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Malcolm's Market Eye: 14 to 20 September 2007

The world wide credit crunch, which had its origins in US banks lending to less than credit-worthy house buyers, is hitting Britain harder

The world wide credit crunch, which had its origins in US banks lending to less than credit-worthy house buyers, is hitting Britain harder.

A sign of the seriousness of the situation was Northern Rock having to go cap in hand to the Bank of England for emergency cash, and paying a penal rate of 6.75 per cent.

This is a classic situation that has affected banking since it first began in the 17th century: borrowing short-term money and lending long term money in the way of house mortgages, in some cases offering 120 per cent of a house's value or offering borrowers debt equivalent to eight or ten times income.

Northern Rock did this to secure higher, if riskier, profits. But this time it has ended in tears, with a run on the bank by panicky savers desperate to get their cash out while the going is good. 

Prime Minister Gordon Brown has taken the unprecedented step of guaranteeing all Northern Rock investors against loss. Can he guarantee the deposits held at all UK banks? The answer is no. All we can do is wait to see if British savers keep their nerve, and their faith in the intrinsic safety of the banking system.

We are facing higher borrowing costs as the short term money markets, from which banks borrow, are facing the highest inter-bank borrowing rate since 1998.

The US dollar has hit a record low against the Euro, which is not good news for the UK's major pharmaceutical companies, which make substantial amounts of their revenue in the US, the world's largest pharma market. To add to the bitter mixture, oil prices have hit an all-time high of USD 80 per barrel.

However, the Northern Rock situation has presented the market with another source of worry: Who is next? The Bank of England Governor has hinted that UK interest rates could be cut if the credit crisis deepens, but the Northern Rock affair could delay such a cut. 

Heads are likely to roll not only at Northern Rock, but at the Bank and the Financial Services Authority as well. The UK stockmarket hates uncertainty and we have already seen the gains made during 2007 wiped out as uncertainties crowd on to the dealing desk screens in the Square Mile. Pharmaceutical stocks are still seen as a safe haven for investors compared with the banking stocks which have seen their share prices slashed.

Genetix showing first benefits of merger with Applied Imaging
Genetix, the cell imaging and analysis specialist, has delivered a pre-tax profit of GBP 1.1m on turnover of GBP 10.4m for H1 FY07. The result compares with a pre-tax profit of GBP 1.2m on turnover of GBP 6m for H1 FY06. The company took a one-off hit of GBP 216,000 for amortising goodwill.

Genetix recently acquired California-based Applied Imaging for a high price of USD 25.8m, forcing it to pay top dollar in a bidding war. The acquisition appears reasonably astute as Applied Imaging beefed up Genetix's interim sales to the tune of GBP 4.3m in additional revenue and operating profits of GBP 400,000 were contributed from these extra sales.

Administration and sales costs rose sharply from GBP 2.1m to GBP 4.4m. R&D spending has been increased from GBP 574,000 to GBP 894,000. Sales of the older Qbot genome sequencing instruments fell away sharply.

Genetix's strengths lie in cell-imaging and analysis while Applied Imaging focuses on cell analysis software. The two companies make a good fit, which should be completed by the end of 2007, as they are servicing a market in which pharmaceutical companies look for better and speedier cell selection for new drug candidates.

The acquisition also provides a big change to the business model of the combined companies. Half of sales will be made in the USA and the other 50 per cent will be made in Western Europe, including the UK.

As Genetix is sitting on a cash pile of GBP11.7m it can make one, or even two, more acquisitions to buttress its business still further. Brokers are looking for FY07 sales of GBP 26.5m compared with GBP 15.46m in FY06, as well as profits of GBP 3.5m.

Axis-Shield doing well with point-of-care testing system Afinion
Axis-Shield, the drug diagnostic specialist, has delivered a pre-tax profit of GBP 1.1m on sales of GBP 33.1m for H1 FY07, contrasting with a pre-tax profit of GBP 1.2m on turnover of GBP 31.6m in the same period in FY06.

Broker Numis Securities is looking for full year pre tax profits of GBP 2.5m for the full year - the same profit, as was delivered in 2006. 

The eight per cent drop in interim profits resulted from the weakness of the US dollar against pound sterling and the drop in sales of homocysteine, a diagnostic marker for heart disease. The sales drop resulted from unlicensed competitors selling cheaper markers, and this cut away at the Axis-Shield profit margins to the tune of 4.7 per cent.

The diagnostics specialist is concentrating on rolling out its new point of care testing system, Afinion, which is an analysis tool designed for doctors' surgeries. Sales growth of 25 per cent was delivered by the point of care division in H1 FY07, with 500 Afinion machines in place in UK surgeries. Now it is poised to sell Afinion in France, Germany, Italy and Japan.

Axis-Shield also has an older testing system, Nyocord, which is doing well in less mature markets. Sales of products from the AxSYM-Xtra laboratory testing programme are showing promise.

Low cost generic statins may increase heart attacks
Low cost generic cholesterol drugs could increase risk of heart attacks or strokes by 30 per cent, according to research presented at the European Society of Cardiology in Vienna and published in the British Journal of Cardiology.

The data shows that the UK government's drive to switch patients to low-cost cholesterol-lowering drugs could put them at greater risk of strokes and heart attacks.  Patients moved from a branded statin to a cheaper version were almost one third more likely to have a heart attack or stroke than those who stayed on their original medication. 

The Government has encouraged doctors to use non-branded generic drugs because they are substantially cheaper than patented drugs - but often contain a lower concentration of the active ingredient.

The study examined 11,500 patients on the cholesterol drug Lipitor. Of which around 2,500 were switched to a low cost generic, copy cat drug. The results showed that switching was associated with a 30 per cent increased risk of patients having a heart attack or stroke, or requiring heart surgery.

Malcolm Craig, one of the UK's most freelance financial journalists, is an author of books on many aspects of successful investment.

20th September 2007


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