Malcolm's Market Eye,: 20 to 27 April 2007

The UK stockmarket took a sudden lurch downwards, before recovering lost ground and then falling back again, since hitting a seven year high mentioned in last weekís Market Eye.

The reason? Higher interest rates, with at least two more hikes in prospect and the first to be levied in May 2007 are more than likely. Inflation has gone outside the permitted threshold and the Bank of England will be forced to take action, using the blunt tool of the UKís interest rate mechanism which hits everyone except savers when rates rise.

The USD 2.00: GBP 1.00 exchange rate is not helping Britainís exporters either, much as it delights British shoppers in the USA.

The Pharma sector has been strong as investors piled into the main two players (GlaxoSmithKline and AstraZeneca) in the UK drug sector ahead of their first quarter results.

GSKís Cervarix protects against cervical cancer for at least five years
GlaxoSmithKline (GSK) revealed the good news that Cervarix, its cervical cancer vaccine, has been proved by data analysis to be effective for over five years. This is the longest period of protection known for any cancer vaccine trial to date. GSK should launch Cervarix during 2007 and will be fighting it out with Merck & Coís and Sanofi-Pasteurís Gardasil vaccine.

GSK has begun phase III trials of its drug eltrombopag for patients with a low blood-platelet count disorder (thrombocytopenia). The disorder is prevalent among cancer and HIV patients, with side-effects ranging from mere bruising to possible brain haemorrhages. In trials so far, 87 per cent of the patients have responded to the treatment.

GSKís Q1 FY07 sales hit by weak US dollar
GSKís share price slipped a little to GBP 14.64 on the news that pre-tax profits fell back slightly to GBP 2.1bn in Q1 FY07. The cause lay in the weak US dollar and stronger generic competition, which hit sales in the US. GSK is aiming to grow its OTC medicine sales, from which it is seeing much faster growth than from the wider drugs market. GSK lost patent protection for its anti-nausea drug Zofran (odansetron) in the quarter, as well as anti-depressant Wellbutrin XL (brupropion extended-release). GSK also filed or sought approval for 10 drugs in the period under review.

AstraZeneca moves into vaccines and monoclonal antibodies
AstraZeneca (AZ) sweetened its first quarter results by announcing it had bought US vaccine specialist MedImmune for GBP 7.6bn to bolster its flagging drug pipeline. The astute acquisition takes AZ into the vaccines sector and also into the highly promising area of monoclonal antibodies.

In 2006, AZ acquired Cambridge Antibody Technology, Britainís biggest biotech. AZ is to switch research centres from CAT in Cambridge and over to Maryland at MedImmuneís premises, although the two subsidiaries will both concentrate on biological drugs.

MedImmuneís top seller is nasal spray FluMist. There is also Synagis for childrensí lung problems along with Ethyol, which diminishes the side effects of chemotherapy treatment. AZís shares fell back on the news as the City took the view that it had paid too much, and the deal will only be earnings enhancing by 2009.

The City also reckons AZ needs more short term drugs to boost earnings before 2009 and replace several drugs which will lose their patents over the next few years. Medimmuneís pipeline has three to five drugs which should be in late stage trials by 2010. AZ retaliated by pointing out it still has USD 5bn, bolstered by free cash flow of USD 8bn a year, put aside for further acquisitions.

AZís first quarter sales were up eight per cent at USD 7.0bn. Pre-tax profit rose 11 per cent to USD 2.3bn and operating profit surged ahead 19 per cent at USD 2.2bn.

The combined sales of AZís five key products: Nexium, Seroquel, Crestor, Arimidex and Symbicort rose 17 per cent to USD 3.6bn. AZ is to launch Symbicort in the US in the middle of 2007. The Meteor trial on Crestor treatment shows that the drug slows the progression of atherosclerosis.

