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Malcolm's Market Eye: 18 to 24 August 2007

The FTSE 100 Index endures its biggest one-day percentage fall since 2003

When the US sneezes, the rest of the world catches cold. Since my last Market Eye the FTSE 100 Index endured its biggest one-day percentage fall since 2003, breaking down through the key support level of 6,000 for the first time since March 2007.

On 21 August, there was a flight for safety in the US out of the normally safe haven of the GBP 1.3tn money market and driving down the yield on three-month US Treasury Notes in the biggest fall since modern records began ñ an even bigger fall than took place in October 1987.

UK high volatility will continue
A surprise drop in inflation to 1.9 per cent under the Government's target of two per cent had eased worries over another interest rate increase in the UK. The stockmarket initially rose on the news but again it proved to be a dead cat bounce, followed by another fall.

Then the mighty US Federal Reserve Bank poured billions of dollars into the system by temporarily lowering the US prime rate of interest it charges for lending to commercial banks to 5.8 per cent. Despite another recovery taking place in global markets, high volatility will continue.

The FTSE 100 Index soared 3.5 per cent on 17 August back over the key 6,000 level on speculation that central banks around the world will be forced into reducing interest rates. If the US does so next month this could head off a threatened US recession, but inflation could rise out of control.

The source of the world's stockmarket woes continues to stem from the collapse in the US housing market, where a nosedive in prices has led to many dodgy borrowers: the so-called ëtrailer trash' mortgages defaulting on billions of dollars worth of sub-prime mortgages, many of which have become worthless to the lending banks.

The UK market will continue to be highly volatile with any buying action focusing on the next mega bid, or rumours thereof.

Pharmaceutical sector rides out turbulence, except AstraZeneca
The pharmaceutical sector rode out the market waves reasonably buoyantly as dealers switched into defensive sectors.

Dealers continue to speculate that AstraZeneca (AZ) could take the opportunity presented by lower share prices, to make another bid, with Shire Pharmaceuticals as the prime target.

Shire has a number of attractive, possible blockbuster drugs moving through research and clinical trials. Adverse publicity on two of its blockbuster drugs hit AZ's share price which fell three per cent over the week, admittedly against the background of a falling market.

FDA to review AZ's antacid drugs over increased heart attack fears
The FDA has contacted doctors through its MedWatch safety website, drawing attention to potential problems with Nexium and Prilosec, both anti-ulcerants made by AZ.

Research from a longitudinal study suggests that the two drugs could make heart attacks more likely in patients taking the drugs, as well as in those who also suffer from chronic heart burn.

The FDA is conducting an investigation, the findings of which are due in three months' time. Prilosec is now a generic drug, so falling sales would not affect AZ's share price by much, if at all.

Nexium is AZ's lead drug for treating stomach ulcers and would be vulnerable to a sales fall and the consequent knock on to the profit bottom line. Nexium, AZ's biggest selling drug, is already experiencing a slow down in sales as revealed in AZ's H1 FY07 results.

AZ bosses must be keeping a nervous eye on the recent 40 per cent crash in sales from GSK's diabetes drug Avandia, which has also been linked to a possible increased risk of heart attacks in a US medical journal, despite the FDA's refusal to insist on the withdrawal of the drug.

Vernalis' Frova painkiller check by FDA
Vernalis, a biotechnology company, saw its share price fall by GBP 0.02 to rest at GBP 47.75 after the FDA informed Vernalis, along with partner Endo Pharmaceuticals, that it would not be able to rule on 20 August on Frova, its painkiller used as a prophylactic treatment to prevent migraines. Frova is already on the market as a treatment for migraine caused by menstruation.

Fulcrum slides on consultancy hiccup
Fulcrum Pharma, the drug development company, saw a 19 per cent drop in its share price after the drug development company admitted a subsidiary consultancy business would not hit its individual revenue targets. Other divisions are all on track to hit their revenue targets. Seymour Pierce expects earnings per share of GBP 0.14 in 2007.

Hutchison China Meditech doing well on all fronts
Hutchison China Meditech, the pharmaceutical and biotechnology company, announced a pre tax loss of USD 4.2m on turnover of USD 37.7m for H1 2007. This compares with a loss of USD 3.1m on turnover of USD 32m for the same period in FY06.

The Chinese healthcare market is booming and should continue to move ahead, as the Chinese have more to spend on health, as their potentially enormous economy expands.

Hutchison China is a former subsidiary of giant conglomerate Hutchison Whampoa, which is still a major shareholder in the drug company. Hutchison China concentrates on deriving modern drugs and medicines from traditional Chinese treatments.

Sales of the China Healthcare side of the business rose by 16 per cent to USD 36m, and operating profits streaked ahead by 62 per cent to reach USD 3m. The driving force lies in the company's Baiyunshan OTC medicines which are bought for colds and angina conditions among other common illnesses. A cardiovascular drug is also making big advances on the prescribed drug market and the nutritional health supplements are also selling well.

Hutchison China is generating enough cash for its drug pipeline R&D activities. There has been successful phase II proof-of-concept trial results for an inflamed bowel treatment and the other drugs in the pipeline are all clearing clinical trials successfully. The growth is set to continue in H2 2007. Investec, the broker, expects a FY07 loss of USD 13.3m.

The Author
Malcolm Craig, a freelance financial journalist and one of the UK's leading investment commentators, is the author of 14 books on different aspects of successful investment.

2nd September 2008


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