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Trouble ahead

A convincing performance by the US Democrats in the mid-term elections promises to put pressure on US drug pricing and impact the global pharma industry

The UK stock market continues treading water after the long anticipated increase in UK interest rates. There are continued fears that one more hike in interest rates may be made by the Bank of England in the early months of 2007.

Punters continue to pile in to possible bid situations in the hope of making short-term windfall gains. Nervous investors continue to take profits on market upturns, which is keeping the market oscillating at around the 6,200 level as measured by that bellwether of the market's fortunes, the FTSE 100 Index. This scenario looks set to continue into the winter.

Fears of US drug pricing pressure
The pharma sector took a knock as a result of a general sell-off of pharmaceutical shares, in response to Democrat gains in the US Election. Both GlaxoSmithKline (GSK) and AstraZeneca (AZ) saw their share prices fall back on market worries that the two big drug companies may face increased pricing pressure when the Democrats call for lower drug prices under the 2003 Medicare Act and implement price controls.

Standard & Poor's, the credit rating agency, doesn't believe the Democrats have the ability in the short to medium term to do much about drug pricing in the US but reckons there will be a much closer concentration on the marketing of drugs by Congress.

So far this year, the pharma sector has underperformed the FTSE 100 Index as a result of indifferent news as concerns mount over the weakening pipelines of major players such as GSK and AZ. This has led to market speculation that both companies could look to acquisitions to remedy the deficiencies in their pipelines.

AZ's share price made a partial recovery on the news that it is doubling the size of Cambridge Antibody Technology (CAT), the biotech company it scooped up in the early months of 2006. CAT is leasing a bigger laboratory and taking on 200 extra scientists and researchers, while its research team gears up to focus on cancer and heart disease, in addition to respiratory and inflammatory complaints. The first new product is expected to reach the trial stage in 2008.

Separately, Shire Pharma also saw its shares gain ground as it recovered its losses, sending the share price back up to 996p. The shares had dropped sharply following publication of a Federal Trade Commission report detailing Shire's settlement with rival Barr Pharmaceuticals over an extended patent battle, which dealers dubbed `over-the-top'.

A bit of a glitch
Protherics shares dropped 16.5p to hit 65p on news of a second product glitch in the space of a week. The drug Voraxaze, a treatment for cancer patients that have experienced an overdose with chemotherapy drug methotrexate, is facing a requirement by the US Food and Drug Administration for more information regarding its manufacturing. This means regulatory approval for Voraxaze could be delayed for as much as 12 months.

The other drug that has run into delays is CytoFab for sepsis, which is licensed to AstraZeneca. The Anglo-Swedish company has confirmed it is carrying out extra clinical tests on the drug via extended Phase II trial.

On the news, Piper Jeffrey, the broker, set a price target of 76p per share for Protherics.

Phytopharm is also facing a difficult time. Shares in the firm fell back as it announced a full-year loss of £5.6m against £3.3m in the same reporting period last year. The increased loss has been attributed to lower-than-expected revenue from its experimental weight loss product and delays to its treatment for eczema in dogs. The loss looks bigger because last year Phytopharm earned a one-off £4m payment from Yamanouchi, the Japanese pharma company.

Hope for a share price bounce-back for the company could come in the shape of its collaboration with Unilever to create and market a weight loss drug derived from the South African Hoodia cactus by 2009. Unilever plans to integrate the new product in its Slim-Fast range, which has been hit by the popularity of the Atkins diet. Unilever will pay up to £21m for the slimming product and has already parted with over £10m.

In addition, Phytopharm is talking to a number of companies to license its drugs for both Alzheimer's and motor neurone disease.

3M sheds weight
3M is selling its worldwide branded pharmaceuticals business to a number of buyers for £1.1bn. The US drugs business is going to Graceway Pharmaceuticals for $875m, the European businesses are being sold for $867m to Meda of Sweden, while the Asia-Pacific businesses are being sold to Ironbridge Capital and Archer Capital, two private equity firms, for $349m.

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

2nd September 2008

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