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Tensions mount

UK stockmarket continues its rollercoaster ride as the threat of recession in the US remains

Across the Atlantic the Dow Jones index, which measures the performance of leading company share prices, took a big tumble on worries of recession. Americaís huge services sector slimmed down in January at the quickest pace since 2001, sending a clear message that the US economy may already be in recession. Further pressure is being put on the Federal Reserve Bank to reduce interest rates even further.

In the UK the stockmarket is continuing its roller coaster ride. Greed and fear determine share prices rather more than the fundamentals of the company behind the share. Investors sell heavily if they believe recession may rear its ugly head in the UK ñ and indeed throughout all the developed countries of the globe ñ and they buy heavily if interest rates are cut to avoid an oncoming recession, as happened when the US Federal Reserve Bank cut US interest rates to 3 per cent. The trouble is that cutting interest rates leads to higher inflation ñ and we could be headed towards another era of ëStagflationí, which was endemic in the 1970s.

In uncertain times investors head for gold, which is standing at a record price of near $900 having been written off as a barbaric relic by the ëpaper-basedí investment world for a couple of decades. Alternatively, they buy into defensive stocks such as pharmaceuticals on the rationale that illness is recession proof. No matter what the state of the economy people continue to buy drugs and medicines to cure or alleviate illness. As such, it is worth noting that the pharma sector is due for a re-rating as the share prices of the global pharma companies have failed to keep pace with inflation over the past five years.

GSK profits tumble
GlaxoSmithKline (GSK) saw its share price drop 7 per cent in one day as it announced a fall in full-year profits and a downbeat view of the current year. The reason for the reduced profits was a near 50 per cent fall in revenue from its second best-selling drug, Avandia. Increased competition from generic rivals also contributed to the 10 per cent fall in pre-tax profits to £1.5bn for the fourth quarter. In 2008, GSK will be trading through a peak in drug patent expiries.  
Turnover in the last full-year fell by 2 per cent to £22.7bn, while pre-tax profits for 2007 fell from £7.8bn to £7.5bn. GSK will continue its share buyback programme in 2008 and plans to buy back up to £6bn of its own shares during the year. The company forecasts that earnings per share will fall by 5 per cent in the financial year.

Bids and deals order of the day in MedTech
Analysts have predicted more bid deals in the medical technology, with the relative affordability of UK medtech companies, when compared to US contemporaries, feeding bid activity. Japanese company Olympus has already paid £935m for Gyrus, the UK medical device maker, while British Biocell International has approved a £83.7m takeover by Inverness Medical Innovations.

Whatman has seen its share price surge after receiving a number of bid approaches at around the £300m level. The reason for the build up in bidding for UK medical technology companies is that they are cheap compared with the market price tags of US medtech companies.

More potential bidders are courting Meldex: the company is an attractive acquisition target for pharmaceutical companies as it makes the coatings for drug capsules. Meldex was first approached on January 14, 2008 and there have been more approaches since.

Getting the go ahead
Biocompatibles got the go ahead from the US Food Drug Adminstration for a heart stent using its polymer coating technology. The firm will receive royalties of 1.5 per cent which should total £7.5m per annum.
Sinclair Pharma pleased the market after announcing the pharmaceutical company had been given European Union registration for an over-the-counter herpes simplex. While this is not a potential blockbuster treatment, the market in the UK, France and Germany is estimated to be worth around £8.3m. Over the next 18 months, Sinclair is expected to launch a number of new products.
Malcolm Craig is a freelance financial journalist and author of 14 books on many aspects of successful investment from shares to overseas property, from gilt to gold.

12th February 2008


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