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Malcolm's Market Eye, February 14, 2007

Stockmarkets around the world have hit new highs recently, although doubts as to the future outlook for economic growth and corporate profits continue to swirl around dealing room floors

Stockmarkets around the world have hit new highs recently, although doubts as to the future outlook for economic growth and corporate profits continue to swirl around dealing room floors.

The universally quoted measure of theUK stockmarketís health, the Footsie 100 Index, surged strongly ahead until succumbing to profit taking, leaving it at 6353.5. The value is still a long way short of the all-time high of 6,930 reached on the last trading day of 1999, but even that record may be broken in 2007.

It is a near certainty that the European Central Bank will hike interest rates up next month, with more rises to follow, which will keep the pressure on for another rise in UK interest rates. Bids continue to dominate the UK market, with no company too big to avoid private equity deals, the latest being the GBP 11 billion plus (USD 21.4 billion/ EUR 14.3 billion) bid about to be launched for Sainsbury, the supermarket group.

The pharmaceutical sector is also enlivened by bid speculation. SR Pharma rose 12 per cent to GBP 0.74 (USD 1.44/ EUR 1.11) on vague bid rumours. The more likely cause for the rise is the news that Pfizer and Quark Biotech have started clinical development of a product licensed from SR.

There is a keener appetite for biotechnology shares as more new drugs are produced from this sector and investors want to get in on the ground floor of loss-making biotechnology companies before they climb on the elevator to high profits, or more likely succumb to an attractive bid from Big Pharma companies anxious to bolster flagging drug pipelines.

GlaxoSmithKline ñ blockbuster drugs in late stage pipeline

GlaxoSmithKline (GSK) is wooing its shareholders by spending GBP 6 billion (USD 11.7 billion/ EUR 9 billion) to speed up its two year share buy back programme and is also boosting the dividend payment to GBP 0.48 (USD 0.93/ EUR 0.72) against GBP 0.44 (USD 0.85/ EUR 0.66). The companyís share price rose GBP 0.22 (USD 0.43/ EUR 0.33) on the news to rest at GBP 14.22 (USD 27.61/ EUR 21.24).

The UK-based company is also setting up a major research operation in China. The news caused alarm among GSK staff in the UK and USA, where costs are spiralling. In both countries, governments have shown themselves to be parsimonious, when it comes to helping to fund new state-of-the-art drugs. With Pfizer slashing 10,000 jobs and AstraZeneca cutting a further 3,000. The cuts were prompted by failures in late state trials of prospective blockbuster drugs, and there are natural worries that GSK could also move more of its research activity to China or India, where wages are cheaper.

GSK has 31 products in the final stages of clinical development including one for depression and one for Chronic Obstructive Pulmonary Disease (COPD), both obtained through licensing deals. The company further pleased the market by announcing it had received the green light from the US FDA for its slimming treatment Alli, a reduced strength version of Xenical (Orlistat), which will be available OTC. Sales of GSKís Advair (fluticasone/ salmeterol) for asthma were sluggish due to the warmer winter. Advair, GSKís premier drug, loses patent protection in 2010.

GSKís profits for FY06 rose 16 per cent to GBP 7.8 billion, with sales up 7 per cent to GBP 23 billion. Jean-Pierre Garnier, GSKís CEO, is looking for an 8-10 per cent rise in FY07 profits. Cash generation in FY06 was GBP 8 billion, a 48 per cent rise on the GBP 5.4 billion generated in 2000, when Glaxo and SmithKline merged. GSK is setting up a new centre of excellence for drug discovery to fight diseases, such as MRSA, the hospital superbug.

Sales were lost to generic copies of anti-emetic, Zofran (ondansetron), and Wellbutrin (bupropion), the anti-depression drug. The sales will be made up by the introduction of Tykerb (lapatinib), the new drug for late stage breast cancer, and by cervical cancer vaccine, Cervarix, which should prove a blockbuster drug when it reaches the market this year. Another potential blockbuster is GSKís vaccine for pandemic flu.

Roche boosts profits on high Tamiflu sales for bird flu

Roche posted FY06 net income up 33 per cent to CHF 7.9 billion, boosted by sales of Tamiflu (oseltamivir) for bird flu to governments anxious to stockpile the drug in case the H5N1 virus mutates, allowing transmission between humans. The UK government is planning to stockpile the vaccine and workers at the Bernard Matthews turkey farm in Suffolk, where an outbreak of bird flu has broken out, have been offered Tamiflu as a precaution. Rocheís breast cancer drug Herceptin (trastuzumab) also saw a surge in sales.

AstraZeneca still seen as weak in the drug development pipeline

The UKís number two pharmaceutical firm, AstraZeneca (AZ), has announced FY06 operating profits ahead 28 per cent to rest at GBP 4.2 billion, while operating margins rose 31 per cent. Combined sales of key drugs rose by 23 per cent to GBP 6.8 billion. Key drugs include anti-ulcerant Nexium (esomeprazole), Seroquel (quetiapine) for schizophrenia and Arimidex (anastrozole) for early-stage breast cancer drug, along with cholesterol lowering drug, Crestor (rosuvastatin) and asthma drug, Symbicort (budesonide/ formoterol).

AZ announced a reduction of 3,000 jobs over the next three years, due to two of its top selling products, Nexium and Seroquel, which face attacks from generic competitors. Analysts still think AZ has a weak pipeline of drugs in development, despite its flurry of 12 licensing deals and acquisitions in 2006, as well as nine research agreements with biotechnology firms. AZ also announced a GBP 2 billion (USD 3.9 billion/ EUR 3 billion) share buy-back programme for FY07.

Malcolm Craig is one of the UK ís most respected investment commentators.

14th February 2007


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