FTSE in-depth: Bitter pills for the drug giants

By This Is Money
Updated: 06:58 EDT, 25 September 2010

First, Big Banking lost its shirt, then Big Oil got stuck in the mud. Now it is the turn of Big Pharma to swallow a bitter pill of its own making.

Drug problems: It's the turn of Big Pharma to swallow a bitter pill

Twitchy regulators are at the heart of the problem. German pharma giant Merck was just the latest sector leader to hit turbulence over a new blockbuster drug.

Its shares slumped nearly 10% in early Frankfurt trading after Europe's leading drugs panel took umbrage at its multiple sclerosis treatment Cladribine. That in turn raised serious questions about whether the new pill would ever see the light of day in either Europe or the US.

Merck's malaise follows on the heels of similar woes at GlaxoSmithKline, whose diabetes drug Avandia was banned across the continent on Thursday by the European Medicines Agency, prompting America's Food and Drug Administration to 'severely restrict' Avandia's availability across the pond.

A flicker of good news came in a note by Goldman Sachs stating that the loss of Avandia would have only 'minimal impact' on Glaxo's earnings. The stock reversed early losses, closing 5.5p higher at 1264.50p.

AstraZeneca, unsettled by a small but embarrassing strike – the first in its history – shrugged off recent losses, closing 22.5p higher at 3334.50p. Shire, which was downgraded to underperform by Exane Thursday along with AstraZeneca, inched up 10p to 1472p.

Analysts noted that after having 'a very good run' in recent months, pharma majors were ripe to fall.

Resource majors also had good reason to feel dejected after UBS downgraded miners linked to high copper valuations.

Analyst Themis Themistocleous, warning of easing prices toward the end of the year, cut his rating on South America-focused Antofagasta, trading at an all-time high, to sell from neutral. Themistocleous placed a revised price target of 980p on a stock that led the market lower, closing 30p down at 1182p.

UBS also downgraded Kazakhmys (down 7p to 1421p) two notches to sell from buy, cutting its target price to 1300p from 1428p. It warned investors that 'the time is right' to take profits.

Perhaps the more worrying downgrade, also from UBS, hit Anglo American, whose shares ended off 15.5p at 2535p. South Africa's ruling ANC party has talked stridently of grabbing control of key sectors such as mining, mimicking the role of the state in Moscow and Beijing.

UBS warned of 'rising political risk' and the random application of mining laws, cutting Anglo's rating to neutral from buy and easing its target price to 2700p from 2840p.

BHP Billiton was a rare positive exception, gaining 9.5p to 2009p. Evolution Securities analyst Charles Kernot noted that the balance of possibilities was 'moving toward' BHP finalising its $39bn deal for Canada's PotashCorp. Rio Tinto gained 42.5p to 3695p.

The markets had another directionless session, opening slightly off on running concerns over the economic outlook in Britain, America and Europe. But the day slowly brightened, with the Footsie reversing early losses and closing 51.4 points higher at 5598.48.

ARM Holdings led the market higher, soaring more than 6% after Oracle chief executive Larry Ellison revealed that the cash rich IT giant was keen to buy a chipmaker.

ARM, which has also been touted as a target for Intel and Samsung and which designs the chips that power Apple's iPhone, saw its stock close 23.8p higher at 414.6p.

Rumours of a potential bid for Paragon Group at around 240p a share helped propel the buy-to-let specialist 1.9p to 161p, outpacing the broader market, But one analyst downplayed the possibility of a deal, asking 'why anyone would want to buy a mortgage company at the moment?'

Aberdeen Asset Management had another good day, gaining 7.4p to 159.8p after being upgraded to buy from neutral by Evolution Securities, with a target price of 160p. BP had another dreary session, closing 0.2p lower at 404.95p, while Shell gained 13.5p to 1907.

Falkland Islands oil explorer Rockhopper, which has seen all its wishes come true in recent months, jumped nearly 10% in early trading after doubling daily output predictions at its Sea Lion 1 well. The shares lost some of their gains late in the day but still ended 8.50p higher at 510p. Rockhopper is up 1250% since it struck oil in May.

Hammerson, the owner of Brent Cross shopping centre, saw its shares end 17.1p higher at 406.2p after Credit Suisse upgraded the stock to outperform from neutral. And fizzy drinks maker Britvic closed 7.1p higher at 474.3p, with Evolution Securities reiterating its buy rating and raising its target price to 525p from 467p.