for efficacy and adapts them for new markets, thus following a low risk, low cost development strategy.

The potential block busting drug on which AGI is pinning its hopes is arverapamil for Irritable Bowel Syndrome (IBS), which affects one in five of the population in the developed world, while those hit by the diarrhoea-linked form of IBS number adds up to another six million.

The FDA has given arverapamil the green light for phase III trials. AGI is recruiting patients for the trials during H2 2007. Company stockbroker, Davy Stockbrokers, is looking for the first data from the phase III trials to emerge in mid-2008, with the launch of arverapamil in 2010. The other four products in clinical trials include omeprazole for gastroesophageal reflux disease which is in phase II trials.

Medimmune to explore sale options for GBP 6bn
US biotech company Medimmune has appointed investment bank Goldman Sachs to advise on a sale of the company. Market analysts reckon the sale could fetch GBP 6bn.

Medimmune is one of the bigger independent biotechs on the USA scene. Its lead product is the nasal spray flu vaccine FluMist. Medimmune is taking the action of potentially putting itself up for sale after talks with large pharma companies and the poor performance of its share price. Possible buyers include Merck, Eli Lilly, Wyeth and Abbott Laboratories.

Medical Solutions has GBP13.2m Dubai sale cash to spend on acquisitions
Medical Solutions, the diagnostics and healthcare specialist, made a pre-tax loss of GBP 2.3m on turnover of GBP 6m for the year to end December 2006 as a against a loss of GBP 3.6m on sales of GBP 5.6m. Medical Solutions enjoyed a big inflow of cash (GBP 13.2m) by selling off its Dubai screening division.

The market has speculated as to why Medical Solutions sold off this nice little earner, which made pre-tax profits of GBP 2.1m on sales of GBP 6m before disposal losses. The reason lay in political uncertainty. The Dubai operation could carry out medical tests as part of the process of allowing immigrant workers to enter Dubai with the approved medical visa - but the government of Dubai had the right to terminate this screening deal at any time.

Medical Solutions is focusing on its cytology, or cervical screening, operations and tissue abnormality pathology services which include diagnosing and treating cancer. Nine tenths of Medical Solutions business comes from the National Health Service, but NHS screening targets have not yet been met so the company, which claims 47 per cent of the cervical cancer screening market in England and Wales, has some way to go as yet.

Medical Solutions is likely, according to market speculation, to spend the Dubai cash bonus on acquisitions in the screening sector.

Cyprotex adding new pharma companies for ADMET molecule testing
Cyprotex, the drug discovery technology company, posted a pre-tax loss of GBP 760,000 on sales of GBP 3.5m in FY06, compared with a loss of GBP 1.2m on sales of GBP 2.7m in the previous year.

Cyprotex carries out absorption, distribution, metabolism, excretion and toxicity tests (ADMET) on molecules for pharmaceutical companies. Nursing new drugs through up to seven years of research and development is a costly business so testing at the ADMET initial stage is all important.

Given that ADMET tests are responsible for over half of drug development failures, the tests have to be very comprehensive, and drug companies are reluctant to pass out such tests in case they are not carried out comprehensively enough.

Cyprotex has 130 customers for ADMET, having added 15 new clients during 2007. So Cyptrotex appears to be convincing the pharmaceutical industry its tests are comprehensive enough, and are, indeed, more comprehensive that those carried out by many pharma's in-house laboratories, as well as being a great deal cheaper. Cyprotex' main advantage is that ADMET is totally automated and no human can touch the compound being tested.

Goldshield to demerge two core divisions
Goldshield is planning to demerge its two core divisions after a management buy-out attempt failed. The company is charged with conspiring to defraud the NHS by allegedly fixing prices.

A spokesperson for the company said the reorganisation is being considered to allow each division freedom to develop and invest in their respective businesses. CEO, Ajit Patel, who had been leading the management buyout, will now to become CEO of the homecare business arm.

Malcolm Craig, author of 14 books on all aspects of successful investment, is one of the country's most respected investment commentators.

18th April 2007

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