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Rocky Road

UK stockmarket continues on its recent volatile run as investors brace themselves for likely rise in UK interest rates later this year

The UK stockmarket continues on its rocky road as a result of rising inflation along with another likely rise in UK interest rates which could well be triggered before the end of 2006 (a rise in US interest rates this week has already been priced into the market).

The view from the City is that the stockmarket will continue to oscillate around FT-SE 100 Index levels of 5,500 to 6,000 fuelled by a full pipeline of prospective bids and deals. The UK's third biggest pharma company, Shire, climbed to 785p on speculation that Serono, the Swiss biotech, may launch a bid if it is willing to overcome patent litigation regarding Shire's ADHD drug, Adderall.

The stockmarket has boomed over the past three years, largely as a result of takeover activity or rumours of possible bids such as those focusing on AstraZeneca (AZ). In addition, the pharma sector is an attractive haven in turbulent times as it is seen as highly defensive in contrast to more cyclical sectors, on the rationale that illness will always be with us, along with death and taxes.

Pfizer, the US drugs group, has decided to locate its European HQ in Germany in response to the UK's complicated planning systems.

The biotech sector is popular at present with punters looking for windfall gains from companies succumbing to bids following the £702m takeover of Cambridge Antibody Technology (CAT) by AZ in May and Neutec Pharma going to Novartis for £305m a fortnight ago. A rise in biotech shares this autumn is likely as more biotechs succumb to bids.

GSK beaten into second place for Pfizer's medicines business
GSK has come second in the auction for Pfizer's over-the-counter medicines business. This is going to Johnson & Johnson of the US, which is paying £9.1bn - a `very full price' in analysts' eyes - for the business worth over four times yearly sales. GSK also lost out in January when it tried to buy Boots' drug business, which eventually went to Reckitt Benckiser. The City view is that while GSK has lost out, the episode demonstrates the firm is not willing to pay over the odds to gain acquisitions. GSK declined to pay more than $15.5bn for Pfizer's business despite its strategy to strengthen its foothold in the US.

More good news for AZ from Crestor study
Still buoyed by bid speculation, AZ rose 56p after a study showed that its blockbuster treatment, Crestor, can reduce LDL (`bad') cholesterol by 70 per cent when used together with Zetia, a drug made by Schering-Plough.

AZ revealed it has finished a study which illustrates that a combination of Crestor with Zetia ensured the biggest reduction of cholesterol of any treatment on the market. The global cholesterol market is worth around £11bn in annual sales.

The top selling cholesterol drug in the world is Pfizer's Lipitor. Schering-Plough also sells Zetia in combination with Merck's Zocor for cholesterol sufferers.

Synexus' outsourcing of clinical trials proves a major growth area
Synexus came to the Alternative Investment Market as recently as last October and is making a name for itself quickly. The firm carries out clinical trials for AZ, Amgen and Novartis. The latest pre-tax profits came in at £1.2m on sales of £9.54m for the year to end March 2006. This compares with a loss of £1.06m on sales of £9.77m for the previous year. Brewin Dolphin estimates 2007 pre-tax profits at £1.6m on sales of £11.5m.

The company is operating in a growth market. Until Synexus came on the scene, the time honoured way of recruiting patients for clinical trials was via individual GPs (90 per cent of trials are still carried out via GPs networking). Synexus has built up a patient database of 300,000 and offers a less costly and more efficient outsourcing route for clinical trials.

Synexus concentrates only on phase II and phase III patient trials and its forward order book has risen from £13m last year to over £16m currently. The company is growing by means of organic growth and astute acquisitions - it recently scooped up Diagnostics Units Hungary and SCM in Poland.

BioCompatibles clinches Chinese deal for primary liver cancer DC bead
BioCompatibles, the medical devices company, has clinched a three-year deal with SciClone Pharmaceuticals to distribute its DC bead, which delivers drugs aimed at primary liver cancer, in China. The DC bead is already marketed in Europe and is to be filed for approval in China this year.

SciClone has its own liver disease drug, Zadaxin, and will market the DC bead as well to a global market estimated at $400m a year - more than 50 per cent of new cases each year being in China.

Protherics losses up 360 per cent but healthy drug pipeline attracts interest
Protherics, the drug developer which makes Crofab for rattlesnake bites and Digifab to treat overdoses of heart drug digoxin, delivered a 360 per cent rise in its pre-tax loss to £9.56m on sales of £17.7m, down 6 per cent, for the year to end March 2006. Broker Nomura Code Securities is looking for pre-tax losses of £4.56m for 2007.

The upbeat news is that Protherics' drug pipeline, which includes Protarix for early-stage primary liver cancer in phase I trials, is good enough to attract a big pharma bid.

Meanwhile, Protherics' sepsis drug, Cytofab, goes into phase III trials in 2007 and is licensed to AZ for £195m, with two milestone payments due next year plus a 20 per cent royalty on sales. Other promising drugs include Voraxaze - for toxic levels of chemotherapy drug methotrexate - which is likely to get the green light for sale in the first half of 2007. This could turn out to be a blockbuster drug in view of the potential size of the market. Protherics' blood pressure vaccine has been made more effective after adding an adjuvant and is entering phase II trials. The vaccine should attract lively interest from would-be licensers.

Theratase delivers solid performance.
Theratase, the biotechnology company, posted a pre-tax profit up 27 per cent to £1.19m on turnover up 5 per cent at £5.55m for the half year to end March 2006. Rowan Dartington forecasts full year pre-tax profits of £2.6m. The company is delivering solid results with sales of diagnostic products doing well, particularly glucose oxidise, which is part of the diabetic tool box. The market is awaiting the results of phase IIa trials on AM Pharma's sepsis programme soon - Theratase delivers the active ingredient, alkaline phosphatase, for the programme.

Consumers International points finger at drug firms
Consumers International, the world federation of consumer organisations, accuses drug companies of putting the public at risk via large scale marketing malpractices and of spending twice as much on marketing as on research - £33bn. The study examined the practices of 20 of the biggest drug companies and calls for stricter government controls in addition to asking the companies concerned to put their houses in order.

Malcolm Craig is the author of 14 books on different aspects of successful investment ranging from the stockmarket to gold, from overseas property to gilts, He is one of the country's most respected investment commentators..

2nd September 2008


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