Shire announces Q1 FY07 revenues up 29 per cent
Shire Pharmaceuticals saw a sharp rise in its share price after announcing a 29 per cent rise in Q1 FY07 revenues and increased its full-year revenue growth target to around 20 per cent. Shireís net income rose from USD 6lm to USD 113m.

Shire has recently launched its Hunter Syndrome treatment, Elaprase (idursulfase), and is getting its kidney disease treatments Fosrenol (lanthanum carbonate) and Dynepo (erythropoietin) ready for the market.

Shire is a dominant force in hyperactivity treatment in the US market and plans to file with EU regulators later in 2007 and launch on that market. With its strong new drug portfolio incorporating innovative technology and strengths in the hyperactivity and biologicals sectors catering for rare diseases, Shire would provide an attractive acquisition for a pharmaceutical major, such as AstraZeneca.

Antisoma clinches possible block buster anti cancer injection deal with Novartis
Antisoma , the small, fast growing biotech, saw a 10 per cent bounce in its share price on the announcement it had clinched a deal to commercialise an injection (AS1404), which could mark a major change in cancer treatment.

Antisoma has partnered with Novartis, the Swiss pharmaceutical firm, in a deal over AS1404, which may result in payments of nearly GBP 500m by Novartis to Antisoma, which will receive an initial payment of around GBP 38m from Novartis, followed by another GBP 12m in 2008.

Preliminary tests on patients with terminal lung cancer show AS1404, which is taken in combination with existing treatments including chemotherapy, extends life by five to 14 months. There are hopes AS1404 could be used on other cancers, such as solid tumours.

SkyePharmaís Requip for Parkinsonís disease approved in France.
SkyePharma saw its share price improve as the company that its drug to treat Parkinsonís disease, Requip, received approval in France. The drug is being developed in partnership with GSK.

KKR raises the price for Alliance Boots then Guy Hands ups the price still higherÖ KKR retaliates with an even higher offerÖ
Stefano Pessina, the deputy chairman of Alliance Boots, who mounted a bid for his company to take it private (backed by private equity investor Kohlberg Kravis Roberts) increased their offer for Alliance Boots to GBP 10.90 per share, or GBP 10.4bn in total, making it Europeís biggest ever management buy-out. Alliance Boots has 2,600 pharmacy stores in the UK and 350 stores in Asia and Europe.

Pessina has a 15 per cent share stake in the group and KKRís share stake takes their combined equity holdings to almost 26 per cent. Their first indicative offer was of GBP 10.40 a share. Pessina was trying to head off a bid from Guy Hands, whose private equity firm Terra Firma, has the backing of The Wellcome Trust. Boots recommended the KKR bid to shareholders. Guy Hands then upped the stakes with a preliminary proposal of GBP 11.15p a share.

Not to be outdone, KKR then raised its offer for Alliance Boots to GBP 11.39p a share, a GBP 11.1bn offer which won the day as Terra Firma capitulated.

Stefano Pessina wants to take Alliance Boots into Europe and to scoop up drug distribution businesses in emerging markets. Boots will become the groupís only retail brand while Alliance will be the distribution brand.

GSKís cervarix effective for at least five years.
GSK revealed the good news that Cervarix, its cervical cancer vaccine, has been proved by data analysis to be effective for over five years. This is the longest period of protection known for any cancer vaccine trial.

GSK should launch Cervarix on the market during 2007 in competition with Merck and Sanofi Pasteurís Gardasil vaccine GSK has begun phase III trials of its drug eltrombopag, for patients with a low blood-platelet count disorder. The latter is prevalent among cancer patients and others with the disorder are open to bruising and possible brain haemorrhages. In trials so far 87 per cent of the patients have responded to the treatment.

Allergy Therapeutics gets green light for grass allergies vaccine MPL
Allergy Therapeutics, the biotech company, saw a rise in its share price after announcing the final results for grass allergies vaccine MPL. The vaccine gained the green light in safety and tolerability studies for grass allergies.

Malcolm Craig, author of 14 books on all aspects of successful investment, is one of the UKís leading investment commentators.