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Executive Summary

Searle's price run-up after the firm put out the "for sale" sign two weeks ago created a run up on top of an already strong stick market gain turned in during the third quarter of 1984. In the July-September period, Searle's 14 point advance led all issues of the "F-D-C" Weekly Index. The issue shot up 7-7/8 points during the week of Sept. 21, when the company made the announcement of its availability, and closed on Sept. 28 at 59-3/4 (almost 16 points above its Jan. 6 year opening price). A full purchase price would presumably include a further premium. At that price, the total deal would be approximately $3 bil. ("The Pink Sheet" Oct. 1, p. 5). Although the 'for sale' announcement resulted in a one-week climb of over half Searle's gain during the entire quarter, the issue had been doing well prior to the disclosure.Helped by improving operating results based mostly on the performance of its Nutrasweet artificial sweetener product (aspartame), the company had added over six points in gradual increments between the third quarter opening in July 1 and the last week of the period in which it announced its plans for the future. There was also an encouraging development during the quarter in Searle's drug business. In July, the firm announced it had filed earlier an NDA for the prostaglandin anti-ulcer agent Cytotec (misoprostil), the first such application sent to FDA for the new class of cytoprotective drugs. Other firms who are developing related products include Roche (trimoprostil), Upjohn (arbaprostil), and Syntex (enprostil). The Pharmaceutical Component, despite Searle's big advance, slipped 2.8% during the third quarter after gaining 1% in the second quarter ended June 29. However, a dramatic 16% gain by the Chains and a moderate 2.3% climb by the Diversified Group pushed the Composite ahead 1.4% during the quarter. Searle's inverse image among the drug stocks, and the largest point-loser of the 53 overall listed stocks, was Upjohn, which sagged 12-5/8 points to close the quarter at 53-5/8. The company was one of the strongest overall performers on the Index during the first half of the year, but concern over the company's management of its OTC ibuprofen franchise -- which it licensed to Bristol-Myers -- put a sudden stop to Upjohn's early 1984 momentum on the Street. The other two members of the OTC ibuprofen triangle Bristol and American Home Products, fell off during the third quarter after gains in the January-June period spurred by the marketing approval of the Rx-to-OTC analgesic. Bristol, which added almost 5 points through June, was off 7/8 to 46-1/8 during the most recent period, while American Home dropped 4-3/8 to 48-5/8, squandering its 3-5/8 advance in the first six months. The ANDA vulnerability and publicity for Inderal was presumably a deterrent. Merck suffered through a tough three months as the highest priced issue on the Index dropped 9-7/8 to close September at 82-5/8. Earlier in the year the firm was plagued by adverse reaction problems with several of its products which led to the withdrawal in overseas markets of its Indosmos sustained release form of indomethacin and the suspension of clinical trials in the U.S. of its anti-ulcer candidate omeprazole. The firm's slide in the third quarter was exacerbated by the expiration of the indomethacin patent, and the mixed success Merck had in strategies designed to hold back generic competition. On the one hand, Merck gained FDA approval for a suppository form of the drug, which the firm says is suited for patients who cannot or will not take oral medication. However, a patent complaint filed by Merck which would have disrupted imports by U.S. generic mfrs. of bulk indomethacin from foreign suppliers faced almost certain rejection by the U.S. Internatl.Trade Commission ("The Pink Sheet" Oct. 1, "In Brief"). During the quarter, Merck was also able to settle a troublesome strike by workers at seven of its production sites around the country. One drug stock whose fortunes are partially tied to the success of Merck's sustained release products is Alza, whose Oros system was used in the Indosmos product.Despite the safety problem with earliler Indosmos, Alza flourished in the third quarter, taking on 3-1/4 (a 20% gain) to 19-1/8. Alza got a bit boost in late August when FDA gave "approvable" status to Boehringer Ingelheim's Catapres-TTS transdermal release clonidine using Alza's patch technology ("The Pink Sheet" Sept. 10, p. 3). Alza's competitor in drug delivery specialization, Key, also picked up during the third quarter, adding 1-3/8 to 13-3/4. The performance was a turnaround for Key, which dropped 4-3/8 in the second quarter. Other strong performances by Drug/Diversified stocks were turned in by Tambrands which joined the Index in the second week of June and closed the third quarter up 7-1/4 at 59; McKesson (up 4-1/8 to 39); and DuPont (up 4 to 49-5/8). Thompson Medical lost almost all of a 7-plus gain in the first half of the year by dropping 6 to 19-1/4 during the third quarter. Cooper, the most consistent overall performer on the Index during the first half of 1984, lost its magic in the third quarter, falling 5-5/8 to close at 18-3/8. During the period Cooper invested significantly in Frigitronics and then withdrew its stake at a profit within the next few weeks. Novo's discouraging earnings reports were a factor as the firm dived 11-3/8 to 33-3/8. The Chain Group soared during the third quarter with only Genovese (off 1-3/4 to 12-5/8) among the 12 listed issues losing ground. Leading the charge were two chains involved in merger actions: American Stores, which is taking over Jewel, jumped 7-3/4 to 40-1/8; while Adams, which is being taken over by Pantry Pride, picked up 5-1/4 to 18-1/4. The big advance by the retail group erases a poor first half of 1984, when the group sumped 13.2%.Sparking the recovery were other multi-point gainers Longs (up 5 to 42-3/8), Rite Aid (up 4-5/8 to 25-1/4), Payless (up 4-1/4 to 21-7/8) and Walgreen (up 4-1/4 to 38-7/8). Chart omitted.

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