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Malcolm's Market Eye: 26 May - 1 June 2007

Interest rates continue to dominate the minds of bankers in the City of London's Square Mile

Interest rates continue to dominate the minds of bankers in the City of London's Square Mile.

The reason the analysts reckon there could be two more increases in UK interest rates in 2007, taking them to six per cent, is because the Bank of England seriously considered increasing interest rates by a full half of one per cent at its last meeting ñ and then put them up only 0.25 per cent to fight buoyant credit growth and the house price boom.

With UK consumer debt at GBP 1.3tn, interest rates hitting six per cent could lead to a serious problem for an over-borrowed Britain, and could trigger a house price fall, as forecast by both the IMF and the Bank of England.

Across the Atlantic, the Wall Street market breached the magic 13,600 level, as measured by the Dow Jones Index, the universally quoted indicator of the US stockmarketís health, or lack of it.

As in the UK, the reason for the buoyancy lies in hopes of bigger and better mergers. In the UK, the FTSE 100 share index topped the key 6,600 level. Speculation started to grow that the crash in the GlaxoSmithKline (GSK) share price could open the way for an opportunistic bid from a US pharmaceutical company while the going is good and the share price is low.

Elsewhere, the stockmarket continues in negative mood, falling back to 6,570 on the last trading day before the May Bank Holiday, but recovered the ground lost in February and March.

In such times punters tend to fly to defensive stocks such as pharmaceuticals and avoid high risk sectors. Bids and deals, actual and prospective, continue to provide what excitement there is. Business confidence is at a three year high despite the likelihood of another interest rate rise, or even two.

David Schwarz, the stock market historian, points out that since 1967 there have been 20 years when UK share prices rose in the first five months of each year by up to 15.5 per cent. The UK stockmarket continued to rise for the rest of the year in 19 of those years. The current year could also see a further rise, which would take it to the 6,930 all time high registered by the FTSE 100 on the last trading day of 1999.

Fulcrum moves ahead on the acquisitions front
Fulcrum Pharma, which focuses on drug development and on reinforcing regulatory compliance services, posted pre-tax profits usefully up for the half year to 28 February 2007. Fulcrumís aim is to increase the size of the business via more acquisitions allied with organic growth.

Fulcrum also wants to export its leading regulatory position in Europe to the USA. On the acquisition front, the company scooped up Quadramed, which also offers regulatory services and checks electronic document management and submissions to regulatory agencies.

Fulcrum then acquired another business, Unicus, which keeps a check of safety data when a drug is on sale to the public. Fulcrum is cash rich to the tune of GBP 1.5m due to late payers catching up on debt payments. Yearly sales should hit GBP 19m to GBP 20m for the current year.

Avandia factor pushes GSK into a potential bid target
The alert over diabetes treatment Avandia (roseglitazone) continues to dog GSK, which has seen GBP 5bn wiped off the market price tag of the company ñ the share price then recovered as punters took the opportunity to buy while the going is good. In fact, those self same punters piled in to the shares too early.

The GSK share price took another tumble as investment bank J P Morgan woke up to the unpleasant fact that Avandia could well get the aptly named ëblack boxí warning from the FDA.

Research has indicated that Avandia could trigger off fatal heart attacks in patients taking the drug. Steven Nissen, chairman of cardiology at the Cleveland Clinic in Ohio, wrote an article in the New England Journal of Medicine (NEJM) warning that Avandia could increase the risk of heart attacks by 43 per cent.

The nearest comparison to GSKís situation is that of Merck's Vioxx (rofecoxib, also first spotlighted by Nissen), which is currently going through the US courts with an estimated 20,000 separate suits from patients claiming damage from the painkiller.

GSK is fighting back, pointing out that it has conducted its own as yet unpublished meta-analysis on Avandia and this has been made available to regulators. Due to the study, Avandiaís European labelling has already been tightened up to point out the risk of congestive heart failure.

The FDA has also pointed out it is taking a careful approach regarding the NEJM findings and has not moved to take the diabetes drug off the US market. If such a catastrophe were to happen, it would cost GSK dear. Cazenove, the brokers, has calculated that by 2010, Avandia would have accounted for 10 per cent of GSKís total sales.

GSK has 31 drugs in phase III testing which would help to prop up the share price. CEO Jean-Pierre Garnier countered the bad publicity by saying he expected a short-term sales loss, but predicted the drug would bounce back on all the available evidence was digested.

However the market is worried that GSK will have to increase the impact of the Avandia warning label and reduce sales. European doctors have already been told not to give the drug to patients with weak hearts.

Malcolm Craig is a freelance financial journalist and is the author of 14 books on aspects of successful investment. He is one of the UKís most respected investment commentators.

31st May 2007

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