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Malcolm's Market Eye: 21 - 27 September 2007

After the run on the Northern Bank the UK stockmarket recovered some of its nerve after realising that the government is ready to allow the Bank of England to 'guarantee' savers' deposits

After the run on the Northern Bank (the first for over 100 years) the UK stockmarket recovered some of its nerve after realising that the government, in an unprecedented move, is ready to allow the Bank of England to stand behind the banking sector as lender of last resort and 'guarantee' savers' deposits.

In essence this makes bank deposits as safe as gilts as the government has the ultimate fund raising weapon. It is free to raise more cash from the UK taxpayer to prop up banks, which borrow short term cash on the interbank market and led the cash long, financing, for example, house purchase by dishing out mortgages to dodgy borrowers seeking finance of up to 120 per cent of a property's valuation.

These 'sub prime' mortgages in the UK can be compared with those in the US, according to the IMF, and could intensify the credit crunch and drive mortgage rates up. The struggling banking sector received a shot in the arm as speculators scrambled for shares. And the fall in the inflation rate from 1.9 per cent in July to 1.8 per cent in August 2007 gives the Bank of England some leeway to reduce interest rates.

In the US, the Federal Reserve Bank cut rates by a more than expected half point which gave courage to punters to buy shares, with the optimism spreading across to the UK.

The pharmaceutical sector, still seen as a defensive sector by fund managers, followed the market gyrations but at a safe distance, with share prices reflecting the security premium.

Promising results spurred selective companies' share prices ahead. Phytopharm's share price rose a little on announcing it is making good progress on its weight management drug, Hoodia extract, on which it is working with Unilever.

Another bullish factor lies in rumours of potential bids: there is market speculation that the next target could be Silence Therapeutics, the former SR Pharma, whose share price rose GBP 0.12 to GBP 0.17. Silence is working on drugs and vaccines to 'silence' disease causing genes.

SkyePharma delivers better-than-expected results
SkyePharma's posted results better than the market was expecting, with losses down from GBP 15.8m to GBP 14.1m. The FDA, now a very cautious regulator, has delayed Skye's asthma drug Flutiform (fluticasone/formoterol), but Skye is confident it will soon be able to launch the drug on the market. Broker Landsbanki thinks Skye will move into profitability by 2009.

GSK suffers more Avandia setbacks
More gloomy news for GlaxoSmithKline's (GSK) diabetes drug Avandia (roseglitazone). Two new studies claim the drug increases patients' risks of having heart attacks.

Even worse, other studies say that Actos (pioglitazone), which is made by Japan-headquartered Takeda for diabetes sufferers, reduces the risk of heart attacks.

Shareholders are pressing for a limited break up of GSK, starting with the sale of its consumer division which makes globally recognised brands, such as Ribena and Lucozade.

GSK is poised to introduce its new vaccine, Cervarix, to fight cervical cancer after getting the go ahead from the EU Commission. The EU market for Cervarix could grow to GBP 2bn annually. GSK is still awaiting the green light from the US drug regulators to introduce Cervarix to the US, and there is speculation this could happen early in 2008.

Solid progress for Oxford Biomedica led by anti cancer drug Trovax
Oxford Biomedica reported a loss of GBP 10.3m on turnover of GBP 2m for H1 FY07, compared with a loss of GBP 9.4m on turnover of GBP 210,000 in the same period in the previous year.

Oxford makes the cancer vaccine TroVax, which combats various forms of cancer by stimulating the immune system and is administered together with chemotherapy treatment. TroVax is licensed to French pharmaceutical company, sanofi-aventis.

The latest six months saw Oxford Biomedica move into a positive cash flow situation for the first time, boosting its cash reserves to GBP 42.5m. This was due to Oxford receiving a first milestone payment of GBP 19.7m from licensee sanofi-aventis. Cash flow will be intermittent over the next two years because Oxford receives its revenues from drug development based on milestone payments - not royalties.

Investors have their eyes on 2009 when phase III trials, which will involve testing the effects of varying dosages of TroVax, should be completed and, if successful, it will then be marketed.

Another possible block buster drug for Oxford in early trials is ProSavin, which treats Parkinson's disease (PD). The drug has shown up well in treating the disease which causes hand tremor, muscle rigidity and retards body movement.

New management at Medical Solutions drives toward break even
Medical Solutions, the pharmaceutical and biotech company, posted a pre-tax loss of GBP 300,000 on sales of GBP 3.1m for the H1 FY07. This compares with a loss of GBP 1.3m on sales of GBP 3.2m for the same period in the previous year. Medical has cash of GBP 13.8m in reserve.

Medical Solutions sold off the jewel in its crown, a Dubai-based subsidiary, for GBP 13.2m. A new management team has moved in and the company is making progress. Administration costs have dropped from GBP 2.0m to GBP 1.5m. The operating losses from the businesses left at Medical Solutions have been reduced by nearly 90 per cent to GBP 674,000 (a figure which includes a VAT credit of GBP 206,000).

The driving force of the business is Medical's cytology, or cervical screening, operation which has a near 50 per cent share of the liquid-based cytology market in England and Wales. The diagnostic pathology businesses, which analyses tissue abnormalities, saw a sales drop against 2006 levels. There was a reasonable rise in sales of drug development support services.

Medical Solutions bought Geneservice for GBP 3.9m in the summer of 2006, which means Medical Solutions can provide life-science research to existing clients.

Geneservice was a spin-off from the Medical Research Council and has kicked in profits and cash from the time of acquisition. Medical Solutions should move into a break-even situation by the end of this year.

The Author
Malcolm Craig, a freelance financial journalist and author of 14 books on aspects of successful investment, is one of the country's most respected investment commentators.

27th September 2007


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