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Malcolm's Market Eye: 27 October to 2 November 2007

The strength of the Pound Sterling against the US Dollar is putting UK manufacturers at a disadvantage on the export front

The strength of the Pound Sterling, particularly against the US Dollar, which is at a 26-year low (GBP 1: USD 2.06), is putting UK manufacturers at a disadvantage on the export front, according to the latest Confederation of British Industry report.

Export orders in September 2007 fell to their lowest level in a year. After a benign period for exporters over recent years, the slowdown of the world economy could lead to an intensification of the UKís industrial decline.
Beleaguered home owners are suffering from high interest mortgages eating into their cash reserves, while also being hit by the increasing cost and size of their bank and credit card borrowings.

Confidence is ebbing from the housing market as shown by the drop in new mortgages granted to a two-year low point. Monetary Policy Committee member Kate Barker says inflation still remains a threat, so the Bank of England may not reduce interest rates in the short term.

The Bank of England also warned that the UK stockmarket could be vulnerable to any further reductions in UK growth and fears further destabilising US Dollar falls.

Ignoring all the bad news, the UK stockmarket has hit 6,706, as measured by the FTSE 100 Index, only a little lower than the June 2007 seven-year high, although still well below the all time peak of 6,960 reached on the last trading day of 1999.

The pharma sector continues to offer its defensive attractions, particularly to institutional share investors. The sector continues to track the market as a whole but at a premium to other more risky sectors of the market: a premium which reflects that defensive strength. However, the slide in the US Dollar is affecting the market ratings of pharmaceutical companies with big exposure to the currency, as far as their overseas revenues are concerned.

GSK: mixed fortunes and massive job losses predicted
GlaxoSmithKline (GSK) saw its share price rise after settling a dispute over a patent with Mylan Laboratories covering its anti-depressant Paxil (paroxetine). The new deal gives Mylan the right to sell a generic version of Paxil from 1 October 2008.

Paxil sales for H1 FY07 hit GBP 77m, with most coming from the US, where Skyepharma earned a royalty of four per cent (or about GBP 600,000 each month), and this is secured at least until October 2008.

GSK upset its employees by predicting that thousands of jobs could go to save GBP 700m a year by 2010. In the UK, GSK employs 20,000.

Around 40 per cent of cost savings will come from closing down some its 80 factories, 12 of which are UK-based. Another 40 per cent could come from cutting the salesforce, who in todayís competitive conditions get little time with GPs.

The remaining 20 per cent of the cuts will be applied to R&D activities, as GSK concentrates investment on its later stage pipeline products. The job cutting programme will cost GBP 1.5bn over five years.

GSK announced weaker Q3 FY07 sales, which resulted from a 38 per cent drop in quarterly sales of its blockbuster drug Avandia (roseglitazone). Sales of the companyís top-selling diabetes medicine were GBP 225m. The drop followed a health scare in the US after the drug was linked to an increased risk of heart attacks in a US study published in May 2007.

GSK is expecting the FDA to order a black box labelling change for Avandia, warning about heart failures linked to conditions, such as high blood pressure and congested lungs. If the FDA adds risk of heart attack to the label, sales of Avandia could fall even further.

GSK has also been hit by generic competition on some of its drugs. Advair (fluticasone), GSKís best-selling asthma treatment, has been knocked back by AstraZenecaís (AZ) competitor product, Symbicort (budesonide/ formoterol), which has invaded its market.

Pre-tax profits at GSK slumped seven per cent in Q3 FY07 to settle at GBP 1.8bn, compared with the same period in FY06, while turnover dropped three per cent to GBP 5.5bn. GSKís vaccine portfolio performed well, however.

Prostrakan: low risk entry to US for anti-nausea patch
Prostrakan, the pharma and biotech company, has clinched a strategic alliance with NovaQuest, giving it a low-risk entry into the US pharmaceutical market.

A sales force of 75 will support the launch of Sancuso (granisetron), Prostrakanís reformulated chemotherapy anti-nausea patch. The product is expected to receive US regulatory approval by the summer of 2008, and the company should deliver profits by the following year.

Premier Research delivers a loss, but silver-lining is on horizon
Premier Research announced a loss of GBP 440,000 on sales of GBP 37.9m for the current half year. This compares with a profit of GBP 1.4m on sales of GBP 17.8m in the same period in the previous year.

Premier carries out clinical trials for pharmaceutical clients and dealers were disappointed in the latest half-year figures, with cash profits plummeting 58 per cent to bottom out at GBP 1.3m.

The reason for the fall into losses was due to high investment in staff after the company made GBP 18.5m worth of acquisitions this year and GBP 20m worth of deals last year. The good news is that new sales have been robust and the order book has increased to GBP 159.3m.

Debt is a problem, according to broker Brewin Dolphin, as it is almost three times the brokerís estimates for cash profits for FY08. The broker has cut its earnings per share forecast by over 30 per cent to GBP 0.09, with an estimate for FY09 cut by 13 per cent to GBP 0.13.

Malcolm Craig, a freelance journalist and author of 14 published books on most aspects of successful investment, is one of the UKís most respected financial commentators.

1st November 2007


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