Market Report: Drug makers face rising threat of legal action

The pharmaceuticals companies faced a bitter pill to swallow yesterday, as investors were warned of the rising danger of legal action within the sector. In the wake of the announcement from GlaxoSmithKline earlier in the week that it is putting aside £2.2bn to cover legal costs, Morgan Stanley said that the "risk of enforcement for the healthcare industry has reached an all-time high".

The broker said it had come to its bearish view on the industry partly because of "discussions with former senior members of the US Department of Justice and industry executives", and it predicted that "penalties are likely to get tougher".

The issue was one of a number of reasons – including budget constraints in Europe – that led Morgan Stanley's analysts to downgrade its advice on the sector to "cautious" from "attractive", saying that the "operating environment... is worsening rapidly".

The blue-chip pharmaceutical groups were among the session's fallers, with GSK – which had its advice cut to "underweight" by Morgan Stanley – retreating 39.5p to 1,151.5p while AstraZeneca dipped 56.5p to 2,922.5p.

However, they were by no means alone as the FTSE 100 lost 108.79 points to finish at 5,867.91, its lowest level yet in 2011. The miners dominated the list of major losers, with China again reviving concerns that it will up its interest rates by revealing that its growth had risen ahead of forecasts.

The banks managed to outperform the index, helped from across the Atlantic by Morgan Stanley, which said its earnings over the fourth quarter had risen by 35 per cent.

Barclays took the top spot, jumping up 7.1p to 303.25p, while Lloyds Banking Group and Standard Chartered were up 0.6p to 66.81p and 3p to 1,707p respectively.

National Grid advanced 8p to 539p, sparked into action by JP Morgan Cazenove's decision to upgrade its recommendation on the group to "overweight". The broker made the change as it noted the utility had underperformed its peers in 2010, commenting that "the market has become so focused on the risks facing Grid that it has lost sight of the opportunity".

The wooden spoon went to Invensys, following its interim management statement. Although the engineering group's update contained just "a few minor disappointments", according to Charles Stanley's Jeremy Batstone-Carr, it still declined 27.8p to 329.6p.

The insurers were in focus as RSA and Aviva both updated the market. RSA was knocked back 1.6p to 133.2p after releasing a statement in which it said it took a hit of £142m from the extreme weather conditions seen in the final two months of 2010.

Meanwhile, Aviva – which RSA tried to buy in August – announced it was planning to cut its hybrid debt over the next three years by at least £700m. Its aim, it said, is to increase both its dividend and profits, and the group edged back 0.2p to 428.1p.

A third contract win in a week for Autonomy boosted the software company forwards 16p to 1,424p, but Rolls-Royce – which struck a $250m deal with the airline Cathay Pacific to provide engine maintenance – had a different experience, sliding 19.5p to 630p.

EasyJet was left at the base of the FTSE 250 after plummeting 73.8p to 382p as it warned its pre-tax loss for the first-half of the year could double. The budget airline blamed both the current state of the economy and an increase in fuel prices for its gloomy update, and it was left at its lowest price since last October.

Nonetheless, Richard Curr, head of dealing at Prime Markets, was not too worried, saying he does not believe "these short-term blips warrant the concerns expressed by some over the longer-term outlook".

British Airways was also falling, as it moved back 5p to 282.5p on the airline's last session of trading ahead of the official completion today of its merger with the Spanish company, Iberia. Investors will be able to buy stocks in the resulting holding company, International Consolidated Airlines Group, from Monday in both the London and Madrid markets.

Back on the mid-tier index, St James's Place managed to finish ahead with a move up of 2p to 281p after the wealth manager revealed that new business had increased by over 30 per cent.

The group did not comment on the future of Lloyds' 60 per cent stake in the company, uncertainty around which has "created a great opportunity to acquire the shares at the current depressed level", according to Panmure Gordon's analyst Barrie Cornes.

Among the small-cap companies, Laura Ashley was very much in fashion with investors, booking gains of 4p to close at 23.25p.

The chain – known for its floral designs – announced its second profit upgrade in little over a month, saying that it had experienced a "strong like-for-like performance over Christmas and early January".