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Pharma stocks remain attractive

Despite growing fears of a financial meltdown on both sides of the Atlantic, pharma sector shares are in reasonably good health

Despite growing fears of a financial meltdown on both sides of the Atlantic, pharma sector shares are in reasonably good health.

The UK stock market continues its daily battle between bulls and bears as punters re-align their share portfolios. The bears sell out on brief rallies due to fear of higher inflation, a possible UK economic recession, stagflation in the US, and higher UK interest rates. All are bad news for share prices. The bulls buy shares which offer windfall gain opportunities if a bid materialises, or try to obtain returns from their portfolios in the way of dividends appreciably better than the returns on cash deposits.

The market is in doubt as to whether we are seeing a new bull rally from a bear market - brief upturns in the FTSE 100 Index provide only a temporary reprieve. Will the ongoing trend of that bellwether of the stock market be downwards?

We saw such an upturn late in February with the FTSE 100 Index back over the key 6,000 benchmark at a six-week high point that we can expect more substantial falls during 2008, after which bargain hunters will prompt an equal number of rallies. The falls are likely to get bigger and the rallies smaller, so the market is likely to end up 2008 at a substantially lower level than it is now.

The pharmaceutical sector continued to offer its defensive attractions in uncertain times - people fall ill whether a recession reigns or not. And there are always speculative rumours of a potential bid arising as big pharma companies seek out biotechs with promising pipelines.

Pfizer is to invest £500,000 to buy new shares in Imaginatik, the collaborative software maker. The US firm is taking its 10 per cent equity stake in order to expand Imaginatik's software that allows ideas from employees in large companies to be shared.

Nestor Healthcare saw its share price rise as the news reached the market that it is in exclusive talks over a bid with venture capital group, 3i.

Immunodiagnostic Systems is working with a metabolism specialist to develop and market five products for its automated diagnostic analyser by 2009. The tests reveal the abuse of growth hormones by athletes for which diagnostic tests are currently carried out manually. The global market for the products, which are used at the Olympic Games, is estimated at £34m. Additional tests for the detection and monitoring of patients with hypertension are currently under development.

Vernalis has cut its workforce in half as a result of its decision to stop trying to produce - and market - drugs for the US after failing to get the green light from US regulators for its migraine medicine, Frova. The cost of this change of course is high. Vernalis is to pay back $56m to Endo Pharmaceuticals and will slash its spending from £20m to under £10m annually.

This is essential to reduce the rate of cash burn. Now Vernalis will concentrate of clinching in-licensing deals with other pharma companies. Chief executive Simon Sturge exited the company at the end of February, with John Slater taking up the mantle as chief operating officer. The bombed out shares, which hit a low 5p early in February rose to 8.4p on the news.

It has transpired that the two giant pharma, Glaxo Wellcome and SmithKline Beecham did not want to enter into a full merger according to the outgoing boss of the combined GSK group, John-Pierre Garnier. Other options were being explored including a plan to merge both companies' R&D, creating an Institute of Research and share out the drugs emerging. The plan was aborted when agreement could not be reached over the valuation of drugs still in development and a full merger went ahead. During Garnier's seven years as chief executive of the combined group, the share price has slid by nearly 40 per cent.

Shire's shares have been on the slide over fears that Vyvanse; its treatment for children with attention deficit hyperactivity disorder (ADHD) is not selling well in the US.

The third biggest UK pharma group, subsequently surprised the market with better than expected fourth quarter results, even though it announced an operating loss of £714,000 thanks to its acquisition of New River. The company reported strong revenue growth across all of its products last year.

Fears over Vyvanse proved unfounded and Shire expects revenues from the drug to hit £203m in sales this year if the treatment is approved for use in adults by the middle of the year. Vyvanse will replace Adderall XR, Shire's best-selling treatment for ADHD, which goes off patent in 2009.

The company plans to market the drug to adults in the second half of 2008 if Shire gets US regulatory approval.

Pre tax profit rose 52 per cent to $551m on turnover up 36 per cent at $2.44bn for the year ended December 2007. Results were also boosted by the introduction of Dynepo for chronic kidney failure and Lialda for ulcerative colitis.

Now calmed, investors bought Shire shares briskly sending them up 2.4 per cent. Shire plans to launch Vyvanse in its adult form in the European market in 2010. Although the market in Europe is only worth $200m a year it is calculated to be growing at up to 60 per cent a year.

The Author
Malcolm Craig is a freelance financial journalist and a respected investment commentator.

7th March 2008


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