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Pharma remains strong

As the housing market stagnates, pharma stocks continue to produce returns for investors.

The UK economy continues to see little benefit from the billions being poured into it with banks and building societies seeking refuge in old-fashioned banking practices. When it comes to mortgage lending to homebuyers, financial organisations are looking for substantial deposits and will lend no more than three times income. The days when you could get a 110 per cent mortgage or borrow six times your annual income are gone. With homeowners at the top end of the market seeking 2007 prices and no movement at the bottom end as first-time buyers struggle to get a foot on the ladder, the housing market is stagnating.

Inflation has turned into deflation, so cash is king despite the near zero interest rates being paid. It's a long time since we saw deflation – since 1935-36 to be precise – when the value of cash actually rose, as is the case now.

The UK stock market is trying hard to stage a sustained recovery and may manage this by the summer as dealers take the view that the banking crisis may be over. We could also see income seekers buying into solid dividend-yielding shares, out of pure exasperation at the tiny rates of interest paid on cash deposits. The market is still struggling to get out of the doldrums following a report documenting the worst jobless figures in decades.

In pharma, dividends are high, sustainable and defensive against sudden market drops – people become ill whether they are in a recession/depression or not. On the other side of the Atlantic, investors welcomed US Treasury Secretary Tim Geithner's plan to remove up to $690bn of toxic assets as he tries to use private capital to clean up the banks' balance sheet. The US government is to inject up to an initial $100bn from the original $700bn bank bail out fund into two separate schemes – money which will hopefully be matched with private capital and leveraged up to buy the most toxic of assets held by banks, as well as illiquid secondary mortgage assets. In the UK, some appetite for risk-taking has appeared and some big pharma companies such as AstraZeneca have seen profit taking develop as punters look for better chances of capital appreciation.

Deal making
Merck has seen its share price rise after broker Bernstein upgraded the company to outperform, affirming it had agreed a very fair price for rival Schering-Plough, whose share price also gained.

Shares in CV Therapeutics lost ground after Astellas hinted that it would not revise its bid for the firm on news that CV Therapeutics had accepted a rival bid from Gilead Sciences.

Alzheimer's early-stage test highly accurate
US scientists have created a test that can accurately detect Alzheimer's disease before dementia symptoms appear. The test is 87 per cent accurate at predicting which patients with early memory problems and other symptoms would eventually develop Alzheimer's. The findings from Leslie Shaw of the University of Pennsylvania School of Medicine appear in the current Annals of Neurology.

The test focuses on measuring proteins in a patient's spinal fluid. The test could be used to restrain mild memory problems from progressing into total Alzheimer's disease.

CVS delivers robust results
CVS, which owns a chain of veterinary surgeries looks proof against the economic storm, as animal owners are not reducing treatments for their pets or livestock. CVS made half-year pre-tax profits of £1.9m with sales rising 2.3 per cent. CVS reckons discretionary spending by pet owners only accounts for 10 per cent of its business but did admit that it could be exposed to non-essential cutbacks such as preventative flea control treatments.

The results show a good recovery from a £1.6m first-half pre-tax loss in 2008 following a 30 per cent rise in revenues to £37.2m in the six months to the end of December. The group now has a chain of 163 small animal surgeries, four laboratories and one pet crematorium. It is the biggest employer in the veterinary profession with 1,690 staff.  CVS has cash balances of £1.2m and total debt of £43.5m at the end of last year.

The Author
Malcolm Craig is a freelance financial journalist and author

25th March 2009

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