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Malcolm's Market Eye: 28 July to 3 August 2007

Pharmaceutical companies with large US revenues will are hit as the US dollar dropped to a 26-year low against the British pound, while the US sub-prime property market collapses

Pharmaceutical companies with large US revenues will have been hit as the US dollar dropped to a 26-year low against the British pound. The reason lies in the collapse of the US sub-prime property market, the ripples of which have been spreading among financial markets globally.

In response, the market endured its worst week since 2003. The index of medium-sized companies, the FTSE 250, somersaulted into the worst performance of its entire history, while stockmarkets around the world also dropped back sharply on fears of higher interest rates. The credit crunch re-awakened memories of the early 1990s, with its sky-high interest rates and corporate failures, alongside a vicious bear housing market.

The pharmaceutical sector shared in the general mayhem, although the sector was not hit as badly as many, as it is perceived to be historically cheap and also a useful defensive sector to be in when times are acutely uncertain. However, with both GlaxoSmithKline (GSK) and AstraZeneca (AZ) reporting failing and flat sales respectively, there was little buying interest, while many sellers stayed on the sidelines adopting a wait and see attitude.

GSK mounts share buy back to secure shareholder loyalty
GSK has disappointed the market with its latest quarterly pre-tax profits. In Q2 FY07, net profit was GBP 1.9bn, which was flat on Q2 FY06. Avandia (roseglitazone), the companyís flagship diabetes drug, has been linked to possible heart attacks by the New England Journal of Medicine (NEJM) and saw a 22 per cent fall in sales. GSK is boosting its share buyback programme and is spending GBP 12bn over the next two years.

The share repurchases may help in protecting the group against investors interested in releasing value from the business while the share price is low and making a short-term mega profit though an opportunistic bid. GSK is looking to launch its cervical cancer vaccine Cervarix, and could get a licence in Europe by September 2007.

GSK is planning to launch 25 new drugs between 2007 and 2009. The market is expecting peak sales of USD 1bn from three of them: Cervarix, Promacta (eltrombopag) and Tykerb (lapatinib), the breast cancer drug. The company has stayed with its earning guidance for growth of six per cent to 10 per cent in FY07.

H1 FY07 turnover fell three per cent from GBP 11.6bn in FY06 to GBP 11.3bn. Currency fluctuations wiped eight per cent off Q2 EPS. Pharmaceutical sales were flat at GBP 4.8bn, as a result of generic competition and the Avandia sales slump.

Q2 FY07 profits were also flat at GBP 1.9bn after Avandiaís sales fell back to GBP 359m from GBP 477m. US revenues for the diabetes drug were down by a third. GSKís asthma treatment Advair enjoyed strong sales growth in the quarter up 12 per cent to reach GBP 871m, while its new weight loss drug Alli, which was launched at the beginning of 2007 notched up sales of GBP 78m.

AstraZeneca in massive cost cutting strategy
AstraZeneca (AZ) is to cut 7,600 jobs over the next three years from a wide sector of its business, even research and development. The reason is due to the expiry of some of its valuable patients in the next few years and slower sales from Nexium (esomeprazole), its blockbuster antacid treatment. AZ announced Q2 FY07 pre-tax profits down 10 per cent to GBP 970m. Nexium sales in the US fell back by one per cent as a result of generic erosion of prices.

Shire clinches deal to set up in regenerative surgery
Shire Pharmaceuticals, the third-largest pharmaceutical company in the UK after GSK and AZ, has closed a licensing deal over a scar repair drug and hopes to establish itself in regenerative surgery.

The deal was struck with Manchester-based Renovo to license its revolutionary drug Juvista. The treatment aims to be the first clinically tested drug which prevents scarring around a wound. Januvia will go into late-stage clinical trials in H2 2008.

Shire announced a Q2 loss of GBP 900m, after writing down assets in the purchase of New River Pharmaceuticals in the US.

Sales of Shireís portfolio of drugs for attention deficit and hyperactivity disorder (ADHD) continue to expand. Revenues from Vyvanse (lisdexamfetamine), which came along with the New River purchase, topped expectations. The company is projecting revenue growth of 5 per cent or more in 2007. Shire wants the drug to take over from Adderall XR (amphetamine/dextroamphetamine), its blockbuster drug now threatened by generic competition, because in 2009 it loses patent protection.

Ark Therapeutics withdraws application for early approval of Cerepro
Ark Therapeutics has informed the European Medicines Agency (EMEA) that it will no longer continue to progress its application for early marketing approval of Cerepro (glicerylphosphorylcholine), its treatment for malignant glioma, following confirmation from the agency that data from the ongoing phase III trial are required for approval.

Ark has consequently withdrawn the application, but confirmed that progress with Cerepro remains on schedule, with a filing for marketing approval anticipated in 2008 following the conclusion of the ongoing, fully-recruited phase III study. Cerepro has orphan drug status in the EU and the US.

Alizyme on brink of breakthrough
Alizyme, the pharmaceutical and biotech company, posted a pre-tax loss of GBP 13.3m on zero sales for H1 FY07, compared with a loss of GBP 6.1m on sales of GBP 1.1m for Q2 FY07.

Breakthrough looks imminent at the company, as it is in talks on all four of its products which could lead to deals of all of them through separate contract for the US or the EU.

Alizyme is moving forward with its drug cetilistat, which treats diabetes and obesity and has been given the go-ahead for phase III trials from the FDA. Renzapride for irritable bowel syndrome has also been progressing through phase III trials. Alizyme has net cash of GBP 10m, but its rate of cash burn will fall after the phase III trials complete in Q4 2007.

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

2nd August 2007

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