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Stage jitters

Threat of interest rate rise makes stockmarket nervous but pharma stocks still appeal

The High Street recovery continues to gather speed as retailers raise their prices. The Office for National Statistics reported retail sales in August were 0.3 per cent higher than July and 4.3 per cent up on the previous year.

While the stockmarket continues nervous ahead of another possible rise in UK interest rates to 5 per cent to beat rising inflation, bids, particularly from private equity specialists, continue to provide some excitement to the market. The pharma sector has yet again demonstrated its defensive attractions in times of volatility and continues to attract institutional buying. Pharmaceutical companies are continuing to build up their drug pipelines either independently or in partnership. Dealers are keeping a close eye on potential blockbuster drugs to bolster future earnings and making their buying decisions for the medium- to long-term.

AZ clinches deal with Schering over new breast cancer drug
AstraZeneca (AZ) clinched a breast cancer drug deal with the newly formed Bayer subsidiary, Bayer Schering Pharma AG. The two firms will work together on a new drug focused on women who have become resistant to current cancer drugs. AZ is noted for its pioneering work in oncology, having developed Tamoxifen, for breast cancer, and also Arimidex, the current gold standard therapy. Bayer Schering has a possible drug for the two pharmas to work on but this has not yet entered clinical trials. It could take a decade to develop, but if successful, will help to bolster AZ's pipeline.

GSK seeks green light from US regulator for Tykerb
GlaxoSmithKline (GSK) is seeking the green light for its new breast cancer drug, Tykerb, from the US regulators. GSK is seeking the go-ahead for Tykerb to be used in combination with Xeloda, a cancer drug developed by Roche. GSK is hoping that Tykerb will eventually replace Herceptin, made by Roche. At first Tykerb will be prescribed for patients in terminal stages of breast cancer. At stake is a market worth a potential £2.1bn yearly. GSK has also developed Cervarix, which inoculates women against cervical cancer.

Hikma - record year of regulatory approvals in sight
Hikma, the pharmaceutical company in Jordan, saw a 34.5p one-day boost to its share price to 400p recently. The market was delighted to learn that Hikma's pre-tax profits for the six months to June had risen to $42.4m from $38.7m in the same period in the previous year. Even better, the company believes it is in the middle of a record year of regulatory drug approvals. Eighty-two new drugs were approved in the first half of the current year, compared with 98 for the whole of the previous year.

However, not all the news was positive. Due to aggressive trading in the US allied to a fall in generic drug prices, Hikma's profit growth was lower than anticipated. For the full year, chief executive, Samih Darwazah, says profit margins will improve.

Hikma's revenues jumped by nearly 18 per cent to $155m as a result of excellent growth in the core branded and injectable drug businesses. Generic drug revenues fell 4 per cent to $53.8m as a result of keen price competition.

Hikma is growing organically and also via acquisition, having bought JPI of Saudi Arabia to bolster its position in this market. The deal brought with it manufacturing operations approved by the US Food and Drug Administration (FDA). This will provide a powerful source of future supply to the US market.

Vernalis - market left with niggling worries
Vernalis, whose share price has fallen by 9 per cent this year, left the market continuing to ask questions after the biotech company posted first half pre-tax losses (to end June 2006) of £19.4m, down 3 per cent on the same period in the previous year. Sales rose 12 per cent to £6.6m.

While the narrowing of losses should have placated dealers, they continued to worry about the poor market performance of Apokyn, Vernalis' treatment for Parkinson's disease. Another niggling worry is the extent to which Vernalis' performance depends on the fortunes of Frova, which the firm has developed to prevent menstrual migraines from developing. We will find out early in 2007 whether the FDA is willing to grant Frova approval, which would trigger a £21.4m milestone payment from partner Endo. Vernalis has a comfortable net cash cushion of £51m.

Surgical Innovations looks like a snip
Niche medical business, Surgical Innovations, pleased the market with pre-tax profits up from £90,000 to £182,000 in its latest interim results. Sales rose from £1.43m to £2.12m. Its products are used in keyhole surgery and it is focused primarily on the medical sector. Surgical is a promising penny share.

Biocompatibles shares leap on positive cancer bead tests
Biocompatibles, the biotech company, saw its shares leap 6 per cent after it announced positive results from studies into its drug-delivering anti-cancer bead, which can be pinpointed straight to a cancer tumour rather than percolate throughout the system, meaning less side effects for the patient. The study encompassed 20 colorectal cancer patients and 15 of them showed a positive response inside a month.

Acambis - good news on litigation and pipeline fronts
Acambis posted a loss of £22.9m for the half year to 30 June 2006 against a loss of £12.8m last time, on sales down 15 per cent at £10.6m. City dealers had been concerned about litigation and the dwindling size of the smallpox vaccines company's cash reserves, which stand at £37m.

There is positive news from mid-stage trials of Acambis' West Nile vaccine, while news on the late-stage trials of the Japanese encephalitis vaccine should be announced before the year end.

The litigation in the US concerned rival Bavarian Nordic, which has been bidding against Acambis for the Project Bioshield smallpox contract. Bavarian first claimed Acambis' vaccine infringed its patents but the International Trade Commission ruled that Bavarian Nordic's patents are invalid. Bavarian is appealing and pursuing its case in Europe but Acambis boss Gordon Cameron reckons that the US ruling will hold good. Acambis has settled over its yellow fever vaccine, Arilvax, with Novartis getting $19m in the process. The $30m US smallpox vaccine contract should also swell Acambis' cash reserves and we should get more news on this in the near future.

AGI Therapeutics - good news from three drug trials
AGI Therapeutics specialises in providing drug delivery skills to ensure older safe drugs can treat new diseases, including gastrointestinal diseases such as irritable bowl syndrome (IBS), diarrhoea and dyspepsia. There was good news from trials of three drugs for the treatment of IBS, ulcerative colitis and acid reflux but the dyspepsia drug performed no better than placebo. The company made a pre-tax loss of Ä2.3m for the half-year to 30 June 2006 against a loss of Ä2.6m last time. Davy Stockbrokers expects a full-year pre-tax loss of Ä3.7m against Ä5.2m in 2005.

Malcolm Craig is the author of 14 books on different aspects of successful investment ranging from the stockmarket to gold, and from overseas property to gilts. He is one of the country's most respected investment commentators.

2nd September 2008

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