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End of the road?

Warning signs are starting to appear that the 3-year UK bull market could be ending, although pharma and biotech still looks a safe bet

The UK stockmarket suffered one of its periodic bouts of panic, as it recently staged the biggest single day fall for three years. Reasons? Higher US interest rates, the prospect of another rise in UK interest rates on Thursday 18 May, the weakness in the US dollar, and even higher commodity prices.

The whole gloomy package stacked up to a fall in UK growth and also in company profits. Professional investors had already detected one warning sign of the end of a bull market: the recent rush of private investors into shares. Another signal was the dash for the door by company directors intent on selling their own companies' shares. An increasing number of City scribblers are declaring an end to the three-year UK bull market and there has been a move into cash and gold as well as shares with defensive strengths against a possible bear market.

These include pharmaceutical companies on the basis that illness will always be with us. Extra spice for big pharmas and biotechs was provided by the confirmation that AstraZeneca (AZ) has agreed to buy out British biotech firm, Cambridge Antibody Technology. The move adds to increasing evidence that big pharma companies are continuing to add to their R&D portfolios by cherry picking the most promising biotechs on the market, and are also willing to pay premium prices.

AZ buys CAT - the UK's biggest biotech
AZ has agreed to buy Cambridge Antibody Technology, the UK's largest biotech, in a deal worth £702m. AZ is paying £13.20 per share in cash - 66 per cent more than CAT's share price before bid talks were announced. As AZ already has a 19.9 per cent stake in CAT, it will pay £567m for the balance of the CAT shares it doesn't already have.

CAT lost £530,000 in its last full year to 30 September 2005. Its most promising drug is Humira, the rheumatoid arthritis treatment, which became the first blockbuster drug from a British biotech when sales hit $1.4bn in 2005. The drug is marketed by Abbott Laboratories of the US.

There is speculation that AZ may try to clinch a deal with Abbott Laboratories over Humira, which could involve Abbott acquiring full control over the rights to Humira.

Market pundits reckon AZ's CEO, David Brennan, wants to boost the company's medicines portfolio in the development pipeline, which has been suffering from setbacks. AZ has the smallest number of late stage treatments in its drug pipeline of any of the large pharma companies.

AZ says it expects that, from 2010, up to a quarter of its drug candidates for full-scale development will be biological therapeutic agents. The firm has so far spent $2.25bn on other drug investments since last December.

AZ's near 20 per cent stake in CAT resulted from a strategic development link up back in November 2004 with both companies promising to spend at least £100m on 25 new drugs aimed at respiratory diseases and other inflammatory illnesses.

York focuses on $1bn skin condition markets
York Pharma posted a first half (to end March 2006) loss of £2.03m on zero turnover, compared with a loss of £780,000 on zero turnover in the same period in the previous year. York has a cash pile of £5.3m to keep its R&D wheels turning until it hits the market with its treatments.

York's drugs are aimed at three-quarters of the skin-cancer and dermatological markets. The two together are worth around US$1bn in sales. York is due to launch antifungal agent, Abasol, this October given the anticipated approval from the regulatory authorities in the summer. Other York products in development are Vampex for psoriasis and Sabarep for eczema. Both are in phase II trials and results from Sabarep are expected in June. There is also YP004, a pre-clinical treatment for skin cancer and York is working towards licensing this to a big pharma partner in 2007.

Vastox sales rise to £531,000 while losses hit £1.15m
Vastox, a spin-off biotech from IP Group, declared a loss of £1.15m for the year to end January 2006 against a loss of £70,000 in the previous year. Evolution Securities is looking for pre-tax losses of £700,000 in the current year. Sales rose strongly from £113,000 to £531,000.

Vastox is following a strategy of combining a services business with a drug development operation. It is testing early stage drug compounds on zebra fish and fruit flies, so avoiding the controversy attached to animal testing. The company has Teva and Novartis as clients.

Dermasalve targets £15bn worldwide skin care market
Another skincare products company, Dermasalve Sciences, is focusing on the £15bn global skincare market. The company came to the Alternative Investment Market (AIM) last January and has just declared a pre-tax loss of £110,000 for the year to end December 2005 on zero turnover, as against a profit of £5,000 on zero turnover in 2004.

HLS - 7 shareholders and Blair stand firm against animal rights activists
Animal rights activists' attacks on Huntingdon Life Sciences (HLS), and on any company doing business with the animal research firm, rumble on. The activists had some success when the Royal Bank of Scotland withdrew its support back in 2001. The bank had joined a banking syndicate to lend £22.6m to HLS but then pulled out after activists targeted RBS branches.

More recently activists threatened GlaxoSmithKline (GSK) shareholders with publishing their names and addresses on a website if they refused to sell their shares. Seven large GSK investors, including F&C Asset Management, have pledged to 'stand firm' against 'bullying tactics'. Prime Minister Tony Blair said he would sign an online petition supporting the use of animals for medical research and said UK companies which deal with animal testing companies should be allowed to keep their shareholders' names and addresses secret.

Boots-Alliance UniChem merger gets a boost
There was a steep rise in the share price of both Boots and Alliance UniChem after the Competition Appeal Tribunal threw out an attack by Celesio, the drug wholesaler, to stop their £6.6bn merger. Over the next six months, Boots has to sell 96 stores in order to meet the Competition Regulators' guidelines.

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

2nd September 2008


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