Market Report: Three-way deal talk lights up pharmaceuticals

There could be an interesting few weeks ahead for the pharmaceutical sector if talk of a three-way deal turns out to be true. The word among investors is that Shire Pharmaceuticals, off 18p to 1,062p, is mulling an offer for US group New River Pharmaceuticals, with AstraZeneca , 7p worse at 2,721p, lined up to buy New River's pipeline if the deal is completed.

New River is due to get FDA approval today for its attention deficit treatment NRP104. Shire already has a deal with New River to commercialise NRP104, which it views as the ideal replacement for its own attention deficit treatment Adderall XR, which is due to come off patent in 2009. Shire was so keen to do a deal with New River it will take only 40 per cent of profits from the drug, despite footing a large proportion of development costs, a very generous deal by pharmaceutical standards.

The rest of New River's pipeline, despite being high quality, is of little interest to Shire, so investors are speculating that it will sell the pipeline on to AstraZeneca. However, as always the stumbling block could be the price. New River is currently worth just over $2bn (£1.02bn), and the speculation is that it wants at least $3bn, between $75 and $80 per share. Shire will have to move quickly if a deal is to be done. Johnson & Johnson, another player in the attention-deficit market, also likes the look of New River and has very deep pockets. But if AstraZeneca is interested in New River's pipeline, which it should be if the state of its own pipeline is anything to go by, Shire may have the backing to match J&J.

Another takeover story doing the rounds in the blue chips was at InterContinental Hotels, 7p better at 1,161p. The rumour is that a private equity group is lining up a 1,500p-per-share bid for the hotels group, a 30 per cent premium to the current price. An offer at that level would value InterContinental at £5.7bn including debt.

Perhaps not surprisingly, volume across the market was light. With little reason to take out new positions before today's shortened trading day and the Christmas break, the FTSE 100 drifted 14.9 lower to close at 6,183.7 as traders continued to bank some of this year's profits.

The healthcare group Smith & Nephew topped the blue-chip leaderboard with a 17.25p gain to 537p, as investors remain convinced The Blackstone Group will bid for the company. There seems to be little foundation to that rumour, other than analyst speculation. One trader said: "You can't write off a bid, but it is unlikely to come before the end of the year. Blackstone is not going to rush into doing this just because the market expects it to."

The fund manager Schroders was in demand as the broker Merrill Lynch upped its forecasts for 2007 and 2008 earnings by 13 per cent. However, the broker does not see much upside to the share price and retained its "neutral" stance. Schroders closed 13p firmer at 1,083p, with rivals Amvescap, 3p firmer at 578.5p, and New Star Asset Management, 4p better at 402p, also in demand.

The high-street staple WH Smith, 5.5p worse at 379p, is out of favour with investors after a raft of negative news from rival retail groups. HMV Group and Woolworth's have both warned in the run-up to Christmas and traders are concerned WH Smith could follow suit. The broker Lehman Brothers told clients it expects the company to be experiencing a tough Christmas because of competition from online book retailers. Meanwhile, HMV rallied a quarter of a penny to 146.75p, while Woolworth's fell half a penny to 33p.

British Energy, another 17.75p weaker at 520.5p, was out of favour again after Wednesday's disappointing news on repairs at two nuclear reactors. The shares were downgraded by brokers JP Morgan and Citigroup, the latter marking the shares as a "sell" with a target price of 430p.

In the small caps, there was a nasty Christmas shock for shareholders in eg Solutions, the AIM-listed operations software group. Although the group remains confident of future trading, sales in the current year have fallen well below expectations and profits will be significantly lower than forecast. The shares tanked, losing 67p to close 47 per cent lower at 75.5p.

There was better news at Teesland, the AIM-listed property group. Executive chairman Kevin McCabe will take the company private after making a £200m bid for the Edinburgh-based firm. Mr McCabe's takeover vehicle, Scamp Holdings, will pay 159.25p in cash for each Teesland share. The stock closed 40.25p up at 155.75p .