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On the slopes

Downward momentum in the US stock market reflects concerns that interest rates may have to rise

The UK stock market followed the downward trend in global equity markets as the fear of rising US inflation reared its ugly head again, while the view that US interest rates will have to rise further gained currency. Concerns about slowing US economic growth also hurt investment sentiment even though oil prices headed sharply lower.

In the UK, interest rates were left unchanged as largely expected. Subsequently, the release of data showing inflation is rising has added renewed pressure on interest rates to be hiked.

GSK settles transfer pricing dispute
News on September 11 that GlaxoSmithKline(GSK) has settled its transfer pricing tax dispute with the US Internal Revenue Service (IRS) by agreeing to pay $3.1bn in taxes and interest dominated the financial headlines. The firm's share price responded positively to the settlement, which was in line with some analysts' expectations, closing 1 per cent higher on the day. A further gain was made on Tuesday morning with the market pleased that the dispute is over and that the prospect of a demand of $15bn in taxes and interest at a trial set for February has disappeared.

GSK's share price also benefited from Merrill Lynch reiterating its buy recommendation. The broker maintains the share is cheap after weakness over the past six months and it also thinks third-quarter results are likely to beat expectations.

AZ loses ground
In the meantime, AstraZeneca (AZ) has lost quite a bit of ground, being the fifth worst performer in the FTSE 100 stock last week, after Citigroup downgraded its recommendation for the share from buy to hold. The shares, which were not far off their high for the year, have risen strongly over the past few months and the broker thinks they now have limited upside. It also pointed out that there is investor concern about the outlook for pharma stocks should the Democrats get control of the House of Representatives or Senate in the mid-term elections in November.

NRP104 regulatory concerns hamper Shire
Shire Pharmaceuticals, the smallest pharma group in the FTSE 100 index, was noticeably weak. It was down more than 3.5 per cent, after a US broker cited growing concerns that NRP104, a next generation attention deficit hyperactivity disorder (ADHD) treatment drug, will have difficulty gaining US regulatory approval. Shire, together with its partner New River, is looking to develop this drug to replace its top-selling ADHD treatment, Adderall XR.

Shire was firmer this week on a repeated buy recommendation from Deutsche Bank, even though the broker trimmed its forecast for 2007 earnings. Analysts are generally playing down the importance on the future outlook for Mesavance, a treatment for ulcerative colitis, following the decision by the US Food and Drug Administration (FDA) to extend its review period for the drug.

SkyePharma licensing agreement
Shares in SkyePharma enjoyed a useful rise after the UK drug delivery group agreed a deal to market its asthma drug, Flutiform, in Europe with Mundipharma, a private Cambridge pharmaceutical group. In terms of the

licensing agreement, SkyePharma is to receive an upfront payment of £10m and further milestone payments of up to around £46m will be received, depending upon what development and revenue targets are achieved. SkyePharma will also receive double-digit royalties.

Smaller cap successes
A clutch of smaller cap stocks sparkled on positive developments. Gene therapy company, Oxford BioMedica, led the way with a jump of more than 13 per cent last week alone, after announcing that talks to find a development partner for its lead cancer drug, TroVax, are at an advanced stage. TroVax is in phase II trials for colorectal, prostate and renal cancer, and recruitment into final stage phase III trials in renal cancer is expected to get underway within the next few months. Interim losses widened dramatically because of substantially higher research and development costs.

Ark Therapeutics continued to move sharply higher after it said that its HIV Lipodystrophy, a treatment for the accumulation of central body fat, in a one-year extension phase of its exploratory phase II study, shows better metabolic risks factors. The news came hot on the heels that the company's Cerepro, a treatment for brain cancer, had made regulatory progress.

The market liked the interim figures and positive comments from the Irish-based and UK listed specialty pharmaceutical company, which focuses on gastrointestinal drug products, pushing the share price up 8 per cent.

2nd September 2008

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