Market Report: Drug giant immune to dose of optimism

Laura Chesters
Friday 11 October 2013 01:54

The pharmaceutical giant GlaxoSmithKline missed out on the injection of optimism into the rest of the market yesterday as City analysts warned that it needs to spend more money on its pipeline of new drugs.

While the rest of the market was cheered by hopes that the US will not default on its debt, GSK was stuck at the bottom of the blue-chip index as Credit Suisse downgraded it to underperform.

The Swiss bank has wider issues with the pharmaceuticals sector, and GSK is just part of that story, but it pointed out that the drugs group is the most overvalued in the sector. Credit Suisse warned that there is a mismatch between what it spends on research and development of new drugs, and its actual pipeline. The bank calculated that it will need to increase its spending by 40 per cent to fund all its pipeline drugs.

GSK nursed a 4.5p fall to 1,545.5p, while fellow pharmaceutical group Shire slipped 6p to 2,381p as Credit Suisse took all UK drugs companies off its buy list.

After three consecutive days of losses, the Footsie was back in the black and firing on all cylinders – it recorded the biggest one-day rise since the middle of August.

Alastair McCaig, a market analyst at the spreadbetting firm IG, said traders welcomed news that Janet Yellen has been lined up to take over from Ben Bernanke, the chairman of the US Federal Reserve, when he steps down in the new year. Mr McCaig said: "The markets welcomed the dovish economist's nomination by President Barack Obama, as it signals to traders that the quantitative easing scheme will be kept in place. Optimism that a last-minute agreement will avoid any chance of the US defaulting has given European markets a relief rally."

The FTSE 100 surged 92.58 points to 6,430.49.

One of the biggest risers was Whitbread. Traders checked into the hotels-to-coffee group on chat about its rapid growth, and speculation over what it will do with Costa Coffee. Whitbread – the company formed from a Bedfordshire brewer – is now the UK's largest hospitality company, owning Costa Coffee, hotel group Premier Inn, and associated cheap restaurants from Beefeater Grill to Brewers Fayre.

Analysts at Oriel Securities said shares in Whitbread are worth buying because of its plans to increase its UK network to 75,000 rooms by 2018, representing an increase of 45 per cent over the next five years. They also pointed out that Costa's British and overseas expansion will see it double its sales to £2bn over the next five years.

However, Oriel's Jeffrey Harwood speculated that Costa could be split off because "it is difficult to believe that the group's current structure is optimal" – as Costa has very little interaction with the rest of the group. While he doesn't expect any disposal or demerger of Costa in the short term, he believes that not only is an eventual split on the cards but also that Costa's freehold property assets mean there is "further upside" if they were ever sold.

Mr Harwood added that there are increasing signs of strength in the UK hotel market and he upgraded Whitbread to buy, from hold, with a 3,270p price target for shares that frothed up 122p better at 3,114p.

While Oriel's analysts were licking their lips over Whitbread, the bakery chain Greggs received a thumbs-down following its trading update yesterday. Oriel retained its sell rating and said that despite an improvement in trading, the "forecasts, and crucially the dividend, remain under pressure". The shares fell 5.4p to 433p.

Continuing on the food and drink theme, analysts at N+1 Singer rated Majestic Wine a buy and said they expected good earnings growth as it gains market share. They gave it a 590p target price for shares that uncorked a 6.5p increase to 540p.

On AIM, Anglo Asian Mining revealed a surge in gold production to record levels at its Azerbaijan mine. The shares were 1.125p brighter at 31.625p.

Punters were still betting there could be some action at bookmaker Ladbrokes yesterday; on Wednesday, rumours swirled that Playtech founder Teddy Sagi had bought a 3 per cent stake. Ladbrokes added another 5.2p to 185p.

Vague rumours that a larger oil group is eyeing Salamander Energy pushed the small-cap explorer up 1.25p to 106.25p.

Gulf Keystone Petroleum has restarted commercial production at its Shaikan field in Kurdistan and jetted 9.25p to 181p.

Liberian goldminer Aureus Mining closed its £9.9m equity raising and the shares were unmoved at 30.1p.

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