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Malcolm's Market Eye: 28 September to October 4

Pressure for interest rate cuts is strong, but the global credit squeeze ensures short term rates for interbank lending remain high

The stockmarket moves into the autumn with the volatility, which has characterised the year so far. Pressure for interest rate cuts is strong, but the global credit squeeze ensures short term rates for interbank lending remain high.

The sub-prime mortgage market in the UK has seen interest rates of over 11 per cent and the situation could get worse for borrowers with poor credit histories. We could soon see forced house sales which could presage an overdue property bear market of the type seen in the early 1990s when three million people plunged into negative equity, meaning the value of their houses were less than their mortgages.

While house property has presented an excellent investment, it has the down risk of being highly non-liquid when the buyers turn their backs on the housing market on fears of their investment losing value.

In the early 1990s, house prices dropped 28 per cent. In the 1970s house prices dropped 36 per cent. As early as 2004, the IMF was pointing out that UK property prices were grossly overvalued and due for a sharp correction. We are seeing the first signs of that correction.

The UK stockmarket took its lead from its US counterpartís surge on hopes of another Federal Reserve Bank interest rate cut. On this side of the Atlantic, dealers are looking for a cut in UK interest rates. Dealers see recent UK gains as a ërelief rallyí rather than a genuine turnaround in the marketís fortunes.

The pharmaceutical sector slightly outperformed the bullish lift in the UK stockmarket as a whole, on idle bid chatter and on increasing awareness as to its defensive qualities, compared with a banking sector still threatened by the global credit crunch.

Prostrakan poised to launch two key drugs on US market
Prostrakan, a UK-based speciality pharmaceutical company, posted a loss of GBP 8.5m on sales of GBP 20.9m for H1 FY07, compared with a pre-tax loss of GBP 9.5m on sales of GBP 16.3m for the same period in the previous year.

Prostrakan is set to launch its two top drugs into the USA ñ news of which caused the share price to rise 15 per cent.

Revenue continues to flow in from two drugs sold into the EU market. One is a testosterone replacement gel and the other treats anal fissures. The company believes it will get approval by the middle of 2008 to sell both drugs in the US, which would boost turnover to USD 500m.

Prostrakan also makes a chemotherapy anti-nausea patch, Sancuso, for which it is seeking approval in both the US and in Europe. The R&D budget was reduced in 2006, which is the main reason for the fall in losses. Landsbanki analysts expect Prostrakan to move into regular profits by 2010.

Antisoma losses down as milestone payments arrive
Antisoma, the biotechnology company, announced a loss of GBP 12.7m on turnover of GBP 8m for the year to end June 2007, compared with a loss of GBP 18.9m on sales of GBP 1.6m in 2006.

Antisoma has cash of GBP 61.4m as a result of a GBP 38.2m payment from Novartis and an inflow of GBP 26.3m as a result of raising funds in the market.

Antisoma has a new leukaemia treatment in phase II trials, which is being tested on leukaemia patients alongside chemotherapy treatments.
Novartis has signed a licensing deal with Antisoma for the latter to develop and distribute its treatment for lung cancer. The treatment works by attacking the blood vessels flowing to cancerous tumours and is in phase III trials. The Novartis tie-up could produce total milestone revenue of USD 890m if it works.

There are, however, uncertainties about the lung cancer treatment, which may not be sold until 2010.

Acambis alerts market to future announcement on smallpox vaccine
Acambis alerted the market to the new that it intends to announce, over the next few months, a new development relating to its smallpox vaccine ACAM 2000, which was given the green light by the FDA.

Dealers speculate the new development will be an announcement of a new GBP 15m contract with the US government.

The company made a pre-tax loss of GBP 19.3m on sales of GBP 3.4m for the half year to the end of June 2007, compared with a loss of GBP 22.9m on sales of GBP 10.6m in the same period of the previous year.
R&D spending is lower at GBP 13.2m as against GBP 20.3m a year earlier and the company has cash of GBP 27.3m.

Acambis is linked to sanofi-aventis in a partnership deal developing a treatment for Japanese encephalitis, which, as trials have shown, is potentially better than the existing vaccines on the market.

AGI moving forward with potential blockbuster drug for IBS
AGI Therapeutics, the biotechnology company, announced a loss of EUR 5.1m on sales of EUR 200,000 for the half year to end June 2007, compared with a loss of EUR 2.3m on zero turnover in the same period in the previous year.

Irish-headquartered AGI also announced its irritable bowel syndrome drug arverapamil has now entered phase III trials. The market is looking forward to a progress report for this potential blockbuster drug this month. Ten to 20 per cent of the population of the developed world suffers from IBS.

AGI is also to start phase II of clinical studies for its mecamylamine CR and arbaclofen drugs designed to fight gastroparesis, ulcerative colitis and chemotherapy induced diarrhoea early in 2008. AGI has a joint venture programme with Axcan Pharma to develop chronabomeprazole for the treatment of nocturnal acid breakthrough in gastroesophageal reflux patients.

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

4th October 2007


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