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Malcolm's Market Eye: 1 to 7 December

Goldman Sachs reckons drastic action is needed to rescue the ailing US economy and predicts the Federal Reserve will have to cut interest rates to three per cent by the middle of 2008 to ward off a major recession in the region

Goldman Sachs reckons drastic action is needed to rescue the ailing US economy and predicts the Federal Reserve will have to cut interest rates to three per cent by the middle of 2008 to ward off a major recession in the region. If so, and Britain fails to follow suit, sterling will go even higher.

The UK stockmarket is still proving surprising resilient despite the Governor of the Bank of England warning of an economic slowdown, fears on higher inflation, a slump in mortgage approvals and a continuing fall in house prices.

Interest rates in the wholesale money markets have hit a record nine-year high at 6.7 per cent. The pressure on the Bank of England to slash interest rates is intense, but the Bankís hands are tied, as it has to regulate interest rates to keep inflation inside pre-determined targets. These are the targets set by the then Chancellor, Gordon Brown, when he handed over interest rate policy to the Bank.

The pharmaceutical sector (or at least the dominant pharmaceutical companies, such as AstraZeneca and GlaxoSmithKline) is facing the problem that double-digit growth in profits is being curbed, because growth rates are falling. This is due to an increase in regulatory hurdles for potential blockbuster drugs as a result of more stringent safety tests.

As a result, the defensive attractions of the pharma sector are increased because the market for drugs are neither unduly affected by economic problems in the US nor are the drug regulators such as the FDA.  So investors continue to buy the shares, collect a major return in the way of dividends and increase their cash balances. 

IMS Health, the pharmaceutical industryís data collector, says that the global pharmaceutical market increased by seven per cent in 2006 to GBP 312bn. More up-to-date data estimate the rise at six per cent in 2007. A far cry from double-digit growth in the 1990s but still attractive to investors and the growth is likely to continue at around the five per cent level for the next two years.

Some smaller, AIM-listed pharmaceutical and biotech companies have been hit by investors taking their profits in advance of the elimination of taper relief for the Alternative Investment Market from the Spring of 2008.

Vectura should generate cash in H2 2008
Vectura, the biotech and pharmaceutical company, announced a pre-tax loss of GBP 11.3m for the half-year to end September 2007 on sales 102 per cent up at GBP 12.3m This compares with a loss of GBP 2.7m on sales of GBP 6.1m in the same period in the previous year.

Vectura has completed the integration of acquisition Innovata, which has produced costs savings of GBP 2m. Vectura concentrates on pulmonary products, which have large markets to cater for, and cheered the market with the estimate that it should be generating cash by the second half of next year.

In the pipeline there are some good products. The VR315 inhaled combination asthma therapy has forged ahead with a GBP 2.2m milestone payment scooped up in October 2007. Vectura also stands to get a EUR 10m milestone payment over the next six months from partner Boehringer Ingelheim for its work on a multi dose, dry powder inhaler. Vectura is also in partnership with Novartis to develop an inhaler for chronic obstructive pulmonary disease, which is now in phase II trials.

York majoring on Abasol for fungal skin infections
York Pharma, the pharmaceutical and biotech company, delivered a loss of GBP 6.6m in the year to end September 2007 on zero sales, compared with a loss of GBP 5.9m in 2006 also on zero sales. 

Its shares have fallen over 15 per cent in the last month, as dealers worry about its cash position (net cash of GBP 5.5m) and the abolition of tapering relief, which has sheltered AIM shares from penal taxation in the past.

York concentrates on skin products and has Abasol, its lead product, awaiting approval from the Medicines and Healthcare Products Regulatory Agency (MHRA). Abasol is a treatment for fungal infections of the skin and we could soon be hearing of a partnership for Abasol being clinched with a US pharmaceutical company. York is also to draw more attention to Abasolís effectiveness in clearing up other skin problems.

York gets a substantial revenue from Zindaclin for the treatment of acne and Vitix for vitiligo: both products contribute total revenue of GBP 5m, as a result of its recent purchase of Derms Development for GBP 17.5m.
Dealers speculate that York could come to the market to raise more cash, but the company is more likely to get the necessary cash from an out-licensing deal for Abasol.

United Drug continues acquisitions to boost profits
United Drug, the wholesale pharmaceutical distributor, made a pre-tax profit of EUR 55.8m for the year to end September 2007, up eight per cent on 2006 on sales seven per cent ahead at EUR 1.6bn. Annual sales are expected to growth at around seven per cent from the core business yearly in the future.

Operating profit rose an impressive 17 per cent to GBP 60m with around 50 per cent coming from recent purchases. United bought the packaging division of Budelpak International of Belgium in April 2006 and followed this up by buying a Dutch packaging company Pharma Logistics Investments in August 2007 for up to GBP 15m.

United is set to spend a further EUR 250m on more acquisitions over 2008. These will buttress its speciality distribution business marketing products direct to the patient   and further strengthen its packaging business in Holland.

United is concentrating on pushing growth through acquisitions, as it had to face a 35 per cent reduction in pharmaceutical prices in its home market of Ireland in March 2007.

Malcolm Craig, a freelance financial journalist and author of many books on successful investment, is one of the most respected investment commentators in the UK.

7th December 2007


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