Spending spree

The stock market, led by big cap stocks, hit a fresh five-year high before a bout of profit taking and weakness in mining and oil stocks wiped out much of the new ground made.

UK equities continued largely to mirror movements on Wall Street, where tame US inflation figures, increased merger and takeover activity, and growing expectations that interest rates do not have to rise further to fight inflation helped drive US equities higher. The S&P, a much broader measure of the market than the Dow Jones Industrial Average, closed above 1,400 for the first time in six years.

Some strategists think the markets both here and in the US are ripe for a sharp downward correction. However, the bulls maintain there is no bad news on the horizon, and it is difficult to see where this could come from or how it would spark a significant retreat.

Spend, spend, spend
Suggestions that AstraZeneca (AZ) is considering a takeover bid for Shire Pharmaceuticals in order to boost its product pipeline sent Shire's share price racing ahead. Analysts mostly take the view that Shire is much more likely to be acquired by a US rival. However, the company's share price is holding firm, up more than 4 per cent, on the AZ takeover rumour.

A media report over the weekend suggested that institutional investors in GlaxoSmithKline (GSK) are putting pressure on the company to use its mountain of spare cash, around $4bn, to make acquisitions to strengthen its product pipeline. The claim, just weeks after institutional investors in AZ demanded that the group employs its huge cash pile to bolster its product pipeline, which was hurt by the withdrawal of four key products in recent months, through acquisitions.

Shares in both AZ and GSK are still depressed, with AZ in danger of closing below the important 3,000p technical level, following Democrat victories in the US mid-term elections, which could signal a dramatic cost-cutting initiative and new legislation in the US.

Flying high
Meanwhile, the UK's biggest listed biotech group Vectura, the inhaled medicines manufacturer, is buying Innovata through an all-share deal, making the enlarged company a UK leader in pulmonary product development. Shareholders in Innovata, which has its own portfolio of inhaled products for asthma and diabetes, were offered a 13 per cent premium on its closing price ahead of the deal announcement. Innovata shareholders will own 46 per cent of the enlarged group and Vectura's shareholders will own the balance. Analysts generally liked the deal, which is expected to be completed early next year.

Shares in Acambis came under the spotlight after the US government's unexpected decision to eliminate the vaccine maker from supplying it with a new smallpox vaccine worth up to $1bn. The shares plunged by 38 per cent to a six-year low with several stockbroking firms recommending their clients sell the shares.

Acambis had been competing with the Danish group Bavarian Nordic to win a contract to supply 20 million doses of smallpox vaccine, followed by up to a further 60 million doses. The company said its failure to meet a technical specification, not price, resulted in it losing out. The decision has not affected Acambis' other contracts with the US government and its shares have recovered some lost ground since rumours surfaced that a US group is interested in making a takeover bid for the company.

Shares in drug development company, Vernalis, moved a little higher on news that the big Swiss pharma group Novartis has approved a second cancer drug discovered through Vernalis' platform as a preclinical candidate under its joint cancer research and development programme.