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Slippery slope

The market gave AZ and GSK an icy reception making known its concerns over late-stage products at both companies, yet bid speculation kick-started their recovery

The stock market scaled new five-year heights on the back of a strong showing by Wall Street, with the FTSE100 Index moving swiftly through the 6,200 mark.

Investment confidence rose, boosted by a flurry of merger and takeover activity in the US market, despite uncertainty ahead of US mid-term elections. Generally, investment strategists expect the US rally to gain further momentum if the Republicans retain both houses of Congress. Pharmaceutical stocks, however, are expected to weaken if the Democrats win both houses.

In the UK, the Bank of England is widely expected to raise interest rates to 5 per cent on Thursday, yet the longer term outlook for interest rates still remains uncertain.

A few new deals in the US pharmaceutical and biotechnology sectors, in particular Abbott Laboratories' $3.7bn offer for rival Kos Pharmaceuticals, gave a bit of a lift to heavyweights AstraZeneca (AZ), a regularly rumoured bid target, and GlaxoSmithKline (GSK).

Meanwhile, Smith & Nephew, the UK medical devices maker, has revealed it is in preliminary merger talks with Biomet, a US rival - the deal would create an enlarged UK healthcare group valued at around $20bn.

Uppers and downers
The share prices of both AZ and GSK took a sharp fall following the release of their third quarter figures with the market making known its concerns about some of the late-stage drugs at both companies. However, there are signs that the slide is now over and their shares look to have found a base from which they have begun to recover some lost ground. This news was not enough, however, to put paid to rumours that the two companies would merge - speculation that gave shares at both companies a welcome boost.

Demands from major AZ shareholders that the group uses its $4bn cash pile to strengthen its drug pipeline, which was weakened by the withdrawal of four key drugs in recent months, through acquisitions also gave its shares a useful lift. News that the group suffered from another regulatory setback, a likely two-year delay in the launch of its sepsis drug, CytoFab, only had a marginal impact on its share price, as did a downgrading, on the same day as the CytoFab announcement, from "buy" to "hold" by Standard & Poor's analyst.

Shares in Protherics, a partner in the development of CytoFab, were, however, noticeably weak following the setback.

GSK benefited from an upgrade by JP Morgan. The broker lifted its rating from "underweight" to "neutral" following its recent fall. The market shrugged off a delay to the group's bowel surgery drug, Entereg, following a request from US regulatory authorities for more safety data.

Shire Pharmaceuticals enjoyed a good gain on hopes that it would renegotiate its profit-sharing arrangement with its US partner New River Pharmaceuticals in developing NRP104, its next-generation attention deficit disorder treatment. Credit Suisse, which moved the stock to a "trading buy" thinks the current agreement is untenable for both parties and the terms are likely to be changed before the treatment is launched in the US in the first quarter next year.

Elsewhere, Proteome Sciences was a star feature, jumping by a fifth on news in a research publication that its plasma biomarkers show proteins found in the blood indicate an increased risk of developing Alzheimer's disease. Continued speculation that the group will announce a partnership deal for one of its products is also helping to fuel its share price.

Relative newcomer
On the new listing front, OSJC Pharmastandard, one of the largest pharmaceutical companies in Russia, is looking to list its shares through a joint listing in both London and Moscow before the end of this year. At this stage, the company has not disclosed how much fresh capital it intends to raise through the flotation. It mostly manufactures and sells branded generic drugs in Russia.

2nd September 2008

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