Malcolm's Market Eye' 15 to 21 March 2007

UK stockmarket still volatile buoyed up by bids, rumoured or real
TheUK stockmarketís continued volatility was marked by that universally quoted measure of the marketís health, or lack of it, the FTSE 100 index, which moved ahead after its sharp drop recently.

Private investors have been cashing in their profits, while institutional investment managers, faced with a ongoing torrent of cash coming in to their coffers in the way of pension contributions and the like, are increasing the cash content of their portfolios and moving away from higher risk shares toward defensive stocks, such as pharmaceutical heavyweights.

The main action continues to focus on bid situations, whether actual or rumoured, such as Alliance Boots, Sainsbury, Imperial Tobacco and publisher Pearson. The pharmaceutical sector is normally a beneficiary from inflows of buyers in uncertain times and this time round is no exception.

Allied to this is the heavy flow of news on drug successes and failures moving through the pipeline toward the all important markets ñ both US and European ñ along with rumours of possible bids from the likes of AstraZeneca (AZ) for Shire Pharmaceuticals to gain control over the latterís medium-term drug pipeline.

AZ falls back on lack of success from AGI-107 trial
AZ stood out in the pharma sectorís upward market trend by falling GBP 0.20 to GBP 28.61 after one of its partners, AtheroGenics, announced that late-stage clinical trials of one of its drugs had been unsuccessful. AGI-1067 was designed to clean away plaque build-up in arteries which can trigger a heart attack or stroke. The drug showed no advantage over the placebo used in trials. AZ had clinched a deal with AtheroGenics for up to GBP 514m (EUR 757.5m) for exclusive rights to the drug. AZ is considering whether to continue the collaboration deal with AtheroGenics after a full analysis of AGI-1067.

Tykerb gets green light from FDA
US regulators gave the green light to Tykerb, the GlaxoSmithKline (GSK) once-a-day pill which could revolutionise the treatment of breast cancer. Tykerb has been christened theí Trojan Horseí because it gets inside the proteins which promote cancer. It will be used to treat a range of solid tumours.

The FDA has initially allowed GSK to sell Tykerb to patients with advanced cases of breast cancer and is to be taken together with chemotherapy. GSK reckons Tykerb could replace Herceptin made by Roche as the top drug to treat the HER 2 strain of breast cancer. City analysts reckon Tykerb will become a blockbuster drugs with annual sales of at least GBP 520m (EUR 766.3m). Further good news on GSKís pipeline of drugs is expected in April 2007, when the company is expected to file cervical cancer vaccine Cervarix for approval in the USA.

Vernalis ñin drive to become self financing
Vernalis, the drug developer, posted a pre-tax loss of GBP 45.5m on turnover of GBP 16.3m for FY06, compared with a loss of GBP 34.4m on sales of GBP 14.1m in FY05. The reasons for the loss were due to increased investment in the companyís products. For example, Apokyn, for which prescriptions are comfortably up for Parkinsonís disease and money spent on establishing Vernarlisí new US operations. Simon Sturge, Vernalisí boss, says the increased losses are part of the biotechís "drive to become self-financing".

The new US arm has been established to sell Apokyn and to gear up for the launch of migraine drug Frovatriptan as a treatment for menstrually-associated migraine (MAM), if it gets the green light from the FDA, which is expected to decide on or around 19 May 2007. The MAM market could become big business, as many women are ignorant of the source of the condition even if they suffer from it, so patient education has to be increased as a necessary precursor to the drugís market launch.

Reasonable revenues arenít expected until early 2008, while sales of drugs for regular migraine are flat. Vernalis took an exceptional hit of GBP 9.8m on investment in its pain-relief drug V-1003 after partner Reckitt Benckiser dithered on whether it wants to take the drug into phase III trials.

Ark Therapeutics ñ sitting up and being noticed
Ark Therapeutics announced a loss of GBP 19.1m on turnover of GBP 300,000 for the FY06, compared with a loss of GBP 16.8m on sales of GBP 2.3m in FY05. Ark now has two products on the market: leg ulcer treatment, Kerrabott, and antimicrobial gel, Flaminal, bought in 2006. Both drugs generated sales of only GBP 300,000 despite the marketing spend of GBP 21.5m. The poor sales result was due to reduced spending by the NHS.

The way forward for Ark may be presented by Cerepro, a gene-therapy-based brain-cancer treatment which could be approved in the EU as a result of positive phase II data. Ark has two drugs in phase III trials and has plenty of cash for R&D after raising GBP 31.4m during FY06. Broker Numis is expected a GBP 12.8m loss for FY07.

Smith & Nephew buys Plus Orthopaedics to become the worldís fourth biggest player in the sector
Smith & Nephew has scooped up Plus Orthopaedics, a private Swiss company, for GBP 460m (EUR 677.8m). The deal will be earnings enhancing as from 2008 and it makes Smith & Nephew the fourth biggest player in the global orthopaedic reconstruction market and doubles its share of the European market.

Biocompatibles concentrating on drug-eluting beads for primary liver cancer
Biocompatibles announced a loss of GBP 6.3m on turnover of GBP 5.9m for FY06 against a loss of GBP 6.7m on turnover of GBP 3.4m in FY05.

The drug delivery company is concentrating on its drug-eluting beads for primary liver cancer and colorectal cancer with liver secondaries. The primary liver cancer market is reckoned to be worth GBP 400m (EUR 589.4) and the market for colorectal cancer possibly even more. Revenues are calculated to rise by just over 50 per cent next year, driven by sales of the bead.

Trials of the beads in primary liver cancer patients, used along with Doxorubicin a chemotherapy drug, have produced positive data with 89 per cent of patients surviving for two years as against 63 per cent using conventional chemotherapy. The big advantage for Biocompatibles is that its medical devices are not classified as drugs and so can be marketed before regulatory approval is gained.

Biocompatibles took a hit in 2006 when Abbott Laboratories chopped its ZoMaxx heart stent with its Biocompatiblesí technology as being inferior to Boston Scientificís Taxus product, so Biocompatibles will not get any royalty revenues.

Malcolm Craig, author of 14 books on successful investment, is one of the UKís most respected investment commentators.