A new report claims that UK speciality pharmaceuticals companies have

prospered in the shadow of UK giants GlaxoSmithKline and AstraZeneca and are now set to deliver the promise of sustainable growth.

This claim is made by brokers at Bridgewell who have initiated coverage on

Shire Pharmaceuticals, SkyePharma, Acambis and Vernalis, selecting them as the key players in the speciality pharmaceuticals market.

‘Four Ps’ put industry under strain

The report states that since the early 2000s, four key factors, (which it

terms the ‘four Ps’) have exerted a potentially negative effect on

drugmakers, namely the “the combination of political pressure, patent

expiries, pricing pressures and productivity issues in R&D” has placed the

industry under a great strain. However, this environment has created an

atmosphere that lets the smaller firms flourish.

Bridgewell argues that, although R&D spend continues to rise dramatically,

“as a consequence of progressively more overall investment and a ramp-up

in the average cost of taking a single drug to market,” this does not

appear to be matched by a similar trend in productivity.

Subsequently “big pharma is more and more keen, and in some cases

desperate, to increase R&D productivity, and increased specialisation is

being embraced as a way forward. Clearly, in our view, the UK speciality

players will benefit from this trend.”

The four stocks in the report are “relatively well-positioned versus their

large-cap peers in terms of pursuing relatively low-risk strategies,” the

broker notes, including late-stage/low-risk R&D, line extensions, sales

forces which target niche markets and “active strategically-focused

merger-and-acquisition and partnering strategies.” Furthermore, Bridgewell

says all four companies are well placed “to repulse the impact of generics

currently threatening the industry at large.”

Vernalis is top pick

The report gives ‘buy’ recommendations for Vernalis, Acambis and

SkyePharma and an ‘overweight’ rating for Shire. Vernalis “is our top

pick” the brokers say, as “we believe it combines significant potential

upside and lowest exposure to risk, together with several solid key share

price triggers.”

It concludes by noting that Acambis and SkyePharma have recently been

impacted by negative news, “and we expect their share price recoveries to

be accompanied by some volatility,” while Shire, in contrast, has

enjoyed a recent rapid rise in share price, “we believe some unrecognised

value still remains.”