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Malcolm's Market Eye, 2 June to 8 June 2007

The UK stockmarket took the latest near eight per cent drop in the Chinese stockmarket in its stride

The UK stockmarket took the latest near eight per cent drop in the Chinese stockmarket in its stride. The tumble was triggered off by the Chinese government trebling the stamp duty tax on share buying and selling in an attempt to cool off the over buoyant Chinese stockmarket.

The UK market is more concerned it will see yet another rise in interest rates in June and continues moving sideways in anticipation of that rise. Prospective mega-bids and deals continue to excite investor interest in speculative windfall gains, if a bid is actually launched at a sizeable premium to the current market share price of the company concerned.

Overall, the rally in the FTSE 100 index, the bellwether of the marketís health, has been robust and the stockmarket is well up on its level a year ago after the scares of May 2006. Barring sudden and unexpected shocks the FTSE should hit 7,000 by the year end, topping its previous all time record high of 6,930 reached on the last trading day of 1999.

The pharmaceutical sector continued to attract investor interest as a defensive sector to protect them against continuing volatility, with the exception of GlaxoSmithKline (GSK) which attracted the higher risk taking speculators on hopes of a rebound in the share price from a two-year low point. Over the last fortnight, GBP 12bn has been stripped from GSKís market price tag as a result of the unwelcome news on its best selling diabetes treatment drug Avandia (roseglitazone) which has been linked to an increased risk of heart attacks.

Plethora clinches US deal for premature ejaculation spray
Plethora Solutions, the biotech specialist, saw a sharp rise in its share price to GBP 1.76 on the news it had clinched its first deal in the US. This is a licensing agreement for Plethoraís spray to check premature ejaculation. Sciele, the US specialist in womenís health and sexual dysfunction, is buying a GBP 3.5m share stake in Plethora and is to make milestone payments as the spray undergoes phase III studies.

Vectura ñ increased losses but robust drug pipeline
Vectura, the UK-based drug discovery specialist, delivered a loss of GBP 8.7m on turnover of GBP 14.1m for FY06, compared with a loss of GBP 7.4m on sales of GBP 8.4m in FY05. Revenue from licensing and royalties is increasing. R&D expenditure rose by over one third to GBP 17m. Bridgewell, the broker, expects losses of around GBP 20m for the current year. Vectura is forecast to produce profits by 2011.

Vectura has also signed up with Boehringer Ingelheim to produce a dry powder asthma inhaler. Other drugs in the Vectura pipeline are inhaled versions of treatments for cystic fibrosis, asthma, chronic obstructive pulmonary disease and sexual dysfunction. Phase IIa trials for VR776 to treat premature ejaculation have shown encouraging results. The drugs under development for chronic obstructive pulmonary disease and for asthma are both in the blockbuster category and are likely to produce huge revenues.

Innovata, another drug inhaler company, bought by Vectura back in January 2007 for USD 243m, saw its FY06 sales rise 31 per cent to GBP 11m. Innovata has contributed GBP 3m to Vecturaís revenue stream.

Biocompatibles signs deal with Abbott for drug-eluting stent
Biocompatibles International signed a deal with Abbott Laboratories to produce a polymer for its Medtronic Endeavor drug-delivering stent which is designed for patients with heart disease. The cash terms of the deal were not announced, but Biocompatibles will receive an advance payment plus milestone payments on US sales and a 1.5 per cent royalty on global sales. Biocompatiblesí lead product is its drug delivery bead for cancer and the company has GBP 33m in cash to develop this and other drugs and products.

Pfizer faces GBP 3.5bn claim from Nigeria over Trovan
Nigeria has filed charges against Pfizer for GBP 3.5bn for its alleged role a decade ago in the deaths of 11 children. Nigeria is claiming damages for what it sees as the part Pfizer played in the permanent health problems, and in some cases fatalities, of children who took the antibiotic Trovan (trovafloxacin/ azithromycin), which was then an unapproved drug, during a meningitis epidemic in 1996.

Pfizer says it acted ethically when testing Trovan on the children and denies the allegations which relate to a drug trial on 200 children carried out during the epidemic. Pfizer insists its records prove that none of the 11 deaths was linked to the drug Trovan or to substandard treatment.

Avandia/ GSK controversy continues
The Avandia/GSK saga continues. Since a research study published in the New England Journal of Medicine (NEJM) claimed Avandia (rosiglitazone), the diabetes drug, came with an increased risk of heart attacks, US doctors have all but stopped prescribing the drug.

GSKís share price has now hit a two-year low point before recovering a little, as market analysts calculated the future loss of revenue from lower Avandia sales. Avandia is GSKís biggest-selling treatment, with yearly sales of GBP 1.6bn, accounting for 6.9 per cent of the firmís GBP 23bn total sales in FY06.

Deutsche Bank reckons GSKís earnings could be slashed by 22 per cent in the short term.
Impact RX, the market research firm, reported that Avandiaís market share dropped from 10 per cent to zero in the two days after the research findings came to public attention. Deutsche Bankís research reckons the total weekly US prescriptions for Avandia has toppled 16 per cent since its safety was called into question.

Now GSKís head of research, Moncef Siaoui, has been chosen to appear before the US Congressional Oversight Committee on 6 June to answer questions on Avandiaís safety.

GSK launches counter attack
GSK continues to punch its weight by insisting that the benefits of Avandia continue to outweigh any treatment risks. GSK is struggling to put a floor under its share price. This hit a two year low of GBP 12.66 before recovering after GBP 12bn had been wiped off GSKís market price tag as a result of the Avandia news. If the Congressional Oversight Committee hearing goes badly for GSK another GBP 5bn could be wiped off GSKís value.

GSK has posted a letter from Ronald Krall, GSKís CMO, on the website of The Lancet. He stressed the NEJM article, which was written by Steven Nissen, Chairman of Cardiology at the Cleveland Clinic in Ohio and said that Avandia could increase the risk of heart attacks by 43 per cent, had not revealed that the number of heart attacks on which the comparison was based was tiny. It was 0.6 per cent for both Avandia and a control group of patients using other treatments.

Krall also pointed out that two long-term trials had shown that the incidence of heart problems with Avandia was essentially comparable with two gold standard medicines used to treat type 2 diabetes. He emphasised: We believe that these studies provide clear evidence of the cardiovascular safety of rosiglitazone (Avandia) and that the estimates of cardiovascular morbidity completed to date are not robust."

In addition, Nissenís methodology has drawn criticism on the grounds that the meta-analysis technique employed meant analysing the results of 42 previous trials, the samples of which were far too small or carried out on patients with existing heart disease.

Credit Suisse focused on another GSK drug, Tykerb (lapatinib), the recently approved breast cancer drug which had produced two disappointing studies. Citigroup analysts disagreed and described the data as good.

Malcolm Craig, a freelance writer who has published 14 books on successful investment strategies, is one of the UKís most respected investment commentators.

7th June 2007


